Chapter 1 - Self test questions

Question 1

Joanne is looking at ways of using a bedroom in her house for additional income. As she lives in an area
popular with commuters, Joanne hopes to obtain rent of £600 per month. Which of the following is not
a criterion in qualifying for rent-a-room relief?

A. The property must be in the UK.
B. There is no need for Joanne to claim the relief.
C. The property must be unfurnished.
D. The room must not be self-contained.

Answer 1

C

To qualify for rent-a-room relief the property must be furnished, not unfurnished. All the other criteria are correct. Option B does not fit the definition of ‘criteria’, but you will see anomalies like this in the exam

Question 2

Jack and his wife Cassandra have three children, Jonah aged 18 months, Sian aged 4 and Chloe aged 17.
What is the maximum they can put into standard Cash ISAs?

A. £20,000.
B. £40,000.
C. £60,000.
D. £72,360

Answer 2

C

Both adults can now contribute £20,000 into the Cash ISA. As Chloe is 17, she can also contribute to one. The other two children would only qualify for the Junior ISA.

Question 3

Peter is investing in various fixed interest securities. He has just purchased a Treasury 6% 2034 Gilt. The clean price that was published was £105 but Peter paid £110 dirty price to enable him to receive the next coupon distribution. The par value is £100. What running yield will Peter receive on his investment?

A. 6.19%.
B. 6.00%.
C. 5.71%.
D. 5.45%.

Answer 3

C

The dirty price paid is not used in a running yield calculation, as it is simply an extra payment to secure all of the next coupon distribution.
The running yield is the coupon t the clean price, so £6 -r £105 = 5.71% running yield.

Question 4

Derek recently bought shares 4 in 3 different banks as per the below:

Bank A £20,000
Bank B £11,000
Bank C £9,000

Assuming all transactions were completed on CREST, how much Panel on Takeovers and Mergers (PTM)
levy will he have paid?
A. £0.
B. £1.
C. £2.
D. £3.

Answer 4

C

£1 is paid on each transaction above £10,000 so he would have paid £1 when buying shares A & B

Question 5

Christopher has carried out several share deals this year. What is the total Stamp Duty/Stamp Duty Reserve Tax he would have paid on the following?

• Bought £10,000 company A shares using CREST.
• Sold £5,000 company B shares using CREST.
• Bought £7,500 company C shares using a paper-based system.
• Bought £2,500 company D shares using a paper-based system.

A. £100.
B. £105.
C. £125.
D. £130.

Answer 5

B

Stamp Duty / Stamp Duty reserve tax is paid at 0.5% on purchases only:

• Bought £10,000 company A shares using CREST: £10,000 x 0.5% = £50
• Sold £5,000 company B shares using CREST: £0 no stamp duty on sales
• Bought £7,500 company C shares using a paper-based system: £7500 x 0.5% = £37.50 but rounded up to £40 as paper transactions are rounded up to nearest £5
• Bought £2,500 company D shares using a paper-based system: £2500 x 0.5% = £12.50 but rounded up to £15 as paper transactions are rounded up to nearest £5

Total = £50+ £40 +£15 = £105

Question 6

Jack holds shares with three different companies, and has just received a dividend from each as shown below. Which of these has given Jack the greatest dividend yield?

Company A - £6.30 SP / £0.35 Dividend Paid / £500,000 profits to shareholders
Company B - £1.20 SP / £0.10 Dividend Paid / £620,000 profits to shareholders
Company C - £0.90SP / £0.05 Dividend Paid / £850,000 profits to shareholders

A. A.
B. B.
C. C.
D. They are all the same.

Answer 6

B

Dividend yield is calculated by dividing the dividend by the share price x 100. Profits attributable to shareholders would be needed to calculate Dividend Cover, but not dividend yield.

A - 0.35/ 6.30 x 100= 5.56%
B - 0.10/ 1.20 x 100=8.33%
c - 0.05/ 0.90 x 100 = 5.56%

Question 7

Jager has little investment experience but wants to get into shares. He is happy to pay a premium for growth shares. Using the price/earnings ratio only, which of the following shares would you suggest he buys?

Company A, B, C, D
Earnings per share (EPS)
Share price (SP)

A - 75p EPS / £5.50 SP
B - 50p EPS / £6.15 SP
C - 20p EPS / £2.25 SP
D - 10p EPS / £1.25 SP

A. Company A.
B. Company B.
C. Company C.
D. Company D.

Answer 7

D

The price earnings ratio gives the formula in its title. Price/Earnings = P/E ratio. A high ratio usually indicates that investors are confident about future earnings growth.

Company D - 1.25 / 0.10 = 12.50 PE ratio

Question 8

Chad, a first-time buyer, has just bought a flat in Wolverhampton for £300,000. His brother Dave, also a first time buyer, has bought a house in Solihull for £520,000. What is the total Stamp Duty Land Tax that they will pay?

