1.
1. A structured Investment-linked Life Insurance policy has the following features: Issuer = Company A Credit Rating of issuer = AA+ Tenure = 2 years Structure of the product Annual payout plan Maturity value = 100% of the initial amount of single premium Payout = 1% of the initial amount of single premium per annum Early redemption clause = Yes, if the underlying outperforms the benchmark by 20% at the end of any trading day. Which one of the following risk will be of LEAST concern to an investor based on the above- mentioned information?
Correct Answer
D. Leverage risk
Explanation
Based on the information provided, the investor does not face any leverage risk. Leverage risk refers to the potential for losses due to borrowing or using leverage to invest. However, in this case, there is no mention of borrowing or leverage being used in the investment-linked life insurance policy. Therefore, leverage risk would be of least concern to the investor.
2.
2. Which one of the following about participation products is True?
Correct Answer
C.
They are commonly marketed under the name of 'certificates' or 'notes'.
Explanation
Participation products are commonly marketed under the name of 'certificates' or 'notes'. This means that when these products are sold to investors, they are often referred to as certificates or notes. This helps investors understand that they are purchasing a financial product that allows them to participate in the price performance of underlying assets.
3.
3. Which of the following regulatory instrument(s) must a structured Investment-linked Life Insurance policies comply with?
Correct Answer
A. Insurance Act
Explanation
A structured Investment-linked Life Insurance policy must comply with the Insurance Act. This act sets out the regulatory requirements and guidelines for insurance policies in order to protect policyholders and ensure fair practices within the insurance industry. The Companies Financial Act and Deposit Insurance Scheme are not specifically related to structured Investment-linked Life Insurance policies and therefore do not need to be complied with.
4.
4. The forward price of a barrel of oil is S$150. The current spot price is S$120. The cost of carry is therefore equal to a:
Correct Answer
A. Premium of S$30
Explanation
The forward price of a commodity is determined by the spot price and the cost of carry. The cost of carry includes factors such as storage costs, financing costs, and any income that can be earned from holding the commodity. In this case, the forward price of a barrel of oil is S$150, while the current spot price is S$120. Since the forward price is higher than the spot price, it indicates a premium. The premium in this case is S$30, which is the difference between the forward price and the spot price. Therefore, the correct answer is a premium of S$30.
5.
5. The sub-fund's operating expenses to the daily average Net Asset Value is :
Correct Answer
B.
Expense Ratio
Explanation
The correct answer is Expense Ratio. The expense ratio is a measure of the operating expenses of a mutual fund or ETF as a percentage of its assets. It includes management fees, administrative costs, and other expenses. The expense ratio is important for investors to consider as it directly affects the overall return of their investment. A lower expense ratio indicates that a larger portion of the fund's assets is being used for investment purposes, while a higher expense ratio means that a larger portion is being used to cover expenses.
6.
6. Which one of the following statements relating to structured Investment-linked Life Insurance policies (ILPs) is TRUE?
Correct Answer
D.
The structured ILP's sub-funds are valued less frequently compared to other ILP sub-funds
Explanation
Structured Investment-linked Life Insurance policies (ILPs) are a type of insurance policy that combines life insurance coverage with investment options. The statement that the structured ILP's sub-funds are valued less frequently compared to other ILP sub-funds is true. This means that the investments within the structured ILP are not valued as often as the investments in other ILP sub-funds. This could be due to the unique structure and nature of the investments within the structured ILP, which may require less frequent valuation.
7.
7 Which one of the following statements about portfolio rebalancing is TRUE?
Correct Answer
B.
Portfolio rebalancing maintains the desired level of risk exposure
Explanation
Portfolio rebalancing is the process of adjusting the weights of assets in a portfolio to maintain the desired level of risk exposure. By periodically rebalancing the portfolio, investors can ensure that their investments align with their risk tolerance and investment goals. This helps to mitigate the risk of overexposure to certain assets and maintain a balanced and diversified portfolio. Therefore, the statement "Portfolio rebalancing maintains the desired level of risk exposure" is true.
8.
8. Structured products are:
Correct Answer
B.
