Mock Exam 1 Wrong Questions Flashcards
Jim is the holder of a put option on XYZ stock that expires in three months time. The option has a strike of 80p and a premium of 10p. Assuming a current share price of 90p which of the following is true?
AJim’s option is in the money BJim’s option is at breakeven CJim’s option has time value DJim runs the risk of the price falling
The correct answer is: C - Jim’s option has time value
Explanation
Jim’s option is currently out of the money so his option has no intrinsic value but as it still has 3 months to maturity it does have time value.
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).
When referring to index-linked gilts, which of the following is true?
AThe nominal value and the coupon are linked to the consumer price index BThe coupon only is linked to retail prices CThe redemption value only is linked to retail prices DThe redemption value and the coupon are linked to retail prices
The correct answer is: D - The redemption value and the coupon are linked to retail prices
Explanation
The coupon is adjusted for inflation throughout the life of the bond, but the capital is only adjusted on redemption.
Louis Hamilton, a UK resident, has investments outside the UK that produce income. What tax may be deducted by a foreign country?
AIncome tax BIncome tax and capital gains CWithholding tax DInheritance tax
The correct answer is: C - Withholding tax
Explanation
Withholding Tax is often deducted by in foreign territories.
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.
Lorna Wilson wants to ensure that her investment of £15,000 is not invested in tobacco companies. Jack Bond wants to ensure that his £15,000 investment is investing in wind farm projects. Which of the two statements below is/are correct in describing Lorna and Jack?
ILorna is interested in Socially Responsible Investing
IIJack is interested in Ethical Investment
AI only BII only CBoth DNeither
The correct answer is: D - Neither
Explanation
This question has recently been amended.
Ethical investment seeks to negatively screen those companies that are to the detriment of the environment or society. This reflects Lorna’s position.
Socially responsible investment is where investors positively include those companies that actively benefit the environment or society. This reflects Jack’s position.
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.
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.
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 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.
Assuming inflation is 3% and the nominal return is 7%, what is an accurate estimate of the real rate of return?
A4.0% B3.98% C3.88% D3.78%
The correct answer is: C - 3.88%
Explanation
(1+nominal) = (1+ real) x (1+ inflation)
1.07 = (1+ real) x 1.03, so (1 + real) = 1.07/1.03 = 3.88%.
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
Edward died leaving a son, Peter, and daughter, Lisa. He also left behind Amelia, with whom he had been living for the past eight years. For the last two years, however, Edward had been involved in a romantic relationship with Charles and this relationship was still ongoing up to the time of Edward’s death. If Edward died intestate and his estate was valued at £200,000, between whom would this be distributed?
AAmelia only BPeter and Lisa CAmelia, Peter and Lisa DAmelia, Peter, Lisa and Charles
The correct answer is: B - Peter and Lisa
Explanation
Where there is no will (intestate) the spouse will inherit along with other surviving relatives. Intestacy laws do not make provisions for ‘partners’ unless there has been a civil ceremony. This means that there has been no provision for Amelia as she was not officially married to Edward. Same sex marriages are recognised but in this case, as there has been no civil ceremony, Charles will receive nothing. Edward’s assets will therefore revert to his children.
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
Martin is buying a new primary residence. The purchase of the new house goes smoothly, but the sale of his original residence falls through. Luckily, Martin is in a position where he was not relying on the sale of his old property to fund the new one. What are the stamp duty land tax implications of this situation?
AMartin is not liable for SDLT until the sale of his original property goes through BMartin is liable for SDLT at the normal rates as soon as the transfer of the purchased property goes through CMartin is liable for an additional 3% SDLT as soon as the transfer of the purchased property goes through DMartin is liable for an additional 3% SDLT, which may be reclaimed if the sale goes through within 36 months
The correct answer is: D - Martin is liable for an additional 3% SDLT, which may be reclaimed if the sale goes through within 36 months
Explanation
The new purchase will be considered a second property by HMRC and will be liable for the additional 3% SDLT. However, Martin may be able to reclaim this if the sale of the original property is completed within 36 months.
