Mock Exam 1 All Q Flashcards
[1079252] On the 7 December, Deliveree plc is quoted on the on the market at 764-772. Its highest and lowest price of the day was 772 and 758 respectively.
What valuation for IHT purposes would be used on that date?
A758 B765 C766 D772
The correct answer is: B - 765
Explanation
This will be the lower of :
Quarter up
764 + 2 = 766
The average of the highest and lowest bargains
(772+758)/2 = 765
Top Props Ltd is a property company that buys quality residences around England and Wales. Top Props makes a new purchase, their 50th property, of a £600,000 property in Cardiff. What is the stamp duty land tax liability on this purchase?
A£20,000 B£38,000 C£48,000 D£90,000
The correct answer is: D - £90,000
Explanation
Tops Props is a non-natural person buying a property above £500,000, so is liable to a flat SDLT charge of 15%.
SDLT = £600,000 x 15% = £90,000
[1051087] Dave has a moderate attitude to risk, and rather than invest directly in gold, he chooses to invest in the shares of a gold mining company. Which of the following show a non-systematic and systematic risk that he is exposed to?
AAn economic crash similar to 2008 and the company mines being flooded due to extreme weather BInterest rates increasing, and the company being fined for fraud CThe price of gold falls and the UK adopts the gold standard DThe company suffers from volatile profits and 50% of the management resign
The correct answer is: B - Interest rates increasing, and the company being fined for fraud
Explanation
This is an awkward question. It is looking for a non-systematic risk AND a systematic risk. The economic crash, weather, interest rates rising, price of gold falling and the UK adopting the gold standard are all systematic risks. The company being fined for fraud, suffering volatile profits and losing its management are non-systematic risks. The only choice giving both a systematic and non-systematic risk is where interest rates rise (systematic) and the company is fined for fraud (non-systematic).
[1051104] A self-made millionaire, Marcus Hughes, has decided to invest in some new opportunities shown below:
Opportunity 1: £3m to finance a leveraged buy-out. Opportunity 2: £4m in a new venture capital opportunity. Opportunity 3: £2m in an overseas venture capital investment. Opportunity 4: £6m venture capital into a new internet start-up.
Which of the following best describes the above?
A3 and 4 will require that additional investors are found BIncome and gains from 3 will be tax-free C1 will require an element of debt finance D2, 3 and 4 will be free of capital gains tax
The correct answer is: C - 1 will require an element of debt finance
Explanation
Leveraged buy-outs require both equity and debt funding.
The risk of a share performing differently from other shares is known as:
ASystematic risk BSector risk CMarket risk DUnsystematic risk
The correct answer is: D - Unsystematic risk
Explanation
Unsystematic risk is also known as idiosyncratic risk or specific. It is the risk that relates specifically to the individual company.
Systematic risk is the risk that relates to investing in shares and bonds rather than other investments.
[1017507] Which of the following are key risks of deposits?
IInflation risk
IIOperational risk
AI only BII only CBoth DNeither
The correct answer is: C - Both
Explanation
Deposits are exposed to inflation risk. If the interest you receive on your deposit is less than inflation, the purchasing power of your money reduces. It is always important to think about the ‘real’ interest rate on deposits. The real interest rate is the interest rate less the impact of inflation.
As we have seen in recent years, banks can fail and investors (even depositors) can be exposed to losses due to operational errors.
[1049146] Which of the following categories of private equity is the highest risk investment?
AMezzanine Capital BGrowth Capital CLeveraged Buy Outs DVenture Capital
The correct answer is: D - Venture Capital
Explanation
Venture Capital investments are in unproven companies with no track records often at a very early stage of development. VC therefore has the highest risk and highest potential rewards of the categories of private equity.
Where a bare trust is established for a sole adult beneficiary the tax liability will fall on:
AThe settlor BThe beneficiary CThe trustees DThe returns will be tax-free
The correct answer is: B - The beneficiary
Explanation
Due to the nature of these trusts - the beneficiary has absolute interest in the assets - the tax burden falls on them. However, if a parent sets up a bare trust for their own minor children, the tax burden settles on the parent (settlor).
Which of the following is a coincident economic indicator?