A. £0.
B. £3,750.
C. £5,000.
D. £16,000.

Answer 8

D

Chad’s purchase price is £300,000, so he qualifies for the 0% rate.
There is no SDLT for him to pay.

Because of the purchase price of Dave’s house, he will pay:
£0 - £125,000 x 0% = £0
£125,001 - £250,000 x 2% = £2,500
£250,001 - £520,000 x 5% = £13,500

Total £16,000.

Question 9

Gerald owns a retail shop of 125 square metres that he previously rented out for £2,000 per month, providing a 6% annual yield. Earlier this year, he purchased the shop next door, which he has combined with the existing property to create a new retail space of 225 square metres. The purchase and improvements cost £250,000. How much rent must he charge to achieve the same yield?

A. £3,250 per month.
B. £2,800 per month.
C. £3,600 per month.
D. £3,000 per month

Answer 9

A

The annual rental income previously was £2,000 x 12 = £24,000 .If the yield was 6%, the cost of the original property was £24,000 / 0.06 =£400,000. Therefore the total cost of the combined retail space is £650,000.
To achieve the same yield, the rent required is £650,000 x 6% = £39,000 per annum or £ 3,250 per month.
The information about the size of the property was a red-herring, as the question was not asking you to express it as ‘£ per square metre’.

Question 10

An investor pays a clean price of £114.60 for £100 nominal value of stock, with a 6% coupon. Assuming the stock has exactly seven years to run until maturity, what will the simplified gross redemption yield be?

A. 3.42%.
B. 2.09%.
C. 5.24%.
D. 6.00%.

Answer 10

A

Calculate the running yield first by dividing the coupon by the clean price.
£6 / £114.60x100 = 5.24%
Then calculate the loss or gain that would be made at redemption: £114.60 - £100 = £14.60. This would be a loss, as they are paying over par to buy it. Divide this loss by the number of years
remaining. £14.60 / 7 years = £2.09% annual loss.
Divide this annual loss by the clean price: £2.09 t £114.60 x 100 = -1.82%
Deduct this figure from the running yield: 5.24% -1.82% = 3.42%

Question 11

Joanne is buying a property for £175,000 and Kai is buying a property for £275,000. Joanne is also paying an additional £15,000 for items of furniture that the current vendor is willing to leave in the property. How much more Stamp Duty Land Tax will Kai pay than Joanne, assuming neither are first time buyers?

A. £2,750.
B. £3,050.
C. £5,000.
D. £10,750.

Answer 11

A

Stamp Duty is paid at a rate of 0% of on the first £125,000, 2% on the next £125,000 and 5% on £250,001 to £925,000.
There is no stamp duty on the money that Joanne is paying for the furniture items, therefore:
For Joanne:
£125,000 has no stamp duty
£50,000 has 2% stamp duty = £1,000
For Kai:
£125,000 has no stamp duty
£125,000 has 2% stamp duty = £2,500
£25,000 has 5% stamp duty = £1,250
Total £3,750
= £2,750 bigger bill for Kai.

Question 12

A limited company has 5,000 ordinary shareholders. In the current financial year, the company made profits of £1,090,000. The company has just declared a dividend of £84 per ordinary share and a total dividend of £190,000 is due to preference shareholders. What is the dividend cover?

A. 2.60.
B. 2.14.
C. 1.76.
D. 1.46

Answer 12

B

Dividend cover is calculated by dividing the profits attributed to ordinary shareholders by the dividend payments to ordinary shareholders. The dividend payments are £84 x 5,000 = £420,000.
Profit attributed to ordinary shareholders is £1,090,000 - £190,000 (the dividend due to preference shareholders) = £900,000
The dividend cover is therefore: £900,000 / £420,000 = 2.14
The company could pay the dividend distributed 2.14 times from the profits available for distribution.

Question 13

Martin is a high rate taxpayer. He has just purchased an investment property for £190,000. The transaction costs add up to £3,000. If the rent is £700 per month, with 20% earmarked for expenses, what will be the net yield that Martin will receive on this property?

A. 4.42%.
B. 4.35%.
C. 3.48%.
D. 2.09%.

Answer 13

C

The overall acquisition price, taking into account the costs, needs to be established first. £190,000 +£3,000 = £193,000.
The rent needs annualising as before, so £700 x 12 = £8,400 and this is adjusted to reflect the expenses.
£8,400 x 20% = £1,680. So, overall income is £8,400 - £1,680 = £6,720.
Then calculate as before so £6,720 -h £193,000 x 100 = 3.48%.
Martin’s tax rate is not relevant here, as net property yield is pre-tax.

