READ 6.10.6 Chapter 6 – (22 exam questions. 15 standard, 7 multi) Characteristics Risks Behaviours And Tax Considerations Of Investment Products Flashcards

Question

What are unit trusts?

Answer 1

A collective investment set up under trust. The fund is split into units, and this is what investors buy. The units represent the underlying investments They are open ended The price of each unit depends on the net asset value (NAV) of the fund’s underlying investments. (ie, all units in the fund are at any one point the same value as all the underlying investments) The trustees holds the trust assets on behalf of the unit holders and a fund manager is responsible for the day to day running of the fund

Answer 2

The register contains: Each unit holder's name and address, each unit holder's unit holding and the date on when the unit holder was registered. If a unit holder asks to see the register, they must be allowed access at any time, free of charge. It can ONLY be refused if the register is closed due to undergoing maintenance. The max it can be closed is 30 days per year.

Answer 3

Yes. Because it is a material change to the fund it must be approved by unit holders before the trustee requests it and removing a manager must also be approved by the FCA.

Answer 4

Depends on whether the unit trust is classed as an equity fund or a non-equity fund For equity trusts income is treated as dividends so income tax is payable at dividend rates 8.75%, 33.75% or 39.35% depending on tax bracket. They must also exceed the dividend allowance For non equity trusts income is treated as interest so income tax is payable at saving rates 20%, 40% or 45% depending on tax bracket that the investor falls in. They must also exceed their saving allowance

Answer 5

An equity fund is one that has less than 60% of its assets in interest-bearing securities. Income received by unit holders is treated as dividends If a fund has 60% or more of its assets in interest-bearing securities, it is deemed a non-equity fund. Income received given to unit holders is treated as interest Therefore, there are tax differences for the unitholders depending on what the fund is classed as

Answer 6

Franked income refers to income that has already had tax paid on it at a corporate level before it is distributed to shareholders or investors. This term is often used in the context of dividends paid by companies. This typically happens in unit trusts

Answer 7

The following table looks at the taxation of this £200 in the hands of various investors. It assumes no dividend allowance is available.

Answer 8

When an investor buys units, the price they pay includes the right to income that has accrued in the fund from the previous distribution date up to the date of purchase, i.e. income from the time they didn't hold the units!

Answer 9

How CGT works Capital gains sit on top of the investor’s other income. In this example: Gain 1 will all be taxed at 10%. Gain 2 would be part taxed at 10%, part at 20%. Gain 3 would be all taxed at 20%. So, an individual with a small amount of income and a large gain could pay CGT at both rates.

Answer 10

CGT also has an annual exemption of £6000

Answer 11

Where individuals would sell their shares one day, to 'use' their CGT allowance, and then buy them back the next day. This would allow them to dispose of the asset to 'realise' gains up to their unused allowance, thereby re-setting the acquisition value at the new purchase price. Now any sale and re-purchase of shares within 30 days is ignored in a CGT calculation. It’s as if the sale and re-purchase didn’t happen

Answer 12

1- Accumulation units. Where all income produced is reinvested back into the investor's holding. The unit price increases to reflect the retained income. - Income units/distribution units. Pays out any income to the investor. NOTE: If you have two funds starting at the same price but one has accumulation units and the other has income units/distribution units, as time goes by the Income units will have a lower unit price than accumulation units. This is because each non-distributed income is re-invested back into fund which increases the unit price

Answer 13

Unit trusts are eligible for inclusion in an ISA The benefit of linking these to an ISA is the exemption of CGT on any realised gains: The full ISA allowance can be invested in qualifying unit trusts within a stocks and shares ISA. Virtually all unit trusts qualify for ISA wrapping. All UCITS schemes qualify. There are generally no extra charges for investing in a unit trust ISA than in a non-ISA unit trust.

Answer 14

True but ones but ISA unit trusts cannot

Answer 15

The manager must make payment within 4 days after the receipt of signed documentation.

Answer 16

Dual pricing: Units have a different price to buy and sell. An investor in a dual-priced scheme buys units at the offer price (which is higher) and sells at bid price (which is lower) - the difference is called the bid/offer spread and represents charges that must be paid back. Single pricing: Uses mid market rates. Charges are declared and repaid separately

Answer 17

This is only applicable to unit trusts that are 'dual priced' Offer price - what the investor buys the units for. This is higher than the bid price Bid price - The price that the investor sells the units for. This is lower than the offer price Different funds have different Bid/offer spreads as they have different charge amounts that are being accounted for. See image Remember: 'offer to buy' and 'bid to get rid'.

Answer 18

It means a manager creates new units to sell to new investors and cancels units when investors want to cash them in. The number of units that can be created is unlimited

Answer 19

Historic pricing is where investors buy at yesterday's published price Forward pricing is where investors buy at tomorrow's 'yet-to-be-calculated' price With historic pricing the investor knows the price they will get, or pay, and with future pricing they don't.

Answer 20

If the unit trust is dealt with on a historic basis and prices move by more than 2%, the fund manager must move to a forward pricing basis

Answer 21

An initial charge. Most funds now no longer charge this but it can still be payable. An annual management charge. Cover fund manager’s costs, and are typically between 0.5 and 1.5%. Exit charges. Only a feature when no initial fee is taken. These are usually paid if the investment is sold within a given period of time. Performance-related fees. Performance-related fees are very uncommon but are allowed.

Answer 22

It is a collective investment set up as a limited company. Investors buy shares in the OEIC (note: OEICs do not trade on the stock exchange) The price of each share depends on the net asset value (NAV) of the fund's underlying investments meaning, by buying the shares in the OEIC the investor is exposed the fund that the OEIC invests in The fund manager is called the Authorised Corporate Director (ACD). They buys the bonds or shares in companies on the stock market on behalf of the fund. There is a depository who oversees the management It also has a scheme operation who issues reports twice yearly and deals with most administrative tasks. It is open ended They are FCA-authorised They are often single priced (no bid/offer prices etc like with unit trusts that are usually dual prices ). They just have one price based off the mid market Can be equity based or income based

Answer 23

Funds can be UCITS, non-retail UCITS and QIS, (as with unit trusts). The capital is open ended so, (as with unit trusts), there is no secondary market. No stamp duty is paid on their purchase (as with unit trusts). The investor owns their proportion of the shares within the wider fund (as with unit trusts). Trading can be on historic or future basis (as with unit trusts). It is self-contained so is not traded on the stock market like normal listed companies (as with unit trusts). Can be equity based or income based

Answer 24

The OEIC will charge the seller/buyer a dilution levy if they buy/sell a substantial number of shares This is because the dealing costs of this transaction will severely impact on the value of the OEIC's remaining portfolio, and therefore, unfairly impact the other shareholders The levy is paid back into the fund

Answer 25

This allows investors to spread their money between different managers or different funds. Such arrangements further diversify investments. Two main types of multi-manager product exist: one to spread investments across different funds and the other to spread investments across different managers To spread investments across funds a 'funds of fund' (FOF) fund is used To spread investments across different managers a 'managers of funds' (MOF) fund is used For context: This was introduced because collective investments became more popular, and more understood by investors, so investors started to ask for more from their investments and therefore demand arose for access to the expertise of 'star' fund managers and more diversified portfolios, hence multi-manager products were introduced

Answer 26

Fund of Funds (FOF) funds. A FOF fund will either be fettered or unfettered Manager of Managers (MOM) funds.

