Chapter 5: Investment Products Flashcards
(38 cards)
Which of the following investments can trade at a premium or at a discount?
I. Unit Trust
II. Venture Capital Trust
III. Investment Trust
A. I and II only
B. II and III
C. III only
D. II only
B. II and III.
Investment trust companies and venture capital trusts are similar in that they trade on the LSE. This means that there is no direct link between the pricing of the share and the net asset value of the fund. Instead the share’s value will be determined by supply and demand, which could lead to them trading at a premium or discount.
Which of the following is NOT a feature of exchange-traded funds (ETFs)?
A. ETFs are open-ended
B. ETFs follow the performance of an index closely
C. ETFs use forward-pricing
D. ETFs are not subject to stamp duty
C. Exchange-traded funds, as the name suggests, trade on the secondary markets, such as the London Stock Exchange. This allows investors to make purchases and sales at the current market price.
A downward sloping yield curve means what?
A. Short term yields are lower than long term yields
B. A flat level of yields across all maturities
C. Long term yields are higher than short term yields
D. Short term yields are higher than long term yields
D. Short term yields are higher than long term yields.
A downward sloping yield curve is sometimes called inverted or abnormal. It shows the market offering investors a higher yield (or return) on short dated assets and a lower yield on long dated assets. This is not what a rational investor would normally expect.
Ring of Gold plc design and make quality wedding rings. They regularly need to purchase quantities of gold and are concerned about its rising price. Which is the following is/are correct in relation to using a gold future/forward contract?
I. Ring of Gold should take a long position in gold futures
II. Futures in general are less standardised than forwards
A. I only
B. II only
C. Both
D. Neither
A. I only.
Long futures position benefit from price rises. Any profit from the long future can be used to compensate Ring of Gold for the increasing price of gold.
- Futures are standardised by the exchanges that they trade on.
- Forwards trade over the counter and can be tailored to the needs of the investor.
What is the maximum tax efficient annual investment that can be made in new shares of a Seed Enterprise Investment Scheme (SEIS), and what is the maximum income tax relief that can be obtained in any one fiscal year?
A. £500,000 max investment £150,000 max income tax relief
B. £200,000 max investment £60,000 max income tax relief
C. £100,000 max investment £30,000 max income tax relief
D. £100,000 max investment £50,000 max income tax relief
D. £100,000 max investment; £50,000 max income tax relief.
April 6 2012, saw the launch of the EIS and the VCTs little cousin, the Seed Enterprise Investment Scheme (SEIS). It complemented the EIS scheme and was predominantly designed to stimulate entrepreneurship and to help small, early-stage companies to raise equity finance.
The measure supported the coalition government’s growth agenda by helping smaller, riskier, early-stage UK companies, which may face barriers in raising external finance, to attract investment, making it easier for these companies to become established and grow.
It applies to smaller companies, under two years old, with 25 or fewer employees and assets of up to £200,000, which are carrying on or preparing to carry on a new business. It enables individual investors with opportunities to get a range of tax reliefs by investing in new shares of companies in the SEIS. The scheme makes available tax relief to investors who subscribe for shares and have a stake of less than 30% in the company.
The relief will apply to investments made on or after 6 April 2012. SEIS investors can put in up to £100,000 in a single tax year and this investment can be spread over a number of SEIS-eligible companies. Investors can get up to 50% tax relief in the tax year the investment is made, regardless of their marginal tax rate.
Which of the following is/are traded on the London Stock Exchange?
I. Unit trusts
II. OEICs
III. Investment Trusts
A. I and II
B. II and III
C. III only
D. I, II, and III
C. Investment trusts are traded on the LSE.
The units in a unit trust and the shares in an open ended investment company can only be bought from and sold to the manager/authorised corporate director. Investment trust (companies) are genuine companies, the shares in which are freely transferable on the secondary markets.
Which of the following statements is the BEST description of the way in which diversification and risk reduction are related?
