Module 1

Question 1

How can a bank involved in wholesale banking raise money quickly in order to finance business activities?

a) By a further issue of shares.
b) By borrowing from the Bank of England.
c) By calling in their debts.
d) From the interbank market.

Answer 1

Answer d) is correct. Answer b) is incorrect because the Bank of England only lends to the banks in its capacity as lender of last resort, eg when there is a run on its deposits. It does not lend to finance normal business activity.

Question 2

Money is:
„ a medium of exchange – it can be exchanged for goods and services;
„ a unit of account – a common denominator against which the value of goods and services can be measured; and
„ a store of value – money received as payment today can be stored until required.

Which of these important functions enables a person to work out that they can rent four DVDs for the same price as buying one?

Answer 2

The answer is unit of account – this is the function that allows the price of one item to be compared with the price of another.

Question 3

What are the four main reasons why individuals and companies need financial intermediation?

Answer 3

Geographic location
Aggregation
Maturity transformation
Risk transformation

Question 4

What is the key difference between a mutual organisation and a proprietary organisation?

Answer 4

A mutual organisation is owned by its members – in the case of a building society, these are savers and borrowers; for a life assurance company they are the policyholders. A proprietary organisation is owned by its shareholders and is a limited company.

Question 5

A financial transaction that is carried out directly between an organisation with surplus funds to lend and one that needs to borrow is an example of:

a) demutualisation.
b) disintermediation.

Answer 5

Disintermediation.

Question 6

Which one of the following is not a role of the Bank of England?

a) To regulate the supply of money and manage gold reserves.
b) To act as financial ombudsman in resolving customer complaints about banks.
c) To act as adviser to the government.
d) To set interest rates.

Answer 6

To act as financial ombudsman in resolving customer complaints about banks.

Question 7

Which institution issues UK banknotes?

a) The Bank of England.
b) The Treasury.
c) The Royal Mint.

Answer 7

The Bank of England. The Royal Mint issues coins.

Question 8

Credit unions cannot pay interest on savings. True or false?

Answer 8

False. Credit unions can pay interest on savings as long as they have the necessary systems and controls in place and have at least £50,000 or 5 per cent of total assets (whichever is greater) in reserve.

Question 9

Freshfood Ltd supplies fruit and vegetables to market traders and small shops. The banking transactions it carries out are an example of:

a) wholesale banking.
b) retail banking.

Answer 9

b) Retail banking. Wholesale banking involves providing funds to other financial institutions or very large corporate clients.

Question 10

The setting of Libor is a regulated activity. True or false?

Answer 10

True.

Question 11

What is meant by a ‘macroeconomic objective’?

Answer 11

An objective that relates to the economy as a whole, rather than to a specific sector or individual company.

Question 12

What are the four key macroeconomic objectives that UK governments generally seek to achieve?

Answer 12

Price stability, low unemployment, a balance of payments equilibrium and satisfactory economic growth.

Question 13

What is a potential negative consequence of expanding economic growth to reduce unemployment?

Answer 13

Measures taken to expand the economy (eg reducing interest rates and taxation) increase the demand for goods and services, which is likely to result in a rise in inflation.

Question 14

All governments aim to achieve zero inflation. True or false?

Answer 14

False. They aim to keep prices stable, but seeking to reduce inflation to zero is likely to increase unemployment.

Question 15

What is the UK government’s inflation target and how is it measured?

Answer 15

The UK government’s inflation target is 2 per cent with a maximum divergence either side of 1 per cent. It is measured by the Consumer Prices Index.

Question 16

Disinflation means that:

a) prices are rising faster than previously.
b) prices are falling.
c) prices are rising but more slowly than previously. d) prices are staying the same.

Answer 16

c) Prices are rising but more slowly than previously.

Question 17

In June, the Monetary Policy Committee (MPC) decides to raise the Bank rate by half a percentage point. In August, Paul and Amanda’s mortgage payments increase. Explain how these two events are likely to be linked.

Answer 17

Paul and Amanda must have a variable‐rate mortgage, so the amount they pay each month is likely to rise and fall broadly in line with changes in the Bank rate.

Question 18

Which of the following economic measures taken by a government would not help to achieve a budget surplus?

a) Increasing taxation.
b) Increasing public spending.
c) Reducing public spending.

Answer 18

b) Increasing public spending. To achieve a budget surplus a government must cut public spending, raise taxes, or both.

