Test Bank for Investments, 13th Edition by Zvi Bodie CHAPTER 1-28 | ALL CHAPTERS | LATEST A+ GUIDE
is the fundamental structural difference between open- Open-ended funds (unit trusts, OEICs) create/cancel units to meet demand -
ended and closed-ended funds? investors deal directly with the fund at NAV. Closed-ended funds (investment trusts)
have a fixed number of shares traded on an exchange, so the price is set by
supply/demand and can diverge from NAV.
What is the legal structure difference between a unit trust A unit trust is constituted by a trust deed, with assets held by a trustee for
and an OEIC? unitholders (beneficiaries), run by a manager. An OEIC is a company, constituted by
an instrument of incorporation, with shareholders and an Authorised Corporate
Director (ACD); a custodian replaces the trustee role.
What are SICAVs and FCPs, and where are they typically European open-ended collective investment vehicles (typically
domiciled? Luxembourg/France). SICAVs are structured as companies (like OEICs); FCPs are
established by contract rather than trust or company.
What is the difference between a physical and a synthetic A physical ETP owns the underlying assets directly (may engage in stock lending,
ETP? creating counterparty/collateral risk). A synthetic ETP gains exposure via derivatives
(eg, total return swaps) with a counterparty, without owning the underlying assets -
typically higher tracking error but can track harder-to-access markets.
What is an 'authorised participant' in the ETF A large institutional investor (eg, broker-dealer) that deposits a 'creation basket' of
creation/redemption process? securities with the ETF in exchange for creation units, or redeems creation units for
the underlying basket - this mechanism prevents sustained ETF
premiums/discounts to NAV.
What is the difference between an ETC and a commodity An ETC typically tracks a single commodity or commodity index (price moves with
ETF? spot/futures price). A commodity ETF can hold baskets of commodities via futures
contracts or commodity company shares.
What does UCITS stand for, and what is 'passporting'? Undertakings for Collective Investment in Transferable Securities - an EU regulatory
framework (1985) for open-ended retail funds. Passporting allows a UCITS fund
authorised in one EU state to be sold across all EU member states without further
authorisation (the UK lost these passporting rights after Brexit).
What is the UCITS concentration limit on exposure to a Aggregate exposure to transferable securities, deposits, money market instruments
single corporate group? and OTC derivative counterparty risk from one corporate group cannot exceed 20%
of the fund's NAV.
What is the difference between a KIID and a KID? KIID (Key Investor Information Document) applies specifically to UCITS funds. KID
(Key Information Document) is the broader PRIIPs disclosure document covering a
wider range of packaged retail and insurance-based investment products.
What is an Unregulated Collective Investment Scheme A fund not authorised/regulated by the FCA, so it cannot be marketed to the general
(UCIS), and what protections does it lack? public. UCIS investors have no Financial Ombudsman Service recourse and no
FSCS compensation scheme cover, alongside risks like illiquidity, high/unclear
charges, and gearing.
What does it mean for an investment trust to trade at a Premium: the share price is ABOVE the NAV of the underlying portfolio. Discount:
'premium' or 'discount'? the share price is BELOW the NAV. This reflects supply/demand for the trust's
shares rather than the value of its holdings directly.
What is a discount control mechanism (DCM) used by A programme where the trust buys back its own shares (holding them in treasury) to
investment trusts? support the share price and narrow a discount to NAV; a premium control
mechanism (PCM) does the reverse to manage a premium.
Why can closed-ended funds (like investment trusts) gear Closed-ended funds have a fixed capital base and can borrow against their assets
(borrow) while open-ended funds generally cannot? to amplify returns (and losses) - typically capped around 25-30% of total assets.
Open-ended funds can only borrow in limited circumstances since they must be
ready to redeem units on demand.
What are the maximum investment, tax relief rate, and Maximum £1 million (plus £1 million more for Knowledge-Intensive Companies),
minimum holding period for EIS income tax relief? 30% income tax relief, shares must be held at least 3 years or the relief is
withdrawn.
, Test Bank for Investments, 13th Edition by Zvi Bodie CHAPTER 1-28 | ALL CHAPTERS | LATEST A+ GUIDE
How do SEIS limits differ from EIS limits (company size SEIS companies: gross assets up to £350,000, fewer than 25 employees, trading
and investor tax relief)? under 3 years, max lifetime raise £250,000. Investor relief: 50% income tax relief on
investments up to £200,000 (vs EIS's 30% relief on up to £1m).
What are the VCT tax reliefs, and what is the minimum 30% income tax relief on investment up to £200,000/year (new shares only), tax-
holding period? free dividends, and CGT-free gains (on new AND second-hand shares). Minimum
holding period is 5 years for the income tax relief to stick.
Which of EIS, SEIS and VCT offer 'carry back' of income EIS and SEIS allow carry back. VCTs do NOT allow carry back.
tax relief to the previous tax year?
Which of EIS, SEIS and VCT offer CGT deferral relief and Only EIS offers CGT deferral relief and loss relief. SEIS offers a CGT 'holiday'
loss relief? (exemption on reinvested gains) instead. VCTs offer neither deferral nor loss relief,
but dividends are tax-exempt (unlike EIS/SEIS where dividends remain taxable).
