U1: T6 - DIRECT INVESTMENTS: CASH AND FIXED-INTEREST SECURITIES

Question 1

What 3 main components are conventional Gilts made up of?

Answer 1

1) Par (face value)
2) Coupon
3) Redemption Date

Question 2

In the context of GILTs what is the Par (face) value?

Answer 2

The issue value - the initial loan made to the government

Question 3

In the context of GILTs what is the Coupon?

Answer 3

A taxable fixed interest rate payable on the par value at half-yearly intervals

Question 4

In the context of GILTs what is the Redemption Date?

Answer 4

The date on which the government must ‘redeem’ or pay back the amount borrowed i.e. the par value

Question 5

GILT coupons are:

1) Taxable
2) Not-taxable

Answer 5

1) Taxable

Question 6

According the Financial Press a 6y GILT is:
1) Short-dated
2) Medium-dated
3) Long-dated?

Answer 6

2. Medium-dated

Question 7

According to the UK Debt Management Office, is a 6-year GILT:

1) Short-dated
2) Medium-dated
3) Long-dated?

Answer 7

1) Short-dated

Question 8

According to the UK Debt Management Office, what is a short-dated GILT?

1) Less than 5 years to redemption
2) Less than 6 years to redemption
3) Less than 7 years to redemption

Answer 8

3) Less than 7 years to redemption

Question 9

According to the UK Debt Management Office, what is a medium-dated GILT?

1) Between 5-15 years to redemption
2) Between 6-15 years to redemption
3) Between 7-15 years to redemption

Answer 9

3) Between 7-15 years to redemption

Question 10

According to the UK financial press, what is a short-dated GILT?

1) Less than 5 years to redemption
2) Less than 6 years to redemption
3) Less than 7 years to redemption

Answer 10

1) Less than 5 years to redemption

Question 11

According to the UK Financial Press, what is a medium-dated GILT?

1) Between 5-15 years to redemption
2) Between 6-15 years to redemption
3) Between 7-15 years to redemption

Answer 11

1) Between 5-15 years to redemption

Question 12

According to the UK Financial Press, what is a long-dated GILT?

1) More than 14 years to redemption
2) More than 15 years to redemption
3) More than 16 years to redemption

Answer 12

2) More than 15 years to redemption

Question 13

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 13

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

Question 14

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

Answer 14

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 15

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 15

b) 16.

Question 16

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

Answer 16

False.

Interest is paid gross but is taxable.

Question 17

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

Answer 17

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 18

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

Answer 18

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

Question 19

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 19

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

Question 20

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 20

The running yield is £3 (coupon) ÷ £107 (price paid) = 2.8%.

Running yield = coupon ÷ price paid

Question 21

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 21

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

Question 22

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 22

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

Question 23

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

Answer 23

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 24

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 24

c) A basic bank account.

Question 25

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

a) capital gains tax exemption.
b) the annual dividend allowance.
c) personal savings allowance.
d) tax-free status.

Answer 25

c) personal savings allowance.

Question 26

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

a) and the seller will each receive 50% of the next due income payment.
b) will be entitled to a bonus dividend on the next due income date.
c) will receive 100% of the next due income payment.
d) will not receive any of the next due income payment.

Answer 26

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

Question 27

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

a) regulated by the Prudential Regulation Authority.
b) a direct contract between one lender and one borrower.
c) co-ordinated by banks and building societies.
d) not protected by the Financial Services Compensation Scheme.

Answer 27

d) not protected by the Financial Services Compensation Scheme.

Question 28

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) premium bond.
b) income bond.
c) guaranteed growth bond.
d) investment account.

Answer 28

c) guaranteed growth bond.

Guaranteed growth and income bonds have new issues which are not up for sale

Question 29

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

a) loan stock.
b) an investment bond.
c) a perpetual subordinated bond.
d) a debenture.

Answer 29

d) a debenture.

Question 30

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

a) ATM card.
b) Overdraft facility
c) Direct debits.
d) Cash withdrawals from a Post Office.

Answer 30

b) Overdraft facility

Question 31

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

a) True
b) False

Answer 31

b) False

The interest on an offshore deposit is paid gross. A UK resident must declare the income to HMRC and may have to pay tax on it. However, if the country where the investment is held has a reciprocal tax treaty (double taxation arrangement) with the UK, and the interest has already been taxed overseas, tax relief may be available on some or all of it.

Question 32

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 32

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 33

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 33

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 34

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

a) the issuing organisation is now a bank.
b) the investment is lower risk than a deposit account.
c) she has a corporate bond holding.
d) she has no guarantee that her original investment will be repaid.

Answer 34

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

Question 35

The interest on an offshore deposit is paid:
A) gross
B) net

Answer 35

A) gross

Question 36

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

a) and the seller will each receive 50% of the next due income payment.
b) will be entitled to a bonus dividend on the next due income date.
c) will receive 100% of the next due income payment.
d) will not receive any of the next due income payment.

Answer 36

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

Question 37

Sale of a GILT is liable for CGT?

True or False

Answer 37

False

Any capital gains made on the sale or redemption of gilts are entirely free of capital gains tax (CGT).

Question 37

Sale of a GILT is liable for CGT?

True or False

Answer 37

False

Any capital gains made on the sale or redemption of gilts are entirely free of capital gains tax (CGT).

Question 38

Permanent interest‐bearing shares are issued by:
A) Government
B) Local Authorities
C) Building Societies

Answer 38

C) Building Societies

Question 39

Permanent interest‐bearing shares pay:
A) Quarterly
B) Semi-Annually
C) Annually

Answer 39

B) Semi-Annually

Question 40

If a building society ‘demutualises’ what does it become?

Answer 40

Converts to a bank

Question 41

Complete this sentence:
‘If a building society converts to a bank by ‘demutualising’, the PIBS it has issued are converted to _______’

Answer 41

Perpetual subordinated bonds (PSBs).

Question 42

How is the income of Local authority bonds, corporate bonds, PIBS and Eurobonds classed?

Answer 42

Savings income

Question 43

Which 3x NS&I government investment range is tax free?

Answer 43

Direct ISA
Junior ISA
Premium Bonds

Question 44

What is the minimum age for all NS&I products?

Answer 44

16

Question 45

NS&I Green Savings Bonds are not taxable.

True or false

Answer 45

False - they are taxable at maturity

Question 46

Any capital gains on gilts are subject to CGT. True or false

Answer 46

False

Any capital gains made on the sale or redemption of gilts are
entirely free of capital gains tax (CGT).

Question 47

GILT interest that falls beneath an individuals savings band will not be taxable.

True or false

Answer 47

True

Gilt interest is normally paid gross without deduction of tax, although investors
can elect for net payment. The income is classed as savings income so would
be tax free if it fell within an individual’s starting-rate band for savings income
or their personal savings allowance

Question 48

A structured deposit performance is equal to the underlying index.

True or false

Answer 48

False.

The return generated through a structured deposit is variable because it is linked to the performance of the underlying index.

Because structured deposits guarantee the return of their deposit - the return of index gains is reduced (will lag index performance)

Question 49

A Perpetual Subordinated Bond (PSB) used to be a?

Answer 49

PIBS - Permanent Interest-bearing share before the building society was demutualised.