Question 14

The share price of company X is 285p and the earnings per share are 15p. The share price of company Y is 181p and the earnings per share are 34p. The price earnings ratio of companies X and Y respectively, would be:

A. 5.26 and 1.88.
B. 19 and 5.32.
C. 6.35 and 0.44.
D. 1.57 and 2.27.

Answer 14

B

The P/E ratio is the price / earnings so:
* Company X = 28515 = 19
* Company Y = 181 -r 34 = 5.32

Question 15

A limited company has purchased a residential property in Kensington for £1,650,000. What would the Stamp Duty Land Tax be on this transaction?

A. £65,000.
B. £72,000.
C. £111,750.
D. £247,500.

Answer 15

D

£1,650,000 x 15% = £247,500

Question 16

When considering the price of a conventional GILT…

A. you will always receive £100 per gilt at redemption.
B. a price of £109.50 is said to be below par value.
C. a purchaser of a gilt will usually pay a lower price than the seller will receive.
D. a purchase of a bond between coupon payment dates will be transacted at the clean price.

Answer 16

A

All GILTS pay back the £100 nominal or par value at maturity and costs are inevitably involved in the transaction, meaning that the seller will not get all of the value of the sale.
Anything above £100 is trading over par, not under par. Most transactions occur at the dirty price, taking into account the interest adjustment.

Question 17

Tabatha, who usually invests in equities, is looking to diversify her portfolio by investing in commercial
property. You should advise her that…

A. any transaction is likely to be slower, and more complex, than she is used to.
B. she is unlikely to pay Stamp Duty Land Tax.
C. the income yields will be higher from more expensive properties.
D. the commercial property sector is more liquid than the equity markets.

Answer 17

A

Any kind of direct property transaction is slow to complete and the market, even at its most buoyant, is somewhat illiquid. Stamp Duty Land Tax is payable.

Question 18

Ibrahim is looking to invest in commodities to further diversify his investment portfolio. If he proceeds…
TICK ALL THAT APPLY

A. he will only be able to trade directly in hard commodities.
B. the expected returns would be higher than any normal asset class.
C. he could invest in a commodities OEIC or Unit Trust.
D. commodities should diversify his equities well, as they are negatively correlated to them and move in different cycles.

Answer 18

C, D

In theory, anyone can hold both direct and indirect commodities but in reality, it is impractical, with storage of the commodities being the biggest issue. So, many investors invest via funds.
Commodities have performed well and do work as a perfect foil against equities, but it is impossible to say that they will, or should, outperform other ‘normal’ asset classes.

Question 19

Peter, a higher rate taxpayer, has £90,000 of savings in his only building society account. Karen, an additional rate taxpayer, has £101,000 in her only bank deposit account. Both accounts provide the same interest rate.. In comparing the two accounts you would note…
TICK ALL THAT APPLY
A. Karen would have a higher level of protection from the FSCS.
B. Peter’s account must have exit penalties, as building societies always pay higher returns.
C. both accounts would have the same level of tax deducted automatically at source.
D. Karen’s account is less likely to provide voting rights.
E. the maximum Peter can deposit in a building society account is £100,000.

Answer 19

C, D

Both would be protected by the FSCS up to the £85,000 limit. Building societies can have voting rights through their share accounts, but these do not guarantee better rates.
All interest from bank and building society accounts is paid gross irrespective of the tax status of the depositor.

Question 20

Theresa, an experienced investor, has diversified her portfolio by buying some shares in Bovis Homes.
She should be aware that listed property company shares…
TICK ALL THAT APPLY

A. offer greater diversification than direct property investment.
B. will not be eligible to put into a ISA.
C. will be less volatile than direct property investment.
D. are affected by the quality of the company management.
E. will be easier to sell than direct property investment.

Answer 20

A, D, E

Shares in property companies are a good indirect way of investing in the property market. A buoyant housing market should boost share prices across the industry, assuming that good company management is in place Housing companies will build and maintain many properties in different locations, diversifying their own portfolios. The shares are as readily saleable as any other stock, which can mean that they are actively traded, so their price will fluctuate, making them a more volatile investment than the value of a property owned directly. Listed shares are eligible investments for an ISA.

Question 21

When depositing cash into a bank account, an investor should be aware that…
TICK ALL THAT APPLY

A. the only return will be interest, the capital will not grow.
B. all accounts are obliged to pay an interest return.
C. interest payments to non-taxpayers are always made without tax being deducted.
D. protection from the FSCS may apply within certain limits.
E. a term account is more likely to pay a higher rate than an instant access account.

Answer 21

A, C, D, E

Capital growth is not possible from bank accounts with the only growth coming via interest distributions.
Accounts paying no or little interest are quite common.
Interest is paid gross to all investors.
FSCS protection applies to the first £85,000 of an investor’s deposit in any organisation that qualifies.