Created by combining traditional investments with financial derivatives
Explanation
Structured products are financial instruments that are created by combining traditional investments, such as stocks or bonds, with financial derivatives. These derivatives can include options, swaps, or futures contracts. By combining these different elements, structured products offer investors a unique risk-return profile that may not be available with traditional investment products. This allows investors to tailor their investments to meet specific needs or objectives.
9.
9. Structured Investment-linked Life Insurance policy is less than traditional Investment-linked Life Insurance policy.
Correct Answer
A. Liquid
Explanation
The correct answer is "liquid" because a Structured Investment-linked Life Insurance policy is designed to provide more flexibility and ease of access to the policyholder's investment funds. This means that the policyholder can easily withdraw or transfer their funds without incurring significant penalties or restrictions. In contrast, a traditional Investment-linked Life Insurance policy may have more limitations and restrictions on the liquidity of the investment funds.
10.
10. Structured deposits are issued by:
Correct Answer
A. Banks
Explanation
Structured deposits are financial products that offer a combination of a traditional deposit account and an investment product. They typically provide a fixed return over a specific period of time, with the return linked to the performance of an underlying asset or index. Banks are the most common issuers of structured deposits, as they have the necessary infrastructure and expertise to create and manage these products. Lloyds' syndicates, insurance companies, and stock broking houses may offer other types of investment products, but they are not typically associated with structured deposits.
11.
11. A structured Investment-linked Insurance policy (ILP) has the following features:
Issuer = Insurer A
Underlying Asset = Basket of 6 stocks
Tenure = 2 years
Maturity Value = Initial capital amount + Guaranteed 1% of the capital
Bonus payout = 2% of the initial capital every year if the price of all 6 stocks has increased by 10% on maturity as compared to the price on the start date of the investment.
Assume that an investor invests S$50,000 in this structured ILP
Calculate the total amount that the investor will receive at the end of the 2 years under the WORST possible market performance scenario.
Correct Answer
B.
S$50,500
Explanation
The investor will receive S$50,500 at the end of the 2 years under the worst possible market performance scenario. This is because the policy guarantees a 1% return on the initial capital amount, which is S$50,000. Therefore, the maturity value will be S$50,000 + 1% of S$50,000, which is S$50,500. There is no bonus payout mentioned in the worst possible market performance scenario, so it is not considered in the calculation.
12.
12. John expects the Gold market to have big movement in the near future but unsure which direction. He can apply the following strategy to capture the market:
Correct Answer
D.
Bull Straddle
Explanation
A bull straddle strategy involves buying both a call option and a put option with the same strike price and expiration date. This strategy is used when the investor believes that the market will have a significant movement, but is unsure about the direction. By buying both options, the investor can profit from a large price movement in either direction. The potential loss is limited to the cost of purchasing the options, making it a relatively low-risk strategy.
13.
13. The counterparty to the derivative contract default, it may cause:
Correct Answer
D.
All of the above
Explanation
The counterparty to a derivative contract defaulting can lead to all of the mentioned outcomes. If the counterparty defaults, it can result in a total loss of the principal amount of the investment. Additionally, it may also trigger an early redemption of the investment, meaning that the investment is terminated before its maturity date. Lastly, if the counterparty defaults, the redemption amount for the investment may be lesser than expected. Therefore, all of the mentioned outcomes can occur if the counterparty to the derivative contract defaults.
14.
14. An investor placed $100,000 in Australia (AUD) investment when AUD was S$1.40. The AUD has since depreciated against the S$ and is now worth only S$1.20. On the other hand, the AUD investment has appreciated by 10% in AUD terms.
What is the investor's nest gain / loss on the investment, as measured in S$?
Correct Answer
D. Loss of 6%
Explanation
The investor initially invested $100,000 in Australia (AUD) when the exchange rate was S$1.40. However, the AUD has since depreciated against the S$ and is now worth only S$1.20. This means that the investor's initial investment of $100,000 is now worth $120,000 in AUD terms (10% appreciation). However, when converting it back to S$, the investor will receive only S$144,000 ($120,000 x S$1.20). This is a loss of 6% compared to the initial investment of S$154,000 ($100,000 x S$1.40).
15.
15. Which of the following option strategies would be MOST appropriate if Sally is bullish about a stock but does not want to own it?
Correct Answer
B.
