Question 1.

The tax multiplier effect may be described as:

A. The extent to which production changes given a change in demand

B. The annual increase in inflation
C. The ratio of the change in output to the change in tax
D. The sum of aggregate demand and consumption

You didn't answer this question. The correct answer is C

Where taxes are cut (raised) people in the economy have more (less) money to spend, consumption
increases (decreases) by the Marginal Propensity to Consume and a multiplier effect kicks in.
2281

Question 2. When does a firm maximize profit?

A. When MR = MC
B. When total revenue is maximized
C. When a firm is above its shut down level
D. When resources are fully employed

You answered A. This is correct.

The last profit maximizing unit of output occurs when marginal cost = marginal revenue. This is true
for firms operating in perfect competition and a monopoly.
2283

Question 3. Which of the following would not result in a change in aggregate demand?

A. A change in investment
B. A change in the marginal propensity to consume
C. A change in autonomous expenditure
D. Measuring the change in the money supply

You didn't answer this question. The correct answer is D

Aggregate demand is consumption plus investment. Consumption may be calculated using the
consumption function: C = a + bY , where C is consumption, a is autonomous expenditure, b is the
marginal propensity to consume and Y is disposable income. Answers A, B, and C all in some way
affect aggregate demand, but measuring the money supply will not.
2284

Question 4. The original Phillips curve showed that:

• i. Inflation and unemployment are positively linked

• ii. Inflation and unemployment are cyclical
• iii. Inflation and unemployment are negatively linked
• iv.

A. I only
B. I and II
C. II and III
D. III only

You didn't answer this question. The correct answer is D

The Phillips curve shows that if, in the short run, inflation increases, the number of people out of
work decreases. This is a negative relationship.
2286

Question 5. A barbell portfolio strategy is which of the following:

A. An active strategy for a bond portfolio

B. A strategy involving an equal mix between bonds and equities.
C. A passive strategy where the coupon and principal receipts for the portfolio exactly match the
required outflows.
D. A strategy where a bond portfolio holds bonds with durations much smaller and much larger than
the target.

You didn't answer this question. The correct answer is D

Bond portfolios can be protected against interest movements by adopting an immunisation strategy.
IMMUNISATION - matching duration of assets with duration of liabilities - there are 2 types of
immunisation strategies; Bullet portfolios, where the duration of the bonds exactly matches the
duration of the liabilities Barbell portfolios, where the overall weighting of the duration of the
component bonds matches the duration of the liabilities. i.e. the answer to D
2294

Question 6. An immunisation portfolio strategy is which of the following?

A. Choosing a bond portfolio with the same duration as the liability it is intended to meet
B. Choosing a portfolio which is perfectly hedged by exposure to derivatives
C. Attempting to anticipate interest rate changes and choosing a portfolio to maximise the impact of
these changes
D. Attempting to identify the under priced bonds on the market and lock into the potential for gain

You didn't answer this question. The correct answer is A

An immunisation strategy aims to protect the fund from changes in interest rates.
2295

Question 7. What is a passive fund?

A. Where the fund manager takes advantage of mis-priced assets

B. Where there is no fund manager
C. Where the fund manager times his purchases to buy at low prices
D. Where the fund manager mimics a financial market index

You didn't answer this question. The correct answer is D

Tracker funds are examples of passive funds. Generally speaking passive funds consist of the same
securities as the index they are tracking.
2296

Question 8. What type of index measure is the FT-30?

A. Market weighted arithmetic mean

B. Geometric mean
C. Arithmetic mean
D. Equally weighted arithmetic mean

You didn't answer this question. The correct answer is B

It is an equally weighted geometric mean index, whereas the FTSE 100 is a market weighted
arithmetic mean.
2298
Question 9. Which of the following are true of systematic risk?

• i. It can be controlled by diversification

• ii. It is the total risk for a fully diversified portfolio
• iii. It is the risk particular to a particular investment
• iv.

A. I and III
B. II and III
C. II only
D. I only

You didn't answer this question. The correct answer is C

Also known as market or non-specific risk. Total risk is made up of systematic risk and specific risk.
Specific risk is the risk associated with the features inherent in a particular company and is
diversified away in a portfolio.
2303

Question 10. If you are given Rp and Rf and want to calculate the Sharpe measure - what
do you require?

A. Standard deviation of the portfolio

B. Return on the benchmark
C. Beta of the portfolio
D. Standard deviation of the market

You didn't answer this question. The correct answer is A

The Sharpe measure assumes a non-diversified portfolio. The measure therefore looks at the TOTAL
RISK of the portfolio, i.e.. its standard deviation.
2305

Question 11. The fundamental accounting principles in CA85 do not include:

A. Going concern
B. Prudence
C. Accruals
D. Comparability

You didn't answer this question. The correct answer is D

The fourth concept is 'consistency'.
2309

Question 12. What is the life of a superlong JGB?

