TOPIC 6 - Direct investments: cash and fixed interest securities

Question 1

Amanda has a permanent income-bearing shareholding. This means:

a) the investment is lower risk than a deposit account.

b) she has no guarantee that her original investment will be repaid.

c) the issuing organisation is now a bank.

d) she has a corporate bond holding.

Answer 1

b) she has no guarantee that her original investment will be repaid.

Question 2

Income from an offshore deposit account is tax free for a UK resident.

a) True
b) False

Answer 2

b) False

Question 3

Sally has a National Savings and Investment (NS&I) product, but her friend Sarah cannot open a similar account because new issues of the product are no longer available. This means Sally has an NS&I:

a) investment account.

b) income bond.

c) guaranteed growth bond.

d) premium bond.

Answer 3

c) guaranteed growth bond.

Question 4

Which of the following is true? Peer-to-peer lending is:

a) co-ordinated by banks and building societies.

b) regulated by the Prudential Regulation Authority.

c) not protected by the Financial Services Compensation Scheme.

d) a direct contract between one lender and one borrower.

Answer 4

c) not protected by the Financial Services Compensation Scheme.

Question 5

Kimberley’s paid £105 for a 4% Treasury gilt with a par value of £100. What is the running yield of the gilt?

a) 2.5%.

b) 3.8%.

c) 4%.

d) 5%.

Answer 5

b) 3.8%.

The running yield is the income of £4 (par value of £100 x 4%) as a percentage of the £105 price paid = 3.8%.

Question 6

Jerry has a corporate bond secured on the company’s assets. This is referred to as:

a) loan stock.

b) a perpetual subordinated bond.

c) an investment bond.

d) a debenture.

Answer 6

d) a debenture.

Question 7

Joanne has a basic bank account. Which feature is her account unlikely to offer?

a) Overdraft facility

b) Cash withdrawals from a Post Office.

c) Direct debits.

d) ATM card.

Answer 7

a) Overdraft facility

Question 8

A structured deposit account:

a) provides a guaranteed fixed return.

b) places the original capital at risk.

c) runs for a fixed term.

d) matches the return from an associated stock market index.

Answer 8

c) runs for a fixed term.

The total return is not guaranteed, although the original capital is guaranteed to be returned at the end of the fixed term. The total return is linked to the performance of an associated stock market index, although the return will usually be below the index’s actual return.

Question 9

An investor has bought a gilt ‘cum dividend’. This means they:

a) will not receive any of the next due income payment.

b) will receive 100% of the next due income payment.

c) will be entitled to a bonus dividend on the next due income date.

d) and the seller will each receive 50% of the next due income payment.

Answer 9

b) will receive 100% of the next due income payment.

Question 10

Income from a Eurobond received by a higher-rate taxpayer qualifies for:

a) the annual dividend allowance.

b) personal savings allowance.

c) capital gains tax exemption.

d) tax-free status.

Answer 10

b) personal savings allowance.

Question 11

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

Answer 11

True

Question 12

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 12

b) 16.

Question 13

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

Answer 13

False, interest is paid gross but is taxable

Question 14

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

Answer 14

Currency exchange rate

Might not have the same investor protection schemes as UK

Question 15

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

Answer 15

Interest rate payable on the par value of the gilt

Question 16

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 16

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

Question 17

Rubina is considering buying a gilt, 3% Treasury 2025. The gilt
is currently trading at a price of £107. What is the running yield?

Answer 17

2.8% Running yield = coupon (3%) ÷ 107

Question 18

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 18

d) are considered to be higher risk investments.

Question 19

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 19

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

Question 20

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

Answer 20

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 21

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 21

c) A basic bank account.

Question 22

How does the UK Debt Management Office, which issues gilts, define short and medium gilts?

Answer 22

Short‑dated gilts: less than 7 years.

Medium‑dated gilts: 7–15 years