AIndex of consumer expectations BMoney supply CThe unemployment rate DRetail sales
The correct answer is: D - Retail sales
Explanation
Retail sales is a coincident indicator. The Index of consumer expectations and the money supply are leading indicators. The unemployment rate is a lagging indicator.
Paul is looking for a quick and mathematically simple method to value the return of his portfolio. Since setting up his portfolio Paul has not paid in, or taken out, any wealth from the portfolio. Which method should Paul select?
ABeta of return BHolding period return CMoney-weighted rate of return DStandard deviation of return
The correct answer is: B - Holding period return
Explanation
Given that there have been no further contributions to the portfolio, or withdrawals, holding period return is the most appropriate method of valuing returns for Paul to use. Beta and standard deviation are measures of risk, not of return.
Nigel purchases a commercial property in 1999 for £100,000 and incurs £750 legal costs during the purchase. During his ownership he spends £10,000 improving and modernising the property. In the fiscal year he disposes of the property for £230,000, paying £700 in fees and commissions. Assuming an annual exemption of £6,000, calculate Nigel’s chargeable gain.
A£230,000 B£229,000 C£118,250 D£112,550
The correct answer is: D - £112,550
Explanation
The chargeable gain would be calculated as follows:
Proceeds: £230,000
Cost of disposal: (£700)
Net proceeds: £229,300 Cost of purchase: (£100,000)
Incidental costs of purchase: (£750)
Enhancement expenditure: (£10,000)
Gain on asset: £118,550
Annual exemption: (£6,000)
Chargeable gain: £112,550
Sam invested GBP 45,000 into a life company investment bond. She takes out GBP 700 after 8 months and another GBP 600 after 15 months. What is the maximum amount Sam can withdraw by 36 months without trigging an immediate tax event?
AGBP 2,250 BGBP 5,450 CGBP 6,750 DGBP 43,700
The correct answer is: B - GBP 5,450
Explanation
This is an investment bond and therefore the 5% rule applies. Based on a £45,000 investment, Sam can withdraw £2,250 per year. The maximum after 36 months is, therefore, £6,750. Sam has taken £1,300 so far, leaving £5,450 to take. Remember, this is not tax-free; this is tax deferral.
In which document is an investor most likely to see a synthetic risk reward indicator?
AA client agreement BA key investor information document CA company prospectus DA last will and testament
The correct answer is: B - A key investor information document
Explanation
A major part of the information provided in KIIDs is the synthetic risk and reward indicators (SRRI). Regulations now require all UCITS funds to provide a SRRI score. It is an overall measure of the risk (and reward) of a fund. The risk indicator for any fund can take a value in a range from 1 to 7: the lower part of SRRI corresponds to a low-risk (and typically lower-reward) investment, while the higher value of 7 corresponds to a high-risk (and typically higher-reward) investment. The SRRI is determined from volatility of past returns over a five-year period.
Fund X aims to achieve a positive return regardless of the direction of the market. What is this fund most likely to be?
ATracker fund BAlpha fund CAbsolute return fund DExchange traded fund
The correct answer is: C - Absolute return fund
Explanation
Absolute return funds aim to achieve positive returns that are unrelated to market movements.
Share A has had returns over the last 4 years of -12%, 8%, -2%, 15%.Share B has had returns over the last 4 years of 2%, 6%, 7% , 10%. Which of the following statements is correct?
AShare A has the higher mean and the higher standard deviation BShare B has the higher mean and the higher standard deviation CShare A has the lower mean and the higher standard deviation DShare A has the lower mean and a similar standard deviation
The correct answer is: C - Share A has the lower mean and the higher standard deviation
Explanation
A’s mean is 2.25, B’s mean is 6.25, A has higher S Dev.
In core satellite management, the correct description would be that:
AThe core portfolio is managed actively, and the satellites passively BThe core portfolio is managed semi-actively, and the satellites passively CThe core portfolio is managed passively, and the satellites actively DThe core portfolio is managed passively, and satellites passively
The correct answer is: C - The core portfolio is managed passively, and the satellites actively
Explanation
The core can also be managed semi-actively.
