Topic 6

Question 1

Which one of the following client need areas are bank and building society accounts BEST equipped to provide for?

A. Rainy day money
B. Savings for those who want a guaranteed real return on their money
C. Long term regular savings
D. Pension provision

Answer 1

A. Rainy day money

Question 2

Which one of the following would be regarded as an advantage of a building society savings account?

A. A high rate of interest reflecting the risks involved

B. Regular interest payments and security of capital

C. The potential for capital growth with high risk

D. A tax-free return but no guarantee of performance

Answer 2

B. Regular interest payments and security of capital

Question 3

Income tax is not payable on which one of the following forms of income?

A. Winnings on Premium Bonds
B. Income from local authority stocks
C. Tips
D. Inventor’s income from copyright or patent

Answer 3

A. Winnings on Premium Bonds

Question 4

A new gilt issue has been referred to as medium dated in the financial press, however the UK Debt Management Office has described it as short dated. It will therefore be for which of the following terms?

A. Two years
B. Four years
C. Eight years
D. Six years

Answer 4

D. Six years

Question 5

Which type of investment would be MOST suitable for a non-taxpayer requiring monthly income with NO risk to capital?

A. Gilts
B. National Savings Income Bonds
C. National Savings Certificates
D. An annuity

Answer 5

B. National Savings Income Bonds

Question 6

What is the maximum total investment into Premium Bonds?

A. £30,000
B. £3,600
C. £50,000
D. £20,000

Answer 6

C. £50,000

Question 7

Barry owns £5,000 of premium bonds. Which one of the following is FALSE?

A. His recent £1,000 winnings are tax-free
B. He must give 3 months’ notice if he wants to encash them
C. He may purchase another £15,000 of bonds
D. There is no interest rate paid on premium bonds

Answer 7

B. He must give 3 months’ notice if he wants to encash them

Question 8

Which of the following statements in respect of gilts and local authority stock is true?

A. Interest on local authority stock is subject to capital gains tax

B. Local authority stocks are not negotiable and carry a government guarantee

C. Interest on gilts is paid without deduction of income tax but is taxable

D. Gilts are negotiable and any gain may be subject to capital gains tax

Answer 8

C. Interest on gilts is paid without deduction of income tax but is taxable

Question 9

Which one of the following is LEAST likely to affect the price of gilts?

A. The time outstanding until redemption date
B. The length of time it has been held for
C. Current market interest rates
D. Anticipated changes in interest rates

Answer 9

B. The length of time it has been held for

Question 10

What rate of capital gains tax, if any, would a basic rate taxpayer be liable to on gains made from gilts?

A. 22%
B. 20%
C. 18%
D. Nil

Answer 10

D. Nil

Question 11

Why would a client want to know the ‘coupon’ of a gilt?

A. It gives an indication of the total income and capital growth that can be expected
B. It is the amount of capital that will be repaid
C. It is the income payment that will be received
D. It is the purchase price required

Answer 11

C. It is the income payment that will be received

Question 12

According to the financial press, the term to run before redemption under a medium-dated gilt is between:

A. 3 and 5 years
B. 5 and 10 years
C. 5 and 15 years
D. 10 and 15 years

Answer 12

C. 5 and 15 years

Question 13

What is ‘index-linked’ on an index-linked gilt?

A. The coupon rate only
B. The redemption price only
C. The price throughout the term and the redemption price
D. The coupon rate and the redemption price

Answer 13

D. The coupon rate and the redemption price

Question 14

What returns can be achieved on an investment into gilts?

A. The capital will remain intact and interest will be added in line with prevailing interest rates

B. A fixed rate of interest will be paid during the term and the investment can be sold at any time to realise capital

C. There is potential for high capital and income growth but the value of both may fluctuate in the short term

D. Both capital and income returns will accumulate and be payable free of all UK taxes

Answer 14

B. A fixed rate of interest will be paid during the term and the investment can be sold at any time to realise capital

Question 15

Which one of Belinda’s needs would direct investment in gilts be UNABLE to satisfy?

A. Fixed income
B. Low risk investment
C. Return free of capital gains tax
D. Income free of higher rate income tax

Answer 15

D. Income free of higher rate income tax

Question 16

Which one of the following organisations issues permanent interest bearing shares?

A. Companies quoted on the London Stock Exchange
B. Building societies
C. Local authorities
D. The Bank of England

Answer 16

B. Building societies

Question 17

Derek has invested in undated gilt-edged securities. This means that:

A. the interest will be paid net of lower rate income tax.

B. he will have to sell them on the open market to access his capital.

C. the government will pay no interest until the holding is sold.

D. the government will redeem the holding at anytime, if Derek requests it.

Answer 17

B. he will have to sell them on the open market to access his capital.

Question 18

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

A. usually pay variable rate interest
B. are available for larger amounts
C. normally have no specified redemption date
D. are considered to be higher risk investments

Answer 18

D. are considered to be higher risk investments

Question 19

A key difference between a debenture and a loan stock issued by a company is that a debenture:

A. holder has 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 in the company.

D. pays a fixed rate of interest

Answer 19

B. is usually secured on the assets of the company.