Friday Five Focus on Investments – 5 Questions in 5 Minutes – 23 Oct 2026

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 2026/27, examinable by the CII until 31 August 2027.

1. 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.

2. Henry is a higher-rate taxpayer and Anna, his wife, is a non-taxpayer. Henry holds an onshore investment bond in his name which if encashed by him would create a substantial gain. To reduce the tax payable on the gain Henry should be aware that
   1. an assignment to Anna would be chargeable to Capital Gains Tax at the date of transfer.
   2. if he assigns the bond to Anna before surrender, any future encashments will be assessed on her.
   3. an assignment to Anna is a chargeable event for Income Tax.
   4. he can assign the bond to Anna and this will be chargeable to Inheritance Tax at the date of transfer.

3. Stefan bought £1,000 nominal value of Treasury 7% 2028. What interest payment can he expect to receive?
   1. £70 every year.
   2. £5.80 every month.
   3. £35 every 6 months.
   4. £23.33 quarterly.

4. Hydra’s year end accounts show gross profit of £15,625, tax on ordinary activities of £2,325, preference share dividends of £800 (with 2,000 preference shares in issue), ordinary dividends of £1,400 (with 3,000 ordinary shares in issue). From this information we can say that their earnings per share is
   1. 4.17p
   2. 4.43p
   3. 2.5p
   4. 3.7p

5. Pauline requires £21,000 in four years’ time. If the interest rate is 8.78% per annum, how much will she have to invest now?
   1. £10,000
   2. £15,000
   3. £16,000
   4. £18,000

Answers

1. 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.
2. B; See R02 Study Text, Chp 8; Rationale: There are several ways in which tax can potentially be reduced on gains on bonds; as Henry is a higher-rate taxpayer but Anna, his wife, is not, then the bond could be assigned to her before a surrender is made and the gain will be assessed on her.
3. C; See R02 Study Text, Chp 1; Rationale: The name of the bond tells us this is a gilt with a coupon of 7%, which matures in 2028. Therefore, Stefan receives 7% of £1,000 each year (i.e., £70). Interest is paid on gilts bi-annually, so the answer is he receives £35 every six months.
4. A; See R02 Study Text, Chp 2; Rationale: The earnings per share is calculated as: Profit attributable to ordinary shareholders/Number Of ordinary shares. Profit attributable to ordinary shareholders = profit less tax less dividends to preference shareholders; in Hydra’s case this is £15,625 – £2,325 – £800 = £12,500. Therefore, Hydra’s earnings per share = £12,500 / 3,000 = 4.17p.
5. B; See R02 Study Text, Chp 5; Rationale: To calculate the amount Pauline needs to invest (the present value or PV) we use the formula: PV = FV/(1 + r)ⁿ where FV = future value, PV = present value, n = number of time periods and r = interest rate (expressed as a decimal). Therefore, Pauline needs to invest £21,000 / (1 + 0.0878)⁴ = £21,000 / 1.0878⁴ = £15,000 (To calculate 1.0878⁴, use the x^y function on your scientific calculator).

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