Mock Exam Flashcards
A fund manager sells his holdings in a Japanese Special Situations OEIC. Which of the following is TRUE?
1.
He will sell his shares on the London Stock Exchange.
2.
The trustee of the OEIC will become the beneficial owner.
3.
He sells his shares directly to the Authorised Corporate Director. Authority (PRA) will regulate both in terms of prudential regulation.
4.
The unit trust manager will hold the shares in his box.
He sells his shares directly to the Authorised Corporate Director. Authority (PRA) will regulate both in terms of prudential regulation.
OEICS are open-ended investment funds where the funds are managed by the Authorised Corporate Director and the depository is the legal owner.
The investor is always the beneficial owner.
OEICS aren’t traded on the LSE, but bought and sold directly to / from the fund.
An FX trader quotes GBP/USD as 1.2356/1.2360. The bid-ask spread is:
1.
0.0004 pips
2.
0.04 pips
3.
4 pips
4.
40 pips
4 pips
1 pip is 0.0001.
The spread is 1.2360-1.2356 = 0.0004, which equals 4 pips.
James buys £100,000 nominal of the UK 6% Treasury stock on 7th July for settlement on the 8th July at a clean price of 103.50. It pays interest on 7th June and 7th December. What is the total amount payable?
1.
£104,484
2.
£104,008
3.
£103,995
4.
£103,992
We need to calculate the dirty price of the bond.
Dirty price = clean price + accrued interest
Accrued interest = coupon ÷ 2 x days x Accrued days ÷ days in coupon period
The last coupon was paid on 7th June Accrued days = 23+8 = 31
Total days in the coupon period = 23+31+31+30+31+30+7 = 183
Accrued Interest = 6 ÷ 2 x 31 ÷ 183 = £0.508
Dirty price = £103.50 + £0.508 = £104.008
For £100,000 nominal the total amount payable will be £104,008.
John has made the following investments:
Convertible loan stock £15,000
Gilts 3% 2022 £25,000
Floating rate notes £10,000
If UK interest rates fall, which of the following statements is CORRECT?
1.
All three holdings will see an increase in market prices in equal proportion.
2.
Gilts prices will rise, whereas convertibles and floating rate notes will stay closer to their nominal value.
3.
Gilts & convertibles prices will rise, whereas floating rate notes will stay closer to their nominal value.
4.
Floating rate notes will see a fall in market prices whereas Gilts & convertibles will stay closer to their nominal value
Gilts & convertibles prices will rise, whereas floating rate notes will stay closer to their nominal value.
Gilt and convertible prices will rise as rates fall.
Floating rate notes stay closer to their nominal value.
Which of the following is TRUE regarding unit trusts?
1.
They can be bought and sold on the London Stock Exchange.
2.
The ACD is responsible for managing the investments.
3.
The depositary is the beneficial owner of the underlying investments.
4.
The trustee is the legal owner of the underlying assets.
Unit trusts are traded directly with the unit trust fund manager who is responsible for managing the investments (not the ACD), the investor is the beneficial owner and the trustee the legal owner of the assets..
The main difference between a reporting and a non-reporting fund is:
1.
A reporting fund must distribute all its income. Non-reporting funds usually roll-up their income.
2.
Gains on non-reporting funds are taxed as income rather than as capital gains.
3.
UK residents will pay UK tax on reporting funds but not on non-reporting funds.
4.
The CGT exemption is available for non-reporting funds but not for reporting funds.
Gains on non-reporting funds are taxed as income rather than as capital gains.
Explanation:
Reporting funds do not have to distribute their income.
UK residents will have to pay tax on both reporting and non-reporting funds and because gains on non-reporting funds are treated as income, they cannot make use of CGT exemptions, unlike reporting funds.
Jane has a holding in £100 government stocks with a coupon of 7.25% and a redemption date in 6 years’ time. She paid £121.50 for the stock. What is the simplified gross redemption yield?
1.
1.28%
2.
2.95%
3.
3.02%
4.