[1049180] Which of the following is not an active bond strategy?
AAnomaly switching BImmunisation switching CIntermarket spread switching DPolicy switching
The correct answer is: B - Immunisation switching
Explanation
Immunisation is a passive strategy.
What could the rationale be for a hedge fund strategy to take a long / short position?
ALower transaction costs BTo follow a passive investment strategy CTo create a market neutral position DTo benefit from falls in the market
The correct answer is: C - To create a market neutral position
Explanation
Long / short positions can be created by hedge funds to be market neutral. This means that they have no market exposure. Market risk is often measured by beta, so market neutral is also known as a zero beta strategy.
When a company has a capitalisation issue which of the following is true?
ANew funds are raised for the company BThe share premium account will decrease CThe share price will increase DInvestors are invited to buy more shares
The correct answer is: B - The share premium account will decrease
Explanation
In a capitalisation issue, no new cash is raised, the share price will decrease, and the share premium account will decrease. It is really an accounting balance sheet adjustment that lowers the share price.
Which of the following transfers are exempt for inheritance tax purposes?
ATransfer to a child BTransfer to a spouse/civil partner CTransfer to trust DTransfer to a family company
The correct answer is: B - Transfer to a spouse/civil partner
Explanation
Transfers to: Spouse/civil partner Certain charities Certain political parties
are examples of those exempt from inheritance tax, as are certain lifetime transfers such as small gifts and gifts on marriage.
A client wants her adviser to continue doing what they have always done as it seemed to work in the past. What is the name of the behavioural finance trait that they are displaying?
AAvailability bias BStatus quo bias COverreaction bias DSelf-serving bias
The correct answer is: B - Status quo bias
Explanation
Status quo bias – the tendency to like things to stay relatively the same.
Availability bias – the tendency to use information that can be quickly recalled, when evaluating a topic or an idea, even if that information is not the best representation of that topic or idea.
Overreaction – the tendency to react disproportionately to new information, often led by either greed or fear.
Self-serving bias – the tendency for a person to assume that good things will happen to them when they have done everything right, but bad things will happen due to circumstances outside of their control.
An investor makes a gain from an OEIC, having used up their allowance for the year. Which of the following is true?
APay CGT on the full gain BThe OEIC has already paid the CGT CThere is no CGT on investments in an OEIC DThere is an extra exemption on OEICs
The correct answer is: A - Pay CGT on the full gain
Explanation
Although within the OEIC there is no CGT (this is the same for UT/IT/REIT’s) the CGT comes into play on disposal by the investor. If the investor has used his allowance for the year, and we have to assume there are no losses to offset, then the investor pays the full CGT.
Which of the following is true of Inheritance Tax?
AIHT is paid on death only BIHT is paid on death and is paid in life on a potentially exempt transfer CIHT is paid on death and is paid in life on an exempt transfer DIHT is paid on death and may be paid in life on a chargeable lifetime transfer
The correct answer is: D - IHT is paid on death and may be paid in life on a chargeable lifetime transfer
Explanation
IHT may be paid on death and also in life with a chargeable lifetime transfer, but only for transfers in excess of the nil rate band.
A retired investor has come to a management firm for investment advice. The investor is aware that investments rise and fall, and would like to protect capital and seek income producing assets. The investor has the portfolio shown below:
Cash: £75,000 Equity: £20,000 Debt: £5,000 Total: £100,000
Which of the following recommendations would be most suitable?
AReduce cash, increasing debt exposure BReduce equity, increasing debt exposure CIncrease cash, reducing equity exposure DDo nothing, as suitable already
The correct answer is: A - Reduce cash, increasing debt exposure
Explanation
Since the investor has stated that capital protection and income is the issue, a reduction of cash and increase in fixed income would be suitable. Debt tends to generate better income.
The level of equity, at 20%, is broadly suitable for the age of the client. Cash should be approximately 10 - 20%. A good measure for the level of debt is to use the investor’s age to determine the proportion of debt. For example, 65% for a 65 year-old.
A basic rate taxpayer and a higher rate tax payer each receive gross interest income of £1000. If this is the only interest income they receive, what will be the difference in their tax liabilities?
