R02 Direct investment and cash: free practice questions

1. Question 1 of 5

   Which statement best describes the capital held in a cash deposit?

   Option A: It isn't exposed to investment risk, but inflation erodes itOption B: It can rise in value when interest rates fall, as bonds doOption C: It's fully protected from inflation by the interest it earnsOption D: It's at risk of loss whenever the stock market falls

   Show answer

   The answer is A: It isn't exposed to investment risk, but inflation erodes it

   A cash deposit repays the capital in full on demand or at the end of the term, so the capital isn't exposed to investment risk. The return is interest only, with no growth, so over time inflation erodes its real value.

   Why the other options are wrong

   B

   Deposits have no capital growth; it's bond prices that rise when rates fall.

   C

   Interest often fails to keep pace with inflation, so the real value can fall.

   D

   Deposit capital isn't linked to stock market movements.

2. Question 2 of 5

   Mia sells her house and deposits the £900,000 proceeds while she waits to buy another. How does the FSCS protect the money?

   Option A: Not at all, as sale proceeds aren't eligible depositsOption B: Only up to £120,000, as with any other depositOption C: Up to £1.4m for as long as the money stays thereOption D: Up to £1.4m for six months, as a temporary high balance

   Show answer

   The answer is D: Up to £1.4m for six months, as a temporary high balance

   Temporary high balances, such as house sale proceeds or an inheritance, are protected up to £1.4m for six months, after which the normal £120,000 limit applies.

   Why the other options are wrong

   A

   Sale proceeds are eligible and get temporary high balance cover.

   B

   Temporary high balances from events such as a house sale get extra protection.

   C

   The higher limit lasts for six months.

3. Question 3 of 5

   For which client could a US dollar deposit account be most suitable?

   Option A: One who wants the highest possible return in sterlingOption B: One who needs a risk-free emergency fund in sterlingOption C: One who will need to pay bills in US dollarsOption D: One who wants FSCS protection above the usual limit

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   The answer is C: One who will need to pay bills in US dollars

   Foreign currency deposits can suit people who need income or capital in that currency to meet liabilities, or who want to speculate on exchange rates while earning some interest.

   Why the other options are wrong

   A

   Currency movements could wipe out any extra interest in sterling terms.

   B

   An emergency fund in sterling shouldn't carry currency risk.

   D

   The currency of a deposit doesn't raise FSCS protection.

4. Question 4 of 5

   Ben pays £6,000 into a flexible cash ISA in 2026/27 and later withdraws £2,500. How much more can he subscribe to ISAs this tax year?

   Option A: £14,000Option B: £20,000Option C: £12,000Option D: £16,500

   Show answer

   The answer is D: £16,500

   With a flexible ISA, money withdrawn can be replaced in the same tax year without using more allowance. His net subscription is £3,500, leaving £16,500 of the £20,000 limit.

   Why the other options are wrong

   A

   That would be right for a non-flexible ISA, where withdrawals still count.

   B

   His net £3,500 still counts towards the allowance.

   C

   £12,000 is the cash ISA limit for under-65s from 2027/28.

5. Question 5 of 5

   A three-month Treasury bill is bought at £99.40 per £100 nominal. What is the return over the three months, to two decimal places?

   Option A: 0.60%Option B: 0.06%Option C: 6.04%Option D: 2.41%

   Show answer

   The answer is A: 0.60%

   The gain is £100 − £99.40 = £0.60. As a percentage of the price paