Chapter 1 - Asset Classes Flashcards

Question

Which of the following credit ratings is considered to be investment grade? A) BB/Ba B) A or BBB/Baa C) C or below D) D

Answer 1

Answer: B) A or BBB/Baa Explanation: A rating of A or BBB/Baa is considered investment grade, indicating a strong financial standing.

Answer 2

Answer: B) Larger businesses Explanation: Larger businesses are generally excluded from FSCS coverage, which is primarily for private individuals and smaller businesses.

Answer 3

Answer: B) £85,000 Explanation: The FSCS provides up to £85,000 of compensation per eligible account holder in the event of a bank failure.

Answer 4

Answer: A) £170,000 Explanation: Joint accounts are eligible for compensation up to £170,000, with each account holder receiving £85,000.

Answer 5

Answer: B) Crowdfunding investments Explanation: Crowdfunding investments, especially those without suitable advice, are generally not covered under FSCS unless the advice was from an authorised firm.

Answer 6

Answer: B) £50,000 Explanation: Jersey, Guernsey, and the Isle of Man have their own schemes, protecting up to £50,000 per person.

Answer 7

Answer: C) European Deposit Guarantee Scheme (DGS) Explanation: The DGS provides protection for up to €100,000 per depositor in Europe

Answer 8

Answer: B) US Explanation: The FDIC in the US insures deposits up to $250,000 per person per institution.

Answer 9

Answer: B) Fixed-term deposit Explanation: Fixed-term deposits generally do not allow additional deposits once the account is opened.

Answer 10

Answer: A) No withdrawal restrictions Explanation: Instant access accounts allow savers to access their money without restrictions, though interest rates are typically lower than fixed-term accounts.

Answer 11

Answer: B) Loss of interest Explanation: Fixed-term deposits often penalize early withdrawals by deducting some or all of the interest earned.

Answer 12

Answer: C) Current account Explanation: Current accounts are designed for day-to-day transactions, allowing easy access to funds.

Answer 13

Answer: A) Instant access account Explanation: Instant access accounts allow withdrawals at any time and generally earn interest at a variable rate, but may not provide cheque books.

Answer 14

Answer: B) Giving a set period of notice Explanation: Notice accounts require the saver to give a specified period of notice before withdrawing funds.

Answer 15

Answer: B) They are less liquid Explanation: Money market accounts are less liquid than regular savings accounts, meaning there are limits on withdrawals.

Answer 16

Answer: A) Term (fixed-term) accounts Explanation: Term accounts offer a fixed interest rate for a set period, with the principal returned at the end of the term.

Answer 17

Answer: A) Money market account Explanation: Money market accounts typically invest in low-risk, short-term instruments such as CDs and T-bills.

Answer 18

Answer: B) To provide deposit and savings products to the investing public Explanation: NS&I is an executive agency of the Chancellor of the Exchequer, offering savings and investment products to the public, raising funds on behalf of the UK government.

Answer 19

Answer: B) Its risk profile Explanation: Banks contribute to the DGS based on their risk profile, among other factors.

Answer 20

Answer: A) They are guaranteed by the UK government Explanation: The products offered by NS&I are backed by the UK government, effectively eliminating default risk, and there is no overall limit on the guarantee.

Answer 21

Answer: B) Direct ISA Explanation: The Direct ISA product is a tax-free account, unlike others like Income Bonds and British Savings Bond, which are taxable.

Answer 22

Answer: B) Money market funds invest in short-term debt instruments and are generally highly liquid Explanation: Money market funds typically invest in short-term assets like T-bills and commercial paper, making them highly liquid.

Answer 23

Answer: C) Constant net asset value (CNAV) Explanation: CNAV funds maintain an unchanging face value, meaning their NAV stays stable, typically at £1.

Answer 24

Answer: C) High volatility net asset value (HVNAV) Explanation: The text mentions CNAV, ANAV, LVNAV, and VNAV funds, but there is no reference to a high volatility net asset value (HVNAV) fund.

Answer 25

Answer: B) They offer high liquidity and the safety of principal Explanation: Money market funds are popular due to their focus on liquidity and safety, as they invest in short-term, low-risk instruments.

Answer 26

Answer: B) The NAV falls below £1 and may lead to losses Explanation: "Breaking the buck" refers to a situation where the NAV of the money market fund falls below £1 due to poor asset performance, leading to potential losses.

Answer 27

Answer: C) Income Bonds are subject to income tax Explanation: Income Bonds, like many other NS&I products, are taxable, specifically under income tax, but they are not subject to CGT.

Answer 28

Answer: B) Commercial paper Explanation: Money market funds primarily invest in short-term debt instruments like commercial paper, which are issued by large corporations.

Answer 29

Answer: B) 2005 Explanation: The P2P lending market began in 2005 and has grown significantly since, especially after the global financial crisis.

Answer 30

Answer: C) Crowdfunding raises equity, while P2P lending involves borrowing money Explanation: Crowdfunding seeks to raise equity from investors, whereas P2P lending involves lending money without a financial intermediary, like a bank.

Answer 31

Answer: B) Borrower default Explanation: One of the main risks of P2P lending is the potential for borrowers to default on repayment.

Answer 32

Answer: B) They underwrite each borrower by reviewing credit history and verifying identity Explanation: P2P lending companies mitigate default risk by underwriting borrowers, reviewing their credit history, and verifying their identity.

Answer 33

Answer: C) The default risk is spread across multiple lenders Explanation: To reduce the impact of default, the loan is typically spread across many smaller lenders, so the failure of one borrower doesn't significantly affect any single lender.

Answer 34

Answer: C) Illiquidity and frozen withdrawals Explanation: During the COVID-19 pandemic, P2P platforms froze withdrawals as nervous investors rushed to withdraw funds, leaving them unable to access their cash for several months.

Answer 35

Answer: B) Regulators worldwide are focusing on this market due to its rapid growth and increased risks Explanation: P2P lending has attracted regulatory attention worldwide due to its rapid growth and the increased risks it poses to consumers.

Answer 36

Answer: B) Lenders deposit money with the P2P firm and get matched with borrowers Explanation: Lenders open an account, deposit money, and are then matched with borrowers requesting loans from the same firm.

Answer 37

Answer: C) The loan may be transferred to another lender, and liquidity is not guaranteed Explanation: If a lender requires early access to capital, the loan can be transferred to another lender, but this does not guarantee short-term liquidity, and a fee may be charged.

Answer 38

Answer: C) The interest must be declared to the tax authorities and taxed accordingly Explanation: In the UK, the interest earned from P2P lending is not taxed at source and must be declared to the tax authorities for tax calculation.

Answer 39

Answer: B) They involve the issuer borrowing funds from investors with a promise to repay the principal and often provide regular interest payments. Explanation: Fixed-income securities, like bonds, involve the issuer borrowing funds from the investor with the commitment to repay the capital and pay interest during the life of the bond.

Answer 40

Answer: B) BBB Explanation: A bond is considered investment grade if its long-term credit rating is BBB or higher by Fitch or S&P, or Baa or higher by Moody’s.

Answer 41

Answer: C) The difference in credit risk Explanation: The spread between two bonds reflects the difference in perceived credit risk, with higher spreads typically associated with higher-risk bonds.

Answer 42

Answer: A) A1 Explanation: In 2007, Greece's sovereign debt was rated A1 by Moody’s, indicating a relatively low level of credit risk.

Answer 43

Answer: B) It widens Explanation: When a country's credit rating is downgraded, the perceived risk of holding its bonds increases, which causes the spread between its bonds and those of higher-rated countries to widen.

Answer 44

Answer: C) They are issued by foreign entities in the domestic market’s currency Explanation: Foreign bonds are issued by a foreign entity in the domestic market's currency, such as a US company issuing bonds in Canadian dollars.

Answer 45

Answer: B) Foreign bonds are issued in the domestic market, while eurobonds can be issued in any major currency Explanation: Eurobonds are not restricted to being issued in euros and can be issued in any major currency, while foreign bonds are issued in the domestic market’s currency.

Answer 46

Answer: C) The amount the issuer agrees to repay the bondholder at maturity Explanation: The nominal value, or face value, of a bond is the amount the issuer promises to repay to the bondholder at maturity.

Answer 47

Answer: C) The price excluding accrued interest Explanation: The clean price of a bond is quoted without the accrued interest, while the dirty price includes the accrued interest.

Answer 48

Answer: B) The final date when the bond issuer repays the principal Explanation: The maturity date is the date when the issuer repays the nominal value of the bond to the bondholder.

Answer 49

Answer: A) A bond that the issuer can redeem before its maturity date Explanation: A callable bond gives the issuer the right to redeem the bond earlier than the maturity date, usually when interest rates decrease.

Answer 50

Answer: C) A bond that allows the holder to sell it back to the issuer before maturity Explanation: Puttable bonds give bondholders the right to sell the bond back to the issuer before its maturity.

Answer 51

Answer: B) Short, medium, and long Explanation: Bonds in the UK are classified as short (under five years), medium (five to 15 years), and long (over 15 years) based on the time to redemption.

Answer 52

Answer: C) A bond with a maturity of 50 to 100 years Explanation: Ultra-long bonds are those with maturities of 50 or even 100 years, often classified as long bonds.

Answer 53

Answer: B) Perpetual bond Explanation: A perpetual bond has no maturity date, and the issuer is not obligated to redeem the principal, although they may choose to do so.

Answer 54

Answer: B) A bond that matures on a single, predetermined date Explanation: A bullet redemption bond is redeemed at a single, specified maturity date, where the principal and final coupon are repaid.

Answer 55

Answer: B) Double-dated bond Explanation: A double-dated bond allows the issuer to choose between two possible maturity dates for redemption.

Answer 56

Answer: B) It determines the interest payments the issuer makes to the bondholder Explanation: The coupon rate determines the periodic interest payments that the issuer makes to the bondholder.

Answer 57

Answer: B) A market where bonds are bought and sold after their initial issue Explanation: The secondary market refers to the buying and selling of bonds after they have been initially issued in the primary market.

Answer 58

Answer: B) They lead to higher yields due to a higher risk of default Explanation: High-yield bonds have lower credit ratings and are associated with a higher risk of default, which leads to higher coupon payments to compensate for this risk.

Answer 59

Answer: A) The price that includes the bond's accrued interest Explanation: The dirty price is the price of a bond that includes accrued interest since the last coupon payment.

Answer 60

Answer: C) The amount of interest paid annually based on the nominal value of the bond Explanation: The coupon refers to the amount of interest an investor will earn each year based on the nominal value (NV) of a bond. The NV is the original amount borrowed by the issuer. The coupon is typically a fixed amount, but some bonds may have coupons that fluctuate based on market conditions.

Answer 61

Answer: B) Floating rate notes (FRNs) Explanation: Floating rate notes (FRNs) have a coupon rate that is tied to a short-term market interest rate (e.g., SONIA or SOFR). The coupon is adjusted regularly based on changes in these reference rates, making them attractive during periods of interest rate volatility.

Answer 62

Answer: D) Zero Coupon Bonds (ZCBs) Explanation: Zero Coupon Bonds (ZCBs) do not pay regular interest. Instead, they are issued at a price lower than their face value and redeemed at par value (face value) at maturity. The return is realized through this price appreciation.

Answer 63

Answer: B) Coupons are taxed as income, subject to the individual’s personal savings allowance Explanation: In the UK, bond coupons are taxed as income. If the income falls within the individual’s personal savings allowance (PSA), no further tax is owed. Otherwise, it will be taxed at the investor's marginal income tax rate.

Answer 64

Answer: C) A bond that ranks lower in the capital structure for repayment in case of liquidation Explanation: A subordinated bond (also known as junior debt) ranks lower in the repayment order in case the issuer goes into liquidation. It is repaid after unsubordinated or senior bonds have been repaid.

Answer 65

Answer: B) £100, $1,000, €100 Explanation: The nominal value (NV) of a bond is the amount originally borrowed by the issuer and typically referred to in these denominations for ease of calculation and communication.

Answer 66

Answer: C) To finance government operations and infrastructure projects Explanation: Government bonds, like UK gilts, are issued to raise money for financing government operations, including paying for state benefits and funding infrastructure projects such as road building. They are a primary tool for managing government debt.

Answer 67

Answer: C) Inflation-linked bonds (ILBs) Explanation: Inflation-linked bonds (ILBs) adjust their interest payments and principal repayment based on inflation measures, such as the Retail Price Index (RPI) or Consumer Price Index (CPI). This makes them useful for protecting investors against inflation.

Answer 68

Answer: B) Inflation-Linked Bonds (ILBs) Explanation: Inflation-Linked Bonds (ILBs), also called index-linked bonds or linkers, adjust their interest payments and capital repayment according to inflation rates like the retail prices index (RPI) or the consumer prices index (CPI). This makes them a popular choice for investors looking for protection against inflation.

Answer 69

Answer: B) Corporation Stocks These bonds are commonly referred to as corporation stocks when traded on the LSE.

Answer 70

Answer: C) 1 basis point is equal to 0.01% Explanation: A basis point is a unit of measurement used in finance to describe changes in interest rates or other percentages. One basis point equals 0.01%, so a quoted margin of 25 basis points would be equivalent to 0.25%.

Answer 71

Answer: B) They were guaranteed by the Public Works Loans Board (PWLB) Before the PWLB's abolition in 2020, these bonds were considered safer because of the guarantee from the PWLB.

Answer 72

Answer: B) Charge over the assets of the issuing authority Local authority bonds are typically secured by a charge over the assets of the issuing authority, meaning assets can be sold to raise money if needed.

Answer 73

Answer: B) Local Authority Negotiable Loans (Yearlings) These bonds, known as Yearlings, are marketable and issued for a maximum of two years.

Answer 74

Answer: B) The PWLB's functions were taken over by the Treasury, with operational responsibility delegated to the DMO After the abolition, the Treasury now oversees the functions that were once handled by the PWLB.

Answer 75

Answer: B) They are supported by the government’s ability to print money or raise taxes Government bonds are often considered "risk-free" because the government can raise taxes or print money to redeem them at maturity.

Answer 76

Answer: A) Local Authority Fixed Stocks Local Authority Fixed Stocks are a type of bond issued with fixed rates, but they are not marketable and must be held until maturity unless redeemed early.

Answer 77

Answer: B) Germany In Germany, government bonds are commonly known as Bunds and are issued with maturities ranging between ten and 30 years.

Answer 78

Answer: B) They are issued at a discount and redeemed at face value T-bills do not pay interest; instead, they are sold at a discount and redeemed at face value, with the investor’s return coming from the price increase.

Answer 79

Answer: C) 26 weeks US T-bills are typically issued in maturities of 4, 8, 13, 26, or 52 weeks, with 26 weeks being one of the most common.

Answer 80

Answer: B) They allow the holder to convert them into equity Explanation: Convertible loan stocks give the holder the option to convert their bonds into shares at predetermined terms. This feature distinguishes them from standard corporate bonds, which generally do not offer conversion options.

Answer 81

Answer: C) PIBS are non-cumulative, meaning interest is not guaranteed each year Explanation: PIBS are non-cumulative, meaning that in times of financial difficulty, the issuing building society is not obligated to pay interest in any given year, nor is it required to roll it over to the next year.

Answer 82

Answer: A) Debentures are backed by security; convertibles are not Explanation: Debentures are backed by security, such as land or buildings, and the assets must be sold in case of liquidation. Convertibles, on the other hand, are bonds that can later be converted into equity or other bonds, providing the potential for capital growth.

Answer 83

Answer: B) It is interest-paying and denominated in sterling Explanation: A qualifying corporate bond (QCB) is a bond that is interest-paying and denominated in sterling. This makes it exempt from capital gains tax (CGT) under UK tax law, provided it meets these criteria.

Answer 84

Answer: B) They allow banks to satisfy regulatory capital requirements without impacting shareholders Explanation: CoCos are designed to convert into equity in times of financial stress, thus helping banks meet regulatory capital requirements without impacting existing shareholders until the conversion option is exercised.

Answer 85

Answer: C) They are issued by international entities formed by multiple countries Explanation: Supranational bonds are issued by entities like the European Investment Bank (EIB) or the World Bank, which are formed by multiple countries. These bonds are considered some of the safest investments, with very high credit ratings.

Answer 86

Answer: C) Risky lending practices and loose credit standards leading to defaults Explanation: The global financial crisis was exacerbated by the pooling of high-risk subprime mortgages in ABSs. Many of these mortgages were given to borrowers without proper income verification, which led to high default rates when the housing market collapsed.

Answer 87

Answer: C) They are collateralized by a pool of assets like loans or leases Explanation: ABSs are bonds that are backed by a pool of financial assets, such as loans or leases. These assets are bundled together, making it easier to sell the securities in the market.

Answer 88

Answer: C) All forms of interest are forbidden, and risk is shared. Explanation: Islamic finance operates under the principle that all forms of interest (Riba) are forbidden, and investments should be based on sharing risk and profits between the investor and the bank or financial institution.

Answer 89

Answer: B) Ijarah sukuk. Explanation: Ijarah sukuk involves the transfer or sale of an asset, often with the option of lease-back, for a specified period and consideration. It is one of the most common forms of sukuk in Islamic finance.

Answer 90

Answer: C) Bond-like instruments representing ownership in an underlying asset under Shariah law. Explanation: Sukuk are Islamic financial certificates that resemble bonds but are based on an underlying tangible asset or project. They comply with Shariah law, which prohibits interest.

Answer 91

Answer: B) It can be redeemed or amortised at the issuer's discretion at any time. Explanation: Perpetual sukuk have no specific maturity date. They offer flexibility to the issuer, who can decide to redeem or amortise the sukuk as needed, providing a unique feature in comparison to standard sukuk.

Answer 92

Answer: B) The lack of standardization regarding what constitutes a 'green' bond. Explanation: A major concern with green bonds is that there is no clear, universally accepted standard for what qualifies as a 'green' bond. This can lead to "greenwashing," where bonds are marketed as green without meeting the necessary environmental criteria.

Answer 93

Answer: B) To raise funds for environmentally sustainable projects. Explanation: Green bonds are debt instruments specifically used to finance projects that have positive environmental or climate benefits, such as renewable energy and pollution prevention.

Answer 94

Answer: C) Marine and ocean-based projects. Explanation: Blue bonds, like green bonds, are designed to finance environmental projects, but their focus is specifically on marine and ocean-based initiatives, such as marine protected areas and fisheries management.

Answer 95

Answer: C) The Green Gilt Framework. Explanation: In 2020, the UK government introduced its Green Gilt Framework, detailing how funds from green bonds would be used to meet climate goals and support net-zero objectives.

Answer 96

Answer: B) Seychelles. Explanation: The Republic of Seychelles issued the world's first sovereign blue bond in 2018, raising $15 million to support marine protection and governance of fisheries.

Answer 97

Answer: B) The return an investor makes on an investment Explanation: Yield refers to the return an investor receives from an investment, which can be income, capital growth, or both.

Answer 98

Answer: B) The annual income return as a percentage of the current market price Explanation: Running yield is calculated by dividing the bond’s gross coupon rate by its market price, giving the income return as a percentage of the investment.

