Unit 1 Topic 6

Question 1

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

Answer 1

True
Deposit accounts allow instant access to funds and they are low risk because savings are protected by the Financial Services Compensation Scheme.

Question 2

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 2

B)16

Question 3

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

Answer 3

False, interest is paid gross but is taxable.

Question 4

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

Answer 4

1. If the investment is held in a current other than sterling, its value might be affected by adverse exchange rates if it has to be converted to sterling.
2. Accounts held offshore might not be covered by investor protection schemes to the same extent as onshore UK investments.

Question 5

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

Answer 5

Interest rate payable on the par value of a gilt.

Question 6

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 within the end of the term.

Answer 6

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

Question 7

Rubina is considering buying a gilt, 3% Treasury 2030. The gilt is currently trading at a price of £107. What is the running yield?

Answer 7

Running yield = coupon / price paid
£3 / £107 = 2.8%

Question 8

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 8

d) are considered to be higher-risk investments.

Question 9

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 9

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

Question 10

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

Answer 10

False, a Eurobond is a bond denominated in a different currency from the one of the country where the bond has been issued. They can be issued by multinational organisations, not just government.

Question 11

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) A packaged account.
b) An interbank account.
c) A basic bank account.
d) A debit account.

Answer 11

c) A basic bank account.

Question 12

which of the following is identified as a main asset class?
a) Capital
b) Savings accounts
c) Equities (company shares)
d) Alternative investments

Answer 12

c) Equities (company shares)

Question 13

What significant risk is highlighted regarding shares (equities)?
a) They offer no guarantee of income payments or future capital value; in a worst-case scenario, an investor could lose all of their invested money.
b) They are subject to government regulation.
c) Their value is directly linked to interest rate changes.
d) They are difficult to buy and sell quickly.

Answer 13

a) They offer no guarantee of income payments or future capital value; in a worst-case scenario, an investor could lose all of their invested money.

Question 14

Which main asset class is described as “money held in deposit accounts”?
a) Property (e.g., buy-to-let)
b) Cash
c) Fixed interest securities (e.g., gilts, corporate bonds)
d) Equities (company shares)

Answer 14

b) Cash

Question 15

Gilts and corporate bonds are examples of which main asset class?
a) Property (e.g., buy-to-let)
b) Cash
c) Equities (company shares)
d) Fixed interest securities

Answer 15

d) Fixed interest securities

Question 16

Shares (equities) are generally described as what in terms of risk and potential return?
a) Lower risk with lower potential returns.
b) Higher risk with higher potential returns.
c) Medium risk with stable returns.
d) No risk with guaranteed high returns.

Answer 16

b) Higher risk with higher potential returns.

Question 17

Savings accounts may have what kind of restrictions?
a) Unlimited withdrawals at any time.
b) May have restrictions on access and withdrawals.
c) Guaranteed high interest rates that never change.
d) Compulsory regular deposits of large amounts.

Answer 17

b) May have restrictions on access and withdrawals.

Question 18

Packaged current accounts often offer what extra benefits?
a) Significantly higher interest rates than other accounts.
b) Offer extra benefits (breakdown cover, mobile phone insurance, travel insurance).
c) No monthly or annual fees.
d) Guaranteed overdraft facilities with no charges.

Answer 18

b) Offer extra benefits (breakdown cover, mobile phone insurance, travel insurance).

Question 19

Interest earned within a Cash ISA is typically treated how for tax purposes?
a) It is taxed at the individual’s standard income tax rate.
b) Only interest above a certain threshold is taxed.
c) It is subject to capital gains tax.
d) Interest earned isn’t taxed.

Answer 19

d) Interest earned isn’t taxed.

Question 20

Why does HMRC (Her Majesty’s Revenue and Customs) keep an eye on offshore accounts?
a) To encourage more people to invest overseas.
b) Seen as a way to avoid tax, so HMRC keeps an eye on them.
c) To ensure that offshore accounts comply with local regulations.
d) To offer financial advice to individuals with offshore holdings.

Answer 20

b) Seen as a way to avoid tax, so HMRC keeps an eye on them.

