Overall AF4 Flashcards

Question

limitations of the Sharpe ratio

Answer 1

*SD assumes that equity/investment returns are normally distributed when they ARE NOT *the SR can be manipulated by changing the measurement interval * It is simplistic, a single figure *it ignores investment charges and costs *it uses historic data

Answer 2

similar to the sharpe ratio but uses beta as the divider and measures returns earned in excess of that which could have been earned on a riskless investment per each unit of market risk.

Answer 3

is a measure of return that is independent of the underlying market or benchmark - it is a measure if the mangers stock picking skills. it is the return that is not explained by the CAPM sometimes called Jensen alpha

Answer 4

in the exam we may get a question to calculate the annual volatility, this is simply the variance squared root

Answer 5

should be specified and agreed with the client in advance should priced at suitable periods how has the benchmark performed in the past how is it calculated/ has to be transparent benchmark must be relevant to the investment fund/ i,e you would not place a bond fund against the FTSE 100

Answer 6

measure to compare the performance of different types of funds a basis for reviewing the asset allocation and structure of your portfolio benchmark for assessing and comparing the performance of your DFM

Answer 7

choose an appropriate benchmark to compare the portfolio Not much to do here but check it fits client ATR

Answer 8

tabulate the asset allocation or check the asset allocation of the benchmark.

Answer 9

calculate the return that each asset class in the benchmark portfolio would have achieved in line with appropriate index for its sector.

Answer 10

compare this benchmark performance with the fund mangers performance in terms of asset allocation.

Answer 11

compare the fund managers % returns in asset classes with the relative index return The aim is to see how the managers selection of investments within each asset class performance relative to appropriate index

Answer 12

suggests a course of action the clients accepts or rejects usually lower charges than DFM priority is for maximum return within appropriate risk profile

Answer 13

once investment objectives agreed prior consultation with the client is not required to buy/sell investments usually higher charges than Advisory priority is for maximum return within appropriate risk profile

Answer 14

Investment Style (absolute returns or benchmarking) Active vs Passive Management approach types of asset used

Answer 15

tailored to the individual client can be operated on a discretionary or advisory basis Bespoke portfolio management is offered by stock brokers and private client investment managers

Answer 16

client gives discretion to the investment firm to manage their investments on their behalf regulatory requirement that there is a 2 way client agreement

Answer 17

offered by investment managers that recognises that some clients don't want to give up on the decision making and want to remain actively involved in the management of their portfolio.

Answer 18

structured to match particular risk profiles target at particular set of clients to which the profile applies to diversified and managed to a known objective

Answer 19

standardised approaches to investment to investment advice include model portfolios and DFM without specifically and clearly outlining the advice, why they are suitable to the client

Answer 20

removes portfolio drift removes any adviser/ bias/ behavioural bias keeps portfolio in line with client ATR via regular rebalancing

Answer 21

NOT client specific May be higher costs assumptions based on historic data

Answer 22

a 2 way client agreement must be entered for a Discretionary investment services between client and adviser must provide regular reports on investment performance

Answer 23

AMC & Ongoing charges Dealing commission / bid offer spread panel on takeover and merger stamp duty reserve tax initial set-up fees/ exit fees one off valuation charges VAT custodian/platform/ wrapper fees

Answer 24

performance fees platform/adviser charge brokerage charges panel on takeover and merger stamp duty reserve tax

Answer 25

specific instructions that guide the investment manager in the management of a clients investment portfolio purpose of their objectives on the other hand it can be seen as the operational detailed instructions to the investment manager on how the portfolio should be managed

Answer 26

winning investments may be sold that may continue to produce higher returns losing investments could be bought and continue to fall there will charges incurred when rebalancing there may be tax liabilities incurred

Answer 27

Fixed weighting/ asset allocation Long term With occasional/infrequent rebalanced Little variation from objective No response to market changes

Answer 28

Varying weighting/ asset allocation Short term Frequent rebalanced Substantial variation from objective Take advantage of market movements

Answer 29

Rising positive curve Longer term gilts should produce a higher return/yield to compensate the risks of erosion and longevity of the redemption

Answer 30

When there is no perceived investment risk then the yield will be flat This occurs in stable economic situations where there are no significant changes expected to interest rates or inflation

Answer 31

Investors optimism on inflation Shorter term bonds have a higher yield than longer term bonds Seen as an indicator of recession Effectively investors demanding a higher return for the perceived risk to shorter dated bonds compared to long dated bonds

Answer 32

Easy to calculate/ uses widely available information takes into account systematic risk/market risk reflects fact that most portfolios are diversified to remove unsystematic risk robust/trusted provides an expected return

Answer 33

Management fee/Annual Management charge administration fees Marketing fees audit/ tax compliance registration/regulation fees custody/depositary/trustee

Answer 34

transaction fees/initial fee/spread/stamp duty performance fees one of legal/professional charges interest/gearing costs adviser charges

Answer 35

Default Risk/ credit worthiness credit rating

Answer 36

Synthetic - uses derivatives Optimisation - computer model/ algorithm sampling - uses a sample of the market/index

Answer 37

Net Assets (Remember remove long term debt) ---------------- No O/S in issue

Answer 38

NAV per share - Share price ------------------------ NAV Per Share x100

Answer 39

net assets plus money from warrant holders ---------------------------------------------------------------- O/S plus warrant shareholders

Answer 40

total gross assets ------------------ net assets Over 1 is high OR long term debt --------------------- net assets (total assets - total liabilities)

Answer 41

Profit attritituble to O/S (remember to remove Preference shares) ------------------------------------------------------------------ No of O/S in issue remember answer is in p x100 to get 2 decimal places in pence

Answer 42

To fund expansion/acquisition Strengthen the balance sheet To refinance company To reduce share price

Answer 43

Take up the rights issue Sell the rights on the open market Sell some of the rights on the market and take up the remainder Do nothing and let the rights lapse/the company will then sell the rights and distribute the proceeds After costs

Answer 44

Operating profit / capital employed X100

Answer 45

A real estate investment trust (REIT) is a company that owns, operates, or finances income-generating real estate.

Answer 46

A real estate investment trust (REIT) is a company that owns, operates, or finances income-producing properties. REITs generate a steady income stream for investors but offer little in the way of capital appreciation. Most REITs are publicly traded like stocks, which makes them highly liquid (unlike physical real estate investments). REITs invest in most real estate property types, including apartment buildings, cell towers, data centers, hotels, medical facilities, offices, retail centers, and warehouses. Dividends from the ring fenced element are taxed as rental income with 20% taxed at source. Can be held in a ISA or SIPP and can be tax free

Answer 47

Invest at least 75% of total assets in real estate, cash, or U.S. Treasuries Derive(gain) at least 75% of gross income from rents, interest on mortgages that finance real property, or real estate sales Pay a minimum of 90% of taxable income in the form of shareholder dividends each year Be an entity that's taxable as a corporation Be managed by a board of directors or trustees Have at least 100 shareholders after its first year of existence Have no more than 50% of its shares held by five or fewer individuals

Answer 48

Liquidity Diversification Transparency Stable cash flow through dividends Professional management Partial sale / CGT benefit Attractive risk-adjusted returns

Answer 49

Low growth Dividends are taxed as regular income Subject to market risk Potential for high management and transaction fees

Answer 50

A gift from a parent would fall under the parental settlement rules. If annual income exceeds £100 the full amount of income will be assessed against the receiver. Vice versa is less than £100 it will be assessed against the sender

Answer 51

Choosing asset allocation Then geographical areas Sectors Style (growth-value) Individual stocks

Answer 52

Fixed rate of interest (bonds) Undated (perpetual) Low priority on wind up (subordinated) Interest not guaranteed Non cumulative Not covered FSCS high risk high coupon High minimum investment

Answer 53

Net profits / Shareholders fund X100

Answer 54

The return on investment made by shareholders Indication of the firm's efficiency at generating profits It is used as a measure of earnings growth

Answer 55

Net profit/ number of shares in issue X100 as pence

Answer 56

Dividend paid/number of shares in issue X100 in pence

Answer 57

100% of the fund is invested in long only stocks that are favoured by the manager 30% of the value of the fund goes short The proceeds from the 30% short selling of unflavoured stocks allows the fund manager to buy an additional 30% of favoured stocks The end result is 130% long 30% short

Answer 58

130/30 funds are authorised by FSCS Hedge funds are not covered under FSCS short positions which are high risk are limited by the proportion oh short to long holdings Hedge funds can generally short sell whatever they like 130/30 funds cannot go 100% short Hedge funds can go 100% short

Answer 59

Is exposure to a contract of greater value than the initial payment required to secure it, in expectation of better returns It is generally acquired by physically borrowing the money or assets to invest or sell back at a later date Can be achieved by investing in gold mining shares rather than physical gold

Answer 60

Research On companies and sectors To attempt to identify and invest in securities which are trading below their fair market value Superior growth can be achieved as the market catches up and realises the share is undervalued

Answer 61

It uses a swap For a fee And collateral An investment bank/ the swap provider will pay the fund the return on the relevant index The risk is counterparty risk Which is the risk that the investment bank / swap provider fails in their obligation to pay the return on the Index

Answer 62

This means the fund primarily invests in companies with above market average earnings growth potential. Growth stocks tend to retain earnings rather than pay dividends which allows them to reinvest into the company

Answer 63

Fund manager fee/OCF income tax on dividends and other investment income CGT on any capital gains Vat Stamp duty/SDRT PTM levy Platform/wrapper charge Performance fee Entry/ exit charges

Answer 64

A digital commodity/ asset/ currency Which operates independently of a central bank It uses encryption techniques/ blockchain To regulated the issue of new units And transfer of existing ones

Answer 65

Contract for difference Between investor and investment bank At end of the contract the investor and investment bank will exchange the difference between the opening and closing values of the investment It allows investors to invest in assets without owning them Geared investments Purchase takes place on margin The investor only deposits an initial outlay (10% or 20% or thr full value of the investment) and borrows the rest of money from the CFD investment bank Not covered by FSCS Potentially subject to CGT

Answer 66

Imports minus Exports/balance of payments In goods and services Plus receipt from overseas income generating assets

Answer 67

Movement of all monies / assets Into country Out of country

Answer 68

Rising interest rates Economy growth falls Currency devaluation Unemployment rises Inflation increases

Answer 69

Less Diversification More expensive Less research available Higher risk Screening rules out Growth

Answer 70

Debt based securities Bonds and debentures Loans to companies Cash Peer to peer lending