Answer 99

Answer: B) Income yield focuses on the coupon return, while GRY includes capital growth or loss. Explanation: Income yield is the annual return based on the coupon and market price, while GRY includes both income yield and the capital growth or loss an investor might experience if holding the bond to maturity.

Answer 100

Answer: C) The duration of the bond Explanation: The price of a bond is influenced by factors such as market demand, interest rates, and investor sentiment. Duration, while important for assessing price sensitivity to interest rate changes, does not directly affect the bond price itself.

Answer 101

Answer: B) If the bond is purchased below par, capital appreciation will add to the GRY. Explanation: GRY considers both the coupon payments and any capital gain or loss from buying a bond at a price different from par. If purchased below par, there will be capital appreciation, adding to the yield.

Answer 102

Answer: B) To assess the price sensitivity of a bond to interest rate changes Explanation: Macaulay Duration is used to measure a bond's sensitivity to interest rate changes, combining the effects of the coupon and maturity period on price volatility.

Answer 103

Higher coupon bonds tend to be less volatile because a smaller change in interest rates represents a smaller proportional change. Explanation: Higher coupon bonds generally experience less volatility because the return from interest payments is more significant compared to price changes due to interest rate fluctuations.

Answer 104

Answer: C) The coupon becomes less attractive, and the price of the bond falls. Explanation: When market interest rates rise, the coupon of a fixed-interest bond becomes less attractive relative to new issues, causing demand to drop. As a result, the price of the bond falls.

Answer 105

Answer: C) They are designed to protect investors from rises in interest rates. Explanation: FRNs adjust their coupon rates according to market interest rates, helping protect investors from the negative effects of rising interest rates.

Answer 106

Answer: B) Inflation can erode the real return on the bond, potentially making it negative. Explanation: High inflation can reduce the purchasing power of the bond's returns, leading to a negative real return for bondholders if inflation outpaces the bond's yield.

Answer 107

Answer: B) On-the-run bonds from the most recently issued bond series. Explanation: On-the-run bonds are typically the most liquid as they are more frequently traded in the market, especially compared to older or smaller issues (off-the-run bonds).

Answer 108

Answer: C) Debt holders have higher priority for repayment in the event of liquidation. Explanation: In a liquidation, creditors (debt holders) are repaid before shareholders, which gives debt instruments a higher level of security compared to equity.

Answer 109

Answer: C) Government-issued bonds. Explanation: Government bonds are typically considered the safest because governments are less likely to default compared to corporate issuers, although defaults can still occur.

Answer 110

Answer: C) A guarantee from a third party to make payments if the issuer defaults. Explanation: Credit enhancements, such as guarantees from financially strong organizations, make bonds more attractive by reducing the risk of default.

Answer 111

Answer: C) It can push up yields for future issues if there is a large volume of selling. Explanation: If many bonds are sold in the secondary market, the increased supply can cause yields on future bonds from the same issuer to rise.

Answer 112

Answer: b) Through a stockbroker Bonds are typically bought and sold through a stockbroker, who may charge a commission. The commission rate may vary depending on the broker and the size of the deal.

Answer 113

Answer: b) Potentially lower dealing costs Buying bonds directly from the government may result in lower commission charges compared to those levied by stockbrokers, making it an attractive option for retail invest

Answer 114

Answer: b) By completing an application form and bidding through the DMO Investors can participate in gilt auctions by completing an application form and submitting their bids through the Debt Management Office (DMO), either directly or via a GEMM.

Answer 115

Answer: b) Non-competitive bids are guaranteed to receive the requested amount of stock at the average price, while competitive bids are riskier Non-competitive bids guarantee that the investor will receive the stock at the average price accepted in the auction, while competitive bids may result in a partial allocation or no allocation if the bid price is too low.

Answer 116

Answer: c) Corporate bonds are usually sold over-the-counter (OTC) due to their diversity in terms of qualities, maturities, and yields The diverse nature of corporate bonds, with varying maturities, qualities, and yields, makes it difficult for them to be traded on major exchanges. Instead, they are mostly traded in decentralized markets or OTC.

Answer 117

Answer: b) To provide liquidity by buying and selling bonds and facilitating trades Dealers in the corporate bond market act as market makers, providing liquidity by being willing to buy or sell bonds, and facilitating trades between buyers and sellers.

Answer 118

Answer: c) To compensate the underwriter for their role in distributing the bonds The underwriting spread is the difference between the price at which the underwriter buys the bonds from the issuer and the price at which they sell them to investors. This spread compensates the underwriter for taking on the distribution role.

Answer 119

Answer: b) It allows retail investors to buy gilts, supranational bonds, and UK corporate bonds The ORB platform enables retail investors to directly purchase a range of gilts, supranational bonds, and UK corporate bonds, increasing investment opportunities for individuals.

Answer 120

Answer: b) The minimum price movement for bonds during trading hours The "tick size" refers to the smallest price movement that can occur for a bond on the platform during trading hours. For the ORB platform, the tick size is £0.01.

Answer 121

Answer: c) Retail bonds are generally sold to private investors, while wholesale bonds are sold to institutional investors The retail bond market is designed for private investors and has smaller investment denominations, while the wholesale bond market primarily caters to institutional investors with larger denominations.

Answer 122

Answer: B) The price of a bond excluding accrued interest. Explanation: The clean price is the market price of the bond excluding any accrued interest. Accrued interest is added to the clean price to calculate the dirty price.

Answer 123

Answer: A) Coupon rate × Number of days since last payment ÷ Total number of days in the coupon period. Explanation: Accrued interest is calculated by multiplying the coupon rate (usually halved for semi-annual payments) by the fraction of the coupon period that has elapsed since the last payment.

Answer 124

Answer: B) The bondholder is not entitled to the next interest payment. Explanation: When a bond goes ex-dividend, buyers of the bond are not entitled to the upcoming interest payment. The seller retains the right to this payment if they owned the bond before the ex-dividend date.

Answer 125

Answer: D) All of the above. Explanation: Bond indices are more complex because bonds are less liquid, have a larger universe with varying maturities, and include unique features like calls or sinking funds, making it difficult to replicate and maintain accurate indices.

Answer 126

Answer: C) The investor becomes entitled to the next interest payment. Explanation: Buying cum-dividend (Latin for "with dividend") means the investor is entitled to the entire forthcoming interest payment, even if some of it accrued before their purchase.

Answer 127

Answer: B) To measure performance in portfolio management. Explanation: Bond indices provide a benchmark for evaluating the performance of bond portfolios, measuring both income (interest) and capital appreciation.

Answer 128

Answer: B) Income and capital appreciation. Explanation: Total return indices account for the interest earned (income) and the change in the bond's market price (capital appreciation) over time.

Answer 129

Answer: A) They are weighted by total issuance value. Explanation: Most bond indices give greater weight to bonds with higher total issuance, meaning issuers with larger debt levels have a bigger influence on the index.

Answer 130

Answer: B) A global index including various types of bonds such as government and asset-backed securities. Explanation: This index measures the performance of a broad range of global bonds, including government, corporate, and asset-backed securities.

Answer 131

Answer: C) A 1% change in its price affects the index more than smaller bonds. Explanation: Since bond indices are often issuance-weighted, the largest bond (in terms of total issuance) has a proportionally larger impact on the overall index value.

Answer 132

Answer: B) Average market capitalization Explanation: Bond indices include calculations such as average coupon, gross redemption yield, time to maturity, Macaulay duration, modified duration, convexity, and others. Market capitalization, which is typically associated with equities, is not included.

Answer 133

Answer: B) By using the arithmetic mean between bid and ask quotes Explanation: The calculation of bond indices is based on mid-prices, which are derived by averaging the bid and ask quotes, ensuring the prices are unbiased and representative of the market.

Answer 134

Answer: B) Access to a diversified portfolio with lower initial investment Explanation: Bond funds pool money from many investors, allowing access to a diversified portfolio of bonds at a lower cost. This reduces risk and provides liquidity compared to individual bond investments.

Answer 135

Answer: A) Laddering Explanation: Laddering spreads bond investments across different maturities, reducing sensitivity to interest rate changes while providing flexibility as each bond matures.

Answer 136

Answer: B) To match the duration of a bond portfolio with liabilities Explanation: Immunisation is a strategy where the portfolio duration is matched to liabilities, ensuring that changes in interest rates do not impact the ability to meet those liabilities.

Answer 137

Answer: C) Bonds typically have lower long-term returns than equities Explanation: Although bonds are generally less volatile and safer, their returns over the long term are lower than those of equities, which have greater growth potential.

Answer 138

Answer: C) Buying long-term bonds and selling them before maturity to profit from declining yields Explanation: Riding the yield curve involves buying longer-term bonds and selling them at a profit before maturity when the yield curve is upward sloping and yields decline.

Answer 139

Answer: C) Bond funds offer greater liquidity and risk diversification Explanation: Bond funds pool investments, enabling diversification and maintaining liquidity by holding cash reserves for redemption requests, which individual bonds may not provide.

Answer 140

Answer: B) Investments focused on bonds with durations close to liabilities Explanation: A bullet portfolio strategy involves investing in bonds with durations close to specific liabilities, ensuring funds are available when needed.

Answer 141

Answer: C) Exploiting pricing differences between two similar bonds Explanation: Anomaly switching takes advantage of pricing discrepancies between bonds that are otherwise similar in characteristics like maturity and credit rating.

Answer 142

Answer: b) Financing government and large company activities Explanation: Before the 1970s, the bond market was mainly used by governments and large companies to borrow money to finance their activities or keep the economy running. Speculative trading became more prominent later.

