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UKFR > U1: T8 - COLLECTIVE INVESTMENTS > Flashcards

U1: T8 - COLLECTIVE INVESTMENTS Flashcards

1
Q

With regard to unit trusts, what does the term ‘open‐ended’ mean?

a) Clients can buy more units.

b) The fund manager can create an unlimited amount of units according to demand.

c) The fund manager does not need to value the units.

d) There is flexibility in the taxation of units.

A

b) The fund manager can create an unlimited amount of units according to demand.

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2
Q

A unit trust fund’s assets are owned and controlled by the fund manager.

True or false?

A

False.

They are owned and controlled by the trustees.

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3
Q

An investment trust is best described as:

a) a unit‐linked, single‐premium whole‐of‐life policy investing solely in shares.

b) a trust that invests solely in fledgling companies.

c) a company that invests in the shares of other companies.

d) a partnership that invests in gilts.

A

C) A company that invests in the shares of other companies.

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4
Q

How can a private individual invest in an investment trust?

a) The investment trust manager creates more units.

b) By purchasing shares of the investment trust company on the stock exchange.

c) The fund manager issues new shares.

d) By completing an application form for a share account and submitting it to the investment trust trustees.

A

B) By purchasing shares of the investment trust company on the stock exchange.

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5
Q

What potential benefit does gearing offer to an investment trust that is not available to a unit trust or OEIC?

A

An investment trust can borrow in order to take advantage of investment opportunities. Unit trusts and OEICs cannot do this.

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6
Q

How are shares in an open‐ended investment company priced?

a) There is a bid and offer price based on the underlying value of the shares.

b) Shares are based on a historic valuation.

c) There is one price, based on the value of the assets divided by the number of shares.

d) There is a cancellation price at which all shares are traded.

A

c) There is one price, based on the value of the assets divided by the number of shares.

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7
Q

What rate of tax is deemed to have been deducted from the investment fund underlying an investment bond?

a) 0 per cent.

b) 10 per cent.

c) 20 per cent.

d) 40 per cent.

A

c) 20 per cent is deemed to have been taken within the investment with a potential further liability of 20 per cent for higher‐rate taxpayers or 25 per cent for additional‐rate taxpayers.

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8
Q

Investment bonds are attractive to investors because withdrawals are tax‐free.

True or false?

A

False.

The investor may withdraw up to 5 per cent of the value of the original investment per annum without paying tax at the time of withdrawal but a tax liability may arise when the bond matures, on encashment of the bond or on death of the bondholder.

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9
Q

Noah is a higher‐rate taxpayer and is considering a range of investments. He wants to know which investment, out of unit trusts, investment trusts or OEICS, would be most likely to help him meet his objective of achieving capital growth.

What would you advise?

a) A unit trust.

b) An investment trust.

c) An OEIC.

d) Any of the above.

A

Answer is d)

Noah could choose any of the above. The fact that he is a higher‐rate taxpayer has no bearing on his decision – they are all taxed in the same way.

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10
Q

Which of the following is not a form of collective investment?

  1. Unit trusts
  2. Investment trusts
  3. Investment bonds
  4. Open-Ended Investment Companies
  5. Limited Companies
A
  1. Limited Companies
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11
Q

Which of the following is not an advantage of collective investments?

  1. Investment manager expertise
  2. Reduced dealing costs
  3. Wide choice of investment funds
  4. Diversification
  5. Avoiding the intermediary
A
  1. Avoiding the intermediary
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12
Q

Which of the following is a form of collective investment?
A) Shares
B) Bonds
C) Real Estate
D) Unit Trusts

A

D) Unit Trusts

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12
Q

Which of the following is a form of collective investment?
A) Shares
B) Commercial Paper
C) Real Estate
D) Unit Trusts

A

D) Unit Trusts

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13
Q

Which of the following is a form of collective investment?
A) Commodities
B) Investment Trusts
C) IRS

A

B) Investment Trusts

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14
Q

Which of the following is not a form of collective investment?
A) Unit Trusts
B) Investment Trusts
C) Investment Bonds
D) OEICs
E) Real Estate

A

E) Real Estate

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15
Q

A fixed-income trust pays interest. True or false?

A

True.

An equity trust pays a dividend, while a fixed-income trust pays interest.