Question 19

A new piece of EU legislation is being introduced. It is being implemented at the same time and in exactly the same way across all member states. This indicates that the legislation is in the form of:

a) a directive.
b) a regulation.

Answer 19

A regulation. Member states have flexibility in the way they introduce directives.

Question 20

Which EU body is responsible for monitoring the financial system for systemic risk and taking steps to reduce it?

Answer 20

The European Systemic Risk Board (ESRB).

Question 21

A person who is UK resident for tax purposes only pays income tax on earnings generated in the UK. True or false?

Answer 21

False. They are liable for income tax on income generated anywhere in the world, but the UK has reciprocal tax treaties (double taxation agreements) with many countries to ensure that people are not taxed twice on the same income.

Question 22

Which of the following people would be most likely to be a ‘UK resident’?

a) Susan, who normally lives in Spain but spends three months a year working for the family business in England.
b) Antoine, a French surveyor, whose eight‐month contract in Devon with a construction company started in May.
c) Max, who moved to London from Cologne on 6 January for a seven‐month teaching contract.
d) Brenda, who spends 180 days a year in the UK and the remainder in the USA.

Answer 22

Answer b) Antoine is correct

Answer c) is not correct because three months of Max’s contract are in one tax year and the rest in the following year. He will not spend 183 days in either tax year in the UK.

Question 23

Which of the following will not be subject to UK inheritance tax upon death?

a) UK property owned by Paolo, who has lived in the UK for three years but is not UK domiciled.
b) Overseas property owned by Kavita, who was born in the US (to American parents) but has lived in the UK for the past 18 years.
c) Overseas property owned by Helena, who is UK resident but not UK domiciled nor deemed domiciled.
d) Overseas property owned by David, who is UK domiciled but resident in France.

Answer 23

c) As Helena is not UK domiciled she will not pay IHT on overseas assets.

Question 24

On which of the following would a child be subject to income tax?

a) All earned income.
b) An educational grant.
c) Any earned income that exceeds their personal allowance.
d) A settlement from their parents.

Answer 24

c) Any earned income that exceeds their personal allowance. The settlement from their parents (answer d) will be taxed as the parents’ income, the educational grant (answer b) is tax‐free, and they would not pay tax on all of their earned income (answer a), only that which exceeds their personal allowance.

Question 25

A person may become UK domiciled once they have been settled in the country for a number of years. True or false?

Answer 25

True, as long as their actions indicate that their change of residence is permanent and they have severed links with their original country of domicile.

Question 26

Which of the following is not assessable for income tax purposes? a) Tips.

b) Interest from bank and building society deposits.
c) Lottery prizes.
d) Rents from land and property.

Answer 26

c) Lottery prizes.

Question 27

In what order of priority is income taxed?

Answer 27

Non‐savings income, then savings income, then dividend income.

Question 28

Blind person’s allowance can be transferred to a spouse or civil partner if the blind person does not use the allowance. True or false?

Answer 28

True. Blind person’s allowance can be transferred to a spouse/civil partner if the original recipient does not pay tax or use all their allowance.

Question 29

Emma worked abroad for five years but is now back working in the UK. What class of National Insurance contributions could she pay to improve her contribution record for the state pension?

Answer 29

Class 3.

Question 30

For the following questions, use the tax rates, bands and allowances for 2019/20.

Mike earns £22,000. He also receives £500 interest on his savings from a building society deposit account. Calculate the income tax payable.

Answer 30

On earnings:
£22,000 – £12,500 (personal allowance) = £9,500 £9,500 × 20% = £1,900
There is no tax on savings income because, as a basic‐rate taxpayer, Mike has a personal savings allowance of £1,000.

Question 31

Roopa is a company director. In 2019/20 she draws a salary of £12,500. She has dividend income of £27,000. Calculate the income tax payable.

Answer 31

Total income is £39,500
Salary falls within personal allowance of £12,500 so no tax is paid on this.
£2,000 of dividend income is taxable at 0 per cent.
The remaining £25,000 all falls within the basic rate tax band and is taxed at 7.5 per cent.
Total tax is £1,875 (£25,000 × 7.5%).

Question 32

Jemma is self‐employed and is in receipt of blind person’s allowance. In 2019/20, her gross profit is £20,000 and she has allowable expenses of £2,500. She has to pay Class 4 NICs at 9 per cent on her taxable profit above £8,632. Calculate the income tax and Class 4 NICs payable.

