Unit 1

Question 1

Which of the following is an example of the process of disintermediation?
A. A bank offering savings accounts.
B. A building society agreeing to offer a mortgage.
C. An insurance company underwriting an application for term assurance.
D. Crowdfunding.

Answer 1

D. Crowdfunding is an example of disintermediation as the business wanting to raise the funds deals directly with potential investors.

Question 2

A building society has liabilities of £900m. How much, if anything, is the maximum it is permitted to raise on the wholesale market?
A. Nil.
B. £225m.
C. £450m.
D. £900m.

Answer 2

C. Building societies can raise funds on the wholesale market up to 50% of the value of their liabilities.

Question 3

The term ‘bancassurance’ was coined to describe the situation where:
A. A bank offers insurance services.
B. A bank owns an insurance company.
C. A bank owns an insurance company or an insurance company owns a bank.
D. An insurance company owns a bank.

Answer 3

C. A bancassurer is a bank that owns an insurance company or an insurance company that owns a bank.

Question 4

Under what circumstances, if any, can an EU member state opt out of a regulation laid down by the European Parliament and Council of Ministers?
A. None.
B. Only if special dispensation has been granted.
C. Only if an alternative approach has been greed.
D. Only if the member has joined within the previous three years.

Answer 4

B. A state can opt out if special dispensation has been granted.

Question 5

A new gilt issue has received wide publicity in the financial press, in which it has been referred to as ‘medium-dated’. However, the UK Debt Management Office has described it as ‘short-dated’. It will therefore by which of the following terms?
A. Two years.
B. Four years.
C. Six years.
D. Eight years.

Answer 5

C. The financial press refers to medium-dated as 5 to 15 years but the Debt Management Office refers to 0-7 as ‘short-dated’.

Question 6

If a company distributes 25% of its profits in the form of dividends to shareholders, what is the dividend cover?
A. Four.
B. Eight.
C. Ten.
D. Twenty-five.

Answer 6

A. The dividend cover indicates the number of times that dividends could have been laid by profits. If a company distributes 25% of dividends, the dividend cover is 4.

Question 7

An important consideration when evaluating an investment in buy-to-let property is that:
A. An annual wear and tear allowance can be claimed in respect of furnishing in the property.
B. Property is a highly liquid investment.
C. Stamp duty land tax is subject to a 3% surcharge.
D. The benefits of buy-to-let investment are limited to the general benefits of property ownership.

Answer 7

C. Second properties, including buy-to-let are subject to a 3% surcharge.

Question 8

A key difference between a debenture and a loan stock issued by a company is that a debenture:
A. Can be converted to ordinary shares in the company.
B. Holder has the right to vote at the company’s annual general meeting.
C. Is secured on the assets of the company.
D. Pays a fixed rate of interest.

Answer 8

C. Debentures are secured on company assets, whereas loan stocks are unsecured.

Question 9

On a with-profits policy, what is a reversionary bonus?
A. A payment made on maturity, reflecting the investment performance over the term of the policy.
B. A payment that is declared regularly and, once allocated to the policy, cannot be removed.
C. A payment that is pre-set to an anticipated bonus rate, it is reduced if the investment performance is less than anticipated.
D. An irregular payment, made at the discretion of the insurance company from orphan funds.

Answer 9

B. A reversionary bonus is declared regularly, normally annually. Once attached, it cannot be removed.

Question 10

Clive took out a stakeholder pension at age 27 to help to repay the capital under his interest-only mortgage and he selected the shortest repayment term possible. This was:
A. 23 years.
B. 25 years.
C. 28 years.
D. 38 years.

Answer 10

C. The normal minimum pension age is 55. Clive’s mortgage term would have been for a minimum of 28 years.

Question 11

Which type of mortgage listed below allows overpayments, underpayments and payment holidays as standard features?
A. Cap and collar.
B. Fixed.
C. Flexible.
D. Variable.

Answer 11

C. Flexible products permit overpayments, underpayments and payment holidays within pre-set limits.

Question 12

In relation to stakeholder and personal pensions, the open-market option enables the plan holder to:
A. Have more than one personal pension plan, with different providers, in order to get the best returns.
B. Move the accumulated fund at retirement to the pension provider offering the most suitable benefits.
C. Move their pension fund between providers in order to get the best investment return before retirement.
D. Take their pension with one provider, but arrange dependents’ benefits with another.