Long a call
Explanation
If Sally is bullish about a stock but does not want to own it, the most appropriate option strategy would be to "Long a call." This means that Sally would buy a call option, which gives her the right to buy the stock at a specified price (strike price) within a certain time period. By buying a call option, Sally can benefit from the potential increase in the stock's price without actually owning the stock. If the stock price goes up, Sally can exercise the call option and profit from the difference between the strike price and the market price. If the stock price does not increase, Sally can simply let the call option expire and only lose the premium paid for the option.
16.
16. Performance participation structured products:
Correct Answer
D. Typically offer unlimited upside potential with no downside protection
Explanation
Performance participation structured products typically offer unlimited upside potential with no downside protection. This means that investors have the opportunity to earn high returns if the underlying assets perform well, but they also face the risk of losing their initial investment if the assets perform poorly. These products are not secured debt instruments and carry a higher degree of investment risk. Additionally, they allow investors to share in the profits of the participating funds.
17.
17. Derivatives are financial instruments that are generally used for:
Correct Answer
D.
Serve all the above functions
Explanation
Derivatives serve all the above functions, including managing risks, betting on the price movement of underlying assets, and hedging against unwanted price movements. They are versatile financial instruments that can be used for various purposes in the financial market.
18.
18. John decides to invest S$100,000 in the following investment:
Prosperity Fund issued by Smarty Bank and distributed by Brilliant Bank. This fund seeks yearly investment returns, (before fees and expenses) that correspond to 150% of the returns of the yearly performance of the Japan Index fund.
What is / are the risk(s) that the above investor is subject to?
Correct Answer
D. All of the above
Explanation
The investor is subject to market risk because the returns of the Prosperity Fund are linked to the performance of the Japan Index fund, which can be volatile. They are also subject to liquidity risk because if they need to sell their investment before it matures, they may not be able to find a buyer or may have to sell at a lower price. Additionally, there is credit risk of Smarty Bank, as the investor's investment is dependent on the bank's ability to meet its financial obligations. Therefore, all of the risks mentioned (market risk, liquidity risk, and credit risk of Smarty Bank) apply to the investor.
19.
19. Jane, a Singaporean, invests in an exchange-traded portfolio fund issued by AAA+ rating bank, denominated in US$. Which ONE of the following risks should Jane be most concerned?
Correct Answer
D. Foreign exchange risk
Explanation
Jane, being a Singaporean investor, should be most concerned about foreign exchange risk. This is because she is investing in a fund denominated in US dollars, which means that any fluctuations in the exchange rate between the US dollar and the Singapore dollar can impact the value of her investment. If the Singapore dollar strengthens against the US dollar, the value of her investment will decrease when converted back into Singapore dollars. Therefore, Jane should be mindful of this risk when investing in a fund denominated in a foreign currency.
20.
20. Which ONE of the following methods may be used to mitigate counterparty default risk?
Correct Answer
C.
Asking for collateral from the counterparty
Explanation
Asking for collateral from the counterparty can be used to mitigate counterparty default risk. By requesting collateral, the counterparty is required to provide an asset or security that can be used to offset any potential losses in the event of default. This provides a form of protection for the party at risk and reduces the likelihood of financial loss. Investing only in listed companies, using non-publicly traded securities, and dealing in the same foreign currency do not directly address counterparty default risk.
21.
21. Which of the following statements regarding derivatives is FALSE?
Correct Answer
B.
Holders of derivative contracts own the underlying assets
Explanation
This statement is false because holders of derivative contracts do not own the underlying assets. Instead, they have a contractual agreement that gives them the right to buy or sell the underlying assets at a specified price and time in the future.
22.
22. Portfolio bonds are:
Correct Answer
B.
Lifestyles policies
23.
23. Those investments that carry a low probability of loss of principal while offering a high probability of potential returns can be said to be:
Correct Answer
A. Rare gems
Explanation
The correct answer is "Rare gems" because it implies that these investments are valuable and hard to find, similar to rare gems. This suggests that these investments have a low risk of losing the initial investment but have a high potential for returns, making them highly desirable.
24.
24. What is a portfolio of investments with an insurance element called?
Correct Answer
C.
Portfolio bond
Explanation
A portfolio of investments with an insurance element is called a portfolio bond. This type of investment allows individuals to invest in a variety of assets while also providing insurance coverage. It combines the benefits of investment growth with the security of insurance protection, making it an attractive option for individuals looking to diversify their investments and manage risk.