Answer 143

Answer: c) Growing interest in secondary market trading Explanation: As investors began to realize they could make profits by trading bonds in the secondary market, there was an increased need for greater and more frequent price changes to facilitate trading.

Answer 144

Answer: b) The potential for price appreciation as yields become even more negative Explanation: Because of the inverse relationship between yields and prices, investors might profit from a bond's price increase if its yield becomes even more negative.

Answer 145

Answer: b) Speculative short-term trading Explanation: While speculative trading exists, the main reasons for buying bonds include generating income, preserving or appreciating capital, diversification, and hedging against economic downturns.

Answer 146

Answer: b) A premium at which green bonds trade compared to conventional bonds Explanation: Green bonds often trade at a premium (greenium) due to high demand and limited supply, even though they have the same credit risk as their conventional counterparts.

Answer 147

Answer: b) SLBs are more flexible in how proceeds are used Explanation: Unlike green and social bonds, which have strict criteria on how proceeds must be used, SLBs allow proceeds to be used for general purposes while requiring issuers to commit to sustainability goals.

Answer 148

Answer: b) Lack of liquidity in primary and secondary markets Explanation: The relatively small size of the sustainable bond market compared to the overall bond universe makes it harder to enter and exit positions, though this is improving as the market grows.

Answer 149

Answer: c) Social projects like affordable housing and health services Explanation: Social bonds are used to fund projects with social objectives, such as basic infrastructure, health services, and affordable housing, particularly for those below the poverty line.

Answer 150

Answer: B) To fund large-scale projects and operations Explanation: The primary function of the bond market for issuers is to raise capital for financing large-scale projects or operations, as bonds provide an alternative to equity financing.

Answer 151

Answer: B) Ordinary shares or common stock Explanation: Equities are also called ordinary shares or common shares. The term “equities” refers to the shares issued by a company representing ownership, while “ordinary shares” and “common stock” are used in different regions (e.g., ordinary shares in the UK, common stock in the US).

Answer 152

Answer: B) Bondholders are creditors, while shareholders are part-owners of the company. Explanation: Bonds are debt securities, so bondholders are creditors and do not have ownership rights. Equities (shares) represent ownership in the company, making shareholders part-owners with rights attached to their ownership, such as voting.

Answer 153

Answer: B) Shareholders bear more risk because their returns are less predictable and their capital may become worthless. Explanation: Shareholders face higher risks than bondholders. If the company performs poorly, dividends may fall or be eliminated, and share prices may decrease. In extreme cases, shares could become worthless if the company faces liquidation, unlike bondholders who have a more secure claim on the company’s assets.

Answer 154

Answer: C) Shareholders can receive income from dividends, which depend on company profits. Explanation: Ordinary shareholders may receive income through dividends, but these payments depend on the company’s profits. If a company performs well, dividends may rise; if not, dividends may fall or be omitted altogether.

Answer 155

Answer: A) Through secondary market transactions, by purchasing existing shares. Explanation: Ordinary shareholders can buy shares either during the primary market through an IPO (newly issued shares) or in the secondary market, where existing shares are traded between investors. The company itself does not receive any funds from secondary market transactions.

Answer 156

Answer: B) They are the last to be paid, after creditors and bondholders. Explanation: In liquidation, ordinary shareholders are the last to receive any payout after the company's liabilities, including payments to bondholders, have been settled. In many cases, there may be no funds left for shareholders once all debts are cleared.

Answer 157

Answer: B) Capital growth and steady dividends. Explanation: Ordinary shareholders invest with the expectation that their shares will grow in value (capital growth) and that they will receive dividends if the company performs well. The potential for high rewards is offset by the associated risks, as there is no guarantee of returns.

Answer 158

Answer: C) It represents the owners’ stake in the company and is generally permanent. Explanation: Ordinary share capital represents the ownership stake of shareholders and is generally permanent, unlike bonds, which are redeemed at maturity. Share capital is used by companies to fund their operations and growth.

Answer 159

Answer: B) They must be bought back from shareholders after a specified date or event. Explanation: Redeemable shares are issued with an agreement to buy them back from shareholders after a certain date or at a specified future event. This is a defining feature that distinguishes them from other types of shares.

Answer 160

Answer: B) A provision in the company's articles of association. Explanation: A company can only issue redeemable shares if its articles of association provide for it. The articles will also outline the terms of redemption, including the redemption date and price.

Answer 161

Answer: A) By issuing new shares to the public or from distributable profits. Explanation: Redeemed shares are repurchased and cancelled by the company, typically using funds from either new shares issued to the public or from distributable profits.

Answer 162

Answer: B) Dual-class shares offer different voting rights, while redeemable shares do not. Explanation: Dual-class shares are structured to provide different voting rights to different classes of shareholders (e.g., public vs. founders), whereas redeemable shares are distinguished by their buyback agreement rather than voting rights.

Answer 163

Answer: C) To defer dividend payments until a specific condition is met. Explanation: Deferred dividend shares have dividends that are not paid immediately but are instead deferred until a certain condition (like a time period) is fulfilled. This structure is designed to benefit investors interested in capital growth.

Answer 164

Answer: B) The company's founders or executives. Explanation: Deferred ordinary shares are usually issued to the founders or executives of a company. These shares typically provide little or no dividends until certain conditions are met, but they offer a larger share of future profits.

Answer 165

Answer: B) They offer fixed dividends and priority over ordinary shareholders. Explanation: Preference shares typically offer fixed dividends and priority in both dividend payments and liquidation scenarios, providing holders with more security than ordinary shareholders.

Answer 166

Answer: C) Cumulative preference shares. Explanation: Cumulative preference shares accumulate any unpaid dividends and ensure that the missed dividends are paid before any dividends are issued to ordinary shareholders.

Answer 167

Answer: B) The preference shares are cancelled, and the company pays the shareholders for the shares. Explanation: When preference shares are redeemed, the company repurchases the shares, paying the holders the nominal value (or agreed-upon amount), and the redeemed shares are then cancelled, reducing the company’s issued share capital.

Answer 168

Answer: B) Investing in unquoted companies Context: Private equity focuses on providing capital to invest in unquoted companies, which may include public companies that are delisted as part of the transaction.

Answer 169

Answer: B) They allow the holder to convert the shares to ordinary shares. Explanation: Convertible preference shares offer holders the right to convert their shares into ordinary shares at a future date, offering potential upside in the form of equity participation if the company performs well.

Answer 170

Answer: B) Hedge fund investments Context: Hedge funds are often compared to private equity, but they are a distinct type of investment vehicle, with different organizational structures and strategies.

Answer 171

Answer: C) The sponsor only needs to provide a fraction of the capital for the acquisition. Context: In an LBO, the financial sponsor raises acquisition debt, making the transaction attractive by allowing them to provide only a small portion of the capital needed. This is particularly appealing to investors.

Answer 172

Answer: B) Equity investments in start-ups and early-stage companies. Context: VC is focused on providing capital to companies in their early stages, especially for new technology, marketing concepts, or products that are not yet proven.

Answer 173

Answer: C) To expand or restructure relatively mature companies. Context: Growth capital is used by more mature companies seeking to expand, enter new markets, or finance acquisitions without giving up control.

Answer 174

Answer: C) They may carry high risks of bankruptcy. Context: Distressed investments are often made in companies that are financially stressed, facing bankruptcy, or operational distress, making them risky but potentially rewarding if recovery occurs.

Answer 175

Answer: B) To reduce the amount of equity needed for an acquisition. Context: Mezzanine capital provides subordinated debt or preferred equity, filling the gap between debt and equity financing, often used in leveraged buyouts and major expansions.

Answer 176

Answer: C) Bridge Financing Context: Bridge financing is a short-term solution that companies use to solidify their position until a longer-term financing arrangement can be made

Answer 177

Answer: C) The ease and speed with which an investment can be converted to cash. Context: Liquidity refers to how quickly an asset can be sold and converted into cash. Stocks in well-established companies (blue-chip stocks) are typically more liquid, while smaller stocks may be less so.

Answer 178

Answer: C) Liquid shares are more frequently traded, with more buyers and sellers. Context: Liquid shares, like those of blue-chip companies, have a deeper and more active market, meaning they can be bought and sold more easily compared to illiquid shares, which may take longer to trade or are harder to value.

Answer 179

Answer: b) To determine a company's potential for defaulting on debts Explanation: A credit rating assesses a company's creditworthiness, which measures the likelihood of the company defaulting on its debts. This provides investors with insight into the company's health and future prospects.

Answer 180

Answer: b) The net worth remains unchanged, though the distribution of shareholders' funds changes Explanation: A bonus issue increases the number of shares in issue but does not raise new capital. The net worth of the company remains the same, but the shareholders' funds are redistributed between share capital and other reserves.

Answer 181

Answer: b) The share price typically falls in direct proportion to the increase in share capital Explanation: After a bonus issue, the share price typically falls in direct proportion to the increase in the number of shares. However, other factors such as market perception and increased accessibility may influence the price, potentially causing it to rise slightly above the expected value.

Answer 182

Answer: b) A share split reduces the nominal (par) value per share, but the total nominal share capital remains unchanged Explanation: In a share split, the nominal (par) value per share is reduced without altering the total nominal share capital. This differs from a bonus issue, where new shares are issued to existing shareholders, but the total value of shares does not change.

Answer 183

Answer: b) To simplify its statement of financial position and improve marketability Explanation: Companies may issue bonus shares to simplify their financial position and improve marketability. Increasing the number of shares can make them more accessible to a broader range of investors and signal financial health if there are ample reserves to allocate.

