Mock Exam 5

Question 1

Which of the following best describes the expected changes to the UK population in the 21st century?
AGrow at an increasing rate BGrow at a steady rate CBegin to decline at a slow rate DBegin to level off

Answer 1

The correct answer is: D - Begin to level off
Explanation
It is estimated that the UK population in the 21st century will begin to level off.

Question 2

Under the pre-owned asset tax rules, no charge is made if the value of the benefit does not exceed what figure per annum?
A£5,000 p.a. B£6,000 p.a. C£7,000 p.a. D£10,000 p.a.

Answer 2

The correct answer is: A - £5,000 p.a.
Explanation
The POAT exemption is applied where the benefit is valued at less than £5,000 per year.

Question 3

With regard to commercial property, which of the following is TRUE?
AThe commercial property is a very liquid market BIt will normally be valued on the basis of a multiple of the rental income CThe quality of the the tenant is irrelevant in assessing the overall investment return DThe length of a lease will not affect its value

Answer 3

The correct answer is: B - It will normally be valued on the basis of a multiple of the rental income
Explanation
Property is normally valued as a multiple of rental income. Both the quality of the tenant and the length of the lease will affect the value.

Question 4

Which of the following is the lifetime limit on which business asset disposal relief (BADR) can be taken?
A£11,000 B£500,000 C£1,000,000 D£10,000,000

Answer 4

The correct answer is: C - £1,000,000
Explanation
Business asset disposal relief (previously known as ‘entrepreneurs’ relief’) is subject to a lifetime limit of £1 million.

Question 5

An investor sells an asset realising a capital gain. He then invests it in a venture capital trust. What would be his tax situation as far as the capital gain is concerned, assuming no previous or current losses?
AThere would be no tax liability on his capital gain BAny gain above the annual exemption would be taxed at his marginal rate CAny gain above the annual exemption would receive a 30% relief on tax liability DAny gain above the annual exemption would be liable for tax, but the liability can be deferred until the investor exits the VCT

Answer 5

The correct answer is: B - Any gain above the annual exemption would be taxed at his marginal rate
Explanation
This is a tricky one. If the investor makes a capital gain on VCT shares, there is an exemption from CGT and a deferral option for shares bought before 6 April 2004. This investor, however, does not dispose of VCT shares, but uses a gain to buy the shares, so no exemption or deferral here.
The 30% relief offered when you subscribe to shares in a VCT is a relief on income, not on capital gain.
This would mean that the investor will pay CGT on any gain above his annual exemption.

Question 6

A 70 year old client of yours asks you to review her portfolio. She understands that the capital in her investments may go up as well as down. If her portfolio looks as indicated below, what conclusion would you come to?
75% placed in a deposit account 5% invested in bonds 20% placed in equity
AThe portfolio is broadly suitable for the investor BAll money should be placed on deposit CReduce the amount invested in bonds and invest in equity DIncrease the investment in equity by reducing the amount on deposit

Answer 6

The correct answer is: A - The portfolio is broadly suitable for the investor
Explanation
The investor appears to be a medium risk investor, so more equity might initially be considered. As the client is 70 years old, it would be more sensible to err on the cautious side and maintain the present levels of investment.

Question 7

Which ONE of the following is not subject to corporation tax for a UK company?
ARental income BDividends received from a UK company CGains on disposal of property by the UK company DInterest income on the company’s bank accounts

Answer 7

The correct answer is: B - Dividends received from a UK company
Explanation
Dividends received by UK companies are not subject to corporation tax. This is referred to as franked investment income.

Question 8

An investor wishes to directly hold a property through a trust. Which of the below investments will allow this?
AProperty investment trusts BProperty company shares CProperty unit trusts DProperty fund of funds

Answer 8

The correct answer is: C - Property unit trusts
Explanation
The investor has a direct interest in a property held in a property unit trust, so that would be the best answer here. Property investment trusts can not hold property directly. Property company shares are shares of property development companies. Property fund of funds is where a fund has invested in other property funds, so this would be indirect investment.

Question 8

Which of the following is incorrect in describing the UK population?
AThe UK population grew significantly during the 20th century BThe UK population is expected to grow significantly during the 21st century CUntil the mid 1990s the natural increase in population was the primary cause of growth DIn general in the 20th century there were more births than deaths in the UK

Answer 8

The correct answer is: B - The UK population is expected to grow significantly during the 21st century
Explanation
The growth is expected to level off in the 21st century.