Answer 12

B. The open-market option allows an individual to move the fund at retirement in order to purchase the best available annuity or access the most advantageous benefit structure.

Question 13

Martin has set up a trust fund for the benefit of his three grandchildren and has appointed two trustees with discretion to exercise their powers. In these circumstances, which of the following is correct?
A. Both trustees must agree, before exercising their discretionary powers.
B. Martin is known as the testator of the trust and the grandchildren as the beneficiaries.
C. The Trustee Act 2000 requires the grandchildren to obtain advice when reviewing investments.
D. The trustees have no legal interest in the trust property.

Answer 13

A. The agreement of all trustees is required.

Question 14

Any loss by a partnership is usually:
A. Deducted from future dividends.
B. The responsibility of the partners.
C. The responsibility of the shareholders.
D. Written off.

Answer 14

B. Although some partnerships are limited liability, must do not have a separate legal entity and partners are responsible for losses.

Question 15

Under the law of agency, a recent act by an agent has been subject to ratification. This implies that the agent has:
A. Asked their principal to deal with a client.
B. Exceeded their authority.
C. Received money on money’s worth from a client.
D. Submitted a written contract.

Answer 15

B. Ratification takes place where, if an agent exceeds their authority, the principle can, if they choose, agree after the event to what the agent has done.

Question 16

Gains from which of the following are not exempt from capital gains tax in the hands of the investor?
A. Authorised unit trust.
B. Gilts.
C. NS&I Savings Certificates.
D. Stocks and Shares ISA.

Answer 16

A. An investor in unit trusts is potentially liable for capital gains tax on gains.

Question 17

A company will pay corporation tax on a quarterly basis where:
A. It has more than 1,000 employees.
B. Profit is less than £1.5m per year.
C. Profit is more than £1.5m per year.
D. Turnover is less than £1.5m per year.

Answer 17

C. A company will pay quarterly instalments of corporation tax where its profits is more than £1.5m per year.

Question 18

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

Answer 18

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 19

Financial intermediaries can provide maturity transformation because they:
A. Match a wide range of short-term deposit accounts to longer-term loans.
B. Pool together many small deposits from a large number of clients.
C. Provide services to clients from many different geographical locations.
D. Reduce the risk of default or fraud by lending to a wide variety of borrowers.

Answer 19

A. Maturity transformation involves matching a wide range of deposit accounts with different terms to a wide range of depositors.

Question 20

Jenny has elected for the marriage allowance and had an element of her income tax allowance transferred to her husband John. This must mean that:
A. Jenny earns less than her personal allowance and does not pay income tax.
B. Jenny is an additional-rate taxpayer.
C. John is a higher-rate taxpayer.
D. John was registered as blind the current financial year.

Answer 20

A. Spouses and civil partners can transfer 10% of their personal allowance as long as the transferor earns less that their personal allowance so is not liable to income tax, and the recipient does not pay tax at the higher or additional rate.

Question 21

Jim is a higher-rate taxpayer who has investments in gilt-edged securities that pay interest of £10,000 pa. He has not elected to change the original tax treatment of gilts. How much tax, if any, will be deducted at source from the payments made to him?
A. None.
B. £1,000.
C. £2,000.
D. £4,000.

Answer 21

A. Although subject to income tax, the interest is paid gross unless the investor elects otherwise.

Question 22

A company is paying a dividend which has a dividend cover of 0.95. This indicates that it:
A. Has reduced its payment compared with last year.
B. Is highly profitable.
C. Is quoted on the Alternative Investment Market.
D. Will be paid out of retainer surpluses.

Answer 22

D. Dividend cover of less than 1 indicates that part of the dividend is being paid out of retained surpluses and therefore calling on reserves.

Question 23

A property bond is most likely to have which of the following as its underlying investment(s)?
A. A range of commercial properties and shares in property companies.
B. A single commercial property only.
C. Land and owner-occupied residential properties.
D. Shares in commercial buildings only.