Question 21

Interest earned offshore is generally taxable where?
a) Is generally taxable in the UK, and you must declare it to HMRC.
b) Only in the country where the account is held.
c) Is tax-free under international law.
d) Only if the amount exceeds a very high threshold.

Answer 21

a) Is generally taxable in the UK, and you must declare it to HMRC.

Question 22

What tax relief might apply to income earned offshore?
a) Automatic exemption from all UK taxes.
b) Double taxation relief may apply.
c) A significantly lower rate of UK tax.
d) Only capital gains are eligible for relief.

Answer 22

b) Double taxation relief may apply.

Question 23

What are gilts?
a) Shares in publicly listed companies.
b) High-risk bonds issued by private corporations.
c) Savings accounts with guaranteed interest rates.
d) Form of borrowing by the government.

Answer 23

d) Gilt-edged securities – form of borrowing by the government.

Question 24

What is the “redemption date” of a gilt?
a) The date when interest payments are made.
b) The rate of interest payable on the gilt.
c) The date by government must redeem the gilt by paying back its original issue value.
d) The date when the gilt can be traded on the open market.

Answer 24

c) The date by government must redeem the gilt by paying back its original issue value.

Question 25

What is the "coupon" of a gilt? a) The price at which the gilt was originally issued. b) The date on which the gilt will be redeemed. c) The interest rate payable on the par value of a gilt. d) The total profit an investor can expect to make.

Answer 25

c) The interest rate payable on the par value of a gilt.

Question 26

How is the interest (coupon) of a gilt typically paid? a) Annually, net of tax. b) The interest rate is variable and paid at the end of the term. c) Paid monthly and is tax-free. d) Paid half-yearly, gross but taxable.

Answer 26

d) Paid half-yearly, gross but taxable.

Question 27

What is a characteristic of "dual-dated" gilts from the past? a) They offered twice the standard rate of interest. b) They had no fixed redemption date (undated) or a choice of repayment dates. c) They were issued in two different currencies. d) They were only available to investors holding them for a specific period.

Answer 27

b) They had no fixed redemption date (undated) or a choice of repayment dates.

Question 28

What is the typical time to redemption for short-dated gilts? a) More than 15 years. b) 5-15 years. c) Less than 5 years to redemption. d) Exactly 10 years.

Answer 28

c) Less than 5 years to redemption.

Question 29

What is the typical time to redemption for medium-dated gilts? a) Less than 5 years. b) 5-15 years to redemption. c) More than 20 years. d) Exactly 5 years.

Answer 29

b) 5-15 years to redemption.

Question 30

The definitions of short and medium gilts provided by the Debt Management Office (DMO) are based on what timeframe for redemption? a) Short: less than 3 years; Medium: 3-7 years. b) Short: less than 5 years; Medium: 5-10 years. c) Short: less than 7 years; Medium: 7-15 years. d) Short: less than 1 year; Medium: 1-5 years.

Answer 30

c) Short: less than 7 years; Medium: 7-15 years.

Question 31

For Index-linked gilts, how do the interest payments and capital value change? a) They change in line with inflation. b) They are fixed throughout the term. c) They change in line with market interest rates. d) They are inversely related to inflation.

Answer 31

a) They change in line with inflation.

Question 32

What is the aim of Index-linked gilts regarding purchasing power? a) This aims to keep the real value of your investment the same. b) To decrease the real value of your investment over time. c) To provide a significantly higher return than regular fixed interest gilts. d) To make the investment more volatile.

Answer 32

a) This aims to keep the real value of your investment the same.

Question 33

The price of a gilt depends on which factors? a) Only the original issue price and the time left until redemption. b) The credit rating of the government issuing the gilt. c) The level of inflation at the time of purchase. d) Market interest rates, time left until redemption, supply and demand.

Answer 33

d) Market interest rates, time left until redemption, supply and demand.

Question 34

In a "cum dividend" situation, who gets the upcoming interest payment? a) The seller of the gilt. b) The issuer of the gilt (government). c) The buyer of the gilt. d) It is split equally between the buyer and seller.