5.97%
Simplified GRY = Running yield + or - annual capital gain or loss percentage.
- Running yield = 7.25 ÷ 121.50 = 5.97%.
- Loss per year = £21.50 ÷ 6 = £3.58. 3.58 ÷ £121.50 = 2.95%.
- 5.97% – 2.95% = 3.02%
David owns 2 bonds that mature on the same date. Bond X pays a coupon of 2.5% and the Bond Y pays a coupon of 5%. Which of the following statements is true?
1.
Bond Y is twice as risky as Bond X.
2.
The running yield of Bond Y will always be greater than that of Bond X.
3.
Bond X will have a higher Macaulay duration than Bond Y.
4.
The price of Bond Y will always be greater than that of Bond X.
The lower the coupon, the higher the Macaulay duration. A is incorrect as X would be more risky than Y. C is correct.
Re the running yield = coupon / bond price. Yes, the coupon is higher, but the price can change so Bond Y may have a higher running yield but not necessarily all the time.
Again the price may be higher but not necessarily – it depends on the yield of the 2 bonds.
The main currencies trading in the spot foreign exchange markets are US dollars, Japanese yen, Pound sterling and:
1.
Australian Dollar.
2.
Canadian Dollar.
3.
Swiss Francs.
4.
Chinese Renminbi.
The main currencies are USD, Yen, Pound Sterling and Swiss Francs.
Who would be last in line for a pay-out in the event of a company liquidation?
1.
Debenture holders.
2.
Unsecured creditors.
3.
Employees’ wages.
4.
Preference shareholders.
Preference shareholders.
The order would be Debenture holders, preferential creditors (employees’ wages), unsecured creditors and then preference shareholders. Ordinary shareholders are the very last.
Which of the following is TRUE regarding the FTSE 100 and Dow Jones stock market indices?
1.
FTSE 100 is price weighted and the Dow Jones is market capitalisation weighted.
2.
Both are weighted by market capitalisation.
3.
FTSE 100 is weighted by market capitalisation and the Dow Jones is equally weighted.
4.
FTSE 100 is weighted by market capitalisation and the Dow Jones is price weighted.
The FTSE 100 is weighted by market capitalisation, the Dow Jones by price.
XYZ plc are trading at a current share price of 350p. The company announces a 2 for 1 stock split. What will the price of the shares be following the stock split?
1.
350p.
2.
175p
3.
117p
4.
700p
A 2 for 1 stock split means 1 share now becomes 2. The number of shares is doubled so the share price will halve so that the total value of the holding stays the same.
350p ÷ 2 = 175p
In a split capital investment trust, who has the first call on the trust’s assets?
1.
The holders of the income shares.</p>
2.
The holders of the capital shares.
3.
Lenders.
4.
The holders of the zero dividend preference shares.
This is a bit of a trick question. Generally, the zero-dividend preference shareholders get the first call on the assets, but only once the lenders have been paid first.
Gary owns a preference share type where any dividends that are not paid in a year will be carried forward and paid the following year before other dividend payments. This is because Gary owns…
1.
cumulative preference shares.
2.
participating preference shares.
3.
redeemable preference shares.
4.
convertible preference shares.
cumulative preference shares.
Cumulative preference shares will roll up any dividend not paid in previous years. Convertible preference shares convert to ordinary shares, participating shares get an extra dividend payment based on company profits and redeemable preference shares have a set redemption date.
XYZ company has net earnings of £28,000,000. It has ordinary share capital of £85,000,000 and reserves of £37,000,000. From this we can deduce that the…
1.
equity multiplier is 3.04.
2.
return on equity is 22.95%.
3.
return on capital employed is 32.94%.
4.
reserves ratio is 2.30 .
return on equity is 22.95%.
Now we’re guessing that you thought ‘I don’t know what equity multiplier or reserves ratio are’ didn’t you? If that’s the case, then they’re probably not the correct answer. Work out the ones that you do know first and hope that the answer is there.