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16
Q

An equity trust pays interest. True or false?

A

False

An equity trust pays a dividend, while a fixed-income trust pays interest.

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17
Q

A unit trust is:
1) Open Ended
b) Closed Ended

A

1) Open Ended

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18
Q

Define ‘Accumulation Units’

A

With respect to Unit Trusts. Accumulation units automatically reinvest any income generated by the underlying assets. This would suit someone looking for capital growth.

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19
Q

Define ‘Distribution Units’

A

With respect to Unit Trusts. Distribution or income units split off any income received and distribute it to unit holders. The units may also increase in value in line with the value
of the underlying assets.

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20
Q

Define ‘Income Units’

A

With respect to Unit Trusts. Distribution or income units split off any income received and distribute it to unit holders. The units may also increase in value in line with the value
of the underlying assets.

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21
Q

With respect to unit trust transactions, the cancellation price is generally below the ‘bid price’. True or false

A

False

The cancellation price is the minimum permitted bid price, taking into account the full costs of buying and selling. At times when there are both
buyers and sellers of units, the bid price is generally above this minimum level, since costs are reduced because underlying assets do not need to be traded.

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22
Q

For single pricing unit trusts, what is a net-inflow?
A) where the value of subscriptions is greater than redemptions
B) where the value of redemptions is greater than subscriptions

A

A) where the value of subscriptions is greater than redemptions

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23
Q

For single pricing unit trusts, what is a net-outflow?
A) where the value of subscriptions is greater than redemptions
B) where the value of redemptions is greater than subscriptions

A

B) where the value of redemptions is greater than subscriptions

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24
Q

Is there a secondary market for Unit Trusts?

A

No.

Unit trust managers are obliged to buy back units when investors wish to sell them. There is consequently no need for a secondary market in units and they are not traded on the Stock Exchange. This adds to the appeal of unit trusts to the ordinary investor, because the buying and selling of units is a relatively simple process.

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25
Q

Is there a secondary market for Unit Trusts?

A

No.

Unit trust managers are obliged to buy back units when investors wish to sell them. There is consequently no need for a secondary market in units and they are not traded on the Stock Exchange. This adds to the appeal of unit trusts to the ordinary investor, because the buying and selling of units is a relatively simple process.

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26
Q

With respect to unit trusts, which of the following is not a rule specified by the FCA?
A) The trust fund is suitably diversified
B) The fund cannot borrow more than 10% of the fund’s net asset value
C) The fund must have holdings in each asset class

A

C) The fund must have holdings in each asset class

Is not a rule defined by the FCA

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27
Q

If LESS than 60% of the underlying investments in a unit trust are cash or fixed-interest securities - how will the fund be classified and how will income distributions be treated?

A

Equity fund
Dividend distributions

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28
Q

If MORE than 60% of the underlying investments in a unit trust are cash or fixed-interest securities - how will the fund be classified and how will income distributions be treated?

A

Fixed income / non-equity fund
Interest payments

29
Q

Are taxes paid on gains within Unit Trusts?

A

No.

In both cases there is no tax on gains within the fund, meaning that the investor may be liable to capital gains tax if they make a gain when encashing the investment.

30
Q

Could investors be liable for CGT on gains made from Unit Trusts?

A

In both cases there is no tax on gains within the fund, meaning that the investor may be liable to capital gains tax if they make a gain when encashing the investment.

31
Q

Unit Trusts either guarantee the initial capital investment will be returned in full or that a particular level of income will be paid out. True or false

A

False

Unit trusts provide no guarantee that the initial capital investment will be returned in full or that a particular level of income will be paid.

32
Q

What is the main difference between Investment Trusts and Unit Trusts?

A

Investment Trusts are not Trusts or Unitised funds

Investment trusts are collective investments but, unlike unit trusts, they are not unitised funds. In fact, despite their name, they are not even trusts. They are public limited companies whose business is investing (in most cases) in the stocks and shares of other companies.

33
Q

An investment trust is ‘closed-ended’. True or false

A

True

As with all companies, shares are sold to investors. The number of shares available remains constant – the company does not create more just because investors want them – so an investment trust is said to be ‘closed-ended’ (in contrast to the open-ended nature of unit trusts and OEICs).