Answer 184

Answer: B) To allow existing shareholders to buy new shares at a discounted price Explanation: A rights issue allows existing shareholders to purchase additional shares at a price below the current market value. Companies use rights issues to raise capital for various purposes, such as paying off debt, supporting expansion, or funding acquisitions.

Answer 185

Answer: B) They can avoid dilution of their ownership in the company Explanation: A rights issue protects existing shareholders from having their ownership stake diluted by new investors. It gives them the legal right to purchase additional shares, ensuring their percentage of ownership can remain the same.

Answer 186

Answer: C) It is set below the current market value to encourage existing shareholders to invest Explanation: The subscription price for new shares in a rights issue is typically set below the current market value of the shares to make the offer attractive to existing shareholders. This incentivizes them to invest further in the company.

Answer 187

Answer: B) Theoretical Ex-Rights Price, representing the expected price of shares after the rights issue Explanation: TERP is the theoretical price at which the company's old and new shares will trade once the rights issue is completed and all new shares are fully paid. It provides an estimate of what the share price will be after the rights issue.

Answer 188

Answer: C) A financial institution agreeing to purchase any shares not taken up by existing shareholders Explanation: Underwriting is a process where a financial institution agrees to purchase any shares that existing shareholders do not take up in a rights issue. This ensures the company raises the intended capital even if some shareholders do not participate.

Answer 189

Answer: B) The price of old shares typically falls, and the price of new shares rises to the TERP Explanation: After the rights issue, the price of the old shares generally falls to reflect the dilution caused by the issuance of new shares. The new shares are expected to rise to the TERP, which is the weighted average price of the old and new shares combined.

Answer 190

Answer: C) To reward shareholders with free shares Explanation: A rights issue is used to raise capital for the company, not to reward shareholders with free shares (which would be done through a bonus issue). The funds raised might be used for expansion, paying off debt, or acquiring other companies.

Answer 191

Answer: A) A rights issue raises new capital for the company, while a bonus issue does not Explanation: The key difference is that a rights issue raises new capital by selling new shares to existing shareholders, while a bonus issue does not raise new capital. In a bonus issue, new shares are distributed for free to existing shareholders based on the number of shares they already own.

Answer 192

Answer: B) Secured bondholders, unsecured bondholders, preference shareholders, ordinary shareholders Explanation: In the event of a liquidation, the assets are distributed in a specific order. Secured creditors, such as bondholders with secured debt, are paid first, followed by unsecured bondholders, preference shareholders, and finally ordinary shareholders, who are last in line for any remaining funds.

Answer 193

Answer: C) The share price often falls due to the uncertainty about asset distribution and solvency Explanation: When a company enters liquidation, the market typically reacts negatively, especially if the company is insolvent, as there is uncertainty about how much of the company's debts will be repaid and whether shareholders will receive anything. The share price often falls as a result.

Answer 194

Answer: B) Shareholder engagement relies on communication and trust, whereas shareholder activism favours short-term gains at the expense of long-term interests. Context: Shareholder engagement is typically a long-term strategy built around communication and mutual trust, while shareholder activism focuses on achieving more immediate outcomes, sometimes at the cost of the company’s long-term success.

Answer 195

Answer: B) An increase in the supply of shares compared to demand. Context: When there are more shares available than there are buyers, share prices tend to fall due to an oversupply in the market.

Answer 196

Answer: C) Share prices are driven by both company performance and market sentiment. Context: Share prices fluctuate due to both the company's financial health and external factors like market sentiment, economic conditions, and investor behavior.

Answer 197

Answer: B) To place orders for shares on behalf of the client and ensure the transaction goes through a stock exchange. Context: A stockbroker’s job is to execute buy and sell orders on behalf of clients, ensuring the transaction goes through an exchange for matching buyers and sellers.

Answer 198

Answer: C) The value of the company’s physical assets. Context: While the company’s financial performance, political environment, and market sentiment play a significant role in share price fluctuations, the value of physical assets does not directly affect the share price as strongly. Share prices are more influenced by expectations of future performance, management, and market conditions.

Answer 199

Answer: D) Both B and C Context: Both execution-only and non-discretionary advisory services allow the client to make the final decision. In an advisory service, the broker gives advice, but the client decides. In execution-only, the broker only executes the transaction per the client’s instructions.

Answer 200

Answer: B) To act as their clients' agent, executing deals at the best possible price Explanation: Brokers are intermediaries who act on behalf of their clients, seeking the best possible prices when executing their orders in the market. They ensure that trades are placed at the best available prices, following the principle of best execution.

Answer 201

Answer: B) They ensure there is always a market in certain securities by quoting buy and sell prices Explanation: Market makers provide liquidity by quoting both buy and sell prices in certain securities, ensuring that there is always a market for those securities. They compete with one another to offer the best prices to brokers and investors.

Answer 202

Answer: B) SETqx Explanation: SETqx is used for trading less liquid securities compared to those available on the SETS platform. It provides a service for securities that may not have the same level of trading volume or liquidity as those on SETS.

Answer 203

Answer: B) A central securities depository that tracks ownership electronically Explanation: CREST is a central securities depository in the UK that tracks ownership of securities electronically, facilitating the settlement of transactions without the need for physical certificates.

Answer 204

Answer: C) Settlement occurs two days after the trade (T+2) Explanation: In the UK, equity trades generally settle on a T+2 basis, meaning the buyer and seller exchange funds and securities within two business days of the trade.

Answer 205

Answer: C) The excess price per share over the nominal value Explanation: A premium is the amount by which the price at which shares are sold exceeds their nominal value. This occurs when a company issues shares at a price higher than their par or nominal value.

Answer 206

Answer: B) The date the company's board of directors announces the dividend. Explanation: The Declaration Date is when the board of directors formally announces the dividend and makes it a liability for the company.

Answer 207

Answer: B) Using the Gordon growth model based on expected dividends Explanation: The Gordon growth model, also known as the dividend valuation model, calculates the fair value of a share by considering the expected future dividends, their growth rate, and the required return.

Answer 208

Answer: B) The future potential for significant dividends Explanation: If a company does not pay dividends but has a high valuation, investors often believe the company will start paying significant dividends in the future. For example, companies like Microsoft and Apple eventually paid dividends after reinvesting their earnings for many years.

Answer 209

Answer: C) The date by which investors must have purchased the stock to receive the dividend. Explanation: On the Ex-Dividend Date (xd), an investor must have purchased the stock to be eligible for the dividend. If bought after this date, they won't receive the upcoming dividend.

Answer 210

Answer: B) It decreases by the dividend amount. Explanation: On the Ex-Dividend Date, the share price typically drops by the amount of the dividend, as new buyers are not entitled to the upcoming payment.

Answer 211

Answer: C) The day by which an investor must be registered as an owner to receive the dividend. Explanation: The Record Date is when the company takes a record of all shareholders who will receive the dividend. It occurs after the Ex-Dividend Date.

Answer 212

Answer: B) A trade arranged where the buyer does not receive the dividend despite buying during the Cum-Dividend period. Explanation: A special ex trade is a special arrangement where the buyer does not receive the dividend, even though they bought the stock during the Cum-Dividend period.

Answer 213

Answer: B) A trade arranged during the Ex-Dividend period where the buyer doesn’t receive the dividend. Explanation: A special cum trade is a special arrangement where the buyer does not receive the dividend despite buying during the Ex-Dividend period.

Answer 214

Answer: C) Shares are bought with the right to receive the next dividend. Explanation: A stock is considered "Cum-Dividend" when an investor buys it with the right to receive the next declared dividend.

Answer 215

Answer: B) A percentage of the total purchase price. Explanation: Broker commission is typically a percentage of the total purchase price, often ranging from 1% to 2%, but it can also be a flat fee or a combination of both.

Answer 216

Answer: A) A fee for shares traded on the London Stock Exchange over £10,000. Explanation: The PTM Levy is a £1 government fee charged on securities transactions over £10,000 on the London Stock Exchange, Isle of Man, or the Channel Islands.

Answer 217

Answer: B) An index that includes large companies without regard for their domicile or trading location. Explanation: World or global stock market indices, such as the MSCI World or S&P Global 100, include large companies from various countries and regions, without focusing on where they are domiciled or traded.

Answer 218

Answer: B) To represent the performance of a nation's stock market and reflect its economic health. Explanation: National indices like the FTSE 100 or S&P 500 represent the performance of the stock market of a particular country, often serving as a barometer for economic health and investor sentiment.

Answer 219

Answer: B) Stocks of nearly every publicly traded company in the US, excluding ADRs. Explanation: The Dow Jones US Total Stock Market Index represents the stocks of nearly all publicly traded companies in the US, including those on the NYSE and most on Nasdaq, but it excludes American Deposit Receipts (ADRs).

Answer 220

Answer: B) Companies within specific sectors or industries. Explanation: Specialized indices focus on specific sectors, such as pharmaceuticals or technology, and track the performance of companies within those industries.

Answer 221

Answer: A) Price return Explanation: The S&P 500 has multiple versions, including price return, which only considers the price movements of its components, excluding dividends. Other versions include total return and net total return, which account for dividends in different ways.

Answer 222

Answer: B) By summing the share prices of all constituent stocks. Explanation: In a price-weighted index, such as the Dow Jones Industrial Average, the index value is determined by adding up the share prices of its components. Stocks with higher prices have a greater impact on the index.

Answer 223

Answer: B) It gives more weight to companies with a higher market capitalisation. Explanation: Market capitalisation-weighted indices, like the S&P 500, give greater weight to companies with higher market capitalisation, meaning they have a larger impact on the index value.