Answer 71

Fixed dividend Higher priority in payment/ wind up Non voting

Answer 72

Can invest up to £1 million If excess over £1million up to £2 million but the balance must be in knowledge intensive companies 30% income tax relief Up to client income tax liability Can carry back income tax relied to previous tax year Re investment relief I'd available if invests within 3 years of sale of business Exempt from CGT upon sale if held for 3 years Qualify for business relief Exempt from inheritance tax if held for 2 years

Answer 73

Share price ÷ NAV

Answer 74

Company warrants is issued by a company and relates to itself Covered warrant is issued by a financial institution and relates to other companies than the issuer Company warrant is based on one company Covered warrant maybe issued on one underlying security, indices, sectors Company warrants are call options Covered warrants can be calls and puts Covered warrants risks are reduced because the issuer must hold the underlying security but the issuer can still fail

Answer 75

Is where the company sells new shares to an issuing house which then markets the shares to the public based on guidelines in the offering document This is prepared by the company directors and assessed by an independent sponsor who also confirms the company's capital adequacy by letter to UKLA A formal notice will be placed in the paper The share price will be slightly higher than the price the company sold the shares to the issuing House in order to make a profit The offer to the public can either be fixed or tender

Answer 76

Is where the shares are offered to investors at a fixed price as a price just below what can be expected for the offer to be fully subscribed This to encourage an active secondary market

Answer 77

Investors specify amounts of shares they'd like to purchase and amount they are willing to pay A strike price is then determined with all successful bidders who bid at/above this strike paying the strike price for the shares The strike price is generally set low enough to ensure an active secondary market

Answer 78

An offer for subscription is an IPO that can be written on either a fixed or tender basis It involves the issuing house underwriting the offer to ensure any unsold shares are bought A detailed prospectus is produced and put on the issuers website

Answer 79

Both ratios measures the efficiency of profit generation ROE is better for comparing different investments/ Assets but is affected heavily by differences in company capital structure and therefore not suitable as ROCE when comparing companies

Answer 80

Profit before tax and interest ÷ interest paid x100

Answer 81

The interest coverage ratio is used to measure how well a firm can pay the interest due on outstanding debt. The interest coverage ratio is calculated by dividing a company's earnings before interest and taxes (EBIT) by its interest expense during a given period. Some variations of the formula use EBITDA or EBIAT instead of EBIT to calculate the ratio.

Answer 82

Impact of volaity on the order and timing frequency of withdrawals And sustainability of future income Long term impact on capital value and this is greater in early years

Answer 83

Realign portfolio to its original asset allocation / weighting to match attitude to risk and capacity for loss Review of individual funds/ correct any style drift Invest cash Adjust portfolio to deal with any change in their circumstances/ income level/ objectives

Answer 84

Trading costs Whether to retain or alter benchmark Potential tax liabilities Regulatory/ legislation issues Is rebalancing auto or manual Frequency of rebalancing Existing income be effected? Liquidity / ability to rebalanced EIS etc Market timing Suitability of existing funds / allocation

Answer 85

At least 60% of income must come from the exempt property business. Value of property assets must be at least 60% of total assets. Shares must be widely held. No corporate investor can hold more of 10% or more of net asset value

Answer 86

Dividend income paid gross and taxable at 33.75% once Dividend allowance exceeded Property income distribution exempt Paid net of basic rate tax/ 20% And taxable further at 20%/40% in total once personal savings allowance exceeded Interest/other income paid gross but taxable at marginal rate

Answer 87

Involves investing in securities with above average earnings potential Typically growth investors favour smaller companies with the ability to grow more quickly in size reinvesting their earnings back into themselves to deliver capital growth to investors with the share price It's higher risk than value investing because growth managers are not relying on investing in undervalued stock Growth investors need to consider more qualitative measures such as the ability and efficiency of the management team to run the business in the most profitable way

Answer 88

Eps growth for 4 years out of last 5 A low P/E relative to growth Optimistic annual statement from the company chairman Strong liquidity (High cash flow low borrowing) Competitive advantage

Answer 89

Believes that through vigorous research they can discover stocks undervalued by the market which will allow them to profit on the upside Believe that markets are inefficient and investors under and over react to new information The value investor aims to take advantage of these reactions Value investment involves using fundamental analysis in order to identify securities that are undervalued Investing in them and selling them once thr market has caught back up

Answer 90

Solid value indicators include a low P/E ratio High dividend yield Low price to book ratio

Answer 91

Identifying trends using technical analysis Going long in investments likely to continue growing And/or going short in investments likely to continue failing And selling/ closing out the position before before the security changes direction It's a risky strategy as knowing when to sell has proved difficult

Answer 92

This simply involves betting against the herd They invest in assets which are out of fashion or have recently fallen They need a fairly accurate valuation of the security they're investing in (the investment may have fallen for a good reason)

Answer 93

Fundamental analysis uses qualitative and quantitative research into a company and its sector / geography in order to establish the value of an investment- specifically whether it is undervalued or over valued Research will consider company's balance sheet: profitability, profit volatility, liquidity, and operational efficiency. It is used predominantly by value investors and contrarians Technical analysis is most often used by momentum investors It looks at charts to attempt to identify trends in the market and bases future buy/sell decisions on past share price movements

Answer 94

Income from ring fenced lettings element is treated as rental income and paid net 20% tax. But can be reclaimed by non taxpayers including ISAs and SIPPs. Basic rate and additional taxpayers must pay an additional 20/25% Income from the non ring fenced element Is a normal dividend. The first £2,000 of dividend income for investors is tax free. Any dividend income in excess of the allowance is taxed at 8.75% 33.75% 39.35% REIT shares are subject to CGT on any gains in excess of the tax free CGT annual exempt amount at 10 or 20% No relief is available for IHT / NO business relief

Answer 95

Max investment £200,000 VCT £1,00,000 EIS Tax relief 30% for both Holding period EIS 3 years VCT 5 years One year carry EIS yes VCT no Dividend EIS taxable VCT exempt CGT EIS gains exempt after 3 years VCT gains exempt CGT TAX DEFERAL RELIEF EIS yes VCT no

Answer 96

Pay no attention to index benchmarks they select stocks based on their own criteria (value, GAAR etc)

Answer 97

they are the markets for short term borrowings. An original maturity of less than 1 year. Intuitions borrow funds to help with cash flow problems or deposit if they have a surplus

Answer 98

is a market where two-way prices are made between participating banks. the difference between the two is called the spread

Answer 99

A way of the government to borrow money short term - mainly 3 months but can range from 1-6 months usually minimum investment pf £500,000 Highly liquid Issued at a discount of £100 nominal

Answer 100

companies issuing unsecured short dated debt maturities between 30-90 days issued via the money markets

Answer 101

A CD is issued when an investors places some money for a given term with a bank at an agreed interest rate but with a discount as they are tradeable they represent a deposit (not a loan) pay interest at the end of the term maturities between 1-3 months

Answer 102

Credit Risk Inflation Risk Interest rate Risk Currency Risk

Answer 103

they are financial instruments that give the owners the right interest and repayment of capital on loan made to the government and companies

Answer 104

shorts - 7 years to redemption medium 7-15 years Long 15 years plus Interest rate is the coupon described as an annual % of the nominal value £100 which is paid 6 monthly and paid gross of income tax

Answer 105

have coupons and redemption values (par value) linked to the UK RPI or CPI index

Answer 106

the break-even inflation rate is the rate of inflation that gives the same real net redemption yield for an index linked gilt and a comparison conventional gilt of similar maturity for investors of a given tax rate above the break even rate the index linked gilt gives the better return below the break even rate the conventional gilt provides the better return

Answer 107

Separate trading of registered interest and principal of securities these gilts can be stripped into their coupons and final redemption amount, both traded separately. each strip forms the equivalent of a zero coupon bond. it will trade at a discount to its face value with the size of the discount being determined by prevailing interets rates and time.

Answer 108

Separate trading of registered interest and principal of securities these gilts can be stripped into their coupons and final redemption amount, both traded separately. each strip forms the equivalent of a zero coupon bond. it will trade at a discount to its face value with the size of the discount being determined by prevailing interets rates and time.

Answer 109

overseas governments bonds and trade vary from country to country but effectively all operate on the same basic principle there are 3 major bond markets in the UK; gilts issued through the treasury by DMO sterling loans to foreign borrowers eurobond market which deals with foreign currency loans to UK and foreign governments and companies

Answer 110

a repurchase agreement that allows the borrower to use a financial security (gilt) as collateral for a cash loan at a fixed rate of interest. (think of pawn broker lending money against the collateral of the goods and return at some point in the future)

Answer 111

Eurobonds are international bond issues outside any particular jurisdiction. E.G a US dollar Eurobond could be issued anywhere in the world except for the US

Answer 112

are debt securities where the issuing companies promises to repay the capital at the end of the term and interest to the holders throughout the term. these are very much like a gilt with interest fixed or variable rate and terms of redemption and provisions for early redemption/demand for early repayment or convertibility is set out within the terms of issue.

Answer 113

refers to one in which the nationality of the issuer, the denomination of the bonds and the country are the same.

Answer 114

is one in which the nationality of the issuer is different to that of the denomination of the bond and country of issue

Answer 115

Credit/ default risk: non-payment of interest or capital at redemption Economic risk: different countries= different risks (greece vs germany) Interest rate risk: the inverse relationship between bond prices and interest rates Liquidity risk: it is possible to sell a specific amount at the price you want and at the time you want Politcal Risk: political instability can be a major factor

Answer 116

a debenture is a document which acknowledges a company's indebtedness to a third party and in particular to a secured debt instruments. secured corporate bonds would be called debentures the term loan stock refers to unsecured corporate bonds

Answer 117

an ABS is a financial instrument secured by a pool of assets such as property or loans. they are issued by companies specially created for the purpose and are a separate legal entity form the original owner of the underlying assets. this leaves them unaffected by any bankruptcy risk in the original owner.

Answer 118

is a securitized pool of underlying home loans they are used by retail banks to securities the cash flows from mortgages that would otherwise be receivable over normally a 25 year term.

