The 10 Most Common Calculations in the CII R02 Exam
When it comes to the CII R02 exam: Investment principles and risk – it’s pretty much a given that you will need to do some or all of these calculations. Learn which are the most likely calculations you’ll be expected to do on exam day.
- Gross redemption yield
- Dividend cover / PE Ratios / Dividend Yield
- Net yield on an investment property
- Stamp duty/stamp duty reserve tax
- Income tax on dividends
- Income tax relief on VCTs/EISs and/or SEISs
- Tax on offshore funds
- Capital gains tax on collectives
- Income tax on bonds
- Present value/future value
Some of these we have covered before, but let’s have a look at a few of them here:
Question – Gross redemption yield
If a gilt has a clean price of £108.54 and a coupon of 5.95%, with 5 years to maturity, using the simplified method, calculate the approximate redemption yield.
The formula is:
|Step 1||Work out the interest yield |
This is the coupon - 5.95% divided by the clean price - £108.54
5.95 / 108.54 x 100 = 5.48%
|Step 2||The stock will be redeemed for the nominal price of £100 resulting in a capital loss of £8.54|
£100 - £108.54 = - £8.54
|Step 3||There are 5 years till redemption, so the capital loss each year is: £8.54 ÷ 5 = -£1.71|
|Step 4||As a percentage of the price paid the reduction is: (-1.71 ÷ 108.54) x 100 = -1.575|
|Step 5||Add or subtract the result to/from the interest yield to get the redemption yield: |
5.48 - 1.575 = 3.91%
Question – Property rental yields
A property has an annual rental income of £12,000 and was purchased for £200,000. Management costs are 10% per year. Calculate the expected rental yield.
The formula is:
So (£12,000 – £1,200) divided by £200,000 x 100 = 5.4%
If the question includes transaction costs, then these need to be added to the cost of the property; in other words, if the question is:
A property has a monthly rental income of £900. It was bought for £200,000 with costs of £8,000 then the calculation is:
£10,800 divided by £208,000 x 100 = 5.19%Learn which are the most likely calculations you’ll be expected to perform on your #CII #R02 exam. Click To Tweet
Question – Offshore funds
Jack and Joe are invested in offshore funds. Jack has made a gain of £1,000 in a reporting fund, and Joe has made a gain of £1,000 in a non-reporting fund. If they have both used their annual exempt amount for capital gains tax and are higher rate taxpayers, what are their respective tax liabilities?
Jack’s gain of £1,000 in a reporting fund will be taxed at 20% (normal CGT rates for a higher rate taxpayer)
Joe’s gain of £1,000 in a non-reporting fund will be taxed at 40% (taxed using CGT principles but taxed at his income tax rate)
It goes without saying that these (as well as the other common calculations) need to be practised many times before exam day to ensure that as soon as you see them, you know straight away how to tackle them.
Grab the resources you need!
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