Answer 27

Fettered - Only the 'hosts' funds are used Unfettered - Funds from other companies can be used REMEMBER: To spread investments across different funds a 'funds of fund' (FOF) fund is used. This is a form of multi manager model this spread of investments across a single providers different funds are not possible overwise

Answer 28

An overall 'manager' is appointed, whose job it is to find the best fund managers in each sector.

Answer 29

Basically, a platform provides access to a wide range of collective investment schemes, exchange traded funds (ETFs) and pensions. These can be fettered or unfettered. They are wrapped up into one investment for the investor. This widens choice, and also makes it easier to value your investment for tax purposes. A big advantage is the ability to monitor the investment online using the platform REMEMBER: If a fund is Fettered - Only the 'hosts' funds are used for the investments If a fund is Unfettered - Funds from other companies can be used to invest in

Answer 30

Collective investment schemes, established outside of the UK For tax purposes they are either a: Reporting fund Non-reporting fund

Answer 31

Reporting = Income is reported to HRMC whether distributed or not. Dividends or interest are paid and taxed in same way as onshore funds. CGT also applies in same way. (basically the same as onshore funds) Non- reporting = No income is paid (why they are called 'roll up funds') so only CGT is applicable. CGT is payable on gains at income tax rates (20%, 40% or 45%)!!!! And no CGT exemption can be used! NOTE: Most UK resident or domiciled people who invest offshore prefer reporting funds, as dividends are paid gross, and the CGT exemption can be used to cover/reduce gains. SEE LEFT IMAGE Reporting funds are also known as distributor funds Non-reporting funds are known as non distributor funds

Answer 32

They are a collective investment They are Public Limited Companies (PLCs) and they are listed (its share are on the stock exchange) They are closed-ended because they have a fixed number of shares Therefore, supply and demand greatly effect prices They can use gearing with no restriction The shares are dual priced with purchases at the higher offer price and sales at the lower bid price. This varies, depending on supply and demand. The difference is known as the 'market makers' spread or turn'. NOT bid/offer spread! Shares trade at a premium (where shares are worth more than the underlying assets) or a discount (where shares are worth less than the underlying assets)

Answer 33

They are very flexible in their investments when compared to other collective investment schemes. For example, they can invest in emerging markets, provide venture-capital to new firms, invest in any country in the world and so on They are higher risk though because of this

Answer 34

When buying and selling closed-ended fund shares like from investment trusts, they are issued on the primary market and then traded on the secondary markets. This is unlike a unit trust or OEIC that creates and destroys units/shares.

Answer 35

With the left image it is unlikely to be the share price you would pay as the shares are traded and listed on the stock market and therefore Supply and demand principles take over due to the fixed number of shares. Therefore you may be purchasing the shares at a premium or a discount. See image

Answer 36

This shows how discounted shares can lead to a higher returns

Answer 37

A company owned and controlled by five or fewer individuals. This usually relates to small, family run companies.

Answer 38

The two main types of investment trust: - Conventional - Split Capital Conventional trusts = Issue one main type of share which are 'ordinary shares'. Split Capital Trusts = Multiple classes of shares, entitled to different returns, with different priorities on wind up. Useful for an investor looking for a particular type of return e.g. high-risk income or low-risk growth. Often have a fixed term

Answer 39

A conventional Investments trusts with a limited term, rather than indefinite On maturity, the fund is wound up and the NAV is distributed if investors vote to do so. They can also extend the term if they want too. Therefore, they can be good if the investor bought the shares at a discount as they can make a good gain on maturity due to the distribution of the NAV if it is wound up For context: There are two main types of investment trust: - Conventional - Split Capital Limited life trusts are a sub type of conventional investments trusts

Answer 40

Hurdle rate - the rate an investment trust's investments must grow at to repay each share at the wind-up date of the investment trust

Answer 41

Asset cover is used to calculate the percentage of liabilities covered at any moment for investment trusts An asset cover of '1' means that investment trust assets exactly match the money required to repay all share classes at trust wind-up. A figure higher than 1 means that assets are more than liabilities. A figure of less than 1 means that liabilities are greater than assets.

Answer 42

Remember: Conventional investment trusts only offer ordinary shares Split Capital Trusts can have a variety of different share classes in it

Answer 43

They are a 'right to buy' shares at a fixed price at a pre-determined date They are not shares themselves, just simply a 'right to buy' some shares Warrants are tradable on the stock exchange.

Answer 44

When warrants are exercised, this is said to dilute the NAV. Before they are exercised, the NAV is undiluted.

Answer 45

Where the investment trust borrows money to capitalise on investment opportunity's when it doesn't have sufficient cash to do so Gearing is expressed using the following formula: Total gross assets ÷ net assets x 100 - (This is used to calculate how much of the fund is geared. This is obvs useful as it indicates how risky the fund is) Investment trusts can borrow money or 'gear' in the same ways as other companies. See image Advisers must disclose the enhanced risk to investors if they recommend investment trusts that could possible gear, including if the fund invests in other investment trusts that gear.

Answer 46

Figures are published showing the extent to which an investment trust is 'geared': A figure of 100 means there is no gearing, 130 means the company is 30% geared.

Answer 47

It will show the effect of any charges on the investment at the end of years 1, 3, 5 and 10. This simply shows how much less growth the trust could potentially achieve because of charges i.e. how much yield (growth) is reduced by. This should allow investors to compare costs.

Answer 48

True NOTE: This is different from that of OEICs and Unit Trusts, where no stamp duty is paid on purchase of shares or units respectively

Answer 49

The taxation of an investment trust is the same as other collective schemes: Ie: Schemes do not pay CGT on profits made through their dealings. They do not pay additional income tax on dividends and they do they pay corporation tax on unfranked income from cash or fixed-interest coupons. All of this results in little internal taxation Income distributions to investors are taxed in the same way as equity unit trusts: subject to income tax in the same way as dividends from equities. treated as the top part of a person's income i.e. above earnings and interest. income paid without tax deduction. £2,000 dividend allowance available. Dividend income above the £1,000 is taxable: BRTPs have an 8.75% liability. HRTP pay 33.75%. ARTPs pay 39.35%. Gains made on investment trust shares are also subject to capital gains tax in the same way as unit trust units and OEIC shares.

Answer 50

See both images Remember that life assurance products will use very similar investment strategies to collective investment schemes

Answer 51

Their structure and Their taxation is completely different to collective investments

Answer 52

Life assurance products can also be called policies.

Answer 53

True This exam obvs focuses on the life assurance products with an investment element

Answer 54

With profits - Where a provider adds regular 'bonuses' to the sum assured The investment may receive a final or terminal bonus at maturity or when cashed in and reversionary bonuses annually

Answer 55

The amount payable on death and/or the amount payable on maturity of a policy with an investment element

Answer 56

A with-profit investment bond.