A. Diversification and risk reduction is achieved by combining assets whose returns are not perfectly negatively correlated with one another
B. Diversification and risk reduction is achieved by combining assets whose returns are not perfectly positively correlated with one another
C. Diversification and risk reduction is achieved by combining assets whose returns are not correlated at all with one another
D. Diversification and risk reduction are not related to the idea of correlation between assets
B. Diversification and risk reduction is achieved by combining assets, whose returns have not moved in perfect step, or are not perfectly positively correlated with one another.
What type of option can only be exercised at expiry?
A. Asian
B. American
C. European
D. Bermudian
C. European options can only be exercised at expiry.
Following the Retail Distribution Review (RDR), which of the following correctly explain the resurgence in interest in investment trust companies?
I. The elimination of provider commission for open-ended funds
II. The greater level of FCA regulation for open-ended funds
III. The greater level of PRA regulation for closed-ended funds
IV. Compared to open-ended funds, closed-ended funds are less likely to become too large for effective management
A. I and II only
B. III and IV only
C. II and III only
D. I and IV only
D. I and IV only.
Investment trust companies are regulated by the UKLA, HMRC, and Companies Act 2006, not the PRA.
Which of the following would increase the value of a call option?
A. A rise in interest rates and an increase in the exercise price
B. A fall in interest rate and an increase in the exercise price
C. A rise in interest rates and a decrease in the exercise price
D. A fall in interest rates and a decrease in the exercise price
C. A call option value will increase with a rise in interest rates and a decrease in the exercise price.
What is the maximum subscription per subscription year into a child trust fund or Junior ISA?
A. £3,600
B. £4,368
C. £9,000
D. £20,000
C. Contributions of up to £9,000 pa can be made to a child’s CTF or Junior ISA. The ‘subscription year’ for a CTF runs from the child’s birthday to the next. For Junior ISAs it is based on the fiscal year.
Kate is the holder of a put option on stock ABC. The option has a strike of 120 and a premium of 25. At what price of the underlying is Kate’s breakeven?
A. 25
B. 95
C. 120
D. 145
B. Kate has paid a premium of £25, so the underlying needs to fall to 95 from 120 for her to make back her premium and breakeven.
What may be the rationale for a hedge fund strategy to take a long/short position?
A. Lower transaction costs
B. To follow a passive investment strategy
C. To create a market-neutral position
D. To benefit from falls in the market
C. To create a market-neutral position
Long/short funds do not look at the market as a whole, hoping for market rises or falls. Instead, they are more likely to look for under-priced/over-priced stocks and to buy or short sell these accordingly with the intention that, irrespective of the market movements, they will make a profit.
What is the maximum percentage holding by a single shareholder in a REIT?
A. 5%
B. 10%
C. 15%
D. 20%
B. 10%.
The 10% maximum stake in a REIT is intended to prevent tax avoidance, primarily by property management companies who were given the opportunity to convert into REITs.
Which of the following is true of ETF shares and stamp duty?
A. ETF shares incur stamp duty at 0.5% rounded to the nearest pound
B. ETF shares incur stamp duty at 0.5% rounded to the nearest penny
C. ETF shares incur stamp duty at 1.5% rounded to the nearest penny
D. ETF shares do not incur stamp duty
D. ETF shares do not incur stamp duty.
Jim is the holder of a put option on XYZ stock that expires in three months time. The option has a strike of 80p and a premium of 10p. Assuming a current share price of 90p which of the following is true?
A. Jim’s option is in the money
B. Jim’s option is at breakeven
C. Jim’s option has time value
D. Jim runs the risk of the price falling
C. Jim’s option has time value.
Jim’s option is currently out of the money so his option has no intrinsic value but as it still has 3 months to maturity it does have time value.