A. 10 years
B. 20 years
C. 25 years
D. 30 years

You didn't answer this question. The correct answer is B

JGBs have maturities ranging from 2 to 20 years. 'Superlongs' is a title reserved for JGBs with
maturities of 20 years.
 2318

Question 13. If the market values a company's 25p nominal value shares at 180p and
earnings per share is 9p, what is the P/E ratio?

A. 2.8
B. 36%
C. 5%
D. 20

You didn't answer this question. The correct answer is D

P/E = Price / Earnings = 180p / 9p = 20x
2324

Question 14. Which of the following are paid first in the event of a liquidation?

A. Debentures
B. Preference shares
C. Loan stock
D. Trade creditors

You didn't answer this question. The correct answer is A

Debentures are secured debt securities that rank before loan stock (unsecured), trade creditors
(preferred creditors) and, lastly, preference shareholders.
2326

Question 15. X plc has fixed assets £200k, debtors £50k, creditors £30k, overdraft £20k
and stock £30k. What are X plc's shareholders' funds?

A. £230k
B. £250k
C. £30k
D. £280k

You didn't answer this question. The correct answer is A

Fixed assets + Current assets - Current liabilities = Shareholders' funds £200k + £50k + £30k -
£30k - 20k = £230k
2328

Question 16. What impact will a reduction in depreciation have on the financial
statements?

A. Increase net cash flow

B. Decrease profit
C. Increase profit
D. Decrease net cash flow

You didn't answer this question. The correct answer is C

A reduction in depreciation expense will lead to an increase in profit. Note that depreciation is not a
physical cash flow.
2329

Question 17. Where do contingent liabilities appear in the financial statements?

A. The cash flow statement
B. The profit and loss account
C. Notes to accounts
D. The Director's report

You didn't answer this question. The correct answer is C

A contingent liability is an event where the outcome is unknown at the year end, for example, an
outstanding court case.
2330

Question 18. A company paid a dividend of 20p per share last year, its dividend cover was
8 and the net dividend yield was 6%. What was the P/E ratio of the company?

A. 3.33
B. 2.1
C. 1.6
D. 0.2

You didn't answer this question. The correct answer is B

Net dividend yield = dividend / price 0.06 = 20p / price Price = 333.33p Dividend cover = EPS / DPS
8 = EPS / 20p EPS = 160p P/E = Price / EPS P/E = 333.33p / 160p = 2.1
2331

Question 19. Which of the following is an adjusting event under SSAP 17?

A. Issue of shares after the year end

B. Acquisition of a company after the year end
C. Stock destroyed after the year end
D. Insolvency of a debtor after the year end

You didn't answer this question. The correct answer is D

Adjusting post balance sheet events give evidence of conditions that existed at the balance sheet
date. Insolvency of a debtor in the post balance sheet period provides evidence that the outstanding
debtor was actually a bad debt. Consequently, a provision in the accounts must be made.
2332

Question 20. A company has a net cash flow from operating activities of £140,000. During
the period stocks fell by £20,000, debtors increased by £18,000, there was no change in
creditors and the depreciation charge was £37,000. The company's trading profit for the
year was?

A. £105,000
B. £179,000
C. £101,000
D. £175,000

You didn't answer this question. The correct answer is C

Trading profit + Depreciation + Fall in stock - Increase in debtors = Net cash flow from operating
activities Trading profit + £37,000 + £20,000 - £18,000 = £140,000 Trading profit = £140,000 -
£37,000 - £20,000 + £18,000 Trading profit = £101,000
2333

Question 21. Which of the following is not grounds for an audit qualification?
A. Fundamental limitation in scope
B. Material disagreement
C. Ethical disagreement
D. Material limitation in scope

You didn't answer this question. The correct answer is C

There are two categories of qualified report: limitation in scope and disagreement. These two
categories then subdivided into: fundamental and material.
2335

Question 22. Alaska Plc had a trading profit last year of £10m. Over the period stocks
increased by £0.5m, creditors decreased by £1.2m and debtors rose by £0.5m.
Depreciation for the year was £0.4m. What was Alaska's net cash flow from operating
activities?

A. £9.8m
B. £10.6m
C. £8.2m
D. £9.0m

You didn't answer this question. The correct answer is C

Net cash flow from operating activities = Trading profit + Depreciation - Increase in stock - Increase
in debtors - Decrease in creditors Therefore: Net cash flow from operating activities = £10m +
£0.4m - £0.5m - £0.5m - £1.2m = £8.2m
2338

Question 23. The $/£ spot rate is $1.16, with a forward discount of 2.4c. The UK interest
rate is 7%, what is the implied US interest rate?

A. 7 .2%
B. 4. 8%
C. 9. 2%
D. 2 .4%

You didn't answer this question. The correct answer is C

If e1 = forward rate, e0 = spot rate, Ruk = UK interest rates, Rus = US interest rates, then: e1 / e0
= (1+Rus) / (1+Ruk) 1.184 / 1.16 = (1+Rus) / 1.07 (1+Rus) = (1.184 x 1.07) / 1.16 (1+Rus) =
1.092 Rus = 0.092 (or 9.2%)
2346

Question 24. Who can issue CDs in the UK?