Answer 57

Traditional - Annual bonuses are added to the full sum assured. This full sum assured increases as bonuses are added. Pays out sum assured death or on maturity. This starts off with a much higher investment low cost with-profit - Combines decreasing term assurance with a with profits policy. When the policy's with-profit element grows, the decreasing term assurance element reduces. This results in lower premiums, and provides a level of death benefit needed by the client, but the overall return at the end of the policy is also lower because the initial investment will be far lower low start low-cost with-profit - Same as low cost but the premiums also start off lower, and then increase gradually over a (usually) five-year period. For those who need cover but cant afford it

Answer 58

FULL WITH PROFITS - a policy may have a sum assured of £100,000. If a 4% simple bonus is declared after year one. The sum assured of the policy increases to £104,000. Next year another 4% simple bonus is declared, so the policy value increases to £108,000 and so on. If the policyholder dies at any point during the policy term, the sum assured including bonuses, will be paid out into their estate LOW COST WITH PROFITS - Using the same example figures, the policy owner has a full sum assured of £100,000 for death benefit purposes but also a basic sum assured, for investment purposes, which is much lower, say £35,000. Annual bonuses are then added to this basic sum assured which then increases each year. SEE LEFT IMAGE This results in lower premiums, and provides a level of death benefit needed by the client, but the overall return at the end of the policy is also lower because the initial investment will be far lower

Answer 59

Remember: A key point to be aware of is that bonus payments are at the discretion of the fund manager. This can affect the end returns, and the attractiveness, of a with-profit fund.

Answer 60

Also called a Market Value Adjuster (MVA). MVR activates when a with profit fund preforms more poorly than expected MVR is a reduction applied to the value of an holders with-profit fund if they decide to cash it in. This is to keep fairness and prevent other investors loosing out because of another investor cashing in their investment. See example Had Marcus had an MVR clause he could have applied the MVR to reduce the pay-out to Sachin and Penelope from £12,500 to £9,000, leaving £9,000 in the pot for Mia. They are a deterrent in many ways because (using our example) Sachin, Penelope and Mia, when faced with a reduction from £12,500 to £9,000, could simply decide to wait until a future date, when the MVR may not be applied, and then cash in their investment at its face value.

Answer 61

A unitised with-profit fund takes the value of the underlying investment fund and expresses it in the form of 'units'. The value of the units cannot go down It is easier for investors to understand The units are either fixed or variable With fixed unit pricing the units would retain the same value all the way through their lives. Let’s say these units are £1 each. That price never changes. When bonuses are declared, often on a daily basis, these buy additional units, also at £1. So, the number of units Karl holds rises each year, leading to a rising value of his plan. With variable unit pricing, the units have their price increased, often on a daily basis. So, Karl keeps the same number of units, but their value increases after each bonus declaration.

Answer 62

They stop accepting new money For this reason, a second-hand market has sprung up with investors offering to buy with-profit plans from the original investor. They offer slightly more than the insurance company surrender value and take on the risk that they may benefit from future gains. BECAUSE OF THIS Most insurance bonds are now unit-linked rather than with-profit

Answer 63

Pound-cost averaging is where if you buy lots of something whilst the price is low then when you come to sell it again at the end you get back more than you paid, if prices eventually rise. Applying this to a regular premium unit linked contract; as prices fluctuate you get a different number of units for your same regular contribution. IT CAN ALSO INCREASE THE OTHER WAY IF PRICES KEEP INCREASING NOTE: It does not work for any single premium nor with-profit type of investment. i

Answer 64

there are unique types of investment available, e.g. with-profit. Funds can be switched without cost and tax consequences (A BIG BENEFIT)

Answer 65

Qualifying policies that were taken out around when the £3600 max annual contribution qualifying rule came into force Remember that for these policies: The proceeds from any premiums paid in this transitional period would be tax-free, any premiums paid after this period in excess of the new £3,600 contribution limit would be potentially taxable. effectively some premiums may be taxable whereas others arnt

Answer 66

remember DAMPS Death Assignment Maturity Part surrender Surrender. Death As it sounds Assignment. Only a chargeable event if it is for money or money's worth Maturity. The gain is assessed in the tax year in which it occurs. Part surrender. If more than 5% is withdrawn over the life of the policy. Surrender. This has the same rules as those applying to maturity.

Answer 67

A single premium, non-qualifying, whole of life policy NOTE: Although they are life policies the life cover is often minimal, such as 101% of the value of the funds on death. This is because they are used for investing mainly

Answer 68

That there may be tax to pay once the proceeds are given to the investor, following a chargeable event.

Answer 69

This means that rather than have different parts of the bond allocated to the different fund choices, the bond is split up into lots of individual policies with each segment being split across the funds chosen by the investor. This makes them identical in terms of asset allocation. The number of segments can be any figure and varies from life office to life office. So, a £10,000 investment could be 'segmented' into 40 different investments of £250. Be aware that art surrenders and surrenders of segmented bond in the wrong way can lead to large chargeable gains. This is known as segmentation SEE LEFT IMAGE

Answer 70

Bonds have different names depending on their objectives: SEE IMAGE to see how bonds can be marketed differently

Answer 71

5% of the original investment (the withdrawals are tax-deferred) The 5% withdrawal is treated as a return of capital, meaning there is no immediate tax to pay on it. If you don’t use the 5% allowance in a given year, it keeps rolling over to the next year, allowing you to cumulatively withdraw more in future years. At 20 years you will reach 100% You can utilize the 5% withdrawal rule for up to 20 years. Upon reaching 20 years, you will have withdrawn 100% of your original investment. Any money left in the bond after this period must be investment growth. If you withdraw more than the cumulative 5% allowance in any one year, the excess amount is added to your income for that tax year and may be subject to additional income tax if it pushes you into a higher tax bracket. For onshore funds basic rate is deemed to have already been taken due the internal taxation The 5% withdrawals are tax-deferred, not tax-free. After you’ve taken out 100% of your original investment, any further withdrawals are potentially taxable based on the gains in the investment. The 5% rule helps manage your tax liability by allowing you to spread out withdrawals over many years, thereby avoiding large tax bills in any single year. It is important to keep track of your withdrawals to avoid unexpected tax consequences and ensure you don’t exceed the cumulative allowance, which could result in additional taxes.

Answer 72

Investor pays single premium Bond provides a guaranteed income each year for a specified term At the end of the term, the original premium is guaranteed to be returned to the investor If the gain does not push an investor into the higher or additional rate band , there is no income tax liability, so they tend to be popular with basic rate taxpayers. Not popular with non tax payers as they have to pay Basic rate tax no matter what

Answer 73

Basically: Calculate the chargeable gain Check what tax bracket they fall in when adding the chargeable gain to their income No tax if they remain as a basic rate but tax is payable if they become a HRTP or an ARTP

Answer 74

NOTE: Nick’s earnings are £39,875 minus the threshold of £37,700 = £2,175. With normal tax calculations it will just be the higher rate tax applied to the 2175 (the amount that he exceeds the basic rate by) However this is not the case with investments bonds as this would be deemed unfair since the income is being added to the calculation is from previous years, outside of the tax year where the chargeable event occurred. Therefore Top Slicing is used

Answer 75

Basically, Any withdrawals that exceed the 5% annual limit are added to the investors income in the tax year where the withdrawal took place Because these withdrawals have had tax on them already they are deducted from any chargeable gain in the future

Answer 76

High income bonds have no capital guarantee but in return can have higher returns They are based on 'packages of derivatives'. How it works: A high level of income is declared, say 10% annually over a 5-year term. The capital value increases/decreases in line with an index just as the FTSE 100. If index is on target, then the capital is returned but if the payment at maturity will be less than originally invested. They are good when interest rates are low They are taxed the same as guaranteed income bonds

Answer 77

Guaranteed Growth Bonds Same as GIBs except no income is paid out. Set up on shorter terms The income is simply added to capital at maturity, and distributed out in full. Capital is guaranteed Taxed in same way as GIBs/HIBs (make sure you know this)