25.
25. Investors may wish to invest in structured products as they:
Correct Answer
D. Provide access to investment markets that are otherwise closed to them
Explanation
Investors may wish to invest in structured products because these products provide access to investment markets that are otherwise closed to them. This means that structured products offer opportunities to invest in markets that are not easily accessible through traditional investment options. This can potentially provide investors with a wider range of investment options and diversification opportunities.
26.
26. A gearing structured product will have the following effect:
Correct Answer
A. Leveraged
Explanation
A gearing structured product will have a leveraged effect. This means that the product will amplify the returns of the underlying asset or index. It allows investors to potentially earn higher returns but also exposes them to higher risks. The leverage is achieved through borrowing and using additional capital to invest, which magnifies the gains or losses.
27.
27. Portfolio bonds may be invested in a variety of investment instruments, including:
Correct Answer
D.
All of the above
Explanation
Portfolio bonds can be invested in a variety of investment instruments, including bonds, equities, and derivatives. This means that investors can diversify their portfolio by including different types of assets in their bond investments. Bonds provide stability and fixed income, while equities offer potential for growth and higher returns. Derivatives, on the other hand, can be used to hedge against market risks or speculate on price movements. By investing in all of these instruments, investors can take advantage of different market conditions and potentially maximize their returns.
28.
28. A structured investment-linked product should be valued
Correct Answer
A. At least once a month
Explanation
A structured investment-linked product should be valued at least once a month to ensure that investors have accurate and up-to-date information about the value of their investment. This frequent valuation allows investors to make informed decisions and monitor the performance of their investment. Valuing the product less frequently, such as once every two or three years, may result in outdated information and could lead to potential risks and uncertainties for investors. Valuing the product only when there are significant changes to the investment portfolio may not be sufficient as it may not capture smaller fluctuations in value that could still impact investors' decisions.
29.
29. Company Delta issues a structured product, which is distributed by Company Elite. Subsequently, Company Delta's credit rating is downgraded. What kind of risk does this present to the investor?
Correct Answer
B.
Issuer-specific risk
Explanation
When Company Delta's credit rating is downgraded, it presents issuer-specific risk to the investor. This means that the investor is exposed to the risk that Company Delta may not be able to fulfill its financial obligations related to the structured product. The downgrade in credit rating indicates a higher likelihood of default or financial instability on the part of Company Delta, which increases the risk for the investor.
30.
30. Structured products:
Correct Answer
B.
Are also known as hybrid products
Explanation
Structured products are also known as hybrid products because they combine different types of investments, such as stocks, bonds, and derivatives, into a single financial instrument. This combination allows investors to gain exposure to multiple asset classes and potentially diversify their risk. By combining different investments, structured products can offer unique risk and return profiles that may not be available through traditional investments alone.
31.
31. Which of the following regarding to Warrants is WRONG?
Correct Answer
B.
Holder of put warrants have the obligation to sell the underlying assets
Explanation
Put warrants give the holder the right, but not the obligation, to sell the underlying assets at a specified price within a certain time period. Therefore, the statement that the holder of put warrants has the obligation to sell the underlying assets is incorrect.
32.
32. One advantage of a portfolio of investments with an insurance element is that:
Correct Answer
D.
The policy owner can change asset allocation as his financial needs change over time
Explanation
An advantage of a portfolio of investments with an insurance element is that the policy owner can change asset allocation as their financial needs change over time. This flexibility allows the policy owner to adjust their investment strategy to align with their evolving financial goals and risk tolerance. By being able to modify the asset allocation, the policy owner can potentially optimize their investment returns and better manage their overall portfolio.
33.
33. Negatively correlated securities may serve to:
Correct Answer
B.
Enhance portfolio diversification
Explanation
Negatively correlated securities can enhance portfolio diversification because they tend to move in opposite directions. When one security is performing poorly, the other security may be performing well, which helps to balance out the overall performance of the portfolio. This reduces the risk and volatility of the portfolio, as losses in one security can be offset by gains in the other. Therefore, including negatively correlated securities in a portfolio can help to spread the risk and increase diversification.
34.