Question 9

You are considering an investment in either commercial or residential property. Which of the following is/are correct about these property investments?
IThe landlord is responsible for repairs with a commercial property
IIThe landlord is responsible for repairs with a residential property
IIICommercial property is typically let on 99 year leases
IVShops typically have higher yields than offices
AI only BII only CI & II DI, II & IV

Answer 9

The correct answer is: B - II only
Explanation
The landlord is responsible for repairs with a residential property whereas it is the tenant who is responsible with a commercial property. Nowadays commercial leases are normally a maximum of 25 years. The yields from offices are higher than the yields from shops.

Question 10

Which of the following is/are true of the capitalisation rate?
IThe seller of a commercial property would prefer as low a cap rate as possible in valuing their property
IIThe higher the risk of the property the higher the cap rate
IIIWhere net operating incomes are generally increasing over time, cap rates also increase over time
IVThe Gross Rent Multiplier (GRM) is more reliable than using a Cap Rate calculation
AI & II BIII & IV CI, II & III DI only

Answer 10

The correct answer is: A - I & II
Explanation
The net operating income is divided by a cap rate to estimate a value of a piece of commercial property. This is a ‘guesstimate’ as there are not many real transactions upon which to base more accurate market prices.
The lower the cap rate the higher the market value. So sellers will prefer to value their property using lower cap rates. The higher the risk of the property and its estimated cashflows, the higher the cap rate and the lower the valuation.
If income is increasing over time, then the property value should also be increasing over time, indicating that the cap rate is falling over time. The Gross Rent Multiplier is less reliable than using the cap rate approach.

Question 11

Holly is looking at National Savings and Investment deposit based accounts. She prefers an investment that has a fixed term. Which of the following would be suitable to consider?
IIncome bonds
IIChildren’s Bonus Bonds
IIIDirect ISA
IVInvestment Account
AI & II BII only CIII & IV DI only

Answer 11

The correct answer is: B - II only
Explanation
Only Children’s Bonus Bonds have a fixed term - five years. All the rest have an open term.

Question 12

Which of the following securities is most suitable if you are an investor who wishes to have an increase in returns as the performance of the company improves?
ADebentures BParticipating preference shares CCumulative preference shares DRedeemable preference shares

Answer 12

The correct answer is: B - Participating preference shares
Explanation
Participating preference shares have a fixed dividend but also have a bonus tethered to them in years of improved performance. Cumulative preference shares, redeemable preference shares and debentures all have a fixed return.

Question 13

Which of the following would be a feature of an offshore fund?
AAlways pay no income or capital gains tax BIn some cases may have to pay a low level of tax CAre always able to reclaim withholding tax DAre managed with tax efficiency as a focus

Answer 13

The correct answer is: B - In some cases may have to pay a low level of tax
Explanation
This is a tricky question. Offshore funds may be subject to a tax charge locally, but generally this is very low. As tax payments are low or non-existent, tax efficiency is not high on the objectives of the managers. It is true, however, that there is often no double taxation agreement in place for these funds, so reclaiming withholding tax would not be possible.

Question 14

Which of the following is/are valid criteria to qualify for being taxed on the remittance basis in the UK?
IYou must be a non UK resident
IIYou must be not ordinarily resident
IIIYou must be non-domiciled in the UK
AI, II & III BII and III CI only DIII only

Answer 14

The correct answer is: D - III only
Explanation
This question has been recently amended.
To be eligible to be taxed on the Remittance Basis you must not be UK domiciled.
Note: ordinarily resident status no longer exists.

Question 15

An investor has £60,000 which was invested for two years. On sale, a significant capital gain was achieved. Assuming the rate of return is the same for each of the investments, which of the below would have given the investor the most tax efficiency?
AVCT BEIS CISA DNS&I savings certificates

Answer 15

The correct answer is: A - VCT
Explanation
VCT shares do not attract any capital gains tax, regardless of the holding period, on investments up to £200,000.
EIS rules allow for no capital gains tax if held for at least three years, which this does not meet.
ISA would not allow for the whole investment over the two-year period and the max deposit on NS&I savings certificate is £15,000, so could not invest the whole £60,000.