Answer 78

Most common form of investment bond in use. An investment bond that is unit linked. Written as whole of life policies so they have no end date and they can be cashed in at any time, often without any penalties (unlike with-profit bonds which may be subject to MVRs). They are very popular due to their flexibility Taxed in same way as HIBS, GIB, GGBs including the 5% rule

Answer 79

For cautious investors They offer a guaranteed return of capital at the end of the term The guarantee is 100% for guaranteed equity Protected bonds are the same except the guarantee is a range. For example, 90% to 140% Investment is linked to a stock market index, such as FTSE 100 So it is good for investors that want to invest in the stockmarket but dont want their capital at risk. No income is paid. The investment only goes up if the index goes up The max growth they can receive is capped for example 20% so even if the index goes up by 25% theyll only receive 20% SEE RIGHT IMAGE FOR A guaranteed equity bond

Answer 80

What is the primary feature of guaranteed equity investments that appeals to cautious investors? 100% capital protection. How does the capital protection in guaranteed equity investments typically work? The capital protection ensures that the investor will receive back the full amount of their initial investment (principal) at the end of the investment term, regardless of market performance. What stock market index is used for linking the growth potential of guaranteed equity investments? The FTSE 100 index How is additional growth in guaranteed equity investments determined? Additional growth is determined by the performance of the linked stock market index. If the index rises, the investor earns the value of their investment rises, subject to a cap. What does a 'cap' mean in the context of guaranteed equity investments? A 'cap' is the maximum limit on the return that the investor can earn. For example, if the cap is 20%, the investor can earn up to 20% of their principal in returns, even if the index rises more. Can you explain the term 'Hard Protection' in relation to guaranteed equity investments? 'Hard Protection' refers to a capital guarantee that is firm and unconditional. It ensures that the investor will get back their entire principal amount regardless of market conditions. A protection that is not a guarantee, or is subject to conditions, is known as Soft Protection. What investments do firms use to provide the capital guarantee in their guaranteed equity bonds? Firms use zero-coupon bonds to secure the capital guarantee. These bonds mature at the same time as the investment term, ensuring the principal is available to repay investors. What is a 'zero-coupon bond' and how does it relate to the guarantee in guaranteed equity investments? A zero-coupon bond is a bond that does not pay periodic interest but is sold at a discount to its face value. At maturity, it pays the full face value, which is used to guarantee the return of the investor's principal. How would an investor's returns be affected if the linked index drops over the investment period in a guaranteed equity investment? If the linked index drops, the investor will still receive their principal amount back due to the capital protection, but they will not earn any additional returns so potentially an investor could make 0% return if the index preforms badly enough but never less than 0%

Answer 81

What distinguishes protected bonds from guaranteed equity in terms of capital protection? Protected bonds typically offer partial capital protection, often around 90%, compared to the 100% capital protection in guaranteed equity investments. How does the capital protection mechanism typically work in protected bonds? The capital protection in protected bonds ensures that the investor will receive back a certain percentage of their principal (e.g., 90%) at the end of the investment term, potentially risking a small amount of capital. What is meant by a spread of 90% to 140% in the context of protected bonds? This spread indicates that the investor is guaranteed to receive at least 90% of their principal, with the potential to earn up to 140% if the linked index performs well. How is additional growth determined in protected bonds? Additional growth is linked to the performance of a stock market index. The investor gains a return when the index's rise, subject to a specified cap. What does a 'cap' mean in the context of protected bonds? A 'cap' sets the maximum return the investor can earn. For example, if the cap is 20%, the maximum return is 20% of the principal, regardless of higher index performance. Can you explain the term 'Soft Protection' in relation to protected bonds? 'Soft Protection' refers to capital protection that is conditional or not fully guaranteed, potentially subject to certain market conditions or other factors. Hard Protection' refers to a capital guarantee that is firm and unconditional What mechanism do firms use to provide the capital protection in protected bonds? Firms use zero-coupon bonds . What is a 'zero-coupon bond' and how does it relate to the capital protection in protected bonds? A zero-coupon bond is purchased at a discount and matures at face value. It is used to ensure that a portion of the investor's principal (e.g., 90%) is available at the end of the term to provide the capital protection. How would an investor’s returns be affected if the linked index drops over the investment period in a protected bond? If the index drops, the investor will receive the protected portion of their principal (e.g., 90%). They may lose a small percentage of their initial investment but will not lose more than the unprotected portion. With guaranteed equity bonds the portection is typical 100% so they wont lose anything but there returns and cap tend to be lower

Answer 82

Bonds are only assessed for tax at chargeable events, so it reduces the administrative burden on trustees. Generally, the internal taxation of a bond (corporation tax) is lower than trust taxation which can be as high as 45%. When a chargeable event occurs on a bond held in trust, it is taxed based on: First the settlor if alive and resident in the UK at the time of the chargeable event. OR... If the settlor is dead or a non UK resident at time of chargeable event, it is the UK trustees, at trust tax rates

Answer 83

Guaranteed/Protected Equity Bonds: What is the return structure for guaranteed/protected equity bonds? The return is the original capital plus a percentage of the rise in a selected, well-known index, such as the FTSE 100. How do protected bonds lock in growth? Protected bonds lock in growth at pre-set dates. What is the range of protection available for guaranteed/protected equity bonds? The protection ranges from 95% to 100%. What is the difference between Hard protection and Soft protection in these bonds? 100% protection is known as Hard protection, whereas less than 100% protection is known as Soft protection. Basically guaranteed or not guaranteed Guaranteed Income Bonds: What type of contract is a guaranteed income bond? It is a single premium contract that provides guaranteed income for a specified term. What is the typical term for guaranteed income bonds? The term is typically up to five years. What happens to the investor's capital upon maturity of a guaranteed income bond? The investor's capital is returned upon maturity. Why are guaranteed income bonds attractive to basic rate taxpayers? They are attractive because there is no further tax liability on the income received for BRTP. Guaranteed Growth Bonds: How are guaranteed growth bonds similar to guaranteed income bonds? Both are single premium investments, but guaranteed growth bonds do not pay regular income; instead, they provide a guaranteed capital return at the end of a set term. What do guaranteed growth bonds provide at the end of a set term? They provide a guaranteed capital return. How are returns from guaranteed growth bonds treated in terms of capital gains tax and basic rate income tax? Returns are free of capital gains tax and basic rate income tax, as these taxes are accounted for within the fund. What additional tax liability might higher and additional rate taxpayers face with these bonds? They might face further income tax liability if they are higher or additional rate taxpayers in the year of maturity. High Income Bonds: What level of income do high income bonds provide and what are their capital guarantees? They provide high levels of income but do not have capital guarantees. On what does the return of high income bonds depend? The return depends on the performance of the chosen stock market index. What happens to the original capital if the chosen index meets or does not meet the pre-set performance level? If the index meets the pre-set performance level, the original capital is returned in full. Otherwise, less than the original capital may be returned. Why are most high income bonds now issued as offshore bonds? They are issued as offshore bonds due to challenges by HMRC over tax treatment. NOTE: All of these are UK based

Answer 84

Unit Linked Bonds: What is the term structure for unit linked bonds? There is no set term for unit linked bonds. How can income be taken from unit linked bonds? Income can be taken tax-deferred, following the rule that allows taking 5% of the original capital per year like most bonds where income can be taken What options do investors have for encashment with unit linked bonds? Investors can partially or totally encash their bonds at any time, with units being cashed in to provide withdrawals. How do unit linked bonds provide flexibility compared to guaranteed bonds? Unit linked bonds are more flexible as they allow for partial or total encashment and have no set term. With-Profit Bonds: How do with-profit bonds determine investment performance? Performance is determined via bonus additions, including annual (reversionary) and terminal bonuses. What is the purpose of the Market Value Reducer (MVR) in with-profit bonds? The MVR protects remaining investors if bond holders switch or encash funds early by reducing the amount paid out to reflect the current market value of underlying assets. MVR is controversial and can make with profit bond returns look unclear Under what circumstances can the MVR be applied to with-profit bonds? The MVR can be applied if the bond holder switches or encashes funds early. Is the MVR applied on the death of the bondholder? No, the MVR is not usually applied on death. NOTE: All of these are UK based

Answer 85

Offshore bonds are exactly the same as onshore bonds, except for tax treatment.