Answer 224

Answer: B) An index where all constituent stocks are equally weighted, regardless of their size. Explanation: In an equal-weighted index, like the MSCI USA Equal Weighted Index, each stock is given the same weight in the index, regardless of its market size, which balances the influence of each company.

Answer 225

Answer: B) Only the shares that are freely tradable by investors. Explanation: Float-adjusted indices exclude shares held by strategic investors or government bodies, making them more accurate for reflecting what investors can actually trade.

Answer 226

Answer: B) Some companies may be added or removed based on their performance. Explanation: During the quarterly review of the FTSE 100, companies are added or removed based on their market performance, which impacts share prices and requires fund managers to rebalance their portfolios.

Answer 227

Answer: a) Dividend Yield = Gross Dividend Paid in Year / Market Price of Share Explanation: The dividend yield is calculated by dividing the gross dividend paid in the year by the current market price of the share, expressed as a percentage. This gives investors an idea of the return they can expect from dividends relative to the share price.

Answer 228

Answer: a) EPS = Profit Attributable to Ordinary Shareholders / Number of Ordinary Shares Explanation: EPS is the amount of a company’s profits allocated to each outstanding share, calculated by dividing the profit attributable to ordinary shareholders by the total number of ordinary shares in issue.

Answer 229

Answer: c) The company is considered more profitable Explanation: A higher EPS indicates that a company is more profitable as it has generated more profit per share, making it an attractive prospect for investors seeking returns on their shares.

Answer 230

Answer: b) The company is expected to experience good profit growth Explanation: A high P/E ratio may indicate that the market expects good profit growth or that the company is perceived to have low risk, as higher P/E ratios are often linked to higher expectations of future earnings.

Answer 231

Answer: b) The stock is undervalued Explanation: A PEG ratio below one suggests that the stock is undervalued relative to its projected earnings growth. It is considered a favorable indicator for investors seeking value opportunities.

Answer 232

Answer: b) Dividend Cover = EPS / Dividend Paid Explanation: Dividend Cover is calculated by dividing the earnings per share (EPS) by the dividend paid per share (DPS). A higher ratio suggests a safer dividend, as the company can more easily afford to pay it.

Answer 233

Answer: c) 2.0x or higher Explanation: A dividend cover ratio of 2.0x or higher indicates that the company is comfortably able to pay out its dividend, suggesting financial stability. A ratio below 1.5x may signal concerns about dividend sustainability.

Answer 234

Answer: a) P/CF = Market Price of Share / Cash Flow per Share Explanation: The P/CF ratio compares the market price of a company’s shares to its cash flow per share. It helps investors assess whether a company’s stock is overvalued or undervalued relative to its ability to generate cash.

Answer 235

Answer: c) The stock is undervalued relative to its cash flow Explanation: A low P/CF ratio suggests that the stock may be undervalued compared to its cash flow, which can indicate that the company is being priced too low relative to its financial health.

Answer 236

Answer: c) The market value relative to the book value of assets Explanation: The Price-to-Book (P/B) ratio compares the market value of a company’s stock to its book value. It is commonly used in sectors like banking to evaluate the value of a company’s assets after all liabilities have been accounted for.

Answer 237

Answer: b) NAV per share = (Assets - Liabilities) / Number of shares in issue Context: The NAV per share is derived from the total assets minus the total liabilities of a company, divided by the number of shares in circulation. This figure is useful for investors to assess the underlying value of a company and its financial health, especially in cases like liquidation.

Answer 238

Answer: b) EV = Market capitalization + Debt - Cash and cash equivalents Context: The Enterprise Value (EV) gives an indication of what the market values a company's ongoing business operations at, including debt and excluding cash, as it provides a clearer picture of a company's true value for potential takeover purposes.

Answer 239

Answer: a) Tax and interest Context: ROCE focuses on how efficiently a company uses its capital to generate profits, excluding financial obligations such as interest and tax. This allows for a more consistent comparison between companies, regardless of their financing structure.

Answer 240

Answer: b) The return on the investment made by shareholders, represented as a percentage Context: ROE measures how effectively a company uses the capital invested by its shareholders to generate profits. It reflects the return shareholders are earning on their invested funds, making it a key indicator of financial performance.

Answer 241

Answer: b) Gearing = Long-term liabilities / Capital employed Context: The gearing ratio assesses the financial leverage of a company, showing the proportion of a company's capital that is funded through long-term debt. High gearing means more debt reliance, which can increase risk during economic downturns.

Answer 242

Answer: b) The ability of a company to pay off its current liabilities with assets that can be quickly turned into cash Context: The Quick Ratio excludes inventory from the calculation of assets, focusing only on the most liquid assets, such as cash and receivables, to assess a company's ability to meet short-term obligations in case of financial trouble.

Answer 243

Answer: b) The company’s ability to cover short-term liabilities with short-term assets Context: The Working Capital Ratio evaluates whether a company has enough short-term assets to cover its short-term liabilities. A ratio between 1.5 and 2 is generally seen as ideal, indicating sufficient liquidity without excess idle assets.

Answer 244

Answer: D) All of the above Explanation: The past performance of a share should not be assessed in isolation. Investors should consider the performance of the broader market, the total return (capital gains plus dividends), and the share's volatility to gain a comprehensive understanding of its performance.

Answer 245

Answer: B) The share's future performance is entirely predictable based on past trends Explanation: Although past performance provides useful insights, it does not guarantee future results. Market conditions and other external factors can influence future performance, making it impossible to predict with certainty.

Answer 246

Answer: C) Growth investing Explanation: Growth investing is an active strategy where investors focus on companies with high growth potential. In contrast, buy and hold and indexation are passive strategies, while rebalancing is a portfolio management technique that can be applied in both active and passive strategies.

Answer 247

Answer: B) The market quickly processes new information, and securities reflect their fair value. Explanation: Passive investors adhere to the efficient market hypothesis (EMH), which asserts that markets quickly incorporate all available information, making it impossible for investors to consistently outperform the market.

Answer 248

Answer: B) Seeks companies that command a competitive advantage and produce above-average earnings growth Explanation: Growth investing focuses on companies that have the potential for high earnings growth. These companies are typically well-positioned to outperform industry peers, driven by a strong competitive advantage.

Answer 249

Answer: B) Growth at a reasonable price (GARP) Explanation: GARP is a less aggressive growth investment strategy where investors seek companies that offer good growth prospects at a reasonable price, meaning the share price has not yet fully reflected the potential for earnings growth.

Answer 250

Answer: B) Holding a portfolio of securities indefinitely, with only minor adjustments Explanation: The buy and hold strategy is a passive investment approach where an investor purchases securities and holds them for the long term, making minimal adjustments to the portfolio.

Answer 251

Answer: B) Investing in distressed companies that are expected to recover Explanation: Value investing focuses on identifying undervalued stocks, typically in distressed conditions, with the expectation that their price will recover and revert to their intrinsic value.

Answer 252

Answer: C) Indexation Explanation: Indexation is a passive investment strategy where an investor replicates the performance of a market index, such as the S&P 500, without actively selecting individual securities.

Answer 253

Answer: C) Long/short Explanation: The long/short strategy, often used by hedge funds, involves buying stocks expected to rise in value (long positions) and selling stocks expected to decrease in value (short positions).

Answer 254

Answer: b) It balances risk and reward while meeting investor objectives Explanation: A global asset allocation spreads investments across various stock markets worldwide, which helps balance the risk and reward for the investor. This strategy enables the portfolio to target markets that have potential for returns while considering the investor's goals.

Answer 255

Answer: d) Individual stock performance Explanation: While geographic spread, market sectors, and market capitalisation are essential factors in equity diversification, focusing solely on the performance of individual stocks would not provide the necessary diversification to manage risk effectively.

Answer 256

Answer: b) The total value of a company's shares in circulation Explanation: Market capitalisation refers to the total market value of a company's outstanding shares of stock, calculated by multiplying the share price by the total number of shares in circulation.

Answer 257

Answer: b) Price-to-earnings (P/E) ratio Explanation: The P/E ratio is a common method for analysing a company's future growth prospects, as it compares the price of a company's stock to its earnings per share.

Answer 258

Answer: c) They can offer significant upside growth potential Explanation: Small-cap equities tend to have higher growth potential due to their smaller size and greater ability to expand, though they also come with higher risk.

Answer 259

Answer: d) They provide less diversification than equity funds Explanation: Individual equities tend to provide less diversification because investors are exposed to the performance of specific companies, whereas equity funds can offer diversification across multiple stocks.

Answer 260

Answer: c) Market capitalisation Explanation: Market capitalisation is not directly related to dividend prospects. Instead, dividend cover, growth rate, and payout ratio are better indicators of a company's ability to maintain or grow dividends.

Answer 261

Answer: b) It involves additional risks such as political and economic uncertainty Explanation: Foreign investing introduces risks related to different political environments, economic conditions, and currency fluctuations, which can impact returns.

Answer 262

Answer: b) The rate at which securities are bought and sold in a portfolio Explanation: Portfolio turnover refers to the frequency with which assets in a portfolio are traded. High turnover may incur additional costs, potentially reducing overall returns.

Answer 263

Answer: b) An ETF that tracks an index but uses alternative weighting schemes Explanation: Smart Beta ETFs are designed to generate returns above a benchmark by adjusting the weighting of index components based on factors like volatility, quality, or momentum.

Answer 264

Answer: B) To raise capital for growth, enhance credibility, or provide an exit route for shareholders Context: Companies often list shares to raise capital, increase their market visibility, or provide liquidity for existing shareholders. This process is crucial for funding further growth or for facilitating mergers and acquisitions.