34. Which one of the following statements regarding hedgers is CORRECT? Hedgers seek to:
Correct Answer
B.
Minimize risk
Explanation
Hedgers seek to minimize risk by using financial instruments such as futures contracts to protect themselves against price fluctuations in the market. By taking a position opposite to their exposure in the physical market, hedgers can offset potential losses and stabilize their financial position. This allows them to focus on their core business activities without being overly affected by price volatility.
35.
35. The players in the futures market fall into two categories — hedgers and speculators. Which one of the following statements regarding speculators is WRONG?
Correct Answer
B.
Buy low and keep the investment for long period
Explanation
The statement "Buy low and keep the investment for a long period" is incorrect because speculators in the futures market typically engage in short-term trading and do not hold their positions for a long time. Speculators aim to profit from short-term price fluctuations rather than long-term investment strategies.
36.
36. Investors of structured products may face counterparty risks, which means that:
Correct Answer
D.
The counterparty may fail to meet its contractual obligations to the issuer
Explanation
Investors of structured products may face counterparty risks, which means that the counterparty may fail to meet its contractual obligations to the issuer. This means that the party on the other side of the transaction may not fulfill their obligations, such as making payments or delivering the promised assets. This can result in financial loss or other negative consequences for the investor.
37.
37. Investors may wish to invest in structured products as they:
Correct Answer
D.
All of the above
Explanation
Investors may wish to invest in structured products because they have the ability to offer customized exposure, meaning that investors can tailor the product to match their specific investment goals and risk tolerance. Additionally, structured products are useful as a complement to traditional investments because they can provide diversification and potentially enhance returns. Lastly, structured products are accessible to retail investors in the same ways that other investment products are, allowing individual investors to participate in these investment opportunities. Therefore, all of the given options provide valid reasons for why investors may choose to invest in structured products.
38.
38. Which of the following is one of the characteristics of structured Investment-linked Life Insurance policies (ILPs)?
Correct Answer
C.
Structured ILP sub-funds are in tailor-made products
Explanation
One of the characteristics of structured Investment-linked Life Insurance policies (ILPs) is that the sub-funds within these policies are tailor-made products. This means that the investment options available within the ILP are customized to meet the specific needs and preferences of the policyholder.
39.
39. A structured product manager purchased a zero-coupon bond at S$100 for every S$300 invested in the structured product.
The structured product aims to provide a return of the capital portion to investors at maturity. Assuming that the zero-coupon bond matures at the same time as the structured product, what must the maturity value of the zero-coupon bond be, in order for the structured product to meet the return of principal to the investor?
Correct Answer
C.
S$300
Explanation
The maturity value of the zero-coupon bond must be S$300 in order for the structured product to meet the return of principal to the investor. This means that at maturity, the investor will receive the full amount of their initial investment back, which is S$300.
40.
40. If John uses S$200,000 to buy a 5-year bond from Supreme Company and he wishes to mitigate the risk of the company's failure on his Supreme Company bond, he can seek to
buy a/an swap on the Supreme Company Bond.
Correct Answer
D.
Credit default
Explanation
If John wishes to mitigate the risk of Supreme Company's failure on his bond, he can seek to buy a credit default swap on the Supreme Company bond. A credit default swap is a financial contract in which the buyer pays a premium to the seller in exchange for protection against the default of a specific bond or loan. In this case, John would be buying a credit default swap to protect himself in case Supreme Company fails to fulfill its obligations on the bond.
41.
41. A portfolio bond is suitable for investors who:
Correct Answer
D. Are looking to invest in a portfolio of different funds
Explanation
A portfolio bond is a type of investment product that allows investors to invest in a variety of different funds. This can help to diversify their investments and spread their risk across multiple assets. It is not specifically designed for investors who want to invest in bonds, have a short investment time horizon, or are seeking a high level of insurance protection. Therefore, the correct answer is that a portfolio bond is suitable for investors who are looking to invest in a portfolio of different funds.
42.
42. Your client has asked you to distinguish between a futures contract and a forward contract. Which one of the following comparison is CORRECT?
Correct Answer
D.