- Return on equity = net earnings ÷ equity
- Equity = £85,000,000 + £37,000,000 = £122,000,000
- Therefore, return on equity = 28 ÷ 122 = 22.95%
We don’t have the information to work out the return on capital employed or equity multiplier.
Remember watch out for the answers that you know are correct.
Jessica owns deferred shares. This means that…
1.
they may also be known as ‘B’ shares.
2.
they don’t pay any dividends.
3.
Jessica is likely to be one of the founders of the company.
4.
Jessica has inherited the shares.
Jessica is likely to be one of the founders of the company.
B is too definite! They may pay dividends, and they may not, as they only pay dividends are after other dividends have been paid. They are often issued to the founders of a company.
B shares are also held by the founders but have more votes than ordinary shares.
Alix has £100,000 to invest. There are two accounts that both pay a nominal rate of interest of 5% per annum. Account A pays interest annually whereas Account B pays interest quarterly. How much more interest will she earn on Account B compared to Account A?
1.
£94.53
2.
£62.50
3.
£50.94
4.
£37.50
Account A: Amount at the end of 1 year = £100,000 x 1.05 = £105,000
Account B: Amount at the end of 1 year = £100,000 x (1 + (0.05 ÷ 4))4 = £100,000 x 1.01254 = £105,094.53
The difference is therefore £94.53.
Calculate the net profit margin given the above below information for XYZ plc.
Sales £125,000,000
Operating Profit £28,750,000
Profit before tax £9,500,000
Profit after tax £6,000,000
1.
23.0%
2.
20.9%
3.
7.6%
4.
4.8%
NPM = net profit ÷ turnover x100 = 6,000,000 ÷ 125,000,000 x100 =4.8%
Declan holds two bonds. Bond X is upgraded by Fitch from BBB to A and Bond Y is downgraded from BBB to BB. Which of the following statements is TRUE?
1.
Both bonds are classed as investment grade.
2.
The coupon of Bond X will decrease.
3.
The yield of Bond Y will decrease.
4.
Both bonds could see their credit rating change before the redemption date.
Both bonds could see their credit rating change before the redemption date.
Investment grade bonds are those with a credit rating of BBB or higher, so bond Y is not investment grade quality. The change credit rating will not impact the coupon, but the yield on Bond Y will increase due to the lower credit rating.
Credit ratings are not set in stone and could change again at any time before maturity.
A split capital investment trust has an asset cover ratio of 1.2. This means that:
1.
there are 1.2 times as many current assets as there are income shares to be paid.
2.
it does not have enough assets to pay the trust’s debts.
3.
the assets need to grow by 2% to repay all charges and the zero dividend preference shares.
4.
it currently has enough assets to pay its zero dividend preference shares.
it currently has enough assets to pay its zero dividend preference shares.
An asset cover of ‘1’ means that investment trust assets exactly match the money required to repay all share classes (not just income shares) at trust wind-up. Answer A is therefore incorrect, as is B.
They would have enough money to cover all the ZDP shares so answer D is correct.
Currency Quote
1 0.8235 / 0.8240
2 1.9781 / 1.9801
A dealer has the above quotes for two different currencies. Which of the statements is TRUE?
1.
Currency 1 will make more profit.
2.
Currency 1 is likely to have greater liquidity.
3.
Currency 2 has a lower bid-ask spread.
4.
The bid-ask spread for currency 1 is 0.5 pips.
Currency 1 is likely to have greater liquidity.
The spread for currency 1 is 5 pips and 20 pips for currency 2. The narrower spread for currency 1 indicates that there is more liquidity in that currency.
Smaller the spread, higher the liquidity
Mike is looking to invest in fixed income to match the duration of his liabilities. He’s looking at either a bullet strategy or a barbell strategy. One reason for using a bullet strategy is…
1.
it has a shorter time horizon.
2.
the barbell strategy will need more frequent rebalancing.
3.
a barbell strategy is not suitable for duration matching.
4.
a barbell strategy holds bonds with durations that closely match the duration of the liability.
the barbell strategy will need more frequent rebalancing.