Answer 119

credit risk - interest payments and repayment of the bond may not be made market risk - inverse relationship between bond prices and interest rates inflation risk - real value of bond coupon & redemption repayment liquidity risk: bonds not easily traded Exchange rate risk - bonds denominated in different currencies

Answer 120

credit rating agencies make an assessment when first issued (and throughout the term of the bonds) and are divided into investment grade or non investment grade

Answer 121

the income/coupon from a bond remains unchanged throughout the term Yields vary to reflect interest rates rising or falling by a fall or rise in its capital value

Answer 122

Bond prices will not all change by the same amount when interest rates or yields change they are all made up of different coupons and terms # the measure used to calculate how sensitive the bond is to changes in interest rates or yields is known as duration or modified duration

Answer 123

LESS because there will be a capital loss

Answer 124

the actual price paid in the market for a bond is called the dirty price the difference between the clean price and the dirty price is the accrued interest that the bond holder becomes entitled to on the distribution date OR the seller is losing by selling before the distribution date and the dirty price compensates for this loss

Answer 125

clean price (what you pay for it) + accrued interest at point of sale

Answer 126

the smaller the coupon the more the bonds price will move for a given interest rate change : low coupon bonds are more volatile than high coupon bonds

Answer 127

for two bonds with the same coupon, it will be the longer dated that is most volatile Long dated and low yield bonds are the most volatile or sensitive to price movements

Answer 128

reflects the time it would take for the investor to get back his purchase price in present value money

Answer 129

estimates how much a bonds price will change if there is a change in interest rates/yields it quantifies the sensitivity of the bonds price to changes in GRY

Answer 130

where there is no perceived investment risk the yield curve can be flat, this occurs in a stable economic situation where no significant changes are expected to interest rates or inflation

Answer 131

investors optimism on inflation a falling 'reverse' or inverted yield curve is where shorter term bonds have a higher yield than longer term bonds and is seen as an indicator of recession with investors effectively demanding a higher return for the perceived higher risk of short term bond compared to that of a longer term bond

Answer 132

Do not normally carry the right to vote but carry an expectation of a dividend payable after interest payments (bondholders) but before O/S

Answer 133

where the company does not pay a dividend the right to receive that dividend is rolled into the next period O/S cannot be paid until ALL cumulative preference shares have been paid

Answer 134

where additional dividends could be paid, over and above the fixed rate then participating preference dividends (extra dividend) could be paid

Answer 135

rights to convert into O/S

Answer 136

they carry a specified redemption date when the company will refund the nominal value

Answer 137

have a fixed maturity date and also provide a fixed return they get paid out before O/S often referred to as low risk have no voting rights subject to CGT

Answer 138

used by British companies to encourage US investors to buy an equity stake in a UK company gives them opportunity to buy into a UK company but receive dividends in dollars

Answer 139

launched in 1995 currently lists circa 1,000 companies with a total market capitalization of £93billion many AIM companies lack true liquidity lower listings standards and lighter touch regulation than LSE markets (major critism of AIM) lower listing fees and ongoing costs than for the main LSE

Answer 140

the shares may be priced at an attractive level to ensure good take-up transaction costs will generally be lower

Answer 141

no track record for the company's commericail (business)/ investment (share price) performance less stringent reporting requirements at the time of IPO investors in a IPO may get less shares than they applied for

Answer 142

involves the compnay issuing the new shares, selling the issue to a company called an issuing house the issuing house initially buys up new shares from the issuing company before re-selling them the issuing house will buy the shares from the company at a lower price than it intends to sell them

Answer 143

a fixed price is stated and offered on that basis sometimes this initial price is set low to encourage take-up

Answer 144

investors make bids for amounts of stock and the price they're willing to pay. based on the bids, a strike prices et with anyone who bid above the strike price paying the strike price for the stock

Answer 145

involves a company issuing shares directly to the general public and offering them for sale direct this method involves an issuing house underwriting the offer, meaning they'll agree to purchase any unsold shares for a fee

Answer 146

the shares are marketed directly to preferred, specially selected institutional investors these include pension funds, investment banks and life funds

Answer 147

involve a company already listed on one exchange the ability to seek an introduction to sell shares on another exchange.

Answer 148

most recent dividend/ investors required return- growth rate of dividend

Answer 149

top 100 uk companies based on market capitilisation

Answer 150

The index provides a benchmark for the next 250 biggest companies in the UK

Answer 151

combination of ftse 100 and ftse 250

Answer 152

a weighted arithmetic index covering approximatley 800 companies

Answer 153

Is an invitation to shareholders to buy new shares in proportion to their existing holding of shares A rights issue ensures that existing shareholders are always given first refusal on new shares. rights issues are often not good news and are typically done in order to repay a debt or refinance the company

Answer 154

is the price of the shares after the rights issue has taken place

Answer 155

is the price an investor would (theoretically) pay for the right to buy a discounted share (in the rights issue) It is the difference between the new price and old price

Answer 156

some investors may want to sell some of their rights and take up the offer with the money they make.

Answer 157

is a method of issuing new shares to the existing shareholders where new shares are issued without cost the effect of a bonus issue is to dilute the existing market price of a share and has the effect of reducing the price and making it more attractive to investors

Answer 158

a share split is where shares in issue are split into a greater number, each with a smaller nominal value i.e one £2 O/S split into two £1 O/S

Answer 159

the purchase by a company of its own shares is called share buy back. Regulatory as well as shareholder approval is required before a company is allowed to buy back its shares Business protection policies on director/shareholders for company share buy back can be put in place

Answer 160

give the owner the right but not the obligation to purchase shares at a fixed price in the future

Answer 161

one major difference is the expiry date equity warrants expiry date id sometimes months or years Options are traded on the exchange Warrants are issued by a company to raise money

Answer 162

Long term debt + preference shares ÷ Shareholders fund + capital reserves

Answer 163

Profit before interest and tax ÷ Gross interest payable

Answer 164

ROE is ideal for comparing Equities with other assets ROCE is better for comparing between individual companies//efficiencefficiencof

Answer 165

Uses a swap contract Where counterparty (investment bank) agrees to pay the index return In exchange for a fee

Answer 166

Counterparty risk The risk that the investment bank may not be able to return the agreed index Buy/hold collateral Review collateral periodically

Answer 167

Stock lending In exchange for a fee and collateral

Answer 168

measure of risk adjusted return above expected market return return not explained by the CAPM the managers ability to add value through stock picking

Answer 169

An active management strategy where a manager selects shares trading at low valuations that he considers undervalued or under-priced compared to its sector - market or fundamentals potential for re-rating low PE, low price to book, low price earnings to growth ratio

Answer 170

issued by financial institutions such as investment banks listed on the stock exchange classed as derivatives Are issued by someone other than the company and they cover the warrant by owning shares in the company

Answer 171

The profit that could have been paid as an ordinary dividend calculated after all expenses including preference shares The trend of the EPS over time is probably more useful for company comparative performance measure but must be companies in the same business

Answer 172

Profit attributable to O/S / No of O/S in issue

Answer 173

provides an indication of the markets expectation of the company's earnings growth potential it is the time in years, it would take the current EPS to repay the share price a high P/E indicates a greater perceived ability grow EPS compared to to competitors The P/E ratio measures how highly investors value a company as a multiple of earnings it is calculated by dividing the market price by the EPS investors pay more for shares if they expect the earnings to rise

Answer 174

based upon historic data only one number and rather simplistic must be relative to the sector and company competitors PE ratio level should be compared to past levels and trends within industry sector

Answer 175

Share Price / EPS

Answer 176

shows the projected growth in earnings per share in relation to a company's share price

Answer 177

a share is expensive the share has limited growth potential PEG ratio higher than 1 are generally considered unfavourably (overvalued) PEG ratio lower than 1 are generally considered favourably (undervalued)

Answer 178

it is based on projected date forecasts opinions

Answer 179

P/E ratio / earnings growth rate

Answer 180

use interest rates to meet inflation target to act as bank of last resort banker to the government and other banks # control money supply supervise banks and other financial institutions

Answer 181

Accounting policies change over time. uses historic data need to look at trends over time only uses one piece of information, need to use a more comprehensive analyse of the company

Answer 182

it hypothesises that the investment markets are efficient and that it is impossible to beat the market long term and any outperformance is due to luck rather than skill

Answer 183

believes that all current market prices are fair it is impossible to consistently and accurately predict future share prices movements based on past movements the only thing that can significantly impact share prices is new information and this happens randomly no one knows what it is or when it will happen

Answer 184

share prices reflect all public information available it is not possible to gain an advantage by either fundamental or technical analysis because share prices adjust to new information within an incredibly short amount of time

Answer 185

Share prices reflect all information possible both public an private this is unlikely true for many markets as insider trading laws prevent insiders from trading on private information this would undermine investor confidence in the markets

Answer 186

Involves investing in securities with above average earnings potential Growth investors favour small companies with the ability to grow in size more quickly they look for companies that reinvest their profits which in turn will be passed onto the share price in terms of growth This investment style is typically more risky than value investing Growth investors need to consider more measures such as the efficiency and management of the company

Answer 187

EPS growth for 4 out the last 5 years a low P/E relative to growth an optimistic annual statement from the company chairman Strong liquidity

Answer 188

Values investor believe that by undertaking intensive research they can discover stocks that are undervalued by the market which will allow them to make a profit on the upside Value investors believe that the market is inefficient and investors under and overreact to new information. the value investor aims to take advantage of these reactions

Answer 189

Solid value indicators include low P/E ratio high dividend yield low price to book ratio

Answer 190

identifying trends using technical analysis going long on investments that are likely to continue to grow short on investments likely to fall selling/closing out the position before the security changes direction risky strategy knowing when to sell

Answer 191

Basically going against the trend betting against the herd invest in assets that are out of fashion or have recently fallen similar to a value investment style although the asset may have fallen for a very good reason - contrarians need accurate information

Answer 192

The expected return as predicted by the CAPM for any given beta Investments above the SML have alpha and are therefore undervalued Investments below the SML have negative alpha and therefore, over valued the higher the alpha in the portfolio, the more additional return has been achieved by the fund manager

Answer 193

Physical replication - fund manager physically buys and holds the stocks in the index Synthetic replication - the fund manager enters into a swap contract with an investment bank - the investment bank will pay the return on the index Sampling - Stratified - representative sample of the index is chosen and is tracked rather than that of the full index Optimisation - uses computer programs to trade automatically on the index

Answer 194

It uses qualitative and quantitative research into a company and its sector/geography in order to establish the value of an investment specifically, to attempt to identify if the asset is undervalued or overvalued

Answer 195

it is the most often used my momentum investors it looks at charts to attempt to identify trends in the market and bases future buy/sell decisions on past share price movement

Answer 196

*Exempt/PID/Ring fenced Paid net of 20% Subject to further 20%/marginal rate tax PSA not available/ non savings income *Dividend Paid Gross Taxed at marginal rate (8.25/33.75/39.35) Dividend allowance available £2,000

Answer 197

ISA manager can reclaim 20% income/PID/dividend/ not subject to income tax gains are tax free / not subject to CGT