Answer 23

A. A property bond spreads risk by holding a number of commercial properties and shares.

Question 24

Returns from which of the following National Savings and Investments (NS&I) products are tax-free?
A. Direct Saver.
B. Income Bonds.
C. investment Account.
D. Premium Bonds.

Answer 24

D. Prizes on premium bonds are tax-free.

Question 25

If Chris and Kim opt for of a joint repayment mortgage, the most suitable way to ensure that the loan will be repaid if either one of them dies is by:
A. Contributing to an income protection insurance (IPI) policy.
B. Investing in an endowment assurance.
C. Making contributions to a critical illness policy.
D. Taking out a decreasing term assurance.

Answer 25

D. Decreasing term assurance will repay the mortgage upon the death of either of the as the mortgage capital decreases, so does the life cover.

Question 26

Which of the following is a feature of a typical 25-year term repayment mortgage?
A. Repayments will be unchanged throughout the term of the mortgage.
B. The borrower will have to take out an investment policy to cover any shortfall at the end of the mortgage.
C. The capital amount does not reduce over the term of the mortgage.
D. The proportions of capital and interest making up the payment change over the term of the capital.

Answer 26

D. Payments mainly consists of interest in the early stages of the mortgage. Later on the term, more of the payments will be for the capital.

Question 27

Jon, a computer technician, hurt his back in a fall. Following treatment, and a period of recuperation, he is able to return to work on a part-time basis at a lower salary. What effect will his return to work have on his income protection insurance (IPI) benefits?
A. Proportionate benefit may be paid, but no other claims under the policy will be met.
B. Proportionate benefit may be paid, until retirement or until John can return full-time.
C. They may continue at the same level until retirement.
D. They will automatically cease immediately.

Answer 27

B. Proportionate benefits may be payable if a claimant can return to work but on a lower salary.

Question 28

Which of the following is a reason for beneficiaries under a will to execute a ‘deed of variation’?
A. Inheritance tax advantages can be obtained.
B. It is a way of avoiding intestacy.
C. It is a way of meeting the executor’s wishes,
D. It is a way of rendering a will void.

Answer 28

A. Inheritance tax may be reduced by the re-arrangement of the allocation of the estate.

Question 29

When applying for a mortgage, an individual who was previously the subject of a bankruptcy order but is now discharged is obliged to:
A. Always disclose the previous bankruptcy to the lender.
B. Disclose details of the bankruptcy but only if the lender asks.
C. Ensure the lender conducts a thorough credit search.
D. Not borrow more than £50,000.

Answer 29

A. A person, by law, most disclose a previous bankruptcy when applying for a mortgage.

Question 30

Two newly appointed trustees have been advised that their capital gains tax allowance for the current tax year will be 100% of the standard allowance, rather than 50%. This is because:
A. None of the previous year’s allowance had been used.
B. The trust assets are primarily based overseas.
C. The trust consists entirely of business assets.
D. They act as trustees of a trust for a vulnerable beneficiary.

Answer 30

D. The trustees of trusts for vulnerable beneficiaries are entitled to the full capital gains tax allowance.

Question 31

Entrepreneurs’ relief is a tax relief that can reduce the rate of:
A. Capital gains tax.
B. Corporation tax.
C. Income tax.
D. Inheritance tax.

Answer 31

A. Entrepreneurs’ relief can reduce the rate of capital gains tax payable.

Question 32

How much stamp duty is due on a purchase of bearer instruments with a market value of £100,000?
A. £500.
B. £1,000.
C. £1,500.
D. £2,000.

Answer 32

C. The rate of stamp duty on bearer instruments is 1.5%. £100,000 x 1.5% = £1,500.

Question 33

Fred made a ‘chargeable lifetime transfer’ of £1m. When will inheritance tax always be payable?
A. Following the death of the donor.
B. Immediately.
C. Six years after the gift.
D. Seven years after the gift.

Answer 33

B. A fixed rate of 20% applied to chargeable lifetime transfers in excess of the nil-rate band, and is payable immediately.

Question 34

Justin owns the property he lives in and is purchasing a holiday home for £260,000. How much stamp duty land tax will he pay on the purchase?
A. £3,000.
B. £7,050.
C. £7,800.
D. £10,800.