Answer 86

No, offshore bonds are not subject to any reporting requirements/rules It is offshore 'funds' (collective investments) that can be 'reporting or non-reporting' Do not confuse the two together

Answer 87

The fund itself has very little taxation, which improves growth From the individuals perspective because no tax has been paid by the fund already they pay tax at their highest marginal rate on any growth This obvs differs with onshore bonds where 20% is already deemed to have been paid internally (but this obvs affects the investment growth) SEE BOTH IMAGES The Personal Savings Allowance can be used for offshore bonds as it can for onshore bonds. In examples 6.27 and 6.28, both Gordon and Nishma were basic rate taxpayers. but the Personal Savings Allowance was ingored. If it was taken into account Nishma would have a higher gain than Gordan This shows that whether you choose onshore or offshore it is down to personal circumstances

Answer 88

The split in gain can be in any proportion required, as long as notification is given. If the investor does not indicate the split required, HMRC will view this as automatically being 50:50.

Answer 89

Unit linked bonds, like other bonds, have the 5% rule. Unit bonds however do allow partial or total encashment and have no set term unlike other bonds. Dont confuse these two things. if someone encashed more than 5% in a year a tax charge will be payable but with unit linked bonds you do have the option to do this with no issue which is why they are seen as being flexible

Answer 90

Part surrenders and surrenders of segmented bond in the wrong way can lead to large chargeable gains. In the event where a gain is 'wholly disproportionate' due to a part/full surrender, an investor can ask for this to be reviewed by HMRC within 4 years to have it revoked

Answer 91

It is an alternative for endowment policy owners The only way an endowment is surrendered is to cash it in with the life company that issued it but this could be an issue if their is a MVR at the time (if a with profits policy) or the policy may be receiving a large terminal bonus which would be lost due to the surrender The Traded endowment policy market allows the original owner to permanently assign their policy (Note: In all but name) to someone else, in return for a cash payment that will probably be higher than the surrender value. The bond remains in the policyholder's name (life assured) but the benefits are assigned to the buyer

Answer 92

For friendly society investment bonds the max that can be invested without paying tax is/that is tax exempt is: -£270 if annual premium OR -£300 if premiums are paid monthly (£25 a month)... These limits apply to to total amount investment, not per policy They can obvs invest more than that but it wont be exempt from tax Also with friendly society investment bonds there is no internal tax and they are FSCS protected Obs these investments cater for low level investors because you cant invest much without it being subject to tax

Answer 93

NOTE: An ETF is just one type of Exchange Traded Product. ETFs specifically track index's but there are others with different names that track other stuff such as commodities for example. Exchange traded funds (ETFs) work in the same way as tracker funds where it tracks a chosen index; however it is traded on the stock market which tracker funds are not ETFs match the performance of the index by either holding the actual assets within the index or using derivatives to replicate the index's performance (known as synthetic funds). Shares in ETFs are listed and traded on major stock markets around the globe, just like company shares. Any index can be tracked by ETFs, such as the FTSE 100 ETFs have very competitive cost structures compared to other investment funds, often being cheaper due to lower management fees OF 0.5% and no stamp duty is payable in the purchase of the ETF's shares!!! Synthetic funds are ETFs that use derivatives such as swaps to replicate the index's performance without holding the actual assets. ETF's can be held in ISAs

Answer 94

No stamp duty is payable when an investors purchases an ETF's shares making them very competitive

Answer 95

No Any fund that is replicating an index can experience tracking errors synthetic funds have more tracking errors than funds that hold the assets

Answer 96

Work in the same way as Exchange Traded Funds but track commodities It is a type of exchange traded product

Answer 97

Work in the same way as Exchange Traded Funds but they track a currency It is a type of exchange traded product (etp) This type of etp has the highest level of counterparty risk because it uses fixed-interest security (loan stock specifically) issued by banks, in order to track the currency. because this is not full replication this means they are always synthetic

Answer 98

Exchange traded notes, Exchange traded commodities and Exchange Traded Funds are all types of Exchange traded product. They just track different things either synthetically through derivatives, or by owning and replicating the assets themselves ETF track index's, ETN track currency & ETC track commodities

Answer 99

One option for indirect property investment is buying shares in listed property companies * Property firms own and build many properties across the UK Risks = Housing companies can have periods of losses when they build houses, then gains as they sell them so short term investing may not be viable Even though the property company may own 100s of properties which increases diversification, the investor ultimately only has shares in that single property company which reduces diversification

Answer 100

It is where you invest in a unit trust or investment trust, that have bought shares in a property company All the same respective drawbacks of investment trusts and unit trusts apply Why it doesnt suit unit trusts - Many property companies build a clause into their rules stating that they have a right to restrict investors' access to their money for a period of up to six months so this removes all flexibility that unit trusts have See image for some differences between property unit trusts and property investment trusts.

Answer 101

'Insurance company property bonds' are investment bonds that invest in property All same features that apply to investment bonds apply here such as tax treatment Just remember for this: The value of the units is directly linked to the value of the property held.

Answer 102

They are unauthorised investment trusts, specifically to allow them to hold 100% of their assets directly in property, rather than property company shares.

Answer 103

They are a type of investment trust for indirect property ownership It is separated into two business areas. A part that is ring faced specifically to 'property letting' (this makes up most of the RIET) and another part that deals with all other business ventures such as property management services. Both elements have different tax treatment (SEE IMAGE) The ring fenced element - The property letting part of the REIT. This must be where most of the REITs income comes from and makes up most of the RIET. At least 75% of the company’s total gross profit and 75% of the companies total assets must be held within this element. For investors income from this part is paid 20% net of income tax (reclaimable ONLY for non tax payers) A non ring fenced element - Deals with any other activity outside of the property letting side of the business. For example, property management services. For investors income from this part is treated as dividend payments

Answer 104

REITS are a type of investment trust for indirect property ownership The following rules must be satisfied in order to be classed as a REIT At least 75% of total gross profit and at least 75% of assets must be from property letting Interest on borrowing must be at least 125% covered by rental profits (they cannot borrow heavily). At least 90% of the profits from the 'property letting' element (income not gains) must be distributed within 12 months of the end of any accounting period. Property development is allowable but must be intended to generate future income. If it isn't, then it will be classified as non-ring-fenced activity and liable to corporation tax.