Answer 198

PAIF UCITS ETF Investment Trust Pension / Life fund Unit Trust

Answer 199

Asset allocation Geographical allocation Sector weighting Stock selection

Answer 200

Pay a premium/ higher price for stock with specific advantages / qualities mix/combination of value and growth longer term

Answer 201

Trend/ price movement likely to continue / further gains to come sell before trend ends / reverses ignores fundamental/ intrinsic value shorter term

Answer 202

Stock picking does not work Not possible to outperform market/ generate alpha Market is efficient / market prices in all information technical analysis does not work transaction costs offset performance /outweigh benefit

Answer 203

*Annual / reversionary regular variable once applied cannot be removed *Terminal/ Final one-off paid on maturity death surrender/ redemption not guranteed

Answer 204

UWP has units CWP does not UWP bonus is in advance CWP is in areas UWP bonus can be changed CWP cannot be changed UWP bonus applied to unit price CWP bonus added to sum assured UWP easier to switch fund UWP easier to calculate current value/ more transparent

Answer 205

Short term Upto 60 days maturity Upto 120 days life Standard Upto 6 months maturity Upto 12 months life

Answer 206

single factor financial model which projects an expected return for an asset as the combination of return of a risk free asset plus the risk premium of a risky asset

Answer 207

Market risk can be difficult to establish what to use as risk free asset? is there an actual risk free asset? What is the market portfolio? Studies from Fama and French show that actual returns have no relation to those predicted by CAPM The suitability of beta, Betas need to be stable

Answer 208

Minimum 16 holdings Maximum up to 10%; in four companies Maximum/ up to 5% in twelve/ rest/ others

Answer 209

Measure of market risk alone; ignores others factors/ risks assumes risk-free rate is correct/ suitable not stable or accurate predictor of future beta

Answer 210

Active Fund objective/ mandate/ strategy manager experience/ reputation Alpha/ IR/ Share/ performance/ track record Passive Replication strategy/ tracking error is market efficient? counterparty risk Either Diversification/ asset allocation costs/ charges choice / use of benchmark

Answer 211

Client objectives - risk and or return Investment strategy- active passive or both Stock selection Performance analysis

Answer 212

When focusing on asset allocation rayher than stock selection and market timing Asset allocation Geographical areas Sector selection Stock selection

Answer 213

Some managers avoid making a conscious decision on asset allocation and move straight into choosing individual shares and bonds that suite thier investment needs. This is called a bottom up approach

Answer 214

Is where ranges are specifies around the strategic level to enable market timing adjustments Example fixed interest 40-50

Answer 215

The remit of the fund manager to beat the market this index may have moved ahead may have a bigger weight in certain shares the manager has to keep up with the market regardless of value

Answer 216

tend to be influenced by momentum because clients like to see good news and results favored by the news, TV and press conversely, they are disappointed to hold those that are criticized

Answer 217

demands a much higher level of trading a typical funds annual turnover could be 100% plus high transaction costs Momentum investing is highly sensitive to luck of timing whether going into the trend or exiting

Answer 218

Betting against the herd investing in out of fashion holdings in 2014 George Osborne famously quoted that no one will need to buy an annuity again thereafter share prices in Just Retirment fell This was a good buying opportunity for contrarian investors who could profit from the market's overreaction similar to value investing

Answer 219

Present bias is the tendency to rather settle for a smaller present reward than to wait for a larger future reward, in a trade-off situation

Answer 220

Ones belief to ah e the ability to pick winning stocks

Answer 221

where a real or potential loss is perceived by individuals as psychologically or emotionally more severe than an equivalent gain. For instance, the pain of losing $100 is often far greater than the joy gained in finding the same amount

Answer 222

Less willing to sell investment at a loss

Answer 223

extrapolating from just a few years of investment returns to the future

Answer 224

taking out a payday loan without considering payment difficulties that may arise in the future

Answer 225

overestimating the value of a packaged bank account because it is presented in a particularly attractive way

Answer 226

Mental accounting refers to the different values a person places on the same amount of money, based on subjective criteria, often with detrimental results. Mental accounting is a concept in the field of behavioral economics. Developed by economist Richard H. Thaler, it contends that individuals classify funds differently and therefore are prone to irrational decision-making in their spending and investment behavior

Answer 227

investment may be split equally across all the funds in a pension scheme, rather than making a careful allocation decision

Answer 228

following financial advice because an adviser is likeable

Answer 229

Measures the expected return on a security like the CAPM but takes account of all risk specific to the security its an alternative theory to the CAPM CAPM measures prices that are determined solely by market risk APT takes into account a series of risk premiums that can be specific to that particular security APT takes into account systematic ris as well as unsystematic risk

Answer 230

Nonsystematic risks are specific to a particular business all businesses are unique and have their own specific risk factors

Answer 231

Systematic risk is the risk that affect the financial system as a whole

Answer 232

The strategy is exact opposite to a passive one aim is to outperform a benchmark described as beating the market actively managed portfolios are either constructed using a top down or bottom up method

Answer 233

ETF often hold a portfolio of shares or derivatives that are selected to track the performance of an index they offer exposure to many other markets ETFs are usually open - ended traditional ETF are available in hundreds of varieties, tracking nearly every index, commodity, currency or exchange you can imagine low turnover, low cost, broad diversification expense ratios can be significantly lower

Answer 234

no opportunity to design a portfolio specific to client requirements no opportunity to outperform the benchmark the benchmark/index can be influenced by a small number of stocks/sector tracking error can and will occur

Answer 235

many active managers fail to beat the market tracker funds generally have much lower costs than active funds simple to understand

Answer 236

Units are cancelled, and underlying investments sold in proportion to the disposal, unless inflow us received when cash can be withdrawn Possible difficulty in disposing of underlying assets/liquidity Doesn't trade at net asset value Trades at a discount/premium which will widen/narrow The effects of gearing/increased sensitivity to interest rate changes

Answer 237

Advantages Liquid investment Greater Diversification than investing directly Lower risk No responsibility for maintenance/ insurance/ health and safety Professional management Accessibility to smaller investment funds/ economies of scale Enables greater control of CGT planning. Disadvantages Don't fully own the underlying investments Reliant on fund manager to make right investment decision Lack of control over fees and costs Can impose a deferment period Less scope for gearing No tax relief on borrowing

Answer 238

Value/ market capitalisation Price Equal / unweighted

Answer 239

New listing/ IPO Delisting / switch to another market / becomes ineligible Merger / acquisition takeover Change in share price / market cap

Answer 240

Proportion/ percentage of shares Traded on market Companies with less than minimum free float; Have weighting reduced

Answer 241

Alpha Stock picking/ value added by manager Excess return not explained by Beta Sharpe ratio Excess return for every unit of risk/ risk free rate Excess return over standard deviation Information ratio Consistency of manager Excess return over benchmark

Answer 242

ETF £85,000 Per firm Shares. No protection Pension 100% Without limit Per provider SIPP £85,000 Per operator / firm

Answer 243

Exports are expensive for other currencies So consumers and businesses in other countries are not as inclined to buy goods and services from the Uk However this would also make imports cheaper so UK consumers and businesses will be inclined to import goods and services from abroad

Answer 244

Imports are expensive into the UK so they're more than likely to buy goods and services domestically Exports are very cheap for other currencies So consumers and businesses in other countries are more inclined to buy goods and services from the UK

Answer 245

A company issues new shares. Existing shareholders; Subsequently own less of company/ shares worth less. Unless they buy additional/new shares

Answer 246

Conventional Coupon fixed Fixed capital redemption value 100p Index linked Coupon variable Linked to inflation/ RPI three / eight months before payment Capital repayment / redemption linked to inflation

Answer 247

Difference/ gap / spread between Nominal yield On conventional gilts And real yield On index linked gilts. Expectation of inflation / future inflation rate To breakeven on purchase price

Answer 248

Investment grade rated BBB- / Baa 3 or higher Investment grade lower default risk Investment grade lower Coupon/ yield Investment grade longer issue Investment grade lower correlation with Equities

Answer 249

Increase high yield / sub investment grade Move down credit spectrum/ sell gilts / increase credit risk Reduce interest rate risk / shorten duration Reduce inflation risk / buy index linked Increase equity correlation/ buy convertible bonds Increase Beta/ Reduce cash

Answer 250

Counterparty risk Hold collateral Review collateral on an ongoing basis

Answer 251

Stock lending in exchange for a fee and collateral

Answer 252

• Non-systematic/specific risk can be eliminated/diversified; • is not rewarded. • Sensitivity to systematic/market risk; • dictates expected return.

Answer 253

) Benefits • Easy to use/calculate. • Robust/proven/trusted. • Allows for systematic/market risk. • Ignores non-systematic risk/assumes it has been removed. • Output is the expected return/easy to compare. Drawbacks • Risk-free rate may not be suitable/correct. • Assumptions can be unrealistic/the market return may be different. • Assumes beta as the correct/suitable measure of market risk. • Beta is unstable. • Doesn’t include costs and charges. • Assumes single holding period/one-size fits all. • Theoretical/single factor/simplistic.

Answer 254

Weighted • average term; • in years; • for purchase price to be repaid; • by cash flows/coupons • and redemption value.

Answer 255

• Sensitivity; • of bond’s price; • to changes in interest rates/yield to maturity.

Answer 256

Macaulay is relative/can be used to compare funds. • Affected by coupon/price. • Becomes less accurate as change in yield increases. • Assumes linear relationship between interest rate and bond price. • May not reflect fund style/mandate.

Answer 257

• Sterling Corporate Bond. • Sterling Strategic Bond. • Sterling High Yield.

Answer 258

• Business/economic cycle. • Expansionary fiscal policy. • Tightening monetary policy. • QT/unwinding QE. • Rising inflation. • Currency weakness/economic imbalance. • Market forces/credit spreads widening/UK downgraded.

Answer 259

• Manager has not added-valued/active management not justified/better off passive. • Investment style/underlying stocks out of favour/poor stock selection. • Annual/short-term measure/calculation period for alpha. • High PTR/transaction charges. • One-off event. • Smaller companies/sector has higher volatility.

Answer 260

Correlation is strong; • positive. • Will increase returns in rising market. • Will increase volatility/market risk; • as betas are more than 1. • Will reduce diversification.

Answer 261

) • Market/Systematic Risk. • Limited protection in falling market/will follow market down/cannot hold cash. or No ability to outperform in rising market/will only deliver market return. • Style Risk. • Replication strategy may cause underperformance/tracking error/drift from index return. • Counterparty Risk. • Failure of counterparty provider.

