U1: T7 - OTHER DIRECT INVESTMENTS

Question 1

What is Commercial Paper?

Answer 1

An unsecured promissory note – ie a promise to repay the funds that have been received in exchange for the paper.

Question 2

What is Working Capital?

Answer 2

Funds available for the day‐to‐day running of the business, calculated as current assets minus current liabilities.

Question 3

What are Treasury Bills?

Answer 3

Short-term redeemable securities issued at a discount to their face-value. Also known as T-bills

Question 4

What is a ‘Certificate of Deposit’?

Answer 4

A ‘receipt’ confirming that a (substantial) deposit has been made with a bank or building society for a fixed period at a fixed rate of interest.

Question 5

What are ‘bearer securities’?

Answer 5

Securities that are deemed to be owned by whoever physically possesses the document that confers ownership, rather than ownership being determined by an entry on a register, etc.

Question 6

Direct investment in shares is low risk for individual investors because, over the long term, equity markets have outpaced inflation.

True or false?

Answer 6

False.

Direct investment in shares is regarded as high risk because if the company fails, the entire investment is at risk. It is difficult for most investors to spread the risk effectively between a large number of companies and sectors.

Question 7

Name three factors that can affect share prices.

Answer 7

Factors include:
- Company profitability
- The strength of the global and UK economy,
- The strength of the market sector
- Supply of and demand for shares.

Question 8

What are the implications for the purchaser of buying shares ex‐dividend?

Answer 8

They will not be eligible for a dividend payment in the first distribution of shares following their acquisition of the shares. The previous owner of the shares will receive this dividend payment.

Question 9

A share with a low P/E ratio is likely to be more expensive than other shares in the same market sector. True or false?

Answer 9

False.

A low P/E ratio indicates that the share is not in high demand and it is likely to be less expensive than other shares.

Question 10

If a company distributes 25 per cent of its profits in the form of dividends to its shareholders, what would the dividend cover be?

a) 4.
b) 8.
c) 10.
d) 25.

Answer 10

a) 4 – the profit is four times the dividend paid out.

Question 11

What is the difference between a rights issue and a scrip issue?

Answer 11

A rights issue involves offering existing shareholders the opportunity to buy additional shares in order to raise additional capital. A scrip issue involves issuing additional shares to shareholders free of charge, the effect being to increase the number of shares in issue and reduce the share price proportionately; no additional funds are raised.

Question 12

Elliott is considering investing in a buy‐to‐let property. He thinks this is a good way to achieve a high return.

What are the main drawbacks that Elliott should be aware of?

Answer 12

• Properties must be in desirable locations (eg good transport links,
• Suitable tenants may be hard to find. access to local amenities, etc).
• In times of recession, letting properties may be difficult and property prices may fall.
• Property is less easy to realise than most other forms of investment.
• Investment costs tend to be high and can include management fees,
  legal charges and stamp duty.
• Government measures to discourage BTL have made the tax position less advantageous.

Question 13

How can a buy‐to‐let investor claim relief for wear and tear on furniture?

Answer 13

They are allowed a furniture replacement relief, which allows the actual cost of replacing furnishings to be offset against profits.

Question 14

Treasury bills are zero‐coupon securities. What does this mean?

Answer 14

They do not pay interest; instead they are issued at a discount to their par value.

Question 15

Commercial paper is generally issued for a term of between three and six months.

True or false?

Answer 15

False.

Commercial paper is generally issued for between 5 and 45 days, with 30–35 days being typical. Certificates of deposit are generally issued for between three and six months.

Question 16

How do you calculate Earnings per share (EPS)?

1. Gross profit divided by the number of shares in issue
2. Gross revenue divided by the number of shares in issue
3. Net profit divided by the number of shares in issue

Answer 16

3. Net profit divided by the number of shares in issue

Question 17

How do you calculate the P/E (Price/Earnings) ratio?

1. Share price / EPS
2. Share price / EBITDA
3. Share price / Dividend Cover

Answer 17

1. Share price / EPS

Question 18

To measure a company’s growth prospects which metric would you use?

1. P/E
2. EPS
3. Dividend Coverage

Answer 18

1. P/E

Used to gauge a share’s growth prospects i.e. the P/E ratio gives an estimate of the company’s potential to generate returns

Question 19

Are unit trusts?