A. Banks and corporations with an AAA (or Aaa) credit rating

B. Any bank (or building society) with a UK banking licence
C. Any bank with a UK bank licence and an AAA (or Aaa) credit rating
D. Any bank with an AAA (or Aaa) credit rating

You didn't answer this question. The correct answer is B

In the UK, only those institutions with a UK banking licence can issues CDs.
2359

Question 25. If the investor's rate of return is 8%, and a 10 year £5,000 annuity is
required, how much will the annuity cost?

A. £101,500
B. £33,550
C. £50,000
D. £20,227

You didn't answer this question. The correct answer is B

Use the formula for present valuing an annuity as follows;
2361

Question 26. ADRs represent ownership of shares in?

A. US corporations
B. Non-US corporations
C. Municipal Authorities
D. US Government

You didn't answer this question. The correct answer is B

ADRs allow US investors to invest in non-US companies, but transact and receive dividends in US$.
They are issued by depository banks, which are usually US Investment banks.
2367

Question 27. If the interest rate is 5% and the purchaser of an annuity requires a
payment of £6,000 per annum at the end of each of the next 5 years, what is the price of
the annuity?

A. 66,670
B. 25,980
C. 16,850
D. 18,104

You didn't answer this question. The correct answer is B

Use the annuity present valuing formula:
2381

Question 28. A scrip issue means:

A. An issue of ordinary shares with a redemption date

B. An issue of ordinary shares with a fixed dividend
C. An issue that will replace the current ordinary shares when they are redeemed
D. An issue of shares in proportion to current holdings

You didn't answer this question. The correct answer is D

A scrip issue is another way of referring to a 'bonus' or 'capitalisation' issue. It is a share issue where
the issuing company receives no proceeds. Shares must be offered to existing shareholders in
proportion to their existing holdings.
2383

Question 29. What is a close company?

A. A private company limited by guarantee

B. A company which is more than 50% owned by another
C. An company which is more than 20% owned by another
D. A company under the control of its directors, or 5 or fewer persons

You didn't answer this question. The correct answer is D

The Inland Revenue have special tax rules relating to close companies.
 2395

Question 30. Share premium may be used for which of the following?

• i. Bonus issues
• ii. Goodwill write-off
• iii. Underwriting
• iv.

A. I and III
B. II and III
C. I, II, and III
D. I only

You didn't answer this question. The correct answer is A

Share premium may be 1. Capitalised in a bonus issue 2. Used to write off preliminary expenses
associated with forming a company and 3. Used to write off issue costs in relation to securities, e.g.
underwriting fees.
2418

Question 31. Which of the following may cause a pension fund manager to increase the
relative proportion of equities over gilts?

• i. An increase in the trustees' willingness to take on more risk

• ii. Increase in the average age of pension fund contributors
• iii. An increase in the fund managers expectation of future inflation
• iv.

A. I only
B. I and II
C. I, II, and III
D. I and III

You didn't answer this question. The correct answer is D

An increase in the age of contributors is more likely to result in investing more heavily in gilts as the
contributors approach retirement age.
2517

Question 32. Which of the following are associated with investment trusts?

• i. Closed-ended
• ii. May borrow money for gearing purposes
• iii. If an investor sells a share, the net asset value of the portfolio of the fund is affected
• iv. They are approved by the FSA

A. I only
B. II only
C. I and II
D. I, II, III and IV
You didn't answer this question. The correct answer is C
An investment trust may borrow up to 15% of the fund. Shares in an investment trust are sold in
the secondary market - as such the net asset value of the fund will NOT be affected.
2524

Question 33. Which of the following is true of unit trusts?

• i. Open ended
• ii. Can borrow for gearing purposes
• iii. When an investor sells a unit it may affect the net asset value the fund
• iv.

A. I only
B. I and II
C. I and III
D. II and III

You didn't answer this question. The correct answer is C

There is no secondary market in units - the units are sold back to the fund manager and are then
usually cancelled. The net asset value of the fund is therefore reduced. Borrowing is only permitted
as a short-term measure.
2525

Question 34. Which of the following best describes a warrant?

A. A put option issued by the company on its own shares

B. A call option issued by the company on its own shares
C. A future issued by the company on its own shares
D. A swap issued by the company on its own shares

You didn't answer this question. The correct answer is B

Warrants are the right to buy new shares in a company at a particular price, on a particular future
date. The only entity that may issue warrants is the company that issue the underlying shares.
2526

Question 35. If an investor believes that US equity prices will remain unchanged, which of
the following is most appropriate?