Answer 262

Costs/charges. • Fund/ style/objective/mandate. • Alpha/outperformance/past performance. • Volatility/standard deviation. • Sharpe/Information ratio. • Investment house reputation/financial strength. • Manager experience/track record. • Dividends/yield.

Answer 263

• Rising interest rates. • Economy growth falls. • Currency devaluation. • Capital flight out of UK. • Unemployment rises. • Increase borrowing/debt-dependence/reliance on foreign currency reserves. • Inflation increases.

Answer 264

• At least 60% of net income; • from exempt property business/ringfenced. • Value of property must be at least 60%; • of total assets. • Must pay 3 types of income. • Shares widely held. • No corporate investor; • holding 10% or more of NAV.

Answer 265

(i) Herding • Follow others/crowd. • Fear of missing out. • Ignore price/greater fool theory. (ii) Endowment effect • Greater value as inherited/already owned. • Retain unsuitable investments/emotional attachment. • Fear of selling.

Answer 266

*Potential higher returns. • Expertise of fund manager/scope for alpha/outperformance. • Invest in early-stage companies/start of trend/long time horizon. • Lower/negative/non-correlation to other equities/diversification.

Answer 267

Economic/business cycle downturn. • Increase in interest rates/inflation/discount rates. • Higher beta/volatility/standard deviation. • Poor stock-picking by manager. • Tech/growth out of favour/sector rotation. • Exposure to unlisted companies/deemed illiquid. • One off event causes write-down/devaluation of underlying assets.

Answer 268

(£11,780 / £5,000) = 2.356 ∜ 2.356 or 2.356 ^1/4 or 0.25 = 1.23892159 -1 x 100 = 23.89%

Answer 269

• Positive screening/engagement. • Negative screening/ethical. • Impact/microfinance. • Sharia-complaint/religious.

Answer 270

) Environmental • Reduction of Pollution/waste/recycling. • Climate Change/decarbonisation/ renewable energy use. • Conservation/treatment of wildlife. Social • Human rights/education. • Employee working conditions/benefits/diversity. • Charities/community/affordable housing. Governance • Accounting practices. • Board diversity/gender equality. • Conflicts of interest/bribery/corruption.

Answer 271

[(£11,780 - £19,000) / £19,000] x 100 = -38% (-38% - 0.9%) = -38.9% (-38.9 / 10.4) = -3.7403846 = -3.74

Answer 272

Benefits • Compare different funds/managers. • Shows risk-adjusted return. • Identify if returns are from excess risk/beta or manager/stock-picking. Drawbacks • Need to consider other factors/trends over time/do not consider in isolation. • Can be distorted by fund/manager’s strategy/higher risk. • Assumes normal distribution of returns/standard deviation as measure of risk. • Doesn’t take into account trading/turnover/costs.

Answer 273

• Target a specified return/maximise returns; • while limiting volatility/to specified volatility target; • using correlation/diversification; • of asset classes/lower risk assets; • to produce higher risk-adjusted returns.

Answer 274

In line with AtR. • Provides diversification within a small portfolio. • Could reduce market/volatility risk/hedge against market fall. • Sufficient time horizon. • Known/target level of volatility.

Answer 275

• In one place/single view. • Access to tools. Bed to ISA transfer of products with ease • Consolidated tax statement/voucher. • Less administration. • 24 7/on demand access/view online.

Answer 276

£2,955,000 + £3,735,000 = £6,690,000 (£620,000 / £6,690,000) = 0.09267 x 100 = 9.27%

Answer 277

• Rockflour has used capital more efficiently/Best Guest has used capital less efficiently. • Rockflour has higher operating profit/Best Guest has lower operating profit. • Rockflour has lower long-term liabilities/Best Guest has higher long-term liabilities.

Answer 278

• ROCE is a single metric/single period/need to compare over time/doesn’t factor in when funds are raised over period • Affected by one-off factors/distorted by high cash/doesn’t account for current liabilities/doesn’t account for depreciation or amortisation. • If a investor is a shareholder only/ROCE calculates return for all sources/shareholders and creditors.

Answer 279

• Interim declared during financial year/before AGM • Final declared after financial year/at AGM • Interim declared by board. • Final declared by shareholders. • Interim can be revoked. • Final cannot be revoked. • Interim only if Articles expressly permit. • Final not subject to Article/right of shareholders.

Answer 280

• Can use dividend allowance/first £2,000 tax-free. • Not subject to National Insurance. • Taxed at 33.75% compared to 40%.

Answer 281

£12,570 x 0% = £0 £37,700 x 20% = £7,540 £19,730 x 40% = £7,892 Total/Income Tax liability = £15,432 Maximum investment = (£15,432 / 30) x 100 = £51,440

Answer 282

Deferral/rollover relief; • for up to 1 year before; • 3 years after; • sale of the business/disposal. • Can invest up to £1,000,000/if knowledge intensive £2,000,000. • Original gain deferred; • without time limit. • Gain on EIS exempt from CGT; • if held for 3 years. • Loss relief available; • against capital or income. • Exempt from IHT/qualifies for business relief; • if held for 2 years.

Answer 283

Any change in needs/objectives/requirements/circumstances/State of health/ dependents/marital status. • Any changes in assets & liabilities/income & expenditure/emergency fund • Any capital gains made/unused gains/use of CGT/ISA allowance. • Any changes in legislation/Budget/products. • Review of investment performance against goals/target/benchmark. • Rebalance of portfolio. • On-going suitability. • Any change in ESG/ethical considerations. • Re-establish AtR/CfL. • Level of service/advice proposition/adviser charges. • Market/economic outlook/sentiment.

Answer 284

£700 + £38,200 - £25,000 - £10,000 = £3,900 £25,000 + (£10,000 x 7/12) = £30,833.33 (£3,900 / £30,833.33) x 100 = 12.648648 = 12.65%

Answer 285

Exempt/PID/Ring-fenced • Paid net of 20%/BRT. • Subject to further 20%/marginal rate tax. • PSA not available/non-savings income. Dividend • Paid gross. • Taxed at 32.5%. • Dividend allowance/£2,000 available

Answer 286

• ISA manager; • can reclaim 20%. • Income/PID/dividend/not subject to Income Tax. • Gains is tax free/not subject to CGT.

Answer 287

• Unit trust. • Investment trust. • PAIF. • UCITS/SICAV. • Exchange traded fund. • Life/pension funds.

Answer 288

• Accessibility • Unable to withdraw funds/dealing gated/suspended. • Liquidity/pricing • Fund unable to sell assets at fair price/bid price/dilution levy/hard to sell. • Valuation • Material uncertainty/unable to provide NAV. • Void • Loss of tenant/property empty. • Income • Loss of yield/unable to collect rent/reduction in rental income. • Economic • Assets cyclical/sensitive to business cycle.

Answer 289

Asset class allocation. • Geographical allocation. • Sector weightings. • Individual stock/security selection.

Answer 290

• Trend/price movement; • likely to continue/further gains to come. • Sell before trend ends/reverses. • Ignores fundamental/intrinsic value. • Shorter term.

Answer 291

• Pay premium/higher price for; • stock with specific advantages/qualities. • Mix/combination of value and growth. • Longer term.

Answer 292

• Weak. • Semi-strong. • Strong.

Answer 293

• Passive. • Stockpicking does not work. • Not possible to outperform market/generate alpha. • Market is efficient/market prices in all information. • Technical analysis does not work. • Transaction costs offset outperformance/outweigh benefit.

Answer 294

Annual/reversionary • Regular; • variable. • Once applied cannot be removed. • Terminal/Final • One-off; • paid on maturity; • death; • surrender/redemption. • Not guaranteed.

Answer 295

UWP has units/CWP does not. • UWP bonus in advance/CWP bonus in arrears. • UWP bonus can be changed/CWP cannot. • UWP bonus applied to unit price; • daily/over course of year. • CWP bonus added to sum assured. • UWP easier to switch fund. • UWP easier to calculate current value/more transparent.

Answer 296

• Short-term • Up to 60 days maturity. • Up to 120 days life. • Standard • Up to 6 months maturity. • Up to 12 months life.

Answer 297

• Initial yield/natural income. • Expected return/growth rate. • Taxation. • Asset allocation. • Charges. • Inflation/interest rate outlook. • Sequencing/volatility risk. • Time horizon.

Answer 298

• Age/state of health. • Marital status/any dependants. • Any other assets/liabilities. • Any emergency fund. • ESG/ethical preferences. • AtR/CfL.

Answer 299

• Reduce/hold less cash. • Diversify into real asset classes. • Hold inflation-linked bonds. • Own equities with rising/sustainable dividends. • Set aside initial income requirement in cash/take profits/use gains to support income.

Answer 300

• Access different asset classes. • Reduction in systematic risk. • Minimisation of non-systematic risk. • Access to different sectors/styles/niche. • Professional management. • FSCS/investor protection. • Less admin/involvement.

Answer 301

• Minimum 16 holdings. • Maximum/up to 10%; • in four companies; • Maximum/up to 5%; • in twelve/rest/others.

Answer 302

Beta = 4.7 - 0.2 /(5 -0.2) Beta = (4.5 / 4.8) Beta = 0.9375/0.94 Alternative: 4.7 = 0.2 + Beta (5 - 0.2) 4.7 = 0.2 + Beta (4.8) 4.5 = Beta x 4.8 (4.5 / 4.8) = Beta 0.9375/0.94 = Beta

Answer 303

• Investors require extra return; • for extra risk. • Focus on risks that cannot be eliminated by diversification.

Answer 304

• Measure of market risk alone/ignores other factors/risks. • Assumes risk-free rate is correct/suitable. • Not stable or accurate predictor of future beta.

Answer 305

Active • Fund objective/mandate/strategy. • Manager experience/reputation. • Alpha/IR/Sharpe/performance/track record. Passive • Replication strategy/Tracking error. • Is market efficient? • Counterparty risk. Either • Diversification/asset allocation. • Costs/charges. • Choice/use of benchmark.

Answer 306

* Company issues new shares. • Existing shareholders; • own less of company/shares worth less; • unless buy additional/new shares.

Answer 307

(49,000,000 – 8,500,000) = 40,500,000 720,000 x 0.7 = 504,000 40,500,000 + 504,000 = 41,004,000 36,000,000 +720,000 = 36,720,000 (41,004,000 / 36,720,000) = £1.1167/111.67p

Answer 308

• Cumulative/non-cumulative; • Missed payments carried / not carried forward. • Participating/non-participating; • May / may not pay additional dividend. • Convertible • Right to convert to ordinary shares • Redeemable/non-redeemable; • Repaid at a set date or by company / no redemption date/undated.