34
Q

Investment Trust shares have:
A) A bid-offer
B) A single price

A

The shares trade at a single price but dealing fees are added to any purchase and deducted from any sale. An annual management charge is also payable, typically between 0.5 per cent and 1.5 per cent.

35
Q

The price of which collective investment can be more or less than the fund NAV?
A) Unit Trust
B) Investment Trust

A

B) Investment Trust

The share price of an investment trust may be more or less than the net asset value (NAV) per share. Where the share price is less than the NAV the trust is said to be trading at a discount, meaning that an investor should achieve greater income and growth levels than would be obtained
by investing directly in the same underlying shares. Where the share price is higher than the NAV, the trust is said to trade at a premium.

36
Q

What percentage of the income received by the fund managers of investment trusts must be distributed as dividends to shareholders.

A

At least 85%

37
Q

The income of an investment trust is classified as:
A) Dividends
B) Interest

A

A) Dividends

As investment trusts are classified as a company, an investment trust pays income in the form of dividends. The taxation situation is broadly the same as that described for equity unit trusts.

38
Q

Could investors be liable for CGT on gains made from Investment Trusts?

A

Yes.

As with unit trusts, fund managers are exempt from tax on capital gains. Investors are potentially liable to CGT on the sale of their investment trust shares, in the event that their gain, when added to the value of their other gains realised in a tax year, exceeds the CGT annual exempt amount.

39
Q

REIT scheme do not operate in which of the following countries?
A) UK
B) America
C) Canada
D) Australia

A

C) Canada

REITs (pronounced “reets” to avoid confusion with rights) became available in the UK from January 2007. Similar schemes operate in a number of other countries, particularly the USA and Australia.

40
Q

What Stamp Duty % rate are REITs liable for?

A

0.5% SDLRT

One particular advantage is that stamp duty reserve tax is charged at 0.5 per cent on purchase; the rates of stamp duty for direct property purchase are much higher.

41
Q

At least how much of REIT income must derive from rental income?
A) 55%
B) 65%
C) 75%
D) 85%

A

C) 75%

42
Q

At least what percent of REIT profits must be distributed to shareholders?
A) 60%
B) 70%
C) 80%
D) 90%

A

D) 90%

At least 90 per cent of their profits must be distributed to their shareholders net of basic-rate tax. Higher- and additional-rate shareholders will have to pay additional income tax.

43
Q

An individual can hold no more than what percentage of REIT shares?
A) 10%
B) 20%
C) 30%
D) 40%

A

A) 10%

44
Q

It is not possible to have a single property in a REIT. True or false?

A

False

Single-property REITs are only allowed in special cases – such as, for example, a shopping centre with a large number of tenants

45
Q

An OEIC can use gearing. True or false

A

False.

One difference to note, however, is that while both investment trusts and OEICs operate as companies, an investment trust can borrow money to finance its activities but an OEIC can only borrow for short‐term purposes

46
Q

A trustee to a unit trust is a what to an OEIC?

A

Depository, authorised by the FCA.

The role of overseeing the operation of the company and ensuring that it complies with the requirements for investor protection is carried out by a depositary, who is authorised by the FCA. The role of the depositary is similar to that of the trustee of a unit trust.

47
Q

The manager of a unit trust, is the what to the OEIC?

A

The authorised corporate director.

An authorised corporate director, whose role is much the same as the manager of a unit trust, manages the OEIC. The role of the corporate director is to:
- manage the investments;
- buy and sell OEIC shares as required by investors;
- ensure that the share price reflects the underlying net asset value of the OEIC’s investments.

48
Q

An OEICs share price has:
A) A bid-offer
B) A single price

A

B) A single price

The share price of an OEIC is established by dividing the total value of its assets by the number of shares currently in issue. This is, essentially, the same approach as that used to establish the unit price of a unit trust

49
Q

A dilution levy is applicable to which type of collective investment?
A) Unit Trust
B) Investment Trust
C) OEIC

A

C) OEIC

A Dilution Levy may be added to the unit price on purchase of shares or deducted from the price on sale of shares in situations where there are large flows of funds into or out of the OEIC.

