21/22 Mock Set 1 Flashcards
- Kirsten is considering a short-term money market fund. She should be aware that these funds have a weighted average maturity of no more than
A. 6 months.
B. 3 months.
C. 90 days.
D. 60 days.
D - Short-term money market funds have a weighted average maturity of no more than 60 days whereas standard money market funds have a weighted average maturity of no more than 6 months.
- Harry is interested in money market funds. Which of the following types of risk should he be particularly aware of?
A. Event risk
B. Interest rate risk
C. Systematic risk
D. Diversification risk
B - Money market funds invest in cash and cash equivalent securities; they therefore carry many of the same risks as other cash investments which includes interest rate risk.
- Madeline has invested in a number of different gilts. Within the title of each one she can expect to find the
A. risk rating.
B. coupon.
C. interest payment dates.
D. gross redemption yield.
B - A bond title will always include the issuer’s name, coupon, and maturity date e.g., ABC Plc 3.25% 2030.
- Where investors demand higher yields for holding longer-term bonds the yield curve is said to be
A. normal.
B. flat.
C. inverted.
D. reversed.
A - A yield curve compares the yields on bonds with different redemption dates. There are three types: a normal yield curve, a flat yield curve and an inverted or reverse yield curve.Where investors demand higher yields for holding longer-term bonds the curve is said to be a normal yield curve.
- Susan has invested in the following four gilts. Which gives her the highest running yield?
Gilt Price Coupon1 109.2 4.2%2 111.4 4.8%3 123.8 5.2%4 119.6 5%
A. Gilt 1
B. Gilt 2
C. Gilt 3
D. Gilt 4
B - Gilt yields are calculated as coupon/price x 100. Therefore:
Gilt 1 = 3.85% (4.2% / 109.2 x 100)
Gilt 2 = 4.31% (4.8% / 111.4 x 100)
Gilt 3 = 4.20% (5.2% / 123.8 x 100)
Gilt 4 = 4.18% (5% / 119.6 x 100).
The answer is therefore (b).
- When the purchaser of fixed interest investment receives the full six months’ interest, even though the stock was owned for less than the entire period, this is referred to as being purchased
A. ex-dividend.
B. cum dividend.
C. plus dividend.
D. without dividend.
B - Fixed Interest securities usually pay interest bi-annually. If a stock is cum (with) dividend the purchaser receives the full 6 months’ interest even though he did not own the stock for the entire 6-month period. If the stock is ex-dividend, interest is paid to the registered holder of the bond 7 days before the interest payment. The clean price is the price of the bond excluding any interest accrued since the last settlement date, and the dirty price is the price of the bond including any interest.
- Shelley is invested in a range of corporate bonds and gilts. When comparing them we can say that
A. corporate bonds are regarded as lower risk than gilts.
B. the spread between the buying and selling price is wider for corporate bonds.
C. gilt prices are more volatile than corporate bond prices.
D. gilt yields are generally higher than corporate bonds.
B - Corporate bonds are higher risks than gilts (which are backed by the government) and therefore tend to offer higher yields to attract investors. There is also a larger spread in the buying and selling price of corporate bonds as the demand for them is more volatile.
- A client is considering investing in an offshore bank account. Which of the following is regarded as a common danger specific to investing in offshore accounts?
A. Reduced compensation schemes
B. Interest rate risk
C. Higher taxation rates
D. Reinvestment risk
A - Offshore accounts may offer less compensation to an investor, if the institution defaults on its obligations, than that available in the UK under the Financial Services Compensation Scheme.