Question 16

You are evaluating long calls and long put options and the factors that influence their value. Which of the following is/are incorrect?
IAn increase in the strike price will reduce the value of a call and increase the value of a put
IIAn increase in interest rates will decrease the value of a put and increase the value of a call
IIIAn increase in time to maturity will increase the value of a call and decrease the value of a put
IVAn increase in volatility will increase the value of both the call and the put
AI & IV BI, II & IV CIII only DIII & IV

Answer 16

The correct answer is: C - III only
Explanation
An increase in the strike will decrease the value of a call and increase the value of a put - correct.
An increase in interest rates will increase the value of a call and will decrease the value of a put - correct.
An increase in time to maturity will increase the value of both options as there is an increased chance of the options becoming in the money.
An increase in volatility will increase the value of both options - correct.

Question 17

Which of the following investments is best used as a proxy for the risk-free rate?
AFTSE 100 Index dividend yield BUK government debt CLIBOR DBank of England Repo Rate

Answer 17

The correct answer is: B - UK government debt
Explanation
The yield on UK government debt, i.e. gilts, is often used as a proxy for the risk-free rate.

Question 18

Upon spending £10,000 to buy into a UK equity unit trust, Paul Fry receives 2,000 units. His first distribution payment is worth £2 per unit, and he receives the income split into two parts of £1.50 and 50p. He is a higher rate tax payer, and he calculates his tax bill. What should he be aware of?
AEither one of the two amounts of distribution is called accumulated income, and so is not taxed at the investor level as it has already been taxed in the fund BEither one of the two amounts of distribution is called an equalisation payment, and is not taxed at the investor level as it is a return of the investor’s capital CBoth of the amounts of distribution are considered a dividend and will be taxed at the relevant higher rate DBoth of the amounts of distribution are considered a return of the investor’s capital and will not be taxed

Answer 18

The correct answer is: B - Either one of the two amounts of distribution is called an equalisation payment, and is not taxed at the investor level as it is a return of the investor’s capital
Explanation
When Paul first bought into the unit trust, he paid the net asset value (NAV) of the fund as of the valuation point. This valuation would have included the value of the fund’s portfolio plus any income that had been received, but not yet paid-out. When the next distribution in made, the investor will receive a tax voucher that splits the payment into two parts, the normal distribution and the equalisation payment. As the equalisation payment is simply a return of the investor’s money, it is not liable to income tax.

Question 19

Theo, Peter and Duncan are all actively involved in Private Equity Investments. They have formed an investment company called ‘Three Dragons Capital Management’ and are evaluating a number of investment opportunities.
Opportunity A - Growth Capital Project
Opportunity B - Mezzanine Finance Project
Opportunity C - Venture Capital Project
Opportunity D - LBO
The Dragons have built their past success on demanding an equity stake in all their investment opportunities. Which of the following investment opportunities is/are most likely to provide them with an equity stake in the opportunity?
IOpportunity A
IIOpportunity B
IIIOpportunity C
IVOpportunity D
AI, II & III BI & III CIII only DI, III & IV

Answer 19

The correct answer is: B - I & III
Explanation
Venture Capital and Growth Capital are equity financing. Whereas LBOs and Mezzanine Capital are primarily debt financing.

Question 20

Which of the following products offered by National Savings and Investments would never offer a variable return?
AIndex-linked saving certificates BIncome bonds CGreen savings bonds DDirect ISA

Answer 20

The correct answer is: C - Green savings bonds
Explanation
Green savings bonds give the investor a fixed return over a three year period.

Question 21

A new investor has approached you with the intention of taking out a life policy on her partner. What should be your main priority when recommending a policy?
AAffordability for the investor BAttitude towards risk of the partner CLifestyle and health of the partner DCommission that you would receive

Answer 21

The correct answer is: A - Affordability for the investor
Explanation
The insurance company would need to know the health and lifestyle issues to assess risk. Your duty as an advisor, however, is to your client, so attitude to risk and affordability are a priority. As this is a life policy, attitude to risk is not really an issue, so affordability is the main area to focus on.