Answer 309

(26,200,000 – 9,600,000) = 16,600,000 (16,600,000/ 26,200,000) = 0.63359 x 100 = 63.36%

Answer 310

5,450,000 – 2,100,000 = 3,350,000 36,000,000 x 0.08 = 2,880,000 (3,350,000 / 2,880,000) = 1.163194 = 1.163x Alternative: 5,450,000 – 2,100,000 = 3,350,000 (3,350,000 /36,000,000) x 100 = 9.30556 (9.30556 / 8) = 1.163x

Answer 311

Conventional • Coupon fixed. • Capital repayment/redemption at par/100p. Index-linked • Coupon variable; • linked to inflation/RPI; • three/eight months before payment. • Capital repayment/redemption linked to inflation

Answer 312

• Difference/gap/spread between; • nominal yield; • on conventional gilts; • and real yield; • on index-linked gilts. • Expectation of inflation/future inflation rate; • to breakeven on purchase price

Answer 313

• Investment grade rated BBB- /Baa 3 or higher. • Investment grade lower default risk. • Investment grade lower coupon/yield. • Investment grade longer issue. • Investment grade lower correlation with equities.

Answer 314

• Increase high yield/sub-investment grade. • Move down credit spectrum/sell gilts/increase credit risk. • Reduce interest rate risk/shorten duration. • Reduce inflation risk/buy index-linked. • Increase equity correlation/buy convertible bonds. • Increase beta/reduce cash.

Answer 315

£35,400,000 / £28,000,000 = 1.264285 = 126.43p 448p / 126.43p = 3.54

Answer 316

• P/E is lower. • Undervalued/out of favour. • Bad management/decline in business. • Event causing a one-off increase in earnings.

Answer 317

16.2p x £28,000,000 = £4,536,000 £35,400,000 / £4,536,000 = 7.804232 = 7.8 Alternative £35,4000,000 / £28,000,000 = 1.264285 = 126.43p 126.43p / 16.2p = 7.8

Answer 318

High coverage/dividend well-covered. • Retaining majority of profits. • Company financially stable/dividend secure/sustainable. • Low growth/ex-growth business.

Answer 319

• Physical/Full Replication • Buys all stocks within index in correct weighting. • Stratified/Simplified Sampling • Buys subset/selection/sample of stocks within index. • Optimisation • Buys computerised model of index. • Synthetic • Uses derivatives/swaps.

Answer 320

• Currency • Exposed to Dollar/Yen/exchange rate movement. • Concentration/Overlap • Composition/market weighting of index/duplication/same stocks held in more than one fund. • Market/Volatility • NASDAQ/Japan Small Cap/beta likely to be greater than 1. • Counterparty • Failure of ETF. • Passive/Product • Replication style causes underperformance/underperforms index.

Answer 321

• Value/market capitalisation. • Price. • Equal/unweighted.

Answer 322

• New listing/IPO. • Delisting/switch to another market/becomes ineligible. • Merger/acquisition/takeover. • Change in share price/market cap..

Answer 323

• Proportion/percentage of shares; • traded on market. • Companies with less than minimum free float; • have weighting reduced.

Answer 324

• Alpha • Stock-picking/value added by manager. • Excess return not explained by beta. • Sharpe • Excess return for every unit of risk/risk-free rate. • Excess return over standard deviation. • Information Ratio • Consistency of manager. • Excess return over benchmark.

Answer 325

Investment; • £85,000; • per firm. • Shares; • no protection. Pension; • 100%; • without limit. • per provider. • SIPP; • £85,000; • per operator/firm.

Answer 326

• Drawdown/FAD. • PCLS only. • UFPLS. • Phased retirement. • Buy short-term/fixed term annuity.

Answer 327

• Reduce the level of initial withdrawal. • Change the timing/frequency of withdrawals. • Stick to his original retirement plan/date. • Alter asset allocation/reduce equity/market/volatility risk. • Invest in fixed interest/diversification across asset classes. • Increase cash/hold sufficient level of cash/take withdrawals from cash. • Take natural income/dividends. • Secure income through annuity.

Answer 328

SDRT 16.2p x 18,000 x 4 = £11,664 £11,664 x 0.5% = £58.32 PTM levy £1 Total = £59.32

Answer 329

• Ownership of technology provider/conflict of interest/financial stability of tech provider. • Ability to meet existing clients’ needs/expectations. • Timescale for upgrade/testing/phasing of migration. • Business continuity plan during upgrade/reliance on sole platform. • Front/back office compatibility/loss of functionality/tools/reporting. • Impact on firm’s advice proposition/reputation. • Time/cost to firm.

Answer 330

• Loss of service/outage/access. • Loss of income payments. • Unable to trade/buy/sell/out of market. • Data breach/loss. • Loss of transaction history/legacy data. • Increase in costs.

Answer 331

ISA • Dividends; • and interest/distributions; • free of personal taxation/not subject to Income Tax. GIA • Dividends; • taxed at 7.5%; • once DA/£2,000 used. • Interest/Distributions; • taxed at 20%; • once PSA/£1,000 used. GIA £110,000 x 2.1% = £2,310 less £2,000 = £310. £95,000 x 3.5% = £3,325 less £1,000 = £2,325.

Answer 332

• Income May be unsustainable/cut/not paid. • Unregulated Not subject to FSCS/investor protection. • Accessibility Unable to sell underlying assets. • Liquidity Wide price spread/hard to sell. • Capital loss/Valuation Assets may be written down/down-valued. • Correlation May not be uncorrelated/may be more correlated with equities. • Interest rate/Gearing Sensitive to interest rate rises/cyclical.

Answer 333

• Asset may not be eligible/not available to retail clients. • Dealing infrequent/not readily realisable/unable to sell. • Additional costs of ownership. • May require third party to transact/may have to trade manually. • Valuation/price may not show automatically/may have to input manually.

Answer 334

• The ability; • to absorb; • any negative investment event; • without an adverse/detrimental effect; • on lifestyle/standard of living.

Answer 335

• Reduce portfolio risk/AtR. • Hold sufficient cash to cover potential loss/event. • Invest less/only invest what client can afford to lose. • Discuss and agree CfL with client in advance. • Establish the actual risk the client is willing to take/not focus on the outcome. • Avoid overreliance on tools/simplified questions/inappropriate assessment of information.

Answer 336

10.7 - 10.4 = 0.3 0.3 / 1.65 = 0.181818 = 0.18

Answer 337

• Value added by manager/outperformance. • Low risk-adjusted return/information ratio. • Similar return could have been achieved through passive/tracker fund/active management not worth the cost.

Answer 338

Narrow Money the notes and coins in circulation Banks operational deposits in the BoE

Answer 339

Broad Money The notes and coins in circulation Money in savings and time deposits accounts of UK residents in UK Banks and building societies

Answer 340

Reflets but does not influence the economy has limited impact on national output and inflation Growth in M0 indicates consumer spending increasing; while a reduction in M0 indicates consumers aren't spending as much

Answer 341

Influences the economic cycle Growth in M4 indicates increased lending activity from banks and that inflation is likely to rise with fast growth in money circling around the economy

Answer 342

A financial bubble occurs when investors stop paying attention to the fundamental indicators of an investment and invest speculatively simply because they think the asset will continue to grow in value this is what is known as the greater fool theory Investors overestimate potential returns and underestimate competitive pressures

Answer 343

a crash occurs when investors sell investments quickly because they believe the price will continue to fall or perhaps because they are forced sellers

Answer 344

• Collectives-based. • Low minimum investment. • Asset allocation/fund selection determined centrally/by external manager/investment committee. • Portfolio changes can result in client CGT liability. • Range of risk-adjusted portfolios. • Portfolios not bespoke to client/limited choice. • Low cost.

Answer 345

• Charges. • Overlap with existing/non-DIM assets. • Regulatory permissions/reputation/financial strength. • Past performance/track record. • Investment style/strategy. • Client’s AtR/use of unsuitable/high risk assets. • Conflict of interest. • Basis of agreement. • Ownership of client.

Answer 346

• Recovery. • Boom/expansion. • Contraction. • [Correct order of phases].

Answer 347

• M0 excludes/M4 includes; • bank/building society accounts; • of UK residents

Answer 348

M4. • Broader/wider scope. • Reflects borrowing/lending. • Reflects velocity/transfer of money.

Answer 349

• Reduce/cease; • QE. • Sell bonds back to market/QT. • Increase interest rates.

Answer 350

• Target; • measure/calculate performance/fee. • Comparator; • comparison of performance. • Constraint; • limit portfolio construction/asset allocation.

Answer 351

• Anchoring; • fixated on 9%. • Overconfidence; • believes own research is best/overreliance on own knowledge. • Misunderstanding Of Probability; • too focused on yield at expense of potential risk to capital.

Answer 352

5.1 - [0.1 + 1.3 (4.5 - 0.1)] = -0.72

Answer 353

• Doesn’t explain source/reason for outperformance. • Assumes CAPM/market/benchmark/risk-free rate/ is suitable/correct. • Relative to beta/assumes beta is correct measure of risk. • Ignores costs/charges. • Only suited to comparing equity/similar funds.

Answer 354

• Volatility; • Greater degree of movement. • Manager; • Stock-picking/negative alpha/underperforms. • Shortfall; • Returns less than needed/target. • Style/Concentration; • Value out of favour/growth outperforms. • Non-systematic/specific; • Corporate event.

Answer 355

• Liquidity; • Unable to sell/achieve fair price. • Pricing; • Trades at discount/premium to NAV. • Currency; • Returns affected by currency movement. • Gearing/Interest Rate; • Equity returns affected by borrowing/interest rates. • Sector; • Lack of information/early stage/speculative investment.

Answer 356

UK 15% x 12% = 1.8% North America 25% x -9% = -2.25% Asia 40% x -6% = -2.4% Frontier 20% x 8% = 1.6% Total = -1.25%

Answer 357

UK 1.5% vs 1.8% = +0.3% North America 4% vs -2.25% = -6.25% Asia 5% vs -2.4% = -7.4% Frontier 6% vs 1.6% = -4.4%

Answer 358

Lucy • £4,000. • Up to 25%/£1,000 bonus. Clara £0 - you must make at least one payment into an LISA before you turn 40

Answer 359

• Part of £20,000/overall ISA allowance. • Must be 18 or over; • and under 40/make first contribution before 40; • can contribute until/must cease at 50. • 25% withdrawal charge unless/no withdrawals in first 12 months; • buying first home; • £450,000 or less; • aged 60 or over; • terminally ill/less than 12 months to live. • Bonus not payable if HTB ISA bonus used.