Answer 105

YES and True

Answer 106

Only OEICs can qualify as PAIF NOT FINISHED READ OVER 6.10.6

Answer 107

Private Equity Schemes They are all deemed high risk because of their investments in often smaller, unlisted businesses. They all have very tax breaks/reliefs available to them. (this is the governments way of giving back in return for the high risk they present) The government created these schemes to provide a way of helping small, higher-risk, unquoted UK companies to raise capital to fund their growth and expansion. (ie entrepreneurship)

Answer 108

Answer: They are both tax efficient ways to buy shares in a single company, often one that you will have an active part in once you have invested. Dragons Den is an EIS Answer: VCTs are the 'collective investment' of private equity. It is where your money is invested into several companies. VCT is lower risk than the above.

Answer 109

Qualifying individuals: Someone (either resident or not) who pays UK income tax and not connected with the company when subscribing to the shares Eligible shares: Ordinary shares that are not redeemable for at least 3 years. Qualifying company: Unlisted, fewer than 250 employees, no more than 5 million in venture capital raised in last 12 months, gross assets less than £15 million immediately before share issue and £16 million immediately afterwards. Qualifying business activity: Established in the UK and classed as a qualifying trade

Answer 110

1) Someone who pays UK income tax and not connected with the company when purchasing the shares. 2) Yes 3) They can be a UK resident or a non-UK resident but must pay UK income tax. 4) New ordinary shares that are not redeemable for at least three years. 5) Unlisted, fewer than 250 employees, no more than 5 million in venture capital raised in last 12 months, gross assets less than £15 million immediately before share issue and £16 million immediately afterwards. 7) Yes

Answer 111

The major benefit of this type of investment is the tax relief that is available: 30% Income tax relief on investments up to a max of £1,000,000 or £2,000,000 in 'knowledge-intensive companies' (£300,000 and £600,000 respectively) Relief is taken back if the shares she buys are disposed of within 3 years, except to a spouse or on death.

Answer 112

See image to know what classes a company as knowledge intensive For ordinary qualifying EIS investments you get 30% Income tax relief on investments up to a max of £1,000,000 For qualifying EIS investments in 'knowledge-intensive companies' you get 30% income tax relief up to £2,000,000!!!

Answer 113

For knowledge intensive companies the lifetime limit to qualify under the scheme is £20 million. The 5 mill rules in a year is the same

Answer 114

In this example, no income tax relief would be given if Grace were to buy more than 30% of the EIS capital issued because this would be higher than her tax bill of £150000 and relief is only given equal to the tax bill up to a max of £300k or £600k (if its a knowledge intensive company)

Answer 115

SEE EXAMPLE Note: The reinvestment (into an EIS) must take place in the period beginning 1 year before, and ending 3 years after, the disposal giving rise to the gain (the sale of his BP shares). CGT will eventually be payable, and at the rate of CGT at that time, not the rate now.

Answer 116

Unquoted companies = Unlisted companies = companies NOT listed on the stock exchange meaning their shares can only be bought privately

Answer 117

Young or expanding businesses fail often Shares must be kept for 3 years in order to retain tax relief. Shares of EIS companies can be difficult to sell. Tax relief is only given on new issues of shares, not shares traded on the secondary market so people will not want to buy the shares as they gain no tax relief This making the shares difficult to sell and therefore illiquid.

Answer 118

It means the company has offered its shares to the public for the first time though an 'initial public offering'

Answer 119

Shares must be kept for 3 years in order to retain tax relief (tax is paid back if disposed of within 3 years) AND Shares of EIS companies can be difficult to sell because the tax relief is only given on new issues of shares meaning most people will not want to buy the shares from the original owner as they receive no tax relief even though the shares will still be high risk

Answer 120

It is the same as EIS but it is for smaller companies, such as start-ups or brand new companies but it offers higher tax breaks for the higher risk involved

Answer 121

For SEED EIS 50% Income tax on the cost of the shares with a maximum annual investment of £100,000. Qualifying company rules: Maximum employees is 25 (not 250) Less than 3 years old with gross assets of less than £350,000. No banks, property development companies or renewable energy companies are allowed under the SEIS

Answer 122

Investing in an EIS or a SEIS is a viable option if you know, or feel you know, which companies are likely to succeed, but what if you don't have that specialised knowledge but still want access to a speculative investment with tax incentives? VCTs may be the answer.

Answer 123

A VCT is a limited company, run by a fund manager that invests in small, higher-risk companies that are unlisted. Where it differs to EIS and SEIS is that a VCT spreads its investments over several companies. EIS and SEIS is only one qualifying company TO HELP REMEBER: VCT are similar to investment trusts except it is for high risk companies and it gets great tax breaks

Answer 124

30% Income tax relief (as a tax reducer) up to £200,000 in new issues of ordinary shares in VCTs. Any dividends received are tax exempt You get immediate CGT exemptions on any growth in the VCT without the need to wait 3 years

Answer 125

True for both statements

Answer 126

Rules the VCT must meet: VCT must use ALL money within 2 years. The VCT cannot retain more than 15% of the income it generates At least 80% of its investments, by value, must be newly issued shares of qualifying unlisted companies One company cannot have more than 15% of the VCT's total investments Any investment in any company must contain at least 10% ordinary shares. RULES FOR THE COMPANY: Less than 250 employees (or 500 for knowledge intensive companies). No more than £5 million raised under VCTs in past 12 months (or £10 million for knowledge intensive companies).

Answer 127

In both schemes, tax relief is only given on the original issue of shares and not on traded shares. Therefore, no one will want to buy the shares from the original owner as they are high risk with no tax benefits This makes shares in both schemes more illiquid, and therefore even higher risk

Answer 128

shares in VCT do not qualify for business relief EIS/SEIS company shares do qualify for BR if shares are held for 2 years

Answer 129

What is the annual investment limit for EIS? - £1,000,000 or £2,000,000 (for knowledge-intensive companies). How does the annual investment limit for SEIS compare to that of a VCT? - Both SEIS and VCT have an annual investment limit of £200,000.

Answer 130

True, So, when someone states they have invested into a stocks and share ISA, it is more than likely they have invested into a Unit Trust or OEIC that is within an ISA wrapper to shield it from tax.

Answer 131

aged 18+ to invest in a stocks and shares ISA. aged 18+ to invest in an innovative finance ISA. aged 16+ to invest in a Cash ISA.

Answer 132

they cannot be put in trust.

Answer 133

Available to the surviving spouse or civil partner of a deceased ISA-holder. Where the value of the deceased ISA-holder's ISAs can be added to the recipient's current standard annual subscription of £20,000. This additional allowance must be used within 3 years of death

Answer 134

MAIN BIT TO REMEMBER: the APS value used is the value of the ISA when the APS is activated, which can be after death if the accounts remain open, unless the value of the ISA falls following death or it is used for funeral costs, which is where the value of the ISA on the date of death is used instead. see examples

Answer 135

An ISA wrapped around a deposit-based investment RULES: those aged 16+ can invest.* (* = the interest will be deemed to be that of the parents if it is more than £100 per annum.) maximum annual limit is £20,000. no minimum amount or terms apply. limits are per tax year, not calendar year. limits are contribution-based (so any withdrawals can be topped-up to the same amount in the current tax year, if it's a flexible ISA). withdrawals are available at any time without the loss of tax-free interest.

Answer 136

Cash Authorised collective funds. Shares listed on recognised stock exchanges around the world, including AIM. Corporate bonds listed on recognised stock exchanges around the world. Gilts from EEA countries. Individually-owned life assurance investments. Units in a stakeholder medium term product.