Barbell strategies will need frequent rebalancing to ensure that the combined duration of the assets continue to match that of the liability.
An ETF is looking to track the FTSE 100. The cheapest way of doing so would most likely be:
1.
full replication.
2.
optimisation.
3.
creation units.
4.
stratified sampling.
optimisation.
Optimisation (also called synthetic where derivatives are used ) is the cheapest method and uses a computerised model to buy and sell the stocks of the index
Full replication will be expensive as it involves buying all the shares in the FTSE 100. Creation units is a red herring.
Stratified sampling = where fund holds a sample of the index by using stratification
The modified duration of Bond X is 2.5, and Bond Y is 5. This indicates that for a 1% fall in yield…
1.
the price of Bond X will rise by 2.5%.
2.
the price of Bond Y will fall by 5%.
3.
the price of Bond Y will rise by £5 per £100 nominal.
4.
bond X is more sensitive to interest rate changes than Bond Y.
the price of Bond X will rise by 2.5%.
The modified duration measures the percentage price change in a bond for a 1% change in interest rates. A higher modified duration means it is more sensitive to rate changes. As rates fall, prices rise, so A is the correct answer.
Rates full - Prices Rise
A sovereign issuer that has a low per capita income suggests:
1.
that they may have difficulty repaying foreign debt.
2.
they have a strong exchange rate.
3.
it is more likely to be from a developed economy.
4.
it will have a high credit rating.
A low per capita income suggests a low tax base, so it may struggle to repay any debt. These economies tend to be less developed, have low credit ratings and are likely to be from emerging economies.
Company A has a P/E ratio of 10. Company B has a P/E ratio of 15. This suggests that:
1.
company B has a higher price compared to its earnings than company A.
2.
company A is more likely to pay a lower dividend.
3.
company B has a higher dividend cover ratio.
4.
company A has a lower share price than company B.
company B has a higher price compared to its earnings than company A.
P/E ratio = price ÷ EPS, so a higher P/E =a higher price compared to its earnings.
A warrant is trading at a price of 110p with an exercise price of 95p. The current share price is 150p. What is the warrant’s premium / discount?
1.
37% discount.
2.
37% premium.
3.
55% discount.
4.
55% premium.
37% premium.
Premium / discount = (warrant price + exercise price-share price) ÷ share price = (110+95-150) ÷ 150 = 37%. It is positive therefore a premium.
Grant buys a European call option on ABC plc shares. This means that:
1.
he has the right to buy ABC shares any time between now and the expiry date of the option.
2.
he has the right to buy ABC shares any time between now and 1 month before expiry of the option.
3.
he has the right to sell ABC shares anytime between now and the expiry date of the option.
4.
he has the right to buy ABC shares on the expiry date only.
he has the right to buy ABC shares on the expiry date only.
A European call gives the holder the right but not the obligation to buy the shares at a set price on a set date in the future. American call options allow it redeemable within a set period of time rather than a set date
A company is looking to issue a GDR on the LSE. This means that they:
1.
must have at least 10% of the shares in public hands.
2.
must have a minimum market capitalisation of £20 million.
3.
must have at least 5 years of audited accounts.
4.
must appoint a NOMAD.
must have at least 10% of the shares in public hands.
They must comply with the listing requirements of the LSE: 10% of shares in public hands, minimum market capitalisation of £30 million and 3 years of audited accounts.
NOMADs are for AIM listings.
The main difference between Treasury Bills and Treasury Bonds in the US is that:
1.
T-bills pay a variable coupon, T-Bonds pay a fixed coupon.
2.
T-Bills have maturity dates ranging from two to 10 years, T-Bonds have maturity dates ranging from 10 to 30 years.
3.
T-Bills are zero-coupon bonds, T-Bonds pay a fixed coupon.
4.
T-Bills have their principal value linked to inflation.
T-Bills are zero-coupon bonds
T-Bonds pay a fixed coupon. T-Bills are short-term zero-coupon instruments with maturities < 1 year; Treasury bonds are fixed coupon bonds with maturities when issued of 10 to 30 years.