Answer 360

• Increase contribution; • by up to £100 pm/to £200 pm. • Stop/decrease contribution. • Withdraw/close. • Transfer into a LISA/ISA. • Transfer into a different rate/provider.

Answer 361

• Deceased’s; • name; • address/proof of residency; • NI number; • date of birth; • date of death; • date of partnership.

Answer 362

OEIC • Unlimited shares/can create new shares. • Redeems shares linked to NAV. • May be standalone or sub-fund of ICVC. • Must appoint an ACD. • Assets held by depositary. • Can borrow on temporary basis/up to 10%. Investment Trust • Fixed number of shares/finite share capital. • Shares bought/sold independent of NAV. • Listed company. • Has board of directors. • Can borrow on permanent basis/unlimited. • May have fixed life/winding up date.

Answer 363

OEIC • Daily pricing/pricing point; • Based upon NAV. • Single priced; • May apply swing pricing/dilution levy. Investment Trust. • Real-time pricing; • determined by market/supply and demand. • Dual pricing/bid/offer spread. • Can trade at discount/premium/independent of NAV.

Answer 364

Advantages • Accessible at any time/before age 55. • No limit on contributions/not part of Annual Allowance. • No limit on future investment value/not part of Lifetime Allowance. Disadvantages • No Income Tax relief. • No employer contribution. • Taxation within GIA/funds/subject to CGT. • Part of estate/subject to IHT.

Answer 365

• Single point of access/all information in one place. • Multiple tax-sheltered products. • Less/easier administration. • Income flexibility/consolidated payment. • Access to planning tools/bed & ISA, etc. • Transaction/account history. • Migration to cheaper share classes/lower fund charges.

Answer 366

Up to 3 years; • after/following/May 2025. • Up to 1 year before/from now/October 2021.

Answer 367

• Existing gain; • deferred until disposal; • without limits/unlimited; • can be deferred again. • New gain; • exempt from CGT; • after 3 years; • if Income Tax relief obtained. • Loss relief available; • offset against income or gains.

Answer 368

Income Tax relief £100,000 x 50% = £50,000 Carry back = £50,000 CGT reinvestment relief £50,000 x 20% = £10,000 CGT deferral relief £50,000 x 20% = £10,000

Answer 369

Anchoring; • 7% yield/£500,000 capital sum. • Endowment effect; • ‘His’ company/emotional attachment/retains shareholding. • Mental accounting; • Compartmentalising capital for income/used to receiving income.

Answer 370

• Estimate/forecast/predict the; • probabilistic/potential/likely; • range of; • returns/outcomes and; • volatility/standard deviation. • Under different outputs/scenarios/simulations

Answer 371

• Returns. • Volatility/standard deviation. • Time period.

Answer 372

• Assumptions/inputs not correct/unrealistic. • Ignores sequencing risk. • Over-reliance/over confidence. • Difficult to understand/too complex. • Output is unrealistic/unattainable/expected return not accurate. • Doesn’t factor in client circumstance.

Answer 373

£18,500,000 - £2,000,000 - £4,200,000 = £12,300,000 £35,000,000 + £9,700,000 - £22,600,000 = £22,100,000 (£12,300,000 / £22,100,000) = 0.556561 x 100 = 55.66%

Answer 374

• Ability to generate; • profit. • How efficiently it uses; • shareholders’ funds/capital. • Relative performance within sector/against peers.

Answer 375

(£3,800,000 + £2,150,000) = £5,950,000 / £1,400,000 = 4.25

Answer 376

• Company in strong position. • Can easily repay short-term/current debts from cash/most liquid assets; • without use of other assets/external resources.

Answer 377

• Fixed/non-current assets • Tangible (plant, buildings etc.). • Intangible/goodwill. • Investments. • Current assets • Stock/inventory. • Cash. • Trade receivables/debtors/prepaid expenses.

Answer 378

Investments/assets. • Loans/borrowing. • Foreign currency reserves.

Answer 379

• To finance/fund; • a current account; • deficit.

Answer 380

• Stimulates demand/spending; • by increasing aggregate demand. • Increases productivity/output; • and business investment.

Answer 381

• Single; • percentage figure; • that shows the; • annual cost of; • investing in/owning a fund.

Answer 382

(3.3-0.2) 0.91 x (3.1) 0.2 + 2.821 = 3.021 = 3.02

Answer 383

• Minimal/no default risk; • Short duration/less than 3 months; • minimal inflation and; • interest rate sensitivity.

Answer 384

• Investors are rational and risk averse. • Single/identical holding period. • No individual can affect the market price. • Ignores charges/tax. • Market is liquid. • Information is fully available to all investors. • Risk-free rate/treasury bills are suitable to use. • Investors can lend/borrow; • unlimited amounts. • Beta is correct measure of risk.

Answer 385

• Weighted; • average term/number of years; • discounted/present value of; • all cash flows/coupons + redemption value; • from a bond.

Answer 386

• Measures sensitivity of; • a bond’s price; • yield to maturity/redemption yield/interest rates.

Answer 387

Macaulay • Portfolio immunisation/liability matching/hedging out interest risk/predict returns. Modified • Reduce duration/interest rate risk.

Answer 388

• Two; • consecutive; • quarters of; • negative/declining/falling; • GDP growth.

Answer 389

• Fiscal surplus/reduction in gilt issuance. • Monetary policy loosening. • Reduction in inflation expectations. • Quantitative easing (QE). • Credit crisis/safe haven appeal/demand for sterling

Answer 390

• Increase duration. • Decrease high yield. • Increase investment grade/gilts/cash/short dated bonds. • Use derivatives.

Answer 391

• Minimum £500; • Maximum £1 million. • No minimum term/Instant access/no notice withdrawal/penalty. • All/100% protected without upper limit. • Backed by Government. • Can use personal savings allowance/taxable but paid gross. • Pay monthly/income must be paid out.

Answer 392

• Provides diversification. • Could invest more than £85,000/higher level of investor protection. • No volatility/default/market/investment risk.

Answer 393

• Maximum deposit £50,000. • Interest rate notional/may not win any prize/erosion of money in real terms

Answer 394

(-0.4 + 7.3)/2 = 3.45 (-0.4 – 3.45) + (7.3 - 3.45) (-3.85)2 + (3.85)2 14.8225 + 14.8225 29.645/2 = 14.8225 = 3.85

Answer 395

• Volatility/dispersion of returns; • through variation in; • actual return; • against mean return.

Answer 396

• 65-70% for 1SD. • 94-98% for 2SD.

Answer 397

• Prices adjust/reflect/respond to; • all; • public information; • rapidly and; • unbiased. • No excess return/cannot outperform market; • Includes past prices and; • company information.

Answer 398

• Fundamental analysis ineffective; • technical analysis ineffective. • Neither adds outperformance.

Answer 399

• Cost. • Potential tax liability. • Impact/interruption to existing income. • Attitude to risk/capacity for loss. • Suitability of funds/asset allocation. • Retention/change of benchmark. • Time out of market.

Answer 400

• Marital status/dependents/children. • State of health. • Other assets. • Liabilities. • Provision of emergency fund. • Ethical/socially responsible investments preferences. • Capacity for loss.

Answer 401

22,000 x 12.5p = £2,750 £2,750 - £2,000 = £750 £750 x 32.5% = £243.75 £2,750 - £243.75 = £2,506.25

Answer 402

• For investment of up to £200,000; • 30%; • Income Tax relief; • up to investors tax liability; • if held for 5 years. • Gains exempt from CGT/CGT-free; • with no minimum period. • No loss relief/deferral relief. • Dividends tax-free.

Answer 403

• Not covered at all by Financial Services Compensation scheme/£95,000/all capital at risk. • May not receive full Income Tax relief/level of tax relief may exceed tax paid.

Answer 404

• Accessibility/unable to sell underlying assets. • Liquidity. • Manager breaches qualifying rules. • Manager risk/change in gains or income profile. • May hold cash/not invest for a while.

Answer 405

Onshore • Corporation Tax paid; • on capital gains made/investment income; • deemed UK basic rate tax/20% tax paid. • Chargeable gains subject to 20%. • Taxed as top part of income/after dividends. Offshore • Withholding tax; • not subject to UK tax internally/gross roll-up. • Subject to 40% on gains. • Taxed as savings income. • No chargeable event on death if on capital redemption basis.

Answer 406

• Strategic • Investing for the long-term. • Objectives known at outset/future target income.

Answer 407

£132.56 – £100 = £32.56 £32.56/12 = £2.713333333 (2.7133/132.56) x 100 = 2.0468718% £1.45 x 2 = £2.9 (£2.9/£132.56) x 100 = 2.1876885% (2.1876885% - 2.0468718%) = 0.14%

Answer 408

2.19 - -0.14 = 2.05%

Answer 409

• A medium. • Trading above par. • Capital loss; • if held to redemption/maturity. • Running yield lower than annual coupons/issue yield. • Running yield higher than redemption yield.

Answer 410

• Active management. • Diversification; • across yield curve/maturities/durations. • Can invest in new gilts at issue. • Access to market participants

Answer 411

• Exposed to duration risk/manager gets it wrong. • Loss of known redemption date/yield/coupon. • Investor protection limited to £85,000. • Subject to CGT upon disposal. • Daily dealing. • Fund charges.

Answer 412

• Default. • Downgrade. • Credit spread.

Answer 413

(9,500/5) x 2 = 3,800 3,800 x 71p = £2,698 £8,284 + £2,698 = £10,982 (£10,982/13,300) = 0.82571428 = 82.57p

Answer 414

• Do nothing/ignore the issue. • Sell the rights.

Answer 415

• Earnings growth. • Dividend cover. • Style (growth/value/momentum/quality/low volatility). • Weighting.

Answer 416

8.5 - 0.35/1.97 = 4.137055 = 4.14

Answer 417

• IR uses benchmark; • Sharpe uses risk-free return. • IR is relative/can compare funds; • Sharpe is absolute. • IR measures consistency over time; • Sharpe does not. • IR uses tracking error; • Sharpe uses standard deviation.

Answer 418

• Need to consider other factors/trends over time/do not consider in isolation. • Can be distorted by fund/manager’s strategy. • Assumes normal distribution of returns/reliant upon standard deviation. • Can be distorted by illiquidity/volatility/trading frequency/costs.

Answer 419

• UK resident/listed. • Closed-ended/only one share class. • At least 75% of profits; • at least 75% of total assets; • relate to property rental/ring-fenced business. • Interest/borrowing coverage; • at least 125%. • At least 90% of profits; • paid out/distributed; • within 12 months/one year.