Answer 34

c) The buyer of the gilt.

Question 35

How does the price of a gilt typically reflect a "cum dividend" situation? a) The price is lower to compensate the seller. b) The price reflects this upcoming interest payment. c) The price is unaffected by the upcoming payment. d) The price is significantly higher.

Answer 35

b) The price reflects this upcoming interest payment.

Question 36

In an "ex dividend" situation, who keeps the upcoming interest payment? a) The buyer of the gilt. b) The issuer of the gilt (government). c) The seller keeps the upcoming interest payment. d) It is forfeited.

Answer 36

c) The seller keeps the upcoming interest payment.

Question 37

How does the price of a gilt typically reflect an "ex dividend" situation? a) The price is higher to reward the seller. b) The price is unaffected by the recent payment. c) The price is the same as the par value. d The price is lower as the buyer will not receive the immediate payment.

Answer 37

d The price is lower as the buyer will not receive the immediate payment.

Question 38

How is the usual gross interest on gilts (without tax deducted) treated for tax purposes? a) It is tax-free. b) It's taxed as savings interest income. c) It is taxed as capital gains. d) It is taxed at a higher rate than other income.

Answer 38

b) It's taxed as savings interest income.

Question 39

How is the interest on local authority bonds typically paid? a) Annually, after deduction of tax. b) Buy at a guaranteed fixed rate of interest, usually paid half-yearly. c) The interest rate is variable and linked to local economic performance. d) As a lump sum at the end of the bond's term.

Answer 39

b) Buy at a guaranteed fixed rate of interest, usually paid half-yearly.

Question 40

How is the original capital invested in local authority bonds typically repaid? a) It is repaid in regular installments throughout the bond's term. b) Return of original capital is promised on maturity. c) It is converted into shares in local authority services. d) It is not repayable but generates ongoing interest.

Answer 40

b) Return of original capital is promised on maturity.

Question 41

Are local authority bonds generally considered as secure as gilts? a) Yes, they carry the same government guarantee. b) No, not regarded quite as secure as gilts due to no government guarantee. c) They are considered more secure due to local asset backing. d) Their security level depends entirely on the size of the local authority.

Answer 41

b) No, not regarded quite as secure as gilts due to no government guarantee.

Question 42

What does PIBS stand for? a) Permanent Interest-Bearing Shares. b) Public Investment Bond Scheme. c) Private Infrastructure Bond Security. d) Preferred Income Bond Stock.

Answer 42

a) Permanent Interest-Bearing Shares.

Question 43

Who were PIBS originally issued by to raise capital? a) National government agencies. b) Large private corporations. c) Local government authorities. d) Were once issued by building societies to raise capital.

Answer 43

d) Were once issued by building societies to raise capital.

Question 44

Why do companies issue corporate bonds? a) To raise additional finance for company's activities, especially when retained profits aren't enough. b) Primarily to provide tax-free income to investors. c) Because they are a less risky way to raise finance than issuing shares. d) As a short-term measure to boost share prices.

Answer 44

a) To raise additional finance for company's activities, especially when retained profits aren't enough.

Question 45

When is the original loan amount of a bond typically repaid? a) In regular installments over the life of the bond. b) The original loan amount is repaid on a fixed redemption date. c) It is converted into company shares. d) It is never repaid; the bondholder only receives interest.

Answer 45

b) The original loan amount is repaid on a fixed redemption date.

Question 46

Corporate bonds are often used for what purpose by companies? a) For short-term operational expenses. b) Usually for long term, supporting the company's business plans. c) To distribute profits to shareholders. d) To avoid paying taxes.

Answer 46

b) Usually for long term, supporting the company's business plans.

Question 48

What does it mean for a bond to be "secured"? a) Secured bonds may have a charge or claim on specific company assets if the company defaults. b) The interest rate is guaranteed by the government. c) They are considered a very low-risk investment. d) They are easier to trade on the open market.

Answer 48

a) Secured bonds may have a charge or claim on specific company assets if the company defaults.

Question 49

What is another term for secured bonds? a) Debentures. b) Junk bonds. c) Callable bonds. d) Convertible bonds.