Answer 265

Answer: B) "Listed" means the shares meet the stock exchange's criteria and are tradable, while "admitted to trading" allows trading without prior listing Context: "Listing" means that shares meet the exchange's minimum criteria. "Admission to trading" can happen independently of a listing procedure, and not all listed companies are admitted for trading immediately.

Answer 266

Answer: C) They provide a marketplace for issuing and trading securities and ensure companies meet listing criteria Context: Stock exchanges regulate the listing process by ensuring companies meet specific criteria related to market size, liquidity, and financial stability. They offer a marketplace for securities, facilitating trading for investors.

Answer 267

Answer: B) The shares are available for trading and prices are publicly available Context: When shares are quoted, it means they are actively traded on the exchange, with publicly available pricing for investors. "Quoted" shares ensure there is market transparency.

Answer 268

Answer: C) To become more dynamic, cost-efficient, and globalize trading networks Context: Stock exchanges have transitioned to shareholder ownership to adapt to global market demands, improve cost efficiency, and integrate with global financial systems, creating a more competitive and interconnected market.

Answer 269

Answer: C) It is responsible for setting listing criteria and regulating the market Context: The FCA sets and enforces the standards and criteria for listing companies in the UK. It ensures that companies remain compliant with ongoing regulatory obligations to maintain market integrity.

Answer 270

Answer: C) The Main Market has more stringent requirements for size, trading history, and capital, while AIM is for growing and smaller companies Context: The LSE’s Main Market is aimed at more established companies that meet higher thresholds for size and trading history, while AIM caters to smaller, growing companies with fewer listing restrictions.

Answer 271

Answer: C) To enhance liquidity and marketability of companies' shares and build their brands globally Context: Mergers and alliances help stock exchanges create more dynamic, globally recognized markets. These partnerships enable firms to enhance liquidity, market access, and brand visibility, benefiting multinational companies.

Answer 272

Answer: B) Frankfurt Stock Exchange Explanation: The Frankfurt Stock Exchange is the largest in Germany, with a share turnover of around 90%, and lists most major German public companies.

Answer 273

Answer: B) Official Market, Regulated Market, Open Market Explanation: The Frankfurt Stock Exchange has three segments: Official Market (with strict criteria), Regulated Market (less strict criteria), and Open Market (with even lower requirements).

Answer 274

Answer: C) Shanghai Stock Exchange Explanation: The Shanghai Stock Exchange (SSE) lists most of the 2,200 stocks and primarily trades in renminbi.

Answer 275

Answer: B) NYSE Explanation: The New York Stock Exchange (NYSE) is the largest in the world by market capitalization, with over 2,800 companies listed.

Answer 276

Answer: B) Markets in Financial Instruments Directive (MiFID) Explanation: MiFID, which became effective in 2007, introduced MTFs, organised trading facilities (OTFs), and systematic internalisers (SIs), making it easier for investors to trade away from traditional exchanges.

Answer 277

Answer: D) Proprietary Trading Platforms (PTPs) Explanation: MiFID II does not mention Proprietary Trading Platforms (PTPs) as a recognized category. It includes MTFs, OTFs, and SIs.

Answer 278

Answer: B) Bonds Explanation: Under MiFID II, OTFs are specifically designed for trading bonds, structured finance products, emission allowances, or derivatives, but not equities.

Answer 279

Answer: C) To facilitate off-market trading on a frequent and systematic basis Explanation: Systematic Internalisers (SIs) deal on their own account by executing client orders outside of regulated markets, MTFs, or OTFs in a frequent and systematic manner.

Answer 280

Answer: b) To allow traders to buy or sell large orders without revealing them to the market Explanation: Dark pools allow traders to execute large orders without others detecting the transaction, which could potentially affect the stock price. Prices in dark pools are not visible before the trade, and the transaction prices are only revealed after the trade has been completed.

Answer 281

Answer: b) Increased transparency and pricing visibility Explanation: Alternative trading platforms and OTC markets are characterized by lower transparency compared to traditional exchanges. Prices are not always visible to the public in advance, and trades may be private between two parties (in the case of OTC).

Answer 282

Answer: b) The agent charges a fee for facilitating the trade Explanation: An agent does not own the stock they buy; they facilitate the trade on behalf of the client. The agent charges a fee for the service of executing the trade but does not mark-up the price.

Answer 283

Answer: c) They apply a mark-up to the price of the stock Explanation: When acting as a principal, the trader buys and holds the stock in their own inventory. They apply a mark-up to the price to earn a profit, rather than charging a fee.

Answer 284

Answer: d) Commercial property often involves long-term contracts and larger investments Explanation: Commercial properties typically involve larger investments and long-term contracts (over ten years), compared to residential properties, which usually have shorter, renewable leases.

Answer 285

Answer: c) High transaction costs and illiquidity Explanation: Direct property investments are illiquid because properties are immovable and indivisible. Additionally, the transaction costs (such as stamp duty and legal fees) are significant compared to other asset classes.

Answer 286

Answer: b) The property's size, age, condition, location, and market indicators Explanation: When valuing a property, surveyors take into account various factors, including the property’s size, age, condition, and location, as well as market indicators such as supply and demand and comparable property sales.

Answer 287

Answer: b) Their ability to enhance diversification through low correlation with other asset classes Explanation: Property investments are typically considered beneficial for portfolio diversification because they have low correlation with other asset classes like equities and bonds, thus reducing overall risk.

Answer 288

Answer: b) Rental income and property price increases Explanation: In residential property investments, returns are mainly driven by rental income and potential increases in the property’s market value over time.

Answer 289

Answer: c) Distribution warehouses and logistics facilities Explanation: The industrial sector of commercial property includes distribution warehouses, logistics facilities, and other properties used for industrial purposes.

Answer 290

Answer: B) Land or pasture used to grow crops and rear animals, including farm buildings. Agricultural property includes not only the land used for farming but also the buildings such as farm cottages, farmhouses, and other structures on the land.

Answer 291

Answer: C) The scarcity and high price of residential and commercial property in cities make it less attractive for investment. As urban property prices become higher, investors look for alternatives like agricultural property for diversification.

Answer 292

Answer: A) Drones and satellite imagery. Technologies like drones and satellite imagery, along with improved genetics and data collection, have helped increase agricultural productivity, which has boosted profitability and land values.

Answer 293

Answer: B) A lack of formal public market for buying and selling. The agricultural property market is largely private, with no formal exchange, which can make it harder to buy or sell properties quickly.

Answer 294

Answer: B) They can allow either party to end the lease before the expiry date. Break clauses provide flexibility to either the tenant or the landlord to terminate the lease early, which can affect the investment value of the property.

Answer 295

Answer: B) Borrowing funds to purchase property, using the property as collateral. Gearing involves borrowing money to fund the purchase of property, and it can significantly increase risks if property prices fall.

Answer 296

Answer: C) Commonhold doesn’t lose value over time and does not require a landlord. Commonhold properties do not depreciate like leasehold properties, as they are owned indefinitely, and the management is handled by the Commonhold Association, removing the need for a landlord

Answer 297

Answer: B) Rental income has traditionally provided returns higher than cash and gilts but slightly lower than equities. Leases, especially those with upwards-only rent reviews, ensure that rental income remains stable or increases, providing steady returns over time.

Answer 298

Answer: B) Property prices can fall, especially in a rising interest rate environment. While property prices generally rise over time, they can fall, especially when interest rates rise, making borrowing more expensive and reducing property values.

Answer 299

Answer: A) Rent can only increase. Upward-only rent reviews ensure that, at a minimum, rent will not decrease, and may even increase based on market conditions, benefiting property investors.

Answer 300

Answer: B) Annual Investment Allowance (AIA) Explanation: The AIA offers 100% tax relief on qualifying plant and machinery purchases, allowing investors to offset the costs of these assets against their business income.

Answer 301

Answer: D) Farm equipment Explanation: APR applies to agricultural land, growing crops, and farm buildings. It does not cover animals or equipment.

Answer 302

Answer: C) Costs of eviction and maintenance Explanation: Poor-quality tenants may fail to pay rent or maintain the property, leading to costly eviction procedures and necessary repairs to restore the property.

Answer 303

Answer: B) When a property is unlet and not generating income Explanation: Void periods occur when a property is unlet, meaning no rental income is generated. These periods should be accounted for in income estimates.

Answer 304

Answer: B) Rent guarantee insurance Explanation: Rent guarantee insurance, or tenant default insurance, covers lost rent and legal costs during void periods or when tenants fail to pay.

Answer 305

Answer: A) Crop prices Explanation: Crop prices impact the value of agricultural land, as higher prices can lead to higher land valuations and robust returns when sold.

Answer 306

Answer: B) Property deterioration without repairs Explanation: If a property deteriorates and no remedial action is taken, it may depreciate in value, with costs rising for necessary repairs.

Answer 307

Answer: A) Legal fees Explanation: Legal fees are a significant transaction cost when purchasing property, in addition to agent costs and possible stamp duty land tax (SDLT).

Answer 308

Answer: B) Stamp Duty Land Tax (SDLT) Explanation: SDLT is levied on property transactions in England and Northern Ireland when the property value exceeds a certain threshold.

Answer 309

Answer: B) In multiple bands, based on price ranges Explanation: SDLT is calculated using bands, where the percentage tax rate applies to different portions of the purchase price.

Answer 310

Answer: B) 5% Explanation: The SDLT rate for the portion of a residential property purchase price between £250,001 and £925,000 is 5%.

Answer 311

Answer: A) 0% Explanation: Non-residential property purchases up to £150,000 are exempt from SDLT, meaning the rate is 0%.

Answer 312

Answer: B) 2% Explanation: Non-UK residents face an additional 2% SDLT when purchasing residential property in England and Northern Ireland, as part of measures to control housing prices.