A) Open-ended investments
B) Closed-ended investments

Answer 19

B) Closed-ended investments

Question 20

What is the typical tenor T-bills are issued for?

Answer 20

91 days

Question 21

Buy-to-let property has the advantage of liquidity.

a) True
b) False

Answer 21

b) False

Question 22

Certificates of deposit:

a) are bearer securities.
b) have a minimum 12-month term.
c) pay interest monthly.
d) allow penalty-free access at any time.

Answer 22

a) are bearer securities.

Question 23

Karen is a higher-rate taxpayer who owns a buy-to-let flat. What is the position with tax relief on her mortgage? She will:

a) not qualify for any tax relief.
b) receive a basic-rate income tax credit.
c) receive higher-rate tax relief.
d) receive tax relief at her marginal income tax rate.

Answer 23

b) receive a basic-rate income tax credit.

Question 24

What percentage of a company’s share capital must be in public hands for its shares to have a full listing on the main London Stock Exchange?

a) 10%.
b) 25%.
c) 33%.
d) 49%.

Answer 24

b) 25%.

Question 25

A share’s price/earnings ratio is:

a) the share’s dividend as a percentage of the share price.
b) the share price divided by the earnings per share.
c) the number of times the dividend is covered by the company’s profits.
d) the company’s net profit divided by the number of shares.

Answer 25

b) the share price divided by the earnings per share.

Question 26

Bow Ltd has just issued three free shares for every one share a shareholder owns. This is referred to as a:

a) dividend share issue.
b) rights issue.
c) proportional share issue.
d) scrip issue.

Answer 26

d) scrip issue.

Question 27

A preference share:

a) ranks ahead of ordinary shares for repayment if the company is wound up.
b) receives interest payments rather than dividends.
c) is guaranteed to receive a dividend every year.
d) always carries voting rights.

Answer 27

a) ranks ahead of ordinary shares for repayment if the company is wound up.

Question 28

Today is the ex-dividend date for Acme Ltd shares. The share price is most likely to:

a) decrease slightly.
b) become more volatile.
c) increase slightly.
d) remain stable.

Answer 28

a) decrease slightly.

A share price typically decreases roughly by the value of the dividend when it reaches its ex-dividend date.

Question 29

The FTSE 350 Index includes companies listed on the London Stock Exchange. It comprises:

a) the largest 350 companies by capitalisation.
b) the largest 350 companies by capitalisation outside the FTSE 100.
c) the largest 350 companies by capitalisation outside the FTSE 100 and 250 indices.
d) 350 smaller companies who do not meet the AIM criteria.

Answer 29

a) the largest 350 companies by capitalisation.

Question 30

Market capitalisation is a key factor when analysing shares. It represents the:

a) value of the company’s assets and reserves.
b) current share value multiplied by the number of shares issued.
c) annual profit figure shown in the company’s last annual accounts.
d) number of shares the company has issued.

Answer 30

b) current share value multiplied by the number of shares issued.

Question 31

Which of the following is false in relation to qualifying life assurance policies?

a) They must have a minimum term of 10 years.
b) The death benefit must be at least 101% of the bid value of the policy.
c) Premiums cannot vary beyond specified limits.
d) Premiums must be payable at least annually.

Answer 31

b) The death benefit must be at least 101% of the bid value of the policy.

Question 32

In relation to investment trusts, which of the following is true?

a) The trust can borrow for investment purposes.
b) Shares trading at a premium can be bought at below their net asset value.
c) The net asset value is the price shares are trading at.
d) The trust deed outlines the trust’s investment objectives.

Answer 32

a) The trust can borrow for investment purposes.

Question 33

The aim of investment diversification is to:

a) increase investment performance.
b) reduce investment administration and documentation.
c) increase income from investments.
d) reduce investment risk.

Answer 33

d) reduce investment risk.

Question 34

Jason wishes to cash in his unit trust holding. Which unit price will he receive in normal market conditions?

a) Cancellation price.
b) Offer price.
c) Bid price.
d) Creation price.

Answer 34

c) Bid price.

Question 35

Alan has an investment that guarantees a specific return over a five-year period, but some of his initial capital could be lost if the FTSE 100 fails to achieve a certain level by the end of the term. His investment is a:

a) non-structured capital‑at‑risk product.
b) structured deposit.
c) structured capital‑at‑risk product.
d) structured derivative product.