Answer 137

18 to 40 25% annual government bonus on investment is paid until age 50

Answer 138

Self-select ISA's: Where the investors select the shares or collective investments, and then an account manager carries out the investing. (for knowledgeable investors) Investment trust ISAs: Investments trusts with no tax Managed stockbroker ISAs: A portfolio of equities that is actively traded by a stockbroker to maximise returns. Corporate ISAs: Investments made into the shares of one sole company. Derivative-based ISA: Derivatives are used to guarantee a return at the end of the 3 to 5 year investment period

Answer 139

CTF can be transferred into a Junior ISA but in must be in full A child cannot have a CTF and a JISA

Answer 140

The major differences between the two, are: The JISA has no government contribution and never has but CTF's do. (CTF's gave parents 'vouchers' to choose where they wanted it paid in) The contributions period on a JISA is 'per tax year' but, for CTFs it’s 'per birth year'. Beside this they are very similar: A £9,000 limit Full access to the money is given at age 18.

Answer 141

Annuities are contracts that pay a set amount (the annuity) every year while the annuitant is alive. Annuity contracts end on death

Answer 142

Income is split into a 'capital' and 'interest' element where the capital element is a return of capital of the lump sum paid and the interest is the additional amount (where the actual benefit comes from) Capital element is tax free (it would be stupid of this wasn't the case) and an interest element (taxed as savings income) A 'lifetime annuity' is used in pension funds

Answer 143

A derivative is a 'Financial contracts whose value is derived from the value of an underlying asset.' A derivative itself is the right to buy or sell the asset. This right can be sold to others and the value of this right will fall/increase depending on the value of the asset (look at example). In this example, your right to buy the car had a value attached to it. You could trade it to someone else. The same can be said of derivatives. If you buy a right to buy or sell an asset, then you can sell that right to someone else for a profit (or loss).

Answer 144

They are 2 different types of derivative USES: Typically, futures are used for hard commodities such as oil, gas, cocoa etc. and options are used in financial planning.

Answer 145

They can be: Traded on a recognised stock exchange. Known as 'exchange traded' OR created bespoke for a specific customers and sold directly to them by banks and others. Known as 'over the counter' (OTC) IE, The contract (derivative) is signed between two parties, either directly or via an exchange.

Answer 146

A type of derivative It is a legally binding contract (obligation) to buy or sell an asset on a set future date, at a set future price, which is agreed when the contract is created. The buyer: The price of the commodity to rise from when the contract is established so on the day that the contract is due, they can buy the commodity at the pre-agreed price and make a profit. Known as taking a 'long' view of the market. The seller: The commodity price falls after the contract is established so when the contract becomes due, they can sell the commodity at the pre-agreed price and make a profit. Known as taking a 'short' view of the market. The seller is known as the short side and the buyer is known as the long side (due to what they would like to happen as explained above)

Answer 147

A future/option in an open position: The rights of the future/option are still ongoing (ie, the contract hasn't been exercised or hasn't expired) A future/option in an closed position: The contract has been finalised (ie, it has been exercised or has expired)

Answer 148

Both the buyer and seller provide a deposit called an 'initial margin' when the contract made This initial margin is given to the London Clearing House (a 3rd party) whose job it is to ensure the contract is honoured At the expiry of the contract, each side would have already been credited with their profit or debited their loss. They then get back their initial margin and the deal is concluded.

Answer 149

A type of derivative Gives one party (the option holder) the right (not the obligation) to perform a specified transaction with another party (the option issuer or option writer) according to specified terms. Ie, the buyer pays a premium to the seller for the right to buy or sell something owned by the seller at a set price in the future. They don’t have to exercise this right if they don’t want to. An option can either be a 'call option' or a 'put option'

Answer 150

The option holder = Who bought the option The option issuer/option writer = Who sells the option and originally owns the asset In this example, the option holder is Jason and the option issuer is ABC bank

Answer 151

Call option: Gives the Optionholder the right to buy the underlying asset from the seller. The seller must sell the asset when the contract is exercised. A put option: Gives the buyer of the option the right to sell the underlying asset from the seller. The seller must buy the asset when the contract is exercised. The seller (the option issuer/writer) of the option is obliged to meet the obligation placed upon them by the buyer; their obligation depending on whether it is a call or a put option In the example, Jason bought a call option because he has the right to buy the shares

Answer 152

As mentioned both parties when creating the contract pay a deposit called an 'initial margin'. This is the margin payment and it acts as a collateral in case either side doesn't honour the contract. FURTHER EXPLAINED FOR UNDERSTANDING: The margin payments are put together into a 'slush fund' and the LCH (the third party involved in futures) monitors the price of the underlying asset whose price will inevitably move each day. They will then adjust the value of each side's margin daily so as one side makes a profit, they get more margin and the other side makes a loss, they will get less margin. if asset goes down the seller makes a profit but if it goes up the buyer makes a profit. The idea behind this is that more collateral will sit with the side destined to make a profit as they are far less likely to fail their obligations if they are in line for a bargain. This is known as the variation margin.

Answer 153

This is because with call options to be ‘in the money’ the option holder wants the asset’s market price to be higher than the strike price (so they can buy the asset less than market value) And with put options to be ‘in the money’, the option holder wants the assets market price to be less than the strike price (so they can sell the asset higher than market price) Remember: If a put option is 'out of the money' it means if it was a call option it would be 'in the money' and vice versa. they are the opposites in this respect

Answer 154

In the money = The option holder will make profit if they exercise at the option price (the strike price/the pre agreed price) out of the money = The option holder will lose money if they exercise the option price At the money = The option holder will gain or lose nothing if they exercise the option price Remember: If a put option is out if the money it means that if it was a call option it would be in the money and vice versa. they are the opposites in this respect

Answer 155

Exercise it = Where the option holder decides to use option and buy/sell the asset at option price Sell it = Where the option holder trades it on an exchange. The more 'in the money' they are, the better, as it means the option will have higher intrinsic value and therefore they can sell it for more. The opposite is true Let it expire worthless. Where the investor cuts their losses and they lose their premium

Answer 156

Time value The buyer will look at the time left on the option and add or take away value from there This is speculative from the buyers perspective as their assessment is based on the underlying's asset price and this can never be fully known for future dates, especially shares Generally, the longer the period left on the option, the greater the chance that it will end up 'in the money' which means higher value when trading

Answer 157

Hedging is trying to protect your position against future adverse market movements. Hedging is a defensive strategy Speculation is to try and profit by correctly forecasting future market movements. Speculation is a positive strategy COTEXT: The phrase 'I’m hedging my bets' comes from this concept.

Answer 158

In terms of trading, you can enter into a future or options contract by buying them, i.e. someone else has already decided to sell one, or you can sell one yourself and seek a buyer. (exchange traded) You can also buy directly (over the counter)

Answer 159

Writing an option is just selling the option (trading). It doesnt matter if it is a call or a put option.

Answer 160

Their premium For context: For their premium, the buyer of a call option (the right to buy) gets unlimited growth potential. The more it rises, the better, as you can 'buy low'. For their premium, the buyer of a put option (the right to sell) benefits most if the asset falls to zero. The more it drops the better value you are getting from the option, as you can dispose of an asset that would otherwise have a zero value, at a high price, i.e. 'sell high'. Because of the above, sellers of options face almost unlimited risk for the premium they receive. Selling is riskier than buying option especially with call options.

Answer 161

The biggest risk would have been if Marcus's fund did not own XTA PLC shares. (SEE RIGHT EXAMPLE)

Answer 162

Profits from both futures and options are usually chargeable to CGT. The exception is individuals gaining by derivative profits from fixed-interest securities, which are CGT free.

