Friday Five Focus on Investments – 5 Questions in 5 Minutes – 16 Jan 2025

Friday Five Focus on Investments – 5 Questions in 5 Minutes Every Friday

What’s this all about?

Each week, we ask questions relating to one of these topics: Investments, Taxation, Pensions, Protection, or Regulation. This week, our Friday Five is relevant to Investments; this is useful as you prepare for any of the CII’s R02, AF4, or J10 exams. The challenge is for you to answer them in 5 minutes. Answers at the bottom of the page.

Questions

IMPORTANT! These questions relate to examinable tax year 2025/26, examinable by the CII until 31 August 2026.

1. If a bond has a duration of 4 and interest rates fall by 1%, the price of the bond would
   1. increase by 4%.
   2. increase by 0.25%.
   3. decrease by 4%.
   4. decrease by 0.25%.

2. Josian has had a with-profits policy for a number of years and is now considering surrendering it. She should be aware that a market value reduction (MVR) can be applied
   1. as per guidelines set out in the FCA Handbook.
   2. as per guidelines set out by the ABI.
   3. at the discretion of the policyholders.
   4. at the discretion of the life office.

3. Harry is an adviser where the client has stated that scheme investments must be designed to match future liabilities. Which of the following is an example of where scheme funds are designed to do this?
   1. A collective investment scheme.
   2. A defined contribution pension scheme.
   3. A discretionary managed account.
   4. A defined benefit pension scheme.

4. When considering the use of discretionary management services, one of the key issues to consider is
   1. the use of historic portfolio data.
   2. the management of Capital Gains Tax liabilities.
   3. the limitation of available funds.
   4. the tax incentives on offer when using this type of service.

5. Which style of investment management is often used by hedge fund managers?
   1. Value.
   2. Growth at a reasonable price.
   3. Momentum.
   4. Contrarianism.

Answers

1. A; See R02 Study Text, Chp 6; Rationale: A bond’s ‘duration’ is its sensitivity to interest rate changes. Bond prices tend to rise as interest rates fall; therefore, if a bond has a duration of 4, it will increase by 4% for every 1% fall in interest rates.
2. D; See R02 Study Text, Chp 8; Rationale: Market value reductions are applied at the discretion of the life office to protect customers remaining in a with-profit fund (when others are leaving) during adverse investment conditions.
3. D; See R02 Study Text, Chp 9; Rationale: A defined benefit pension scheme is an example of an investment fund where investments are designed to match future liabilities.
4. B; See R02 Study Text, Chp 10; Rationale: Tax management is a key issue in a discretionary management service, as if the assets are held directly, rather than in a tax wrapper, the manager’s actions can trigger CGT liabilities for the client.
5. D; See R02 Study Text, Chp 10; Rationale: A contrarian style of investment management is, as the name implies, a strategy of going against the trend of investor sentiment and is often used by hedge fund managers.

Grab the resources you need!

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