Answer 32

Income tax:
£20,000 Gross profit (£2,500) Allowable expenses
(£12,500) Personal allowance
(£2,450) Blind person’s allowance Taxable income: £2,550
Tax: £2,550 × 20% = £510
Class 4 NICs:
£20,000 – £2,500 = £17,500 taxable profit £17,500 – £9,500 × 9% = £720.00

Question 33

Ashok’s salary is £75,000 and he is paid savings interest of £650. He also has dividend income of £7,000. Calculate the income tax payable.

Answer 33

Tax on earned income: £75,000 Income
(£12,500) Personal allowance
£62,500 taxable earned income
£37,500 × 20% = £7,500
£62,500 – £37,500 = £25,000 × 40% = £10,000 Savings interest:
£500 (PSA) × 0% = £0 £150 × 40% = £60 Dividend income: £2,000 (DA) × 0% = £0 £5,000 × 32.5% = £1,625

Question 34

In July 2015, Joan made a gift to her daughter of £350,000. She has made no other gifts in her lifetime. Joan died in October 2019 leaving a total estate worth £420,000. The full rate of IHT in 2019/20 is 40 per cent on estates over £325,000. How much IHT is applied to the value of the gift that is in excess of the nil‐rate band (£25,000)?
a) £5,000 b) £6,000 c) £8,000 d) £10,000

Answer 34

The answer is b) £6,000. In the first instance, the gift uses the available nil‐rate band of £325,000, there is then an excess of £25,000 above the nil‐rate band. Joan died between four and five years after the gift, so the £25,000 excess is liable for IHT at 60 per cent of the full rate (ie 40% × 60%).

Question 35

Melanie bought a painting in a charity shop for £40. It turned out to be by a well‐known artist, and she sold it three years later for £2,000. She had to pay CGT on the gain she made. True or false?

Answer 35

False. Gains made on ‘chattels’ (movable objects such as jewellery, antiques and paintings) are exempt from CGT if their value is £6,000 or less.

Question 36

For how many years can the annual exempt amount for CGT be carried forward?

Answer 36

The CGT annual exempt amount cannot be carried forward at all.

Question 37

To qualify for roll‐over relief, a business must replace an asset not more than five years from the date of disposal. True or false?

Answer 37

False. Assets must be replaced within three years after the date of disposal.

Question 38

Inheritance tax would be charged on which of the following?

a) The total value of the deceased’s estate.
b) The total value of the estate above the available nil‐rate band.
c) The value of the estate less any gifts that have been made in the previous seven years.

Answer 38

b) Inheritance tax would be payable on the total value of the estate above the available nil‐rate band.

Question 39

Tax on a chargeable lifetime transfer in excess of the available nil‐rate band is payable:

a) immediately, at the full rate.
b) only if the transferor dies within seven years of the transfer.
c) immediately, at a reduced rate.

Answer 39

c) Immediately, at a reduced rate of 20 per cent.

Question 40

What kind of tax is payable when shares are purchased electronically?

Answer 40

Stamp duty reserve tax.

Question 41

Sanjay, a basic‐rate taxpayer with taxable income of £12,000, purchased UK listed company shares for £11,300 in May 2014. He sold them for £25,400 in August 2019. He has no other gains or losses (current or carried forward) in the tax year 2019/20. Ignoring any costs, calculate his capital gains tax liability.

Answer 41

Gain: £25,400 – £11,300 = £14,100
Taxable gain: £14,100 – £12,000 = £2,100
Capital gains tax payable: £2,100 × 10% = £210

Question 42

Sarah, a basic‐rate taxpayer with earned income of £17,000 in 2019/20, bought some shares in May 2016 for £15,000 and sold them in October 2016 for £10,100, making her a loss of £4,900 in the tax year 2016/17. She made no gains in the same tax year. In June 2019 she sold her holiday flat in Devon, which made her a profit of £47,600. She had spent £14,000 on renovations,
and it cost her £3,500 in estate agent’s commission to sell it. Calculate the capital gains tax due for the tax year 2019/20.

Answer 42

Gain on flat
Less cost of renovations
Less cost of disposal (commission)
Less annual exempt amount (2019/20)
Less carried‐forward loss from 2016/17
£47,600 (£14,000) (£3,500) (£12,000) (£4,900)
Taxable gain = £13,200 × 18% = £2,376 capital gains tax
Note that a rate of 18 per cent applies as the gain arises from the disposal of property.

Question 43

Luis sold his studio flat and bought an apartment (his only property) for £325,000. How much stamp duty, if any, will he pay?
a) £6,250. b) £2,500. c) £3,750. d) £0.