A. Buy US equity index futures

B. Buy US equity index puts
C. Sells US equity index futures
D. Sell US equity index calls

You didn't answer this question. The correct answer is D

Futures will make money if prices go up (long futures positions) or down (short futures positions). A
long put will make money if prices fall, but if they remain unchanged, the premium is lost. The only
response in this question which makes money (the premium) if prices remain the same is the short
call.
2529

Question 36. What can be associated with a security that has a beta less than one?
A. Yields generally lower returns than a security with a beta of more than one
B. Yields generally higher returns than a security with a beta of more than one
C. Systematic risk is greater if the beta is less than one
D. The unsystematic risk is the same in both securities

You didn't answer this question. The correct answer is A

Beta measures the (systematic) risk of the security RELATIVE to the market as a whole. A beta of
less than one indicates that the risk of the security is LESS volatile than the market. A beta of more
than 1 indicates the security is MORE volatile than the market.
2532

Question 37. The following information relates to company B: (£) Share capital - 100,000;
Share premium account - 20,000; Reserves - 100,000. Company A purchases 100% of the
shares of Company B for a consideration of £300,000. What is the goodwill?

A. £20k
B. £100k
C. £80k
D. £300k

You didn't answer this question. The correct answer is C

Goodwill = Consideration paid less share of net assets acquired. Consideration paid = £300,000. Net
assets acquired = £100,000 + £20,000 + £100,000 = £220,000. Goodwill = £300,000 - £220,000 =
£80,000.
2534

Question 38. If taxes were increased, the effect on the consumption function graph would
be:

A. An increase in the slope of the consumption function

B. A decrease the slope of the consumption function
C. A flip in the slope of the consumption function
D. No change in the slope of the consumption function

You didn't answer this question. The correct answer is D

The consumption function graph is defined by the equation C = a + bY Y is disposable income, which
will become smaller as taxes are increased. The SLOPE of the line, however, is determined by b, the
MARGINAL PROPENSITY TO CONSUME. An increase in taxes therefore will not affect the slope.
2537

Question 39. A company has distributable earnings of £1.5 million and 5 million ordinary
shares in issue. If the payout ratio is 0.5, what is the net dividend per share?

A. 12p
B. 15p
C. 16p
D. 19p

You didn't answer this question. The correct answer is B

£1,500,000 x 0.5 = £750,000 Therefore: £750,000 / 5,000,000 shares = 15p
2545

Question 40. A fund is worth £10.0 million at the end of its first year. If the rate of return
was 8%, what was the value of the fund at the start of the year?
A. £9.00 million
B. £9.26 million
C. £9.72 million
D. £9.88 million

You didn't answer this question. The correct answer is B

Discount the £10 million using the discount formula:
2547

Question 41. Calculate the sample variance of: 12, 34, 29, 54, 98 and 121.

A. 1723.6
B. 1823. 6
C. 1895.3
D. 1921 9

You didn't answer this question. The correct answer is B

Variance = standard deviation 'squared'. Sample variance = sample standard deviation 'squared'.
(The sample standard deviation is calculated when the data set is particularly small and there is
therefore a greater margin of error). To calculate the sample standard deviation, follow the
procedure for calculating the standard deviation as normal, but rather than choosing ?n- your final
step, choose ?n-1 instead. This will calculate the SAMPLE standard deviation, i.e. 42.70362982. Now
square it up; 42.70362982 x 42.70362982 = 1823.6
2552

Question 42. In a Jensen measure of performance the benchmark is chosen to be:

A. A passively managed portfolio with the same beta as the actual fund
B. A passively managed portfolio with a different beta as the actual fund
C. A passively managed portfolio with the same standard deviation as the actual fund
D. An actively managed portfolio with the same beta as the actual fund

You didn't answer this question. The correct answer is A

The Jensen measure compares the actual return achieved by a fund with the expected return as
calculated by CAPM (i.e. a benchmark portfolio).
2566

Question 43. If the market believes that short term interest rates are going to rise, one
would expect the yield curve to be:

A. Upward-sloping
B. Flat
C. Downward sloping
D. 'Humped'

You didn't answer this question. The correct answer is A

The curve would be downward sloping if short term interest rates are expected to decline.
2573

Question 44. A company's dividends are expected to grow by 4%. An investor, who
requires a return of 10%, has just received a dividend of 15p. What is the share price?

A. 400p
B. 260p
C. 200p
D. 300p

You didn't answer this question. The correct answer is B

Using Gordon's Growth Model; Ex-div share price = Do (1+g) / (r-g), where Do is the current
dividend, g is the expected growth rate of the dividend and r is the investor's required rate of return.
Applying the numbers from the question: = £0.15 x 1.04 / 0.06 = £2.60 or 260p
2578

Question 45. What is the tick size of the FTSE 100 future?

A. One point
B. Half point
C. Two points
D. Quarter point

You didn't answer this question. The correct answer is B

The minimum price movement (or tick) is half an index point. At £10 per index point, the tick value
is £5.
2579

Question 46. You wish to fix the US $ rate to convert a dollar receipt into sterling in 1
month. The current £: US $ rate is £1 : $1.4830 and the 1 month discount is 0.2c - 0.32c.
What is the forward rate?

A. £1 : $1.4862
B. £1 : $1.4832
C. £1 : $1.4828
D. £1 : $1.4898

You didn't answer this question. The correct answer is A

Forward rate = 1.4830 + 0.0032 = 1.4862
2592

Question 47. What is the present value of £5,000 received in 6 years' time at rate of
interest of 7% pa?

A. £2,900.00
B. £3,331.78
C. £3,873.64
D. £5,000

You didn't answer this question. The correct answer is B

Use the discounting formula:
2600

Question 48. Which of the following best defines what variation margin payments cover?

A. Adverse movements expected over the next week

B. Initial payment to cover future movement in price
C. Adverse movements in value from the previous day
D. Adverse movements from the previous week

You didn't answer this question. The correct answer is C

Variation margin can be a receipt or a payment. It represents the profit or loss on open derivative
positions, which result from changes in underlying asset values from the previous day.
 2615

Question 49. With what would a UK pension fund manager managing a new portfolio be
least concerned?

A. Future liabilities
B. Risk
C. Stock selection
D. Taxation

You didn't answer this question. The correct answer is D

Pension funds do not pay tax.
2621

Question 50. What is normally the maximum investment permitted in a company for an
investment trust?

A. 3%
B. 5%
C. 10%
D. 15%

You didn't answer this question. The correct answer is D

An investment trust is not required to be as diversified as a unit trust
2639

Question 51. Define what is meant by range:

A. Maximum value less minimum value

B. Arithmetic mean of all values
C. All values divided by two
D. Difference between mean and median

You didn't answer this question. The correct answer is A

Hence, the range may be distorted by extreme values.
2646

Question 52. Which of the following 15 year bonds will have the highest modified
duration?

A. 2.00% Japanese government bond

B. 6.50% US bond
C. 3.50% Italian bond
D. 3.25% German bond

You didn't answer this question. The correct answer is A

Modified duration is a measure of the bonds risk. The higher the risk, the greater the modified
duration. All the bonds in the question have the same redemption date, therefore, the lowest coupon
bond, the Japanese Government Bond, will have the highest modified duration.
2651

Question 53. Which of the following are characteristics of a preference share?

 • i. They rank before ordinary shares
• ii. They do not normally carry a vote
• iii. Shareholders receive a dividend
• iv.

A. I and III
B. I and II
C. II only
D. I, II, and III

You didn't answer this question. The correct answer is D

Preference shareholders receive their dividends (which are fixed) before ordinary shareholders.
There are some circumstances where preference shareholders may vote at company meetings, but it
is not the norm.
2659

Question 54. Calculate the value of stocks if the quick ratio is 0.8, the current ratio is 1.5
and the value of current assets is £300,000.

A. £140,000
B. £160,000
C. £200,000
D. £240,000

You didn't answer this question. The correct answer is A

Current ratio = Current assets / Current liabilities 1.5 = £300,000 / ? Current liabilities = £200,000
Quick ratio = (Current assets - Stock) / Current liabilities 0.8 = (£300,000 - ?) / £200,000 Stock =
£140,000
2667

Question 55. If the redemption yield is expected to fall, which of the following actions
should a bond fund manager take?

A. Hold long dated, high coupon bonds

B. Hold short dated, low coupon bonds
C. Hold long dated, low coupon bonds
D. Hold short dated, high coupon bonds

You didn't answer this question. The correct answer is C

Remember, if yields fall then bond prices rise. A fund manager who expects yields to fall is going to
want to profit from this event as much as possible, and will therefore seek to hold the most volatile
bonds (those that will go up in value the most). The most volatile are those with the longest
maturity date and lowest coupons.
2669

Question 56. Why is an 8 month time lag used to calculate index-linked coupon payments?

A. Because index-linked gilts pay coupons quarterly

B. So that the coupon amount is known prior to the payment date
C. It takes 8 months to calculate the coupon
D. To account for deferred changes in tax rates

You didn't answer this question. The correct answer is B

It is necessary to calculate accrued interest up to six months in advance, in order to price gilts.
Added to this period is the time required to collect the information necessary to calculate the RPI.
2672

Question 57. For a firm in perfect competition when is profit maximizing output?

A. MC = MR
B. MC = AC
C. AC = AR
D. MR = TR

You didn't answer this question. The correct answer is A

Under perfect competition the demand schedule is flat, so marginal revenue equals average revenue
(or price). With a flat demand curve, the firm can sell as much as it wishes, and the profit-
maximizing condition of MC = MR will give the desired output level.
2675

Question 58. Calculate the conversion premium of a bond priced at £108, with a nominal
value of £100 that will convert into 40 shares priced at 250p per share.