Answer 420

PID £750/80 x 100 = £937.50 x 20% = £187.50 Dividend £2,200 - £2,000 = £200 £200 x 32.5% = £65 Total £187.50 + £65 = £252.50

Answer 421

• Market/systematic/volatility. • Shortfall. • Inflation. • Concentration/all in UK equities/lack of diversification. • Accessibility/liquidity. • Fund specific event.

Answer 422

• Hindsight • UK equites have done well in the past. • Mental accounting • Their money for their objective/known target value. • Endowment effect/divestiture aversion • Already own equities/why change. • Overconfidence • Market timing/they know best/UK equities will be best asset class.

Answer 423

• Charges likely to be lower. • Gearing/borrowing. • Discount/price arbitrage/higher running yield. • More flexible/less diversification. • Ability of board to change/select manager. • Greater accessibility/liquidity/do not have to sell underlying investments. • More suitable structure to hold specialist/niche investments/wider range of investments. • Dealing frequency/real-time pricing.

Answer 424

• Unit trust. • Undertakings for Collective Investment in Transferable Securities (UCITS)/Société d'Investissement à Capital Variable. • Exchange-Traded Fund. • Non-UCITS Retails Schemes. • Life fund/investment bond.

Answer 425

• Beta measures market risk; • alpha measures difference between actual return and expected return (implied by Beta)/not explained by CAPM. • Beta explained by movements/correlation/in relation to market; • alpha not explained by movements in market. • Beta measures volatility; • alpha measures manager value/stock-picking.

Answer 426

Period 1 (£15,470 - £5,000 - £10,000)/£10,000 = 0.047 = 4.7% Period 2 (£16,800 - £15,470)/£15,470 = 0.08597 = 8.6% (1 +0.047) x (1 + 0.08597) - 1 = 0.13701 x 100 = 13.7%

Answer 427

• TWR not influenced by money added/new investment. • TWR focuses on individual manager skill/performance. • TWR compounds multiple periods/shows change over entire period.

Answer 428

• Inheritance Tax; • unlimited spousal exemption/transferable nil rate band. • Capital Gains Tax; • inter spousal disposal exempt. • Income Tax; • marriage allowance/transfer of £1,250/10% of Personal Allowance.

Answer 429

• Smaller investment universe/fewer managers with experience. • Costs likely to be higher. • Dealing frequency of fund/illiquidity of underlying holdings. • Lack of common terminology/inconsistent application. • Higher volatility/beta. • Lack of diversification/greater non-systematic risk. • Risk of fund closure/short lived/implementation risk/theme being closed.

Answer 430

• Ability to hold existing assets/equities. • Ability to continue existing income uninterrupted. • Cash account minimum balance/interest rate. • Charging structure. • Range of income yielding funds available.

Answer 431

• Ability to pay natural income. • Ability to pay regular income/fixed income. • Ability to pay ad-hoc/one-off withdrawals.

Answer 432

£90,000 x 4.2% = £3,780 £3,780 + £19,500 = £23,280 £25,000 - £23,280 = £1,720

Answer 433

• Take withdrawals; • of up to 5%/£2,000 per annum; • of original investment. • Tax deferred/no immediate Income Tax liability; • up to initial 10 years/up to 20 years/surrender/death.

Answer 434

• Effect of volatility/fluctuation; • on the order; • and timing/frequency of withdrawals; • and sustainability of income; • and impact on capital value. • Effect greater in early years.

Answer 435

• Reduce/suspend the level of income. • Change the frequency/order of income. • Take only natural income. • Extend time horizon. • Secure proportion of income/purchase annuity. • Diversification/change asset allocation/buy higher yielding assets. • Hold more/at least 6 months in cash.

Answer 436

• Interim declared during financial year/before AGM. • Final declared after financial year/at AGM. • Interim declared by board. • Final declared by shareholders. • Interim can be revoked. • Final cannot be revoked. • Interim only if Articles expressly permit. • Final not subject to Articles/right of shareholders.

Answer 437

• Covariance/relationship between; • a pair/two assets; • adjusted for the risk.

Answer 438

• Goods. • Services. • Investment income/overseas earnings. • Transfer payments/capital and asset movement.

Answer 439

• Positive screening/engagement. • CSR/SRI/Sharia finance/responsible. • ESG. • Impact.

Answer 440

• Fixed interest/green bonds/charity bonds. • Infrastructure/renewable energy. • P2P/social impact. • Property/social housing/education.

Answer 441

• Small cap focus shown to outperform. • Greater concentration. • Invest at the start of a trend/increase in demand. • Government subsidies/support/less political/legal risk.

Answer 442

• Appropriateness of benchmark. • Ethical criteria/mandate of the fund/United Nations Sustainable Development Goals. • Manager’s skill/track record/experience. • Ethical stance of management group itself. • Is it aligned with client’s ethical views?

Answer 443

Shorts <7 years to redemption, Medium 7-15 and Long >15 Nominal (par) value (=£100 on redemption) Interest rate (coupon described as an annual % of nominal value £100 paid semi-annual 6 months apart and paid gross of income tax) Redemption date (year £100 capital is repaid) with undated/irredeemable gilts effectively being cashed in by the government at any time.

Answer 444

Eurobonds are international bond issues outside any particular jurisdiction. For example, a US dollar Eurobond could be issued anywhere in the world, except for the US. They are a way for an organisation to issue debt without being restricted to their own domestic market.

Answer 445

A foreign bond is one in which the nationality of the issuer is different to that of the denomination of the bond and the country of issue, for example, a sterling bond issued in London by a US company (known as BULLDOGS on the UK market).

Answer 446

 Credit / default risk: non-payment of interest or capital at redemption  Economic risk: different countries = different economies = different risks (Greece versus Germany?)  Foreign exchange / currency risk: negative currency exchange movements  Interest rate risk: the inverse relationship between bond prices and interest rates  Liquidity risk: is it possible to sell a specific amount, at the price you want and at the time you want to?  Political risk: political instability can be a major factor (Venezuela?)

Answer 447

A mortgage backed security (MBS) is a securitised pool of underlying home loans. They are used by retail banks to securitise the cash flows from mortgages that would otherwise be receivable over, normally, a 25 year term.

Answer 448

 Credit risk: interest payments and repayment of the bond may not be made  Market risk: inverse relationship between bond prices and interest rates  Inflation risk: real value of bond coupon & redemption repayment  Liquidity risk: bonds not easily traded  Exchange rate risk: bonds denominated in different currencies

Answer 449

Credit rating agencies make an assessment when first issued (and throughout the term of the bond) and are divided into Investment Grade (various grades) or Non-Investment Grade (junk bonds). For example, using S&P ratings, anything less than a BBB is junk.

Answer 450

The income/coupon from a bond remains unchanged throughout the term. Yields vary to reflect interest rates rising or falling by a fall or rise in its capital value (par=100).

Answer 451

Bond prices will not all change by the same amount when interest rates or yields change – they are all made up of different coupons and terms. The measure used to calculate how sensitive the bond is to changes in interest rates or yield, is known as duration or modified duration

Answer 452

The smaller the coupon the more the bond's price will move for a given interest rate change: low coupon bonds are more volatile than high coupon bonds.

Answer 453

For two bonds with the same coupon it will be the longer dated that is most volatile. Long (dated) and low (yield) bonds are the most ‘volatile’ or sensitive to price movements. Think long and low for bigger swings, more volatility and more sensitivity to change (or the see-saw movements).

Answer 454

This is the most important and often quoted (MD), used to quantify sensitivity. The modified duration (MD) of a bond estimates how much a bond's price will change if there is a change in interest rates/yields; it quantifies the sensitivity of the bond price to changes in GRY:

Answer 455

investor optimism on inflation, a falling 'reverse' or inverted yield curve is where shorter-term bonds have a higher yield than longer-term bonds, and is seen as an indicator of recession, with investors effectively demanding a higher return for the perceived higher risk of a short-term bond compared to that of a longer-term bond.

Answer 456

 Is the annual growth rate required in the assets  To cover the zeros Thus, a Hurdle Rate of 9% means that the assets need to grow by 9% and the zero would still be repaid. Hurdle Rate (to Wipeout): At what point will zero dividend preference shareholders receive NOTHING? Thus, a Hurdle Rate (to Wipeout) of 90% means that the assets would have to fall by 90% before zero holders received nothing. Negative Hurdle Rate: This is the amount that the assets can fall each year and still be sufficient to repay the zeros in full.

Answer 457

o companies must hold AGMs at least once per year o shareholders with more than 10% of voting rights can call EGMs o shareholders with more than 5% of voting rights can propose resolutions o any shareholder can petition the court on grounds of the affairs of the company that are unfairly prejudicial to the interests of some or all of shareholders.

Answer 458

 Launched in June 1995  Currently lists circa 1,000 companies with a total market capitalisation of £93bn  Many AIM companies lack true liquidity (sometimes ANY liquidity!)  Lower listing standards and “lighter touch” regulation than for the main LSE market – which has been a major criticism of the AIM  Lower listing fees and ongoing costs than for the main LSE market

Answer 459

Shares have a nominal/face/par value shown on the face of the share certificate. This is the par value and is virtually irrelevant in normal trading conditions. The market value is the trading price of the share on the market. This is the capital value of that share in the market and used to provide the total ‘capitalised’ value of the company: shares issued x market value = capitalisation.

Answer 460

(GGM) is recognised, widely used and simplified model for calculating a share price: It calculates the (ex-dividend) price of a share, assuming constant dividend growth and dividend payments made at the end of each period. It helps place a price on value of an ordinary share with reference to the dividend. But, it is simplistic and only really suitable for mature shareholdings with track record. Most recent dividend / investors required return - growth rate of dividend

Answer 461

- If the required return is less than the growth rate of the dividend, the model gives a negative share valuation. - If the required return is equal to the growth rate of the dividend, the formula collapses as the result approaches infinity. - It’s only valuing the share based on dividend, which is a single fundamental, and any value investor worth their salt will tell you that fundamentals need to be considered as a whole rather than in isolation. What if the company is very profitable, but it’s retaining its earnings and using them to invest back into the company?

Answer 462

The markets use a range of indices to track the performance of the stocks and shares traded on a daily basis across the world. For example, in a weighted-index a 1% change in the price of a large company (higher market capitalisation) will have a proportionately greater effect on the index than a 1% change in the price of a smaller company.

Answer 463

The current and capital accounts represent two halves of a nation's balance of payments. The current account represents a country's net income over a period of time, while the capital account records the net change of assets and liabilities during a particular year.

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