Answer 43

a) £6,250. No tax is payable on the first £125,000. Tax is payable at 2% on the portion between £125,001 and £250,000 (£125,000 × 2% = £2,500). Tax is payable at 5% on the portion between £250,001 and the purchase price of £325,000 (£75,000 × 5% = £3,750). Total SDLT due = £6,250.

Question 44

A company makes an annual profit of £1.2m. When would the company’s corporation tax normally be payable?

Answer 44

Nine months after the end of the relevant accounting period.

Question 45

Jane and John have two young daughters and claim Child Benefit. If John earns £48,000 per year and Jane earns £57,000 per year, they will be subject to a Child Benefit tax charge of:

a) Nil.
b) 100 per cent.
c) 70 per cent.
d) 7 per cent.

Answer 45

The correct answer is c). The tax charge is 1 per cent for each £100 of income above £50,000.

Question 46

Which form(s) of Employment and Support Allowance is/are means‐tested?

a) Contribution‐based ESA only.
b) Income‐based ESA only.
c) Both contribution‐based and income‐based ESA.
d) Neither contribution‐based nor income‐based ESA.

Answer 46

The correct answer is b). Income‐based ESA is means‐tested; contribution‐based ESA is based on National Insurance contribution record so is not means‐tested.

Question 47

A major difference between the basic state pension and the single‐tier state pension is:

a) The basic state pension is paid at a later age than the new state pension.
b) The new state pension is paid at a later age than the basic state pension.
c) The new state pension has no facility for an individual to claim a state pension based on National Insurance contributions paid by the spouse or civil partner.
d) Lower levels of National Insurance contributions are required to claim a full single‐tier state pension.

Answer 47

The correct answer is c). With the basic state pension it is possible to claim a ‘category B’ pension based on the NICs of a spouse or civil partner, but this is not possible with the new state pension.

Question 48

Why is it important for a financial adviser to know about state benefits?

Answer 48

Financial advisers need to understand what state benefits a person is entitled to or already claiming in order to give appropriate financial advice. For instance, when working out the level of life assurance cover that a family needs, the income that would be available from state benefits if a family wage earner were to die has to be taken into account.

Question 49

Once Universal Credit is fully implemented, parents who are eligible for Child Benefit will have to claim Universal Credit instead. True or false?

Answer 49

False. Universal Credit will eventually replace Child Tax Credit, not Child Benefit.

Question 50

Which of the following is not a feature of Income Support?
a) It is only available to claimants who have made National
Insurance contributions.
b) It is available for claimants aged between 16 and the qualifying age for Pension Credit.
c) Benefits are tax‐free.
d) Both income and savings are subject to means testing to determine eligibility.

Answer 50

a) is the correct answer, in that the statement is untrue. Income Support is available to people who have not made National Insurance contributions.

Question 51

James has been working in IT support for twelve years. His current job is a fixed‐term contract and ends next month. Assuming James has made NI contributions throughout his working life, what benefit is he likely to be able to claim while he is unemployed?

a) Working Tax Credit.
b) Income Support.
c) Contribution‐based Jobseeker’s Allowance.
d) Employment and Support Allowance.

Answer 51

c) Contribution‐based Jobseeker’s Allowance.

Question 52

Aliyah has been working for Abbots Transport for 16 weeks. She is 24 weeks pregnant. Which of the following state benefits may she be entitled to?

a) Statutory Maternity Pay.
b) Income Support.
c) Child Tax Credit.
d) Maternity Allowance.

Answer 52

d) Maternity Allowance. She is not entitled to Statutory Maternity Pay because she will not have been with her employer for 26 weeks by her qualifying week.

Question 53

When is the earliest that Aliyah can begin claiming this benefit?

Answer 53

Eleven weeks before the baby is due.

Question 54

Malcolm, who is 42 and self‐employed, has fallen ill and cannot work. Which benefit might he be entitled to?

a) Disability Living Allowance.
b) Statutory Sick Pay.
c) Employment and Support Allowance.
d) Attendance Allowance.

Answer 54

c) Employment and Support Allowance. He cannot claim Statutory Sick Pay because he is not an employee.

Question 55

Lucy earns £52,000 per year and her partner Howard has an annual salary of £29,000. They have three children, one at primary school and two at secondary school; their eldest son, Ethan, is 18 and studying for three A levels. For how many children are Lucy and Howard able to claim Child Benefit?

a) Two: they cannot claim for Ethan because he is over 16.
b) All three, because Ethan is still in full‐time education.
c) None, because Lucy earns more than £50,000 a year.
d) None, because their combined household income exceeds £50,000 per year.