A. Nil
B. 4%
C. 8%
D. 10%

You didn't answer this question. The correct answer is C

Effective cost per share via the convertible debt is (£108 / 40) £2.70. Additional 20p paid over the
current share price. Expressed as a percentage of the current share price (20p / £2.50 x 100%) =
8%.
2677

Question 59. Arndale plc shares are currently priced at 40p each after being issued two
years ago at 50p. Dividends in the first year were 6p per share and this year are expected
to be 3p. Calculate the return on Arndale plc's shares.

A. -2%
B. -9%
C. 8.5%
D. 2.4%

You didn't answer this question. The correct answer is A

The total (holding period) return to a share is over a given period is:
2679

Question 60. Which of the following are advantages of futures clearing through
LCH.Clearnet?

• i. Increased liquidity
• ii. Lower settlement costs
• iii. Reduced counterparty risk
• iv.

A. I, II and III
B. I and III
C. II and III
D. I and II

You didn't answer this question. The correct answer is A

Liquidity is improved relative to the associated cash market. Counterparty risk is removed by
LCH.Clearnet acting as central counterparty.
2683

Question 61. Which country issues BTANs?

A. Italy
B. France
C. Germany
D. UK

You didn't answer this question. The correct answer is B

There are two main types of French government bonds: BTANs and OATs.
2684

Question 62. Which of the following are not substitutes?

A. Butter and margarine

B. Beef and lamb
C. Petrol and cars
D. Coffee and tea

You didn't answer this question. The correct answer is C

Petrol and cars are complementary goods not substitutes.
2687

Question 63. All of the following are true of swaps except:

A. The intermediary takes a fee

B. They are used by institutional and private investors
C. They are 'tailor-made' agreements
D. They often exchange a fixed for a floating rate of interest

You didn't answer this question. The correct answer is B

The swaps market does not cater for the private investor.
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Question 64. The shares of a company are currently at 400p. The date is January 2001.
Which of the following call options has the highest time value?

A. April 2001 and strike 380p

B. October 2001 and strike 380p
C. April 2001 and strike 360p
D. October 2001 and strike 360p

You didn't answer this question. The correct answer is B

Options with the longest remaining life (in this question, the Octobers) have the greatest time value.
Of these, the option which is closest to being at the money will have greatest time value.
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Question 65. An option's delta is best described as the ratio between:

A. The price of the option and the price of the underlying instrument
B. The change in the option premium and the change in the price of the underlying instrument
C. The time value and the intrinsic value
D. The option premium and the underlying price.

You didn't answer this question. The correct answer is B

The delta of an option quantifies how far a premium changes given a change in the price of the
underlying asset. Note: Delta = Change in premium / Change in underlying.
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Question 66. A company has distributable earnings of £1.5million and 5 million ordinary
shares in issue. If the payout ratio is 0.5, what is the net dividend per share?

A. 12p
B. 15p
C. 16p
D. 19p

You didn't answer this question. The correct answer is B

Total dividend = £1.5m x 0.5 = £750,000. Therefore: Net dividend per share = £750,000 /
5,000,000 shares = 15p.
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Question 67. If company A is more geared than Company B, which of the following is true?

A. A's earnings will be more sensitive to changes in interest rates than B's
B. A's earnings will be less sensitive to changes in interest rates than B's
C. Company A has less debt relative to equity than Company B
D. Company B has more debt relative to equity than Company A

You didn't answer this question. The correct answer is A

The more debt a company has (the more geared it is), the more sensitive it will be to any changes in
interest rates.
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Question 68. Which of the following is implied by the 'liquidity preference theory' of the
yield curve?

A. Maturity is only important for fixed interest stocks

B. Investors want a premium for shorter maturity investments
C. Investors want a premium for longer maturity investments
D. People are indifferent about maturity dates

You didn't answer this question. The correct answer is C

The liquidity preference theory argues that investors require a higher return for longer dated
investments. As a result, investors need to be tempted by higher yields. Consequently, the 'normal'
shape of the yield curve should be upward sloping, i.e. lower yields for nearer dated bonds and
higher yields for longer dated ones.
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Question 69. Which of the following is an adjusting event under SSAP 17?
A. A disposal of a subsidiary after the year ended
B. The insolvency of a debtor after the year end
C. Stock destroyed after the year end
D. The acquisition of a company after the year end

You didn't answer this question. The correct answer is B

An adjusting event is an event that must be reflected in the year -end accounts by adjusting the
balance sheet and/or profit and loss account.
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Question 70. The Jensen measure requires the specification of which of the following?

A. A relevant passive benchmark with the same beta as the managed portfolio
B. A relevant passive benchmark with a different beta as the managed portfolio
C. A relevant passive benchmark with the same standard deviation as the managed portfolio
D. A relevant passive benchmark with a different standard deviation as the managed portfolio

You didn't answer this question. The correct answer is A

The Jensen measure of performance measures the difference between the return a portfolio actually
achieved (Rp) and the return predicted by CAPM (Rcapm): Jensen = Rp - Rcapm The CAPM
prediction is based on a benchmark portfolio with the same beta as the one being measured.
Consequently, the comparison between Rp and Rcapm is valid.
6408

Question 71. A pension fund where most of the members are close to retirement will
invest more heavily in which of the following?