What is the '2 and 20' fee structure common in private General Partners (GPs) typically charge a management fee of about 1.5-2.5% of
equity? fund value per year, plus a 20% performance/incentive fee on profits (carried
interest) above a hurdle rate.
What is the difference between General Partners (GPs) GPs manage the fund's day-to-day investment decisions and are compensated via
and Limited Partners (LPs) in a private equity fund? management + incentive fees. LPs (eg, pension funds, insurers, HNWIs) are the
capital-providing investors, with a typical fund life of around 10 years (extendable by
~3 years).
What is a futures contract, and what are the two key A legally binding agreement to buy/sell a standardised quantity of an asset at a
features that distinguish it from a forward contract? fixed price on a fixed future date. Unlike forwards, futures are exchange-traded and
dealt on standardised terms (contract specifications) - only the price is negotiable.
What does it mean to 'go long' versus 'go short' a futures Long = the buyer, committed to buying the underlying asset (profits if price rises).
contract? Short = the seller, committed to delivering the underlying asset (profits if price falls).
They are mirror images - a zero-sum game between the two positions.
What is the 'cheapest to deliver' (CTD) bond in a bond The deliverable gilt in the futures basket with the highest implied repo rate - it's the
futures contract? bond that is actually most likely to be delivered, and futures prices are closely linked
to its price.
What is the formula for the number of futures contracts Number of contracts = (Price factor x Nominal value of CTD portfolio) / Nominal
needed to hedge a bond portfolio using the CTD bond? value of the contract.
What is the formula for the number of futures contracts Number of contracts = (Portfolio value x Beta) / (Contract size x Index value).
needed to hedge an equity portfolio, incorporating beta?
What are the four main uses of derivatives mentioned in Hedging (reducing risk from adverse price moves), arbitrage (locking in risk-free
the syllabus? profit from price discrepancies), speculation (betting on price direction using
margin), and anticipating future cash flows (fixing a future price in advance).
What is 'basis' in the context of futures, and what is 'basis Basis is the difference between the cash (spot) price of the underlying asset and the
risk'? futures price. Basis risk is the risk that this relationship changes unpredictably,
affecting the performance of a hedge even when using the correct number of
contracts.
In a split capital investment trust, what is the difference Income shares pay out broadly all the income received by the trust (popular for tax-
between income shares and capital shares? efficient income). Capital shares pay no income at all - holders benefit from the bulk
of assets when the trust is wound up, after prior-ranking shares are paid; capital
shares are highly geared and volatile.
is the fundamental structural difference between open- Open-ended funds (unit trusts, OEICs) create/cancel units to meet demand -
ended and closed-ended funds? investors deal directly with the fund at NAV. Closed-ended funds (investment trusts)
have a fixed number of shares traded on an exchange, so the price is set by
supply/demand and can diverge from NAV.
What is the legal structure difference between a unit trust A unit trust is constituted by a trust deed, with assets held by a trustee for
and an OEIC? unitholders (beneficiaries), run by a manager. An OEIC is a company, constituted by
an instrument of incorporation, with shareholders and an Authorised Corporate
Director (ACD); a custodian replaces the trustee role.
What are SICAVs and FCPs, and where are they typically European open-ended collective investment vehicles (typically
domiciled? Luxembourg/France). SICAVs are structured as companies (like OEICs); FCPs are
established by contract rather than trust or company.
What is the difference between a physical and a synthetic A physical ETP owns the underlying assets directly (may engage in stock lending,
ETP? creating counterparty/collateral risk). A synthetic ETP gains exposure via derivatives
(eg, total return swaps) with a counterparty, without owning the underlying assets -
typically higher tracking error but can track harder-to-access markets.
What is an 'authorised participant' in the ETF A large institutional investor (eg, broker-dealer) that deposits a 'creation basket' of
creation/redemption process? securities with the ETF in exchange for creation units, or redeems creation units for
the underlying basket - this mechanism prevents sustained ETF
premiums/discounts to NAV.
What is the difference between an ETC and a commodity An ETC typically tracks a single commodity or commodity index (price moves with
ETF? spot/futures price). A commodity ETF can hold baskets of commodities via futures
contracts or commodity company shares.
What does UCITS stand for, and what is 'passporting'? Undertakings for Collective Investment in Transferable Securities - an EU regulatory
framework (1985) for open-ended retail funds. Passporting allows a UCITS fund
authorised in one EU state to be sold across all EU member states without further
authorisation (the UK lost these passporting rights after Brexit).
What is the UCITS concentration limit on exposure to a Aggregate exposure to transferable securities, deposits, money market instruments
single corporate group? and OTC derivative counterparty risk from one corporate group cannot exceed 20%
of the fund's NAV.
What is the difference between a KIID and a KID? KIID (Key Investor Information Document) applies specifically to UCITS funds. KID
(Key Information Document) is the broader PRIIPs disclosure document covering a
wider range of packaged retail and insurance-based investment products.
