[Set 2] Module 1 - Fundamentals of Investment

Question 1

DURATION is the measure of a bond’s price sensitivity to interest rate changes. It is also the weighted average of a bond’s cash flow.

Answer 1

True

Question 2

Coupon rates do not change until maturity date

Answer 2

True

Question 3

EQUITY is an investment that gives periodic fixed interest payment.

Answer 3

False

Question 4

Stocks and Bonds usually have an inverse relationship.

Answer 4

True

Question 5

The higher the duration of the fund, the LESS RISKY but with the higher return.

Answer 5

False

Question 6

All of these are characteristics of stocks except:

a. Gains primarily from stock appreciation although some stock may give regular dividends
b. High long term average returns but very high year to year volatility
c. Very unpredictable cash flows
d. Primarily for capital growth
e. None of the above

Answer 6

e. None of the above

Question 7

All of the items below are true of derivatives except:

a. Derive their value from a value of another security
b. May be used by a UITF for Income generation
c. Primarily used by UITF to minimize NAVPU volatility
d. None of the above
e. All of the above

Answer 7

b. May be used by a UITF for Income generation

Question 8

___________ is the excess return per unit of risk:

a. Sharpe Ratio
b. Information Ratio
c. Volatility
d. Standard deviation
e. Tracking error

Answer 8

a. Sharpe Ratio

Question 9

This refers to the risk that an individual or entity will experience losses due to factors that affect the overall performance of investments in financial markets

a. Market Risk
b. Reinvestment Risk
c. Currency Risk
d. Credit Risk

Answer 9

a. Market Risk

Question 10

Underlying investments for UITFs can be bought from primary or secondary market.

Answer 10

True

Question 11

The additional amount paid for a bond that is traded at a price that is higher than its par value

a. Premium
b. Discount
c. Yield to Maturity (YTM)
d. Maturity Value
e. None of the above

Answer 11

a. Premium

Question 12

What are the major types of asset classes?

a. Money market
b. Fixed Income
c. Equities
d. Alternative investments
e. All of the above

Answer 12

e. All of the above

Question 13

Which investment is subject to duration risk?

a. Equities
b. Time Deposit
c. Foreign currency
d. Fixed income securities
e. All of the above

Answer 13

d. Fixed income securities

Question 14

What is type of fund tries to replicate the movement and return of a benchmark, also known as index fund?

a. Passive fund
b. Active fund
c. Money market fund

Answer 14

a. Passive fund

Question 15

Rank the following from highest to lowest according to potential returns:

I. Equities
II. Bonds
III. Balanced
IV. Money Market

a. IV,III,II,I
b. I,III,II,IV
c. IV,II,III,I
d. IV,III,I,II

Answer 15

b. I,III,II,IV

Question 16

Which investment will suffer the biggest “loss” for falling interest rates?

a. 360D Treasury Bill
b. 3Y RTB
c. 7Y FXTN
d. 10Y Treasury Bond

Answer 16

a. 360D Treasury Bill

Question 17

What is the importance of a benchmark?

a. It measures the rate of change in bond prices
b. It measures the performance of an investment relative to a broad market index
c. It measures the risk present in an investment
d. None of the above

Answer 17

b. It measures the performance of an investment relative to a broad market index

Question 18

What is the basic principle of diversification?

a. Investing in a single product
b. Investing in a combination of products to achieve higher risk
c. Investing in a combination of products to achieve higher potential returns

Answer 18

c. Investing in a combination of products to achieve higher potential returns

Question 19

Among fixed income securities, this instrument is the most liquid in the Philippine domestic market.

a. Promissory note
b. Government Securities
c. Corporate Bonds
d. All
e. None

Answer 19

b. Government Securities

Question 20

Which asset class is likely to deliver “High-average returns in the long run but very high year to year volatility?

a. Money Market
b. Fixed Income
c. Stocks
d. Real Property Investments
e. All of the above

Answer 20

c. Stocks

Question 21

The purpose of diversification is to reduce the standard deviation (risk) of an investment portfolio by investing in uncorrelated securities. Which of the following statement/s describes diversification in simple terms.