Answer 34

D. Standard SDLT is £3,000 plus 3% surcharge on the whole property price.

Question 35

Which of the following do not pay fixed interest?
A. Certificates of deposit
B. Corporate bonds
C. Gilts
D. Treasury bills

Answer 35

D. Treasury bills do not pay fixed interest.

Question 36

Which statement best explains the tax treatment of NS&I Income Bonds?
A. Income is paid gross, but is taxable.
B. Income is paid net of 10% savings tax, and higher and additional-rate taxpayers must pay remaining tax throughout their term.
C. Income is paid net of basic-rate tax, and higher and additional-rate taxpayers must pay remaining tax through their tax return.
D. Income is paid tax-free.

Answer 36

A. Income is paid gross but liable to tax.

Question 37

Greg decided to invest in cumulative preference shares as he:
A. Intended to convert to ordinary shares.
B. Wanted guaranteed security of capital.
C. Wanted some certainty regarding future dividend payment.
D. Was eager for capital growth,

Answer 37

C. The dividend payments on preference shares are generally fixed and if dividends are not paid, entitlement is accumulated until they can be paid.

Question 38

Three of the following types of charges may be applied to an investment held with an OEIC. Which is the exception?
A. A dilution levy.
B. Annual management charge.
C. Initial or buying charge.
D. Policy fee.

Answer 38

D. A policy fee may be charged on a life policy, but not on an OEIC.

Question 39

Under a unit trust, what does the cancellation price represent?
A. The maximum offer price at which a full encashment of units may be made.
B. The minimum bid price that investors will receive when they cash in their units.
C. The price applicable to investors who cancel their investment during the cooling-off period.
D. The price at which the manager will buy back units if underlying assets do not have to be traded.

Answer 39

B. The cancellation price is the minimum bid price upon encashment.

Question 40

Which of the following endowment policies usually carried the highest level of investment rink?
A. Non-profit.
B. Unit-linked.
C. Unitised with-profits.
D. With-profits.

Answer 40

B. A unit-linked endowment does not provide any guaranteed minimum return at maturity, it reflects stock-market valuations.

Question 41

John is completing the proposal form for the level term assurance he is hoping to take out. Which of the following describes how he must answer the questions?
A. By following the principle of ‘caveat emptor’.
B. By following the principle of ‘utmost good faith’.
C. By taking reasonable care not to make a misrepresentation.
D. By volunteering all material facts,

Answer 41

C. A proposer must take reasonable care not to make a misrepresentation.

Question 42

Which of the following are allowed to use expenses to reduce their income tax liability?
A. Employees only.
B. Employees, partners and sole traders.
C. Sole traders only.
D. Sole traders and partners only.

Answer 42

B. All individuals (employees and self-employed) can deduct allowable expenses when calculating income tax.

Question 43

Fiona, an additional-rate taxpayer, sold shares in May 2019 and realised a gain of £42,100. Assuming that this is her only transaction in the current tax year, how much capital gains tax will Fiona be liable for on the sale?
A. £3,010.
B. £6,020.
C. £5,418.
D. £8,428.

Answer 43

B. £42,000 less annual exempt amount of £12,000 = £30,100 x 20% = £6,020.

Question 44

Emma bought some shares by electronic transfer that cost her £3,500. How much stamp duty reserve tax did she have to pay?
A. £17.50.
B. £35.00.
C. £105.00.
D. £140.00

Answer 44

A. The rate of SDRT is 0.5% so £3,500 x 0.5% = £17.50.

Question 45

In respect of inheritance tax, what is the maximum gift that can be given to a grandchild solely in relation to marriage, without them incurring any tax liability either now or in the future?
A. £1,000.
B. £2,500.
C. £3,000.
D. £5,000.

Answer 45

B, £2,500 is the limit for grandparents. A is the limit for non-family members, C is the annual gift limit for IHT generally, and D is the limit for parents.

Question 46

Henry ears £22,000 per annum. If he receives a dividend of £400 from a unit trust, how much income tax, if any, will he be liable for on the dividend, if he has already fully used his annual dividend allowance?
A. Nil.
B. £30.
C. £80.
D. £130.

Answer 46

B. He is a basic rate taxpayer so income tax of 7.5% applies.