Futures are standardized contracts traded on the exchanges whereas forwards are customized private contracts trade over-the-counter between two parties
Explanation
Futures contracts are standardized contracts that are traded on exchanges, such as the Chicago Mercantile Exchange. They have specific contract sizes, expiration dates, and delivery terms. On the other hand, forward contracts are customized private contracts that are traded over-the-counter between two parties. They can be tailored to the specific needs of the parties involved, including the contract size, expiration date, and delivery terms. This key difference in the trading location and customization distinguishes futures contracts from forward contracts.
43.
43. The January futures price of oil is US$100 per barrel, but the cash price is US$93 per barrel. Which one of the following statements BEST describes this situation?
Correct Answer
D.
Basis is "US$7 under January"
Explanation
The given situation indicates that the cash price of oil is lower than the futures price. This means that the basis, which is the difference between the cash price and the futures price, is negative. In this case, the basis is "US$7 under January" because the cash price is $7 less than the futures price.
44.
44. Which of the following statements about portfolio bonds is FALSE?
Correct Answer
C.
The principal of portfolio bonds is generally guaranteed
Explanation
Portfolio bonds do not generally guarantee the principal amount invested. The value of the investment can fluctuate based on the performance of the underlying assets. Therefore, the statement that the principal of portfolio bonds is generally guaranteed is false.
45.
45. Structured deposits are:
Correct Answer
D.
Usually arranged such that the capital is guaranteed by the bank
Explanation
Structured deposits are financial products that are typically arranged by banks and offer a combination of fixed-income investments and derivatives. They are designed to provide investors with a higher return compared to traditional fixed deposits. One key feature of structured deposits is that the capital invested is usually guaranteed by the bank, meaning that the investor is protected against any potential losses. This guarantee gives investors a sense of security and makes structured deposits an attractive option for those looking for a low-risk investment with the potential for higher returns.
46.
46. On 1 January 2011, David decides to invest S$100,000 in the following structured Investment-linked Life Insurance policy from his life insurer:
Capital preservation fund (maturing on 1 January 2021) seeks to provide policy owners with:
- Annual payout of 4.5% of the initial NAV as at each policy anniversary; and
- 100% capital guarantee on maturity
In making this investment, David is assured of:
Correct Answer
B.
Getting back 100% of his capital on maturity, regardless of the investment performance of the underlying sub-fund
Explanation
The correct answer is getting back 100% of his capital on maturity, regardless of the investment performance of the underlying sub-fund. This means that regardless of how well or poorly the investment performs, David will receive his initial investment amount back in full when the policy matures on 1 January 2021.
47.
47. A / an is a security that entitles the holder to buy or sell an underlying security at a strike price on or before an expiry date.
Correct Answer
C.
Option
Explanation
An option is a security that entitles the holder to buy or sell an underlying security at a strike price on or before an expiry date. This means that the holder has the right, but not the obligation, to buy or sell the underlying security at the specified price within the specified time frame. Options are commonly used in financial markets to hedge against risk or speculate on price movements.
48.
48. Which one of the following statements regarding option is TRUE?
Correct Answer
A. It gives the holder of call option the right to buy the underlying asset
Explanation
A call option gives the holder the right, but not the obligation, to buy the underlying asset at a specified price (the strike price) within a certain period of time. This means that the holder has the choice to exercise the option or not, depending on whether it is profitable to do so. Therefore, the statement that a call option gives the holder the right to buy the underlying asset is true.
49.
49. An investor placed S$20,000 in a single-premium structured Investment-linked Life Insurance policy with a sum assured of S$25,000. If an early redemption events is triggered by the insurer, the investor will MOST likely receive the:
Correct Answer
C.
Initial capital amount with the accrued payouts
Explanation
If an early redemption event is triggered by the insurer, the investor will receive the initial capital amount with the accrued payouts. This means that the investor will get back the S$20,000 they initially invested, along with any additional returns or payouts that have accumulated over the course of the policy. The sum assured of S$25,000 is not relevant in this scenario, as it only applies if the investor holds the policy until maturity.
50.
50. Which of the following investment product may provide guaranteed to the principal amount?
Correct Answer
C.
Structured Deposit
Explanation
A structured deposit is an investment product that may provide a guarantee to the principal amount. This means that the investor's initial investment is protected and will not be lost. Bonds and structured funds do not necessarily provide a guarantee to the principal amount, so they are not the correct answers. Therefore, the correct answer is structured deposit.