a. A portfolio with assets that do not behave in similar manner to the same economic event
b. Equities portfolio investing across different sectors and market capitalization (small, mid, and large)
c. A bond portfolio can have varying maturities, credit qualities and durations.
d. All of the above
e. None of the above

Answer 21

d. All of the above

Question 22

The increase in the value of an investment compared to its purchase price.

a. Stock Rights Offering
b. Dividend Yield
c. Inflation
d. Capital Gain
e. None of the above

Answer 22

d. Capital Gain

Question 23

In case a company is dissolved, which of the following would have the last claim on the company’s assets?

a. Employees
b. Preferred Share Holders
c. Common Share Holders
d. Debtors
e. None of the above

Answer 23

c. Common Share Holders

Question 24

Who among the investors listed below would generally have the highest liquidity needs?

a. Those with steady income from employment
b. Those with regular dual income earned by both spouses
c. Those with multiple income sources such as investments, salary, business, and professors.
d. Those with substantial investments in multiple Trust entities across different currencies and asset classes
e. Those living on income from investments.

Answer 24

e. Those living on income from investments.

Question 25

Which asset class would likely be “Primarily used for servicing liquidity”? a. Money Market b. Fixed Income c. Stocks d. Real Property Investments e. All of the Above

Answer 25

a. Money Market

Question 26

What is the risk management technique that mixes a wide variety of investments within a portfolio? a. Concentration b. Diversification c. Investment Evaluation d. Counterparty Accreditation e. Cost Averaging

Answer 26

b. Diversification

Question 27

Trustees may include indicative future yields to client provided a disclosure that these returns are based on past performance.

Answer 27

True

Question 28

This type of client is willing to accept higher risks involving volatility of returns and even possible loss of investment in return for potential higher long-term results. a. Conservative b. Moderate c. Aggressive

Answer 28

c. Aggressive

Question 29

Which of the following best describes diversification? a. For Fixed Income instruments, invested in various tenors and currencies b. For equity securities, invested in different sectors c. For multi-asset funds, invested in equities and fixed income d. All of the above e. None of the above

Answer 29

d. All of the above

Question 30

This strategy involves investing the same fixed amount in the same investment over a period of time. a. Diversification b. Life Cycle Based Investing c. Cost Averaging d. Goals Based Investing e. Cashflow/Horizon Matching

Answer 30

c. Cost Averaging

Question 31

EQUITY is a type of security that signifies ownership in a corporation and represents a claim on the corporation’s assets and earnings.

Answer 31

True

Question 32

Treasury bills is an example of Zero Coupon Bond or Zero Bond.

Answer 32

True

Question 33

Equity has NO DURATION.

Answer 33

True

Question 34

The higher the interest rates, the higher the risk exposure. Therefore, the lower the return.

Answer 34

False

Question 35

Which of the investments below has the lowest risk exposure?​ a. Equities​ b. Bonds​ c. Real Estate​ d. Time Deposits ​ e. Jewelries

Answer 35

d. Time Deposits ​

Question 36

This is the possibility for an investor to experience losses due to changes in interest rates. a. Interest rate Risk​ b. Foreign Exchange Risk​ c. Market Risk​ d. Country Risk​ e. Liquidity Risk

Answer 36

a. Interest rate Risk​

Question 37

This is the possibility for an investor to experience losses arising from investments in securities issued by/in foreign countries due to the political, economic and social structures of such countries.​ a. Credit/Default Risk​ b. Reinvestment Risks​ c. Market Risk ​ d. Country Risk ​ e. Exchange Risk

Answer 37

d. Country Risk ​

Question 38

Modified duration increases when the maturity ______________.​ a. Increases​ b. Decreases ​ c. Has no movement

Answer 38

a. Increases​

Question 39

When the coupon increase, the modified duration ___________. a. Increases b. Decreases c. Has no movement

Answer 39

b. Decreases

Question 40

The price of a bond is inversely correlated to the interest rate.​ a. True​ b. False​ c. Maybe​ d. None of the above

Answer 40

a. True​