A 90 day notice account would require the holder to:
A. Wait 90 days from depositing funds before a withdrawal could be made
B. Withdraw funds for 90 days at a time
C. Give notice to withdraw funds 90 days before they do, with no waiver from the provider
D. Give notice to withdraw funds 90 days before they do, with a waiver possibility
D. Give notice to withdraw funds 90 days before they do, with a waiver possibility.
The provider could allow the notice period to be waived, but penalties may be applied.
Which of the following statements is incorrect in relation to options?
A. Call options rise in value when the underlying rises
B. Put options fall in value when the underlying rises
C. The option holder has less risk than the option writer
D. Option holders need to deposit margin with their broker
D. The option holder will pay the premium on the option, and this represents his maximum loss, so there is no need to post margin. The option writer is exposed to further losses, so will need to post margin to his broker in order to cover the broker’s exposure to credit risk.
You are holding a meeting with your client, during which you are explaining to her the benefits of diversifying into different asset types and classes. With regard to diversification benefits, which of the following statements is least likely to be true?
A. If the investments are company shares, there is little benefit in diversifying between British and international equity markets
B. As property has gained in popularity, it has become recognised as a core asset class in its own right
C. Assets with a low or negative correlation tend to be attractive to investors since when one asset is performing badly, the other asset is rising in value
D. There is a predictably strong positive correlation between investor returns from equities, and investor returns from government bonds
D. Globalisation has reduced diversification benefits from holding a mixture of both UK and international shares in a portfolio, since returns from different equity markets tend to be strongly positively correlated to one another.
By contrast, returns from shares and government bonds tend to move in opposite directions in times of equity market stress, there is often a ‘flight to quality’ effect as investors sell shares and move into bonds instead.
In relation to OEICs, which of the following is INCORRECT?
I. Investors buy shares in the OEIC
II. OEICs usually have a dual price system
A. I only
B. II only
C. Both
D. Neither
B. OEICs are usually single priced and investors do buy shares in the OEIC.
REGULAR bonuses paid with-profits policies issued by Life Companies are called:
A. Terminal bonuses
B. Reversionary bonuses
C. Special bonuses
D. Annual bonuses
B. Reversionary bonuses.
Life company bonds that are issued ‘with profits’ have a basic sum assured plus a share in any investment profits made by the company. These profits can be shared through reversionary bonuses - which are added each year and once paid cannot be taken away - and terminal bonuses - which are awarded on maturity of the policy or the death of the policy holder.
Which of the following is/are CORRECT provisions of UCITS III?
I. 100% of a UCITS Fund can be invested in other UCITS funds
II. Up to 10% of the NAV of the fund can be invested in one issuer
III. The use of derivatives is limited to 10% of the NAV of the fund
A. I and II
B. II and III
C. I and III
D. I, II, and III
A. I and II.
There is a restriction on how much exposure a UCITS fund can have to derivatives, but this is 20%.
What is the most accurate definition of a future?
A. A right via an agreement to buy or sell a given quantity of a particular asset at a set future date and at a pre-agreed price
B. A binding agreement to buy or sell a variable quantity of a particular asset at a set future date and at a pre-agreed price
C. A right via an agreement to buy or sell a variable quantity of a particular asset at a set future date and at a pre-agreed price
D. A binding agreement to buy or sell a given quantity of a particular asset at a set future date and at a pre-agreed price
D. A future is a binding agreement to buy or sell a given quantity of a particular asset at a set future date and at a pre-agreed price.
Futures are binding agreements or a contract. By definition, a future is traded on exchange and subject to significant contract specifications.
With regard to Venture Capital funds, financial bootstrapping refers to:
A. Private equity capital provided to small growing companies
B. Leveraged purchases of companies
C. Minority purchase of a business via co investment
D. A collection of methods used to minimise external equity and debt financing
D. A collection of methods used to minimise external equity and debt financing
This method will allow the founders the freedom to develop the company as they see best. The other methods refer to venture capital, leveraged buy-outs, and equity co investments.