What is an Unregulated Collective Investment Scheme A fund not authorised/regulated by the FCA, so it cannot be marketed to the general
(UCIS), and what protections does it lack? public. UCIS investors have no Financial Ombudsman Service recourse and no
FSCS compensation scheme cover, alongside risks like illiquidity, high/unclear
charges, and gearing.
What does it mean for an investment trust to trade at a Premium: the share price is ABOVE the NAV of the underlying portfolio. Discount:
'premium' or 'discount'? the share price is BELOW the NAV. This reflects supply/demand for the trust's
shares rather than the value of its holdings directly.
What is a discount control mechanism (DCM) used by A programme where the trust buys back its own shares (holding them in treasury) to
investment trusts? support the share price and narrow a discount to NAV; a premium control
mechanism (PCM) does the reverse to manage a premium.
Why can closed-ended funds (like investment trusts) gear Closed-ended funds have a fixed capital base and can borrow against their assets
(borrow) while open-ended funds generally cannot? to amplify returns (and losses) - typically capped around 25-30% of total assets.
Open-ended funds can only borrow in limited circumstances since they must be
ready to redeem units on demand.
What are the maximum investment, tax relief rate, and Maximum £1 million (plus £1 million more for Knowledge-Intensive Companies),
minimum holding period for EIS income tax relief? 30% income tax relief, shares must be held at least 3 years or the relief is
withdrawn.
, Test Bank for Investments, 13th Edition by Zvi Bodie CHAPTER 1-28 | ALL CHAPTERS | LATEST A+ GUIDE
How do SEIS limits differ from EIS limits (company size SEIS companies: gross assets up to £350,000, fewer than 25 employees, trading
and investor tax relief)? under 3 years, max lifetime raise £250,000. Investor relief: 50% income tax relief on
investments up to £200,000 (vs EIS's 30% relief on up to £1m).
What are the VCT tax reliefs, and what is the minimum 30% income tax relief on investment up to £200,000/year (new shares only), tax-
holding period? free dividends, and CGT-free gains (on new AND second-hand shares). Minimum
holding period is 5 years for the income tax relief to stick.
Which of EIS, SEIS and VCT offer 'carry back' of income EIS and SEIS allow carry back. VCTs do NOT allow carry back.
tax relief to the previous tax year?
Which of EIS, SEIS and VCT offer CGT deferral relief and Only EIS offers CGT deferral relief and loss relief. SEIS offers a CGT 'holiday'
loss relief? (exemption on reinvested gains) instead. VCTs offer neither deferral nor loss relief,
but dividends are tax-exempt (unlike EIS/SEIS where dividends remain taxable).
What is the '2 and 20' fee structure common in private General Partners (GPs) typically charge a management fee of about 1.5-2.5% of
equity? fund value per year, plus a 20% performance/incentive fee on profits (carried
interest) above a hurdle rate.
What is the difference between General Partners (GPs) GPs manage the fund's day-to-day investment decisions and are compensated via
and Limited Partners (LPs) in a private equity fund? management + incentive fees. LPs (eg, pension funds, insurers, HNWIs) are the
capital-providing investors, with a typical fund life of around 10 years (extendable by
~3 years).
What is a futures contract, and what are the two key A legally binding agreement to buy/sell a standardised quantity of an asset at a
features that distinguish it from a forward contract? fixed price on a fixed future date. Unlike forwards, futures are exchange-traded and
dealt on standardised terms (contract specifications) - only the price is negotiable.
What does it mean to 'go long' versus 'go short' a futures Long = the buyer, committed to buying the underlying asset (profits if price rises).
contract? Short = the seller, committed to delivering the underlying asset (profits if price falls).
They are mirror images - a zero-sum game between the two positions.
What is the 'cheapest to deliver' (CTD) bond in a bond The deliverable gilt in the futures basket with the highest implied repo rate - it's the
futures contract? bond that is actually most likely to be delivered, and futures prices are closely linked
to its price.
What is the formula for the number of futures contracts Number of contracts = (Price factor x Nominal value of CTD portfolio) / Nominal
needed to hedge a bond portfolio using the CTD bond? value of the contract.
What is the formula for the number of futures contracts Number of contracts = (Portfolio value x Beta) / (Contract size x Index value).
needed to hedge an equity portfolio, incorporating beta?
What are the four main uses of derivatives mentioned in Hedging (reducing risk from adverse price moves), arbitrage (locking in risk-free
the syllabus? profit from price discrepancies), speculation (betting on price direction using
margin), and anticipating future cash flows (fixing a future price in advance).
What is 'basis' in the context of futures, and what is 'basis Basis is the difference between the cash (spot) price of the underlying asset and the
risk'? futures price. Basis risk is the risk that this relationship changes unpredictably,
affecting the performance of a hedge even when using the correct number of
contracts.
In a split capital investment trust, what is the difference Income shares pay out broadly all the income received by the trust (popular for tax-
between income shares and capital shares? efficient income). Capital shares pay no income at all - holders benefit from the bulk
of assets when the trust is wound up, after prior-ranking shares are paid; capital
shares are highly geared and volatile.