A. Equities
B. Fixed income securities
C. Short term securities
D. Derivatives

You didn't answer this question. The correct answer is B

The income on fixed income securities is more certain; this becomes important as people reach
retirement age and expect to draw down a regular pension.
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Question 72. If the government increases taxes and spending by the same amount,
national income may rise due to:

A. The balanced budget multiplier

B. The accelerator
C. The balanced budget accelerator
D. The government budget deficit

You didn't answer this question. The correct answer is A

When the government increases taxes, the money used to pay for them comes partly from
consumers' disposable income and partly from income they would have otherwise saved. This means
that the amount of money withdrawn from the economy is smaller than the amount injected by the
government's spending. This inequality leads to an overall increase in national income and is known
as the balanced budget multiplier.
6422

Question 73. Which of the following are characteristics of the property market?
 • i. Loose government regulation
• ii. Decentralised market
• iii. Management costs are an important consideration
• iv.

A. I and II
B. I and III
C. II and III
D. I, II and III

You didn't answer this question. The correct answer is C

The property market is tightly controlled by the government e.g. stamp duty / tax regimes etc). It is
a decentralised market, i.e. property is not all traded in one place and subject to one set of supply
and demand forces. Lastly, when buying a property to rent out, the return is going to be severely
restricted by management costs.
6427

Question 74. An open market operation between domestic money and bond markets in
order to neutralise imbalances in the money supply caused by balance of payments
surpluses or deficits is known as:

A. Sterilisation
B. Stabilisation
C. Funding
D. Neutralisation

You didn't answer this question. The correct answer is A

A balance of payments deficit is caused by more imports than exports. This means that there has
been a net outflow of money abroad. This will lead to a reduction in the domestic money supply. The
Bank of England can alleviate this by purchasing bonds on the open markets (and thereby injecting
cash) through its open market operations. If the balance of payments was in surplus it would mean
an increase in domestic money supply. Again the Bank can take care of things through open market
operations; only this time it will SELL bonds and remove cash from the money markets. These are
both examples of sterilisation.
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Question 75. If a dividend is missed, which of the following circumstances apply to

preference shares?

A. There can be no dividends for ordinary shareholders in later years until the missed preference
dividend has been paid
B. The preference shareholders lose the right to the dividend
C. The preference shares convert into ordinary shares
D. The preference shareholders may apply for arbitration

You didn't answer this question. The correct answer is A

All unpaid preference dividends must be paid before ordinary shares can receive a dividend.
6452

Question 76. In the short-run, a company in perfect competition will continue to produce,
even if losses are being made, if:

A. Fixed costs are covered

B. Marginal costs are covered
C. Average variable costs are covered
D. Excess costs are covered

You didn't answer this question. The correct answer is C

When new entrants enter the market the firm will continue to produce in the short run at a loss as
long as average variable costs are covered.
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Question 77. Pie charts are most suitable for which type of data?

A. Categorical/discrete
B. Continuous
C. Time-series
D. Semi-log

You didn't answer this question. The correct answer is A

Discrete data comes in finite values, whereas continuous data may be any value.
6488

Question 78. The inter-quartile range is:

A. A measure of distribution dominated by extreme values

B. A measure of distribution not dominated by extreme values
C. The variance of the range
D. A measure of central tendency

You didn't answer this question. The correct answer is B

The inter-quartile range is the difference between the SECOND and THIRD quartiles and is therefore
not dominated by extreme values.
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Question 79. The DJIA contains how many stocks?

A. 50
B. 30
C. 100
D. Changes every quarter

You didn't answer this question. The correct answer is B

The DJIA is the Dow-Jones Industrial Average, it is a share index of the New York Stock Exchange
and is made up of 30 industrial shares.
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Question 80. What is the present value of £150,000 received in 4 years' time at a rate of
interest of 8% pa?

A. £92,593.00
B. £68,058.00
C. £138,888.89
D. £110,254.48

You didn't answer this question. The correct answer is D

The £150,000 in five years time is the terminal value. The present value may be calculated by using
the discounting formula:
 6536

Question 81. Which forms of unemployment are involuntary?

• i. Frictional
• ii. Structural
• iii. Keynesian
• iv. Classical

A. III only
B. II and III
C. II, III, and IV
D. I, II, III, and IV

You didn't answer this question. The correct answer is A

Frictional, classical, and Structural unemployment are both examples of VOLUNTARY unemployment.
6661

Question 82. If the expected return to a bond portfolio equals 8.5%, the risk-free return is
3%, the duration of the market is 7 years, and the market risk premium is 7.7%. What is
the duration of the portfolio?