Answer 163

Hedge funds are pooled investments, whereby a number of investors entrust their money to a fund manager, who invests in various traded securities. They are very high risk and are expensive. They are often found in the Caymen islands too They seek to: hedge against market downturns. invest in currencies or shares they believe are trading cheaply. use derivatives, arbitrage and gearing to move money quickly, cheaply and easily. The 4 strategies are: SEE IMAGE

Answer 164

Absolute return funds try to make a profit regardless of market conditions. They work better in adverse times Fund managers' skills are tested to their limit here They use derivatives and all the asset classes with a focus on gaining growth in adverse times. In stable times they tend not to do well

Answer 165

A structure product does the following: Provider takes investors money and links it to the FTSE 100 index. If it goes down, the provider returns the money to the investor. If it goes up, the investor receives the growth If it goes up a lot, the provider will keep some back for themselves and return some of the growth to the investor Investors seeking capital protection yet an exposure to the stock-market often use structured products They are structured with two component parts: A zero-coupon bond: provides the capital guarantee as the return is in the form of a capital return (with no income). A call option (gives the fund the option to buy at roughly the price at investment, and will provide the growth if the index rises.)

Answer 166

These are savings and investments aimed at complying with Islamic law. Under Islamic law you cannot: Pay or receive interest (Riba). Invest in anything against Muslim values e.g. alcohol, gambling companies, pork products, tobacco.

Answer 167

Because it is deemed as gambling

Answer 168

People tend to directly own their own house and own shares, have bank accounts and occasionally hold GILTS. Indirectly they have stocks and shares ISAs, with-profit bonds and maybe some structured products.

Answer 169

Works in same way as normal fund of funds but each fund is a different hedgefund, so it offer greater diversity.

Answer 170

Answer: The Investment Association Standard & Poor’s are a credit-rating agency that would measure the performance of companies. The FTSE indices panel doesn’t exist. QIS rules are all to do with the classification of retail or non-retail funds.

Answer 171

Firm ABC Ltd, who exclude tobacco companies from their portfolio The thing to look for with negative screening is exclusions or avoidance. The others are examples of either positive or neutral screening.

Answer 172

His investment is a distribution bond A distribution bond is the only type of life assurance bond that splits interest and capital. With the others, income and capital growth are simply brought together to show the value of the bond.

Answer 173

£540 With annual contributions, they can invest £270 each i.e. £540. If they were doing monthly contributions, then they would total £300 each (£600 between them)

Answer 174

£84.00 Explanation: As an additional rate taxpayer, Jay would pay 39.35% of the distribution. £1,500 x 39.35% = £590.25. As a higher rate taxpayer, Jasmine would pay 33.75% of the distribution. £1,500 x 33.75% = £506.25. £590.25 - £506.25 = £84. Alternatively, a quicker method is to calculate the difference in their respective tax rates: £1500 x 5.6% (39.35 – 33.75) = £84.

Answer 175

American-style options are the most popular style used in the UK. The options available are listed in answers A – C. They cannot be extended, as they have a fixed expiry date FOR CONTEXT: European-style options can only be exercised at expiry i.e. on a particular date in the future. American-style options can be exercised at any time up to expiry. Rather confusingly, most UK options are in the American style

Answer 176

European-style options can only be exercised at expiry i.e. on a particular date in the future. American-style options can be exercised at any time up to expiry. Rather confusingly, most UK options are in the American style

Answer 177

Thomas will pay £2,000 more than Graham Reporting funds pay CGT on gains but non-reporting, whilst calculated on CGT principles, pay income tax. Therefore, Graham will pay £10,000 x 20% = £2,000 and Thomas will pay £10,000 x 40% = £4,000.

Answer 178

default risk Interest rate risk could affect either of them, and you could not say that it is more likely to occur in smaller firms. The same applies with inflation. Counterparty risk is the third-party risk generally associated with structured bonds. Smaller, unlisted companies are more likely to default, so are more susceptible to default risk.

Answer 179

The Trustee Not to confuse unit trusts with OEICs is the key here. The depository would be the correct answer to a similar OEIC question. A trust is not a company so has no directors and the fund manager, whilst having responsibility for the assets within his remit, answers to the trustees, who are ultimately responsible.

Answer 180

Hedging Hedging is the only listed event that would diversify her risk. Arbitrage is the simultaneous buying and selling of securities, currency, or commodities in different markets or in derivative forms in order to take advantage of differing prices for the same asset. Gearing is a fund borrowing to invest. Smoothing is a term familiar to with profit-bond holders that looks to reduce the ups and downs of the stock market.

Answer 181

An investment trust A with-profit bond cannot borrow, nor can most pension schemes. Even those pension schemes that can borrow have stringent rules attached. OEICs can borrow in exceptional circumstances and only over short terms. Of the options listed, the investment trust is certainly the one with the most scope and ability.

Answer 182

ANSWER: Paid gross, with a potential 33.75% income tax liability to pay on £2,000 The distribution from an equity fund is treated as a dividend for tax purposes and are paid gross. Each individual has a £2,000 dividend allowance and if this is exceeded, a higher rate taxpayer would pay income tax at 33.75%.

Answer 183

the trust is priced above its Net Asset Value If it was below its NAV, it would be trading at a discount. It has nothing to do with charges or gearing.

Answer 184

Each individual has a £2,000 dividend allowance

Answer 185

a zero-coupon bond to provide the capital guarantee and a call option to provide the investment return The zero-coupon bond provides the guarantee. The call option gives the fund the option to buy at roughly the price at investment, and will provide the growth if the index rises.

Answer 186

ANSWER: trade the funds' assets to try and make a profit All the other options are duties of the Trustees.

Answer 187

It is an investment company with variable capital & It is operated by a board of directors A unit trust is held in a trust. A fixed capital structure and trading on the stock exchange relates to investment trusts.

Answer 188

B - E are all correct She will have no influence on the fund content or the shares that the fund chooses, although she can choose the most appropriate fund for her needs so A is not correct

Answer 189

A & D are correct To be qualifying, the sum assured must be at least 75% of the premiums paid, not 70% and she would have forsaken the qualifying status in making a payment more than double that of any other.

Answer 190

A & B are correct only ETFs can also be fully replicating, in fact, many are. No Stamp Duty is paid on ETFs and CGT is potentially payable on both.

Answer 191

A B & D are correct C is incorrect Explanations: Hedge fund gains are liable to CGT. They add risk, but do help diversify with their somewhat off-the-wall approaches to fund management.

Answer 192

A & C are correct An oversight, or a great boost for would-be adults (who knows) but it is possible for a 16-year-old to do both a JISA and Cash ISA. The increase in limits has made this a valuable savings tool for 16 -18 year-olds. IF YOU TAKE THE EXAM AFTER 31ST AUGUST BE AWARE THAT THIS IS DIFFERENT

Answer 193

C & D are correct An offshore bond has no tax deducted at source, therefore Mia, when calculating her own tax liabilities, is liable for basic rate tax. Top-slicing would be available if the gain moves her from the basic rate into a higher rate of tax. An offshore bond does have slight tax advantages for a UK taxpayer, but these are limited to the gross roll up experienced by the bond, due to having no internal taxation.

READ 6.10.6 Chapter 6 – (22 exam questions. 15 standard, 7 multi) Characteristics Risks Behaviours And Tax Considerations Of Investment Products Flashcards

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