A£150 B£220 C£200 D£180
The correct answer is: C - £200
Explanation
Basic rate tax payer will pay no tax, as the interest is covered by their savings allowance. Whereas the higher rate payer only has £500 savings allowance, so will pay 40% on the remaining £500 = £200. The difference is £200.
Jason Knight, a higher rate tax payer has made a capital gain on a holding of corporate bonds. What is his tax position on the gain?
AHe will be liable for 40% Capital Gains Tax on the gain BHe may use his CGT allowance (if available) and then be liable to 10% on the balance CHe may use his CGT allowance (if available) and then be liable to 20% on the balance DHe has no tax to pay
The correct answer is: D - He has no tax to pay
Explanation
No CGT on Corporate Bonds.
Which of the following represents one of the main principles regarding usury/interest in Islamic finance?
AFixed interest on borrowing and lending should be set appropriately BVariable interest is preferable to fixed interest on borrowing and lending CAll forms of interest are forbidden, money transfer is to be based on the principle of profit sharing DAll forms of interest are forbidden, money transfer is to be based on the principle of tax sharing
The correct answer is: C - All forms of interest are forbidden, money transfer is to be based on the principle of profit sharing
Explanation
The customer and the bank share the risk of the investment, and divide profits between them.
An investor has just deposited a lump sum into an ISA. They then move away from the UK. What happens to the account?
AThe account must be cashed in at its current value BThe account can remain open but without the tax benefit CThe account is frozen and reactivated when the investor returns DThe account can remain open and keeps the tax benefit
The correct answer is: D - The account can remain open and keeps the tax benefit
Explanation
Assuming that the investor is moving abroad and becomes a non-resident. They are referring to keeping an ISA open, rather than having to close it. The rule is that the ISA does remain open and retains the tax benefits, but no new funds can be added.
You are a bond fund manager who is trying to immunize her bond portfolio. You have been asked to look into the following factors:
Factor A: Default risk of the bonds in the portfolio Factor B: Changes in yield curve Factor C: Duration of the bonds in the portfolio
Which of the factors would concern you the most with respect to the immunization of your portfolio?
AFactors A and C BFactor A only CFactors B and C DAll of the stated factors
The correct answer is: C - Factors B and C
Explanation
The goal of immunization is to protect the portfolio against adverse movements in interest rates, in other words changes in the yield curve. The degree to which the portfolio will be affected by changes in the yield curve will depend on the duration of the bonds in the portfolio. While default risk is very important for any bond fund manager, it is not a factor in the immunization process.
In relation to the Primary, Secondary and Tertiary sectors, which of the following is correct?
AHealthwise Health Clubs are in the Secondary sector BDAX Mining are not in the Primary sector CGoldings Jewellery are in the Secondary sector DLloyd West Bank are not in the Tertiary sector
The correct answer is: C - Goldings Jewellery are in the Secondary sector
Explanation
Primary Sector - raw materials/extraction, Secondary - manufacture, Tertiary - service industries.
Sara has invested £7,320 into a cash ISA with Provider A in the current tax year. What would she be permitted to do with the remaining allowance?
AInvest into a stocks and shares ISA with the same provider only BInvest into a stocks and shares ISA with different provider only CInvest into a stocks and shares ISA with the same or different provider DNo further investment in an ISA would be permitted
The correct answer is: C - Invest into a stocks and shares ISA with the same or different provider
Explanation
The annual ISA investment allowance can be invested in a cash ISA, a stocks and shares ISA, an Innovative Finance ISA, or any combination of these. There is no restriction on the provider that you use.
Investing in high coupon gilts is the most tax effective for which of the following situations?
AAn individual who does not pay income tax BAn individual who pays a high level of tax on income CMaking a large capital gain on the gilts DMaking a small capital gain on the gilts
The correct answer is: A - An individual who does not pay income tax
Explanation
Since bonds do not suffer capital gains tax, the investor is not concerned about the tax implicatons of selling the bond and making a capital gain.
Coupon income is taxable however, and thus the most tax effective situation is where high coupons can be received and the investor pays no tax on income. Foreign investors will often not pay tax on UK investment income.