Answer 49

a) Debentures.

Question 50

What is the position of unsecured bondholders if a company fails? a) They have the first claim on the company's assets. b) Unsecured bonds, Not backed. If company fails, these bondholders are general creditors and have a lower priority in recovering their funds. c) Their investment is guaranteed by the government. d) They are automatically converted into secured bondholders.

Answer 50

b) Unsecured bonds, Not backed. If company fails, these bondholders are general creditors and have a lower priority in recovering their funds.

Question 51

What are Eurobonds used for? a) Primarily for individuals to invest in European markets. b) Only for short-term borrowing between European banks. c) To fund projects exclusively within the Eurozone. d) Way for multinational organisations and governments to borrow money.

Answer 51

d) Way for multinational organisations and governments to borrow money.

Question 52

In what currency are Eurobonds typically paid? a) Always in Euros, regardless of where issued. b) Always in the currency of the investor. c Usually in the currency of the issuing organization's home country. d) Paid in different currency from where the bond is being issued.

Answer 52

d) Paid in different currency from where the bond is being issued.

Question 53

When might the interest from these bonds be tax-free? a) If the investor is a non-resident. b) May be tax free if it falls within one's starting rate band for savings or personal savings allowance. c) For the first year of investment. d) If the bond is held in an offshore account.

Answer 53

b) May be tax free if it falls within one's starting rate band for savings or personal savings allowance.

Question 54

What is a structured deposit? a) A high-risk investment with potentially unlimited returns. b) Offers a return that isn't just a fixed interest rate but is tied to how a specific market or index performs. c) A simple savings account with a guaranteed interest rate. d) A type of shareholding in a financial institution.

Answer 54

b) Offers a return that isn't just a fixed interest rate but is tied to how a specific market or index performs.

Question 55

What is a typical feature of the return on a structured deposit? a) It is guaranteed and always higher than standard interest rates. b) Potential returns may be limited. c) Dividends are typically received regularly. d) Returns are directly linked to the performance of the deposit-taking institution.

Answer 55

b) Potential returns may be limited.

Question 56

What is given as a key example of alternative finance? a) Crowdfunding. b) Traditional bank loans. c) Investing in government bonds. d) Holding money in a savings account.

Answer 56

a) Crowdfunding.

Question 57

What are the two main types of crowdfunding mentioned? a) Equity-based and debt-based. b) Property crowdfunding and green crowdfunding. c) Business crowdfunding and personal crowdfunding. d) Donation/reward-based and investment/P2P lending.

Answer 57

d) Donation/reward-based and investment/P2P lending.

Question 58

Who regulates investment-based crowdfunding and P2P lending? a) The Bank of England. b) Regulation - FCA regulates both. c) A self-regulatory body for the alternative finance industry. d) There is currently no regulation for these activities.

Answer 58

b) Regulation - FCA regulates both.

Question 59

How do contributors typically invest money in investment-based crowdfunding? a) They lend money expecting a fixed return with interest. b) Contributors invest money and in return, they typically receive shares in the company. c) They donate money to support the company's mission. d) They purchase products or services from the company in advance.

Answer 59

b) Contributors invest money and in return, they typically receive shares in the company.

Question 60

What do platforms typically allow smaller investors to do in investment-based crowdfunding? a) To have significant control over the company's decisions. b) Platforms allow smaller investors to pool their money and invest in one or more start-up companies. c) To receive guaranteed returns on their investment. d) To remain anonymous to the company they are investing in.

Answer 60

b) Platforms allow smaller investors to pool their money and invest in one or more start-up companies.

Question 61

What is highlighted as a key risk for investors in the start-up companies involved in investment-based crowdfunding? a) The returns are typically very low. b) FCA highlights investors in this area are very likely to lose their entire investment. This is because start-ups are risky and the shares could become worthless if the business fails. c) Their investment is locked in for a very long period. d) They may be required to invest further amounts if the company struggles.

Answer 61

b) FCA highlights investors in this area are very likely to lose their entire investment. This is because start-ups are risky and the shares could become worthless if the business fails.