Question 22

An investor is to receive a lump sum of £15,000 in five years’ time. If the rate of return is fixed at 4.65%, how much has been invested?
A£18,827.27 B£18,746.45 C£12, 002.27 D£11,950.75

Answer 22

The correct answer is: D - £11,950.75
Explanation
This is a present value calculation. The present value is calculated as follows:
Cash flow / (1 + r)^n.
You will need to use the [x^y] key on the scientific view of the calculator to do this quickly.
£15,000 / 1.0465^5 = £11,950.75.

Question 23

Which of the below could be paying class 2 and class 4 when it comes to National Insurance contributions?
AEmployers BEmployees CSelf-employed DBoth employers and employees

Answer 23

The correct answer is: C - Self-employed
Explanation
Based on the earnings of the self-employed, they may be paying class 2 or class 4. Employees and employers pay class 1 contributions.

Question 24

Neil purchases a commercial property in 1995 for £500,000 and incurs £8,750 legal costs during the purchase. During his ownership he spends £100,000 improving and modernising the property. In the current fiscal year he disposes of the property for £2,000,000, paying £11,000 in fees and commissions.
Assuming an annual exemption of £6,000, calculate Neil’s chargeable gain.

A£1,389,950 B£1,374,250 C£1,356,850 D£1,344,550

Answer 24

The correct answer is: B - £1,374,250
Explanation
The chargeable gain would be calculated as follows:
Proceeds: £2,000,000
Cost of disposal: (£11,000)
______________________________________
Net proceeds: £1,989,000
Cost of purchase: (£500,000)
Incidental costs of purchase: (£8,750)
Enhancement expenditure: (£100,000)
_______________________________________
Gain on asset: £1,380,250
Annual exemption: (£6,000)
_______________________________________
Chargeable gain: £1,374,250

Question 25

A higher-rate taxpayer has been recommended UK government debt. If they have a low-risk preference and considering their tax position, which of the following types of gilts would be most appropriate?
ALow-coupon, short-dated BMedium-coupon, short-dated CLow-coupon, long-dated DMedium-coupon, long-dated

Answer 25

The correct answer is: A - Low-coupon, short-dated
Explanation
Low-coupons and long-dated suggest high-volatility, so high-risk. Although medium-coupon, short-dated would have little risk, we need to take into consideration that this is a higher rate taxpayer. To reduce tax burden, the low-coupon is most appropriate.

Question 26

A unit trust issues more units than it surrenders. If the fund is composed 50:50 of gilts and UK equities, at what rate will the fund effectively pay stamp duty reserve tax?
A0% B0.25% C0.5% D£5

Answer 26

The correct answer is: B - 0.25%
Explanation
Gilts are not subject to stamp duty. Only 50% of the fund invested in equities is subject to stamp duty, so the rate will be 50% of 0.5%.

Question 27

The following transactions occur: Martin buys 5000 shares in a FTSE100 index company and the transaction settles through CREST. Hilary buys 1000 dematerialised shares in a small UK company. Fiona buys £10,000 nominal value gilts that settle through CREST Harold buys 1000 units in an FCA authorised unit trust. With regard to stamp duty and stamp duty reserve tax (SDRT), which of the following is true?
AMartin and Hilary pay SDRT BHarold and Martin pay SDRT and Hilary pays stamp duty CMartin and Fiona pay SDRT and Harold pays stamp duty DMartin, Fiona and Harold pay SDRT and Hilary pays stamp duty

Answer 27

The correct answer is: A - Martin and Hilary pay SDRT
Explanation
SDRT is payable on the purchase of dematerialised shares that settle through CREST, so Martin and Hilary would have to pay this. There is no stamp duty liability on the purchase of gilts or unit in a unit trust (although the unit trust itself will be paying SDRT on all of the purchases within the fund).

Question 28

When considering the current account element of the balance of payments in the economy, which of the following would be true? It measures:
AFlows in relation to trade in goods and services and current transfers BFlows in relation to goods and services and overseas investments CFlows in relation to goods and services and overseas companies operating in the UK DFinancial service activity in the economy only

Answer 28

The correct answer is: A - Flows in relation to trade in goods and services and current transfers
Explanation
The current account considers short-term cash flows only. Overseas investment would be part of the capital account.