Answer 55

b) All three: they will be able to claim for Ethan up until his 20th birthday while he remains in full‐time education.

Question 56

Ian retired in July 2019 at the age of 65. He had made NI contributions for 33 years while he was working but he had had a career break of three years to care for his sick partner. Is
Ian eligible for a full, new state pension?
a) No, because he was not continuously employed throughout his working life.
b) No, because he retired too early to claim the new state pension.
c) Yes, because he had paid NI contributions for more than 30 years.
d) Yes, because he was credited with NI contributions while he was a carer.

Answer 56

d) Yes. Although 35 years’ NI contributions are needed to be eligible for the full new state pension, Ian would have been credited with NI contributions for the three years that he was a carer.

Question 57

Lydia is 22 and has just begun a new job on a permanent, full‐time contract. Her employer will offer her the opportunity to contract‐out of the state second pension. True or false?

Answer 57

False. The state second pension is available only to those who reached state pension age before 6 April 2016. Lydia’s National Insurance contributions will build entitlement to the new state pension, which has no additional earnings‐related element, therefore it is not possible for Lydia to choose to contract out.

Question 58

Why does the fact that corporate bonds are regarded as riskier than gilts mean that they generally pay higher rates of interest than similar gilts?

Answer 58

Corporate bonds pay higher rates of interest than similar gilts because of the relationship between risk and reward – the more risky the investment is considered to be, the greater the reward the investor expects for taking the bigger risk.

Question 59

A bank deposit account is a good place to hold a ‘rainy day fund’. True or false?

Answer 59

True. Deposit accounts allow instant access to funds and they are low risk because savings are protected by the Financial Services Compensation Scheme up to a limit of £85,000.

Question 60

What, if any, is the minimum age at which a person can take out an NS&I Direct Saver?

a) There is no minimum age.
b) 16.
c) 18.

Answer 60

b) 16.

Question 61

Interest on NS&I Income Bonds is tax‐free. True or false?

Answer 61

False, interest is paid gross but is taxable.

Question 62

State two reasons why offshore bank accounts might be more risky than similar UK deposit accounts.

Answer 62

If the investment is held in a currency other than sterling, its value might be affected by adverse exchange rates if it has to be converted to sterling. Accounts held offshore might not be covered by investor protection schemes to the same extent as onshore UK investments.

Question 63

In relation to gilts, what is the ‘coupon’?

Answer 63

The coupon is the interest rate payable on the par value of a gilt.

Question 64

Jane has invested in short‐dated gilts. According to the UK Debt Management Office (DMO) definition, this means that:

a) the gilts will have a redemption date within the next seven years.
b) interest on the gilts will not be paid to her until the end of the term.
c) the gilts will have a redemption date within the next ten years.
d) she will be unable to access her capital until the end of the term.

Answer 64

a) The gilts will have a redemption date within the next seven years.

Question 65

Rubina is considering buying a gilt, 3% Treasury 2022. The gilt is currently trading at a price of £107. What is the running yield?

Answer 65

The running yield is £3 ÷ £107 = 2.8%.

Question 66

The main difference between corporate bonds and gilts is that corporate bonds:

a) usually pay a variable rate of interest.
b) are usually for larger amounts of money.
c) normally have no specified redemption date.
d) are considered to be higher‐risk investments.

Answer 66

d) Corporate bonds are considered to be higher‐risk investments.

Question 67

The main difference between a debenture and other types of corporate bond is that a debenture:

a) carries the right to vote at the company’s annual general meeting.
b) is usually secured on the assets of the company.
c) can be converted to ordinary shares of the company.
d) pays a fixed rate of interest.

Answer 67

b) A debenture is usually secured on the assets of the company.

Question 68

A Eurobond is the equivalent of a gilt, but issued by a government within the eurozone. True or false?

Answer 68

False. A Eurobond is a bond issued or traded in a country that uses a currency other than the one in which the bond is denominated, and they can be issued by large companies, not just governments.

Question 69

Jack opens an account so that his wages can be paid into it. He can use his account to pay bills such as utilities and rent via direct debit, and he can use his debit card to make purchases online and in shops, but he cannot have an overdraft. What kind of account does Jack have?

a) Packaged account.
b) An interbank account.
c) A basic bank account.
d) A debit account.

Answer 69

c) A basic bank account.