Answer 313

Answer: C) Collecting rent and managing property maintenance Explanation: Letting agents or property management companies often handle rent collection and property upkeep, ensuring the landlord's property is well-maintained and tenants meet their obligations.

Answer 314

Answer: B) 10–20% of monthly rental income Explanation: Property managers generally charge a percentage of the rental income, which varies between 10–20%, though flat fees are also an option.

Answer 315

Answer: B) Tenant’s personal insurance Explanation: While tenants may have personal insurance, it is not a cost borne by landlords. Landlords typically cover property maintenance, insurance, and other legal requirements.

Answer 316

Answer: C) Schedule of Condition Explanation: A Schedule of Condition documents the property’s state at the beginning of the term, helping clarify repair obligations and avoid disputes.

Answer 317

Answer: B) At the exchange of contracts Explanation: The exchange of contracts marks the point of no return for both buyer and seller, making the transaction legally binding.

Answer 318

Answer: B. The expected value of the property at the end of the lease term Explanation: Reversionary value is the expected value of a property when the current lease term expires, often reflecting its potential market value at that time.

Answer 319

Answer: C. A long lease is generally worth more on the open market than a short lease Explanation: As a lease nears expiration, the property's value typically diminishes. Longer leases are more attractive to buyers and investors, increasing market value.

Answer 320

Answer: B. The length of the unexpired term before the extension Explanation: The improvement in value depends on the remaining lease term before extension, with shorter terms typically benefiting more from extensions.

Answer 321

Answer: B. Improvements made by the leaseholder that affect value Explanation: Any substantial improvements made by the leaseholder that increase the property's value must be excluded to ensure a fair valuation.

Answer 322

Answer: C. They track property performance by valuations Explanation: Property indices are based on valuations rather than actual transaction prices, making them less volatile but potentially less accurate in reflecting market conditions.

Answer 323

Answer: C. They are based on valuations, not transactions Explanation: Since valuations tend to be smoother and slower to adjust than actual market transactions, indices underestimate the true volatility of the market.

Answer 324

Answer: C. Greater liquidity compared to direct property investment Explanation: Shares in property companies can be traded on stock exchanges, providing better liquidity than direct property investments.

Answer 325

Answer: C. Encashment of units/shares may be postponed if many investors sell simultaneously Explanation: In cases where many investors want to redeem their shares at the same time, funds may need to postpone payouts to sell underlying property assets.

Answer 326

Answer: C. They pay no CGT within the fund, but investors may pay CGT on gains when selling units Explanation: UK property unit trusts and OEICs do not pay capital gains tax within the fund, but investors are liable for CGT on gains made when units are sold.

Answer 327

Answer: B – REITs (Real Estate Investment Trusts) are tax-transparent property investment vehicles. They allow investors to gain diversified exposure to rental properties in a tax-efficient manner. They manage real estate portfolios and are traded on the stock exchange.

Answer 328

Answer: C – To qualify as a UK REIT, the company must have at least 100 shareholders. Other conditions include holding at least 75% of total investments in real estate and distributing at least 90% of profits annually to shareholders.

Answer 329

Answer: B – While REITs are exempt from CGT and corporation tax on property-related income and gains, investors are taxed on dividends and capital gains at their marginal tax rates.

Answer 330

Answer: A – The Edinburgh Reforms removed the rule requiring a REIT to own at least three properties if a single commercial property is worth £20 million or more. This increased flexibility for REITs.

Answer 331

Answer: B – REITs are listed, closed-ended investment vehicles, providing liquidity and ease of trade on the stock exchange. Direct property investments, on the other hand, are generally illiquid and require significant outlay.

Answer 332

Answer: B – The ratio of interest paid on borrowings to rental income for REITs must not exceed 1.25:1, ensuring controlled levels of gearing.

Answer 333

Answer: B – REITs can pay dividends as Property Income Distributions (PIDs), normal dividends, or a combination of both. This provides flexibility in income distribution to investors.

Answer 334

Answer: b) They offer potential for high cash flow and capital appreciation. Explanation: Investing in property can generate rental income (cash flow) and benefit from property value increases (capital appreciation). However, properties are illiquid (not easily sold), require significant maintenance, and values are not guaranteed to rise.

Answer 335

Answer: b) By including 'upward-only' clauses in leases. Explanation: ‘Upward-only’ clauses ensure that rents increase over time, protecting income against inflation. Additionally, property values often appreciate with rising inflation, providing capital growth.

Answer 336

Answer: c) Returns may take years to be realised, if at all. Explanation: Properties in poor areas may face challenges such as lower demand or higher risk (e.g., flooding), which can delay or diminish returns on investment.

Answer 337

Answer: c) Building entirely new properties instead of refurbishing old ones Explanation: Refurbishing existing buildings with energy- and water-efficient appliances is more environmentally friendly compared to building entirely new properties, which involves significant energy use and emissions.

Answer 338

Answer: b) There has been a rise in demand for warehouse space. Explanation: The pandemic accelerated the shift to online shopping, leading to increased demand for warehouses to store goods and manage logistics, while high street retail saw a decline.

Answer 339

Answer: b) Focus on countryside relocation and homes with gardens Explanation: As people spent more time at home during the pandemic, preferences shifted towards homes with features like gardens and countryside locations. However, this trend could reverse if companies end remote work policies.

Answer 340

Answer: A) High correlation with traditional investments Explanation: Alternative investments have historically demonstrated a low correlation with traditional investments like equities and bonds, meaning they tend to perform independently of broad market trends.

Answer 341

Answer: B) Their value is often subjective and dependent on trends and demand Explanation: Alternative investments, such as art and antiques, lack standardized pricing mechanisms and are often influenced by trends, fashions, and subjective assessments of worth.

Answer 342

Answer: B) They often require secure and special storage Explanation: Many physical alternative investments, such as fine wine or precious metals, require specialized storage conditions to maintain their value, adding to the cost of ownership.

Answer 343

Answer: C) It does not generate dividends or regular income Explanation: Gold is often seen as a safe haven, but it does not produce any income, unlike stocks or bonds. Its value is primarily based on market demand and broader economic conditions.

Answer 344

Answer: B) Hard commodities involve extraction or mining, whereas soft commodities are mainly derived from agriculture Explanation: Hard commodities, such as metals and energy resources, require mining or drilling, often involving high capital costs. In contrast, soft commodities, like coffee and wheat, are agricultural products that are typically grown and harvested.

Answer 345

Answer: D) Earning them as a government-issued financial incentive Explanation: Cryptocurrencies operate outside of traditional government systems and are generally not distributed by governments as incentives. They are typically acquired through purchases, earning through certain platforms, or mining.

Answer 346

Answer: C) It ensures secure storage and transfer of private cryptographic keys Explanation: Digital wallets store the private keys required to access and transfer cryptocurrency holdings securely. Without these keys, investors cannot access their funds.

Answer 347

Answer: B) To provide a decentralised alternative to traditional financial systems Explanation: Cryptocurrencies emerged as a response to dissatisfaction with banks and governments controlling money, offering individuals an independent financial system.

Answer 348

Answer: B) It consumes significant energy and computational resources Explanation: Mining requires solving complex mathematical problems, which demands extensive computational power and energy consumption, making scalability a challenge.

Answer 349

Answer: A) It is seen as a threat to their national fiat currencies and financial stability Explanation: Some governments view cryptocurrency as a challenge to their monetary control and fear its potential for financial instability and illicit activity.

Answer 350

Answer: C) Many NFT sellers do not actually own the intellectual property they are selling Explanation: Ownership of an NFT does not always grant the buyer copyright or intellectual property rights, leading to legal uncertainties.

Answer 351

Answer: C) NFT values are influenced by subjective factors like scarcity and demand Explanation: Unlike fungible assets, NFT prices are determined by their uniqueness, market interest, and perceived artistic or cultural value.

Answer 352

Answer: b) The value of the asset Explanation: Before making a purchase, it’s vital to consider the value of the asset in question, as alternative investments like art, antiques, and classic cars can command high prices. Understanding the value helps ensure that the investment is sound.

Answer 353

Answer: a) Keeping assets at cost or a constant value over multiple accounting periods Explanation: For AIFs, fair value measurement (FVM) ensures that assets are kept at cost or a constant value, even in periods of market volatility. This avoids overvaluation or undervaluation due to fluctuating market conditions.

Answer 354

Answer: d) Company’s ability to hire top talent Explanation: Valuation methods for private company shares typically focus on asset value, P/E ratio, and cash flows. The company’s ability to hire top talent, while important for business operations, is not typically a factor in valuation.

Answer 355

Answer: b) The earnings multiple may not be easily applicable to an equivalent quoted company Explanation: One challenge of using the P/E method is that it can be difficult to find a similar quoted company to apply the earnings multiple. This makes the P/E ratio less straightforward when valuing private companies

Answer 356

Answer: b) Investing in the assets themselves Explanation: A direct investment in alternative assets means buying the asset itself, such as owning a piece of art or a classic car. This contrasts with indirect investment, where the investor purchases a fund that holds such assets.

Answer 357

Answer: b) Because equities and bonds now tend to move more in unison, increasing risk Explanation: The traditional 60/40 equity-bond allocation has been debated because, in recent times, equity and bond prices have tended to move in almost perfect correlation, which reduces the diversification benefit and increases overall portfolio risk.

Answer 358

Answer: c) Through either direct or indirect investment, or a combination of both Explanation: Investors can access alternative assets through direct investment (purchasing the assets themselves) or indirect investment (via funds). A combination of both is often used to create a diversified portfolio.

Chapter 1 - Asset Classes Flashcards

(383 cards)