Question 29

Gonzalo invested a lump sum in to a portfolio some time ago. He has since made no further contributions or withdrawals.

Jorge invests different amounts of money in investments that he identifies as being underpriced or as having excellent growth potential in order to create his own fund.

Sergio has a standing order with a fund management group and pays in a set amount every quarter.

When considering the methods of calculating the return on the investments for the three investors, which of the following is true?

ASergio is more likely to use the time-weighted rate of return than Jorge BJorge is more likely to use the holding period rate of return than Gonzalo CGonzalo is more likely to use the money-weighted rate of return than Sergio DTime-weighted and money-weighted rates of return would give the same results for Gonzalo and Sergio

Answer 29

The correct answer is: A - Sergio is more likely to use the time-weighted rate of return than Jorge
Explanation
The holding period return is often referred to as a total return, and is useful where there are no additional contributions or withdrawals. This method best suits Gonzalo’s investment.
The money-weighted and time-weighted rates of return are useful for when there are injections and withdrawals. However, they do not tell the same story.
The time-weighted rate of return is not distorted by the weighting and timing of the cash flows invested. As market timing is not an aspect of Sergio’s investment strategy (he has a standing order that pays no regard to current market performance), he would not want his return distorted by this factor, so this would be better suited to his fund.
Jorge has a very active investment strategy. He places a lot of emphasis on the timings and amounts being invested, so his return should show this. The money-weighted rate of return would allow these factors to be included in the performance figures.

Question 30

An airline relies upon oil for its fleet of planes. It wishes to hedge its oil price risk and yet still benefit if the oil price falls. Which of the following would be the optimum strategy using derivatives?
ALong oil future BShort oil future CLong call option on oil DLong put option on oil

Answer 30

The correct answer is: C - Long call option on oil
Explanation
The airline wants to protect against price rises, yet also wants to benefit if the price falls. It therefore would benefit most from a long call option. The long call option has a payoff if the price rises above the strike price however if the price falls there is no obligation to exercise.

Question 31

Blake Carrington, now well into his retirement, decides to start IHT planning and makes the following gifts to his family.
Jan 1st - Cash transfer of £200,000 to his daughter Lucy
Jan 3rd - Cash transfer of £125,000 into a discretionary trust for his son Robert
Jan 5th - Cash transfer of £20,000 to his granddaughter Crystal
Assuming no other assets , which of the following is/are correct?
IThe transfer to Lucy is only potentially exempt
IIThe transfer to Robert will attract the lifetime rate of IHT
IIIThe transfer of £20,000 to Crystal will attract the chargeable lifetime transfer rate of IHT
AI & III BII only CIII only DNone of the above

Answer 31

The correct answer is: D - None of the above
Explanation
The transfers to Lucy and Robert do not result in a charge as the total assets transferred are below the NRB of £325,000, i.e. £200,000 to Lucy + £125,000 to Robert = £325,000, so would NOT trigger the chargeable lifetime transfer rate of IHT.
The transfer to Crystal will not attract the chargeable lifetime transfer rate as this is only applicable for transfers into discretionary trusts, not to potentially exempt transfers.

Question 32

Which of the following is not a category of multi-factor model?
AMacroeconomic BTechnical CFundamental DStatistical

Answer 32

The correct answer is: B - Technical
Explanation
The three types of model are: fundamental, statistical and macro-economic

Question 33

Which of the following is/are true of correlations?
ICash and property returns are negatively correlated
IIUK equity returns and overseas equity returns are highly correlated
IIIInvestors value negative correlations more than positive correlations
AI & II BII & III CI & III DI, II & III

Answer 33

The correct answer is: D - I, II & III
Explanation
Investors do value negative correlations more than positive correlations as this provides diversification.
Cash and property are negatively correlated.
Global equities are increasingly correlated as they are impacted by the same global events and risks.

Question 34

Firm Q has a current share price of £5.00 a share and announces a one for four rights issue at a price of £3.00. Firm P has a current share price of £5.00 a share and announces a one for four capitalisation issue.
Which of the following is correct?
IThe theoretical ex-rights price per share is £4.50
IIThe theoretical price per share after the capitalisation issue is £4.00
AI only BII only CBoth DNeither

Answer 34

You answered : B - II only The correct answer is: B - II only