50
Q

A friendly society is able to market:
A) A taxable savings plan
b) A tax‐exempt savings plan

A

b) A tax‐exempt savings plan

51
Q

The maximum you can save under a friendly society is:
A) £270 per year (as a lump sum), £25 per month or £75 per quarter.
B) £540 per year (as a lump sum), £50 per month or £150 per quarter.

A

A) £270 per year (as a lump sum), £25 per month or £75 per quarter.

As there is preferential tax treatment, the amount that can be saved is limited to £270 per year (as a lump sum),£25 per month or £75 per quarter.

52
Q

Friendly societies are set up over:
A) A 5 year plan
B) A 10 year plan
C) A 15 year plan

A

B) A 10 year plan

The plan is set up over an initial ten‐year term

53
Q

Which of the following collective investments attracts internal tax?
A) Unit Trusts
B) Investment Trusts
C) OEICs
D) Investment Bonds

A

D) Investment Bonds

In particular, Investment Bonds attract internal tax at 20 per cent on capital gains (whereas unit trust funds are exempt) and this tax is not recoverable by investors even if they themselves would not pay capital gains tax.

54
Q

If a Life Assurance policy is eligible for no tax liability on the proceeds of the plan on death or maturity:
A) Qualifying
B) Non-Qualifying

A

A) Qualifying

Life assurance policies are designated as ‘qualifying’ or ‘non‐qualifying’ policies for tax purposes. The benefit of a qualifying policy is that there is no tax liability on the proceeds of the plan on death or maturity; a non‐qualifying plan may result in a tax liability for higher‐ and additional‐rate taxpayers.

55
Q

Which of the following is not a criteria for qualifying Life Assurance policies?
A) Must be payable annually, half-yearly, quarterly or monthly and set up for at least ten years
B) If premiums cease within ten years, or three-quarters of the original term if this is less than ten years, the policy becomes non-qualifying
C) Must be at least equal to 75 per cent of the total premiums payable
D) Premiums in any one year must not exceed three times the premiums in any other year, or one-eighth of the total premiums payable

A

D) is incorrect

Premiums in any one year must not exceed two times the premiums in any other year, or one-eighth of the total premiums payable

56
Q

Can Investors in Investment bonds withdraw their original investment without incurring immediate tax?

A

Yes. Though these withdrawals are tax‐deferred, not tax‐exempt: when the investment ends, on maturity, death or encashment, a tax liability may arise.

Investors can withdraw up to 5 per cent of the original investment each year without incurring an immediate tax liability, regardless of whether the investor is a basic‐, higher‐ or additional‐rate taxpayer.

57
Q

Can withdrawals from Investment Bonds be carried forward if not used? What %?

A

Yes.

A 5 per cent allowance can, if not used, be carried forward and accumulated, up to an amount of 100 per cent of the original investment.

58
Q

How do you define an Non-Mainstream Pooled Investment?

A

The FCA Handbook defines an NMPI as:
„ - a unit in an unregulated collective investment scheme (UCIS);
„ - a unit in a qualified investor scheme;
„ - a security issued by a special vehicle, unless an excluded security; „
- a traded life policy;
„ - rights or interest in any of the investments listed above.

59
Q

A non-SCARP investment promises what minimum return of the initial capital invested?

A

A non‐SCARP investment is one that promises to provide a minimum return of 100 per cent of the initial capital invested as long as the issuer(s) of the financial instrument(s) underlying the product remain(s) solvent. This repayment of initial capital is not affected by the market risk factors in b) above.

60
Q

Which of the following could not be in a fund supermarket?
- OEICS
- unit trusts
- ISAs
- investment trusts.

A

A fund supermarket is designed to provide access to a wide range of funds, such as OEICS, unit trusts and ISAs, but not investment trusts.

61
Q

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

A

c) structured capital‑at‑risk product.

62
Q

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

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

A

b) Premiums must be payable at least annually.

63
Q

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

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

A

a) Bid price.

64
Q

The aim of investment diversification is to:

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

A

b) reduce investment risk.

65
Q

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

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

A

a) The depositary

66
Q

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

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

A

d) The manager can create units to meet demand.

67
Q

A friendly society tax-exempt savings plan:

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

A

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

68
Q

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.

A

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

69
Q

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

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

A

b) The trust can borrow for investment purposes.

70
Q

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%.

A

c) More than 60%.

UKFR (27 decks)

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