Answer 35

c) structured capital‑at‑risk product.

Question 36

A friendly society tax-exempt savings plan:

a) has a maximum annual savings limit of £270.
b) offers similar taxation benefits to endowment policies.
c) has a term between 10 and 25 years.
d) is offered by proprietary organisations.

Answer 36

a) has a maximum annual savings limit of £270.

Question 37

Which of the following is true in relation to unit trusts?

a) Distribution unit trusts pay regular capital amounts to investors from profits.
b) The trustee decides on appropriate investments for the trust.
c) The manager can create units to meet demand.
d) The manager is responsible for holding and controlling the fund’s assets.

Answer 37

c) The manager can create units to meet demand.

Question 38

What percentage of a unit trust’s fund must be in cash or fixed-interest investments for distributions to be treated as interest payments?

a) At least 50%.
b) Up to 60%.
c) More than 60%.
d) At least 75%.

Answer 38

c) More than 60%.

Question 39

Which of the following is true in relation to real estate investment trusts?

a) At least 80% of the profit must result from property rentals.
b) At least 90% of profits must be distributed to shareholders.
c) They cannot be held in an ISA
d) Corporation tax is payable on profits from property rentals.

Answer 39

b) At least 90% of profits must be distributed to shareholders.

Question 40

Which function is responsible for overseeing the operation of an open-ended investment company and safeguarding investor interests?

a) The manager.
b) The trustee.
c) The authorised corporate director.
d) The depositary.

Answer 40

d) The depositary.

Question 41

Preference shares carry voting rights?

True or False

Answer 41

False

Question 42

Treasury bills, Certificates of deposit and commercial paper are all forms of?

Answer 42

Money market instruments

Question 43

Treasury bills are:
A) Long-term investments
B) Short term investments

Answer 43

B) Short term investments

Treasury bills are short term, normally being issued for a period of 91 days, whereas gilts can be long term or even undated;

Question 44

Treasure bills are:
A) Coupon paying securities
B) Zero-coupon securities

Answer 44

B) Zero-coupon securities

Treasury bills are zero-coupon securities, ie they do not pay interest. Instead, they are issued at a discount to their face value or par value (the
amount that will be repaid on their redemption date).

Question 45

Treasury bills are of interest to small, private investors?

True or false

Answer 45

False

Question 46

Treasury bills are of interest to small, private investors?

True or false

Answer 46

False

Treasury bills are purchased in large amounts, and they are not, therefore, generally of interest to small, private investors. They are held in the main by large organisations (particularly financial institutions) seeking secure short term investment for cash that is temporarily surplus to require

Question 47

Terms of a certificate of deposit (CPD) are typically:
A) 0-3 months
B) 3-6 months
C) 6-12 months

Answer 47

B) 3-6 months

Question 48

Which of the following statements is true for Certificates of deposit (CPD):
A) interest is paid with the return of the capital at the end of the term
B) interest is not paid with the return of capital at the end of the term

Answer 48

A) interest is paid with the return of the capital at the end of the term

Question 49

Which of the following statements is true for Certificates of deposit (CD):
A) There are no penalties for withdrawals before the end of the term
B) There are penalties for withdrawals before the end of the term

Answer 49

B) There are penalties for withdrawals before the end of the term

Question 50

Banks can hold CDs issued by other banks.

True or False

Answer 50

True

Question 51

Certificates of Deposit offer:
A) Fixed rate of interest
B) Variable rate of interest

Answer 51

A) Fixed rate of interest

Question 52

A business looking to raise financing for longer-term business plans should issue:
A) Corporate Bonds
B) Commercial Paper

Answer 52

A) Corporate Bonds

Question 53

A business looking to raise financing for working capital purposes should issue:
A) Corporate Bonds
B) Commercial Paper

Answer 53

B) Commercial Paper

Question 54

Commercial paper can be placed directly with the investors or through intermediaries. True or false.

Answer 54

True

Question 55

Companies with low credit ratings cannot issue commercial paper. True or False

Answer 55

False.

The commercial paper market offers cheaper borrowing opportunities for companies that have good credit ratings, but even companies with lower credit ratings can issue commercial paper if it is backed by a letter of credit from a bank that guarantees (for a fee) to make repayment if the issuer defaults.