Question 22

Jessica and Troy have their savings of £50,000 each in a NS&I investment account and a building society
account respectively. When comparing the two accounts…
TICK ALL THAT APPLY

A. Jessica is effectively lending her money to the Government.
B. both are protected under the FSCS rules.
C. Troy will usually receive lower rates of interest.
D. both accounts will pay interest net of basic rate income tax.
E. Jessica can put a maximum of £1,000,000 in her account and Troy has no maximum.

Answer 22

A, E

NS&I is the Government’s banking arm and so investors are technically lending their money by saving with them. They are government, not FSCS protected. Both pay gross interest.

The investment account has a £lm maximum deposit and pays its interest gross but taxable. There is not usually an upper limit on building society accounts unless it is something like a Cash ISA

Question 23

When comparing Richard’s preference shares and Rebecca’s ordinary shares in the same company, you
would correctly note that…
TICK ALL THAT APPLY

A. only Richard will have voting rights
B. Rebecca will have less protection in the event of the company liquidating
C. both of them have less protection than any corporate bond holders
D. both of them can choose whether to have their dividends on a cumulative or non-cumulative
basis

Answer 23

B, C

Ordinary shareholders are at the end of the queue for payment in the event of a company’s liquidation.
Preference shareholders are one in front of them, with corporate bond holders being in front of both.

Voting rights exist in ordinary shares but are rare in preference shares, as they only get the right to vote if a dividend (or a series of them) is missed.

Question 24

Mark invests in several GILTS and corporate bonds. When comparing these…
TICK ALL THAT APPLY

A. GILTS are less volatile than corporate bonds
B. corporate bonds are sub investment grade, whereas GILTS are investment grade
C. if a higher yield is sought, a corporate bond is likely to be a better solution
D. corporate bonds are easier to trade than GILTS
E. GILTS are only available on the primary market

Answer 24

A, C

This question is all about the hierarchy of risk in bonds.

GILTS, with their government guarantee are the most secure, but offer the lowest returns. As a result, their value tends to be less volatile than corporate bonds.

Both GILTS and corporate bonds are often relatively liquid but smaller companies can be harder to trade. Sub -investment is a term for lower-rated corporate bonds, so many of them are investment grade, as all GILTS are.

Question 25

George has a portfolio of shares comprised of AIM-listed shares, FTSEIOO-Iisted shares, and FTSE 250-
listed shares. He is unsure about the differences that the various listings make, and has asked you to
explain this to him. You can correctly state that an AIM listed company is likely to be…
TICK ALL THAT APPLY

A. smaller than a company listed on the FTSE 100 index.
B. less volatile than a FTSE 250 share listing.
C. a newer company with more risks than an established company.
D. less affected by rules when going through the listing process.

Answer 25

A, C, D

AIM is the easier to access, smaller company listing that many companies use as a steppingstone to full listing. They are typically more volatile than FTSE listed shares, due to their size and often infancy.

Question 26

Gladys has a low attitude to risk. She currently holds £20,000 on deposit with her local Building Society,
and £10,000 in Premium Bonds. She has just received an inheritance from her mother and has another
£60,000 that she wishes to place on deposit. When considering Premium Bonds as an investment,
Gladys would be correctly advised that…
TICK ALL THAT APPLY

A. she can contribute a maximum of £50,000 per annum.
B. she is not guaranteed any return from her investment, but the capital is secure.
C. Premium Bonds have different issues, with different returns on each one.
D. the minimum purchase is £25.

Answer 26

B, D

Did you read answer A correctly?
Premium bonds have a total limit of £50,000 not an annual limit. Investment starts at £25.

Question 27

Harry is 15, and has just started a Saturday job for the summer holidays. He will earn £40 per day, but
will only be working for 7 weeks. His grandmother wants to encourage him to save, so has said that she will give him £1,000 to add to whatever he saves from his wages. As Harry is a new saver, he is asking about deposit accounts. You can correctly tell him…
TICK ALL THAT APPLY

A. normally, the longer the notice period, the higher the interest.
B. term accounts usually pay higher interest.
C. banks pay higher rates than building societies.
D. building societies have more choice of accounts.
E. he qualifies for an investment ISA.

Answer 27

A, B

The longer you keep your money under wraps, the better your rate should be.

Banks and building societies have little between their rates and products and you need to be 18 to qualify for an investment ISA.

Question 28

What are the usual characteristics of a company listed on the Alternative Investment Market compared
to shares of a FTSE 100 company?
TICK ALL THAT APPLY

A. It will have a wider share spread.
B. It will have larger market capitalisation.
C. Less Stamp Duty Reserve Tax will be payable on purchase.
D. It will have lower returns.

Answer 28

A, C

AIM Shares are smaller companies with lower market cap. It is impossible to say that they will have lower returns.

The difference between the buying and selling price i.e. the spread will be wider and no SORT is payable on AIM shares but is on FTSE100 shares.