A. 6.6 years
B. 8.2 years
C. 7 years
D. 5 years

You didn't answer this question. The correct answer is D

The expected return to a bond portfolio may be calculated using a variation of the CAPM formula.
Instead of using betas as a measure of risk, RELATIVE DURATION is used. Relative duration is the
duration of the portfolio divided by the duration of the market:
6672

Question 83. If a company's net dividend yield equals 16%, dividend cover equals 3 and
share price equals 200p, what is its earnings per share (ignore tax)?

A. 96p
B. 32p
C. 11p
D. 200p

You didn't answer this question. The correct answer is A

Using net dividend yield: 0.16 = DPS / 200p DPS = 32p Using dividend cover = EPS/DPS 3 = EPS /
32p EPS = 96p
6752

Question 84. A company has a scrip issue of 1 for 7 when the share price is 330p. What is
the ex-scrip share price?

A. 330p
B. 290p
C. 288.75p
D. 41.25p
You didn't answer this question. The correct answer is C
Seven shares with a combined value of (7 x 330p) £23.10 will become eight shares worth £23.10 (or
288.75p per share) following the bonus issue.
6924

Question 85. Which of the following is the main method of gilt issuance?

A. Placing
B. Auction
C. Offer
D. Tranche

You didn't answer this question. The correct answer is B

Gilts are auctioned by the Debt Management Office (DMO).
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Question 86. What is a gilt repo?

A. An agreement to purchase gilts and resell them later

B. A company purchasing its own shares on the market
C. An agreement to sell gilts and repurchase them later
D. A means for the government to raise cash by issuing more of an existing gilt

You didn't answer this question. The correct answer is C

A describes a 'reverse repo': a purchase and resale. B is a share buy back. D is a description of a
'tap'.
7026

Question 87. Which of the following best describes the quick ratio (acid test)?

A. Debtors + cash + stock / creditors - short term borrowings

B. Debtors + cash / creditors - short term borrowings
C. Debtors + cash / creditors + short term borrowings
D. Debtors + cash + stock / creditors + short term borrowings

You didn't answer this question. The correct answer is C

The quick ratio excludes stock, because stock cannot be easily converted into cash..
9428

Question 88. Lorenz curves are used to:

A. Plot a variable over time

B. Determine mid points for cumulative frequency graphs
C. Indicate the extent to which a variable is uniformly distributed
D. Indicate the extent to which qualitative data is distributed amongst the population

You didn't answer this question. The correct answer is C

Lorenz curves show the disparity of proportions against a line of uniform distribution. For example,
we could show that a small number of factories employ the majority of the working population:
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Question 89. An investor buys shares in a US company at $25. The foreign exchange rate
for the transaction is £1 = $1.50. A year later the shares are trading at $30 and sterling
has appreciated against the dollar by 5%. What is the percentage return, in sterling
terms, achieved by the investment?

A. 14.3%
B. 15.6%
C. 16.3%
D. 16.6%

You didn't answer this question. The correct answer is A

At the beginning of the year the investor pays £16.67 for the shares. This is calculated by: $25 /
$1.50 = £16.67 Sterling appreciates over the year from $1.50 to $1.575, i.e. 5% (1.50 x 0.05 =
0.075). By this time the shares have also increased in value to $30. At the new sterling rate of
$1.575, the shares have a sterling value of: $30 / $1.575 = £19.05. From the sterling perspective
then, the shares rose from £16.67 to £19.05, an increase of £2.38. This is a return of 14.277% on
the original investment of £16.67: £2.38 / £16.67 = 0.14277 or 14.3%
10471

Question 90. Information relating to registered companies is available for inspection by:

A. The Inland Revenue only

B. Shareholders only
C. Inland Revenue and the London stock exchange
D. Any member of the public

You didn't answer this question. The correct answer is D

Company information at Companies House is available to anyone for inspection - companies are
supposed to live public lives.
10505

Question 91. What is the US equivalent of LIBOR?

A. Minimum lending rate

B. Lombard rate
C. Base rate
D. Federal funds rate

You didn't answer this question. The correct answer is D

This is the interbank rate in the US markets.
15477

Question 92. The board of an investment trust company are able to:

• i. Carry out a rights issue

• ii. Borrow funds
• iii. Arrange for the company to be 'split capital' in structure
• iv.

A. I and III
B. I, II and III
C. I and II
D. II only

You didn't answer this question. The correct answer is B

Split capital means that the company issues two types of share; those entitled to the fund's income
and those entitled to I ts capital gains.
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Question 93. How is the FT Actuaries Fixed Interest Index calculated?

A. Unweighted
B. Geometrically weighted
C. Simple arithmetic
D. Market weighted

You didn't answer this question. The correct answer is D

Most bond market indices are total return indices.
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Question 94. Which of the following correctly describes the formula for a line of best fit?

A. y=bx
B. y=(a+b)x
C. y=a+bx
D. y = a+b+x

You didn't answer this question. The correct answer is C

y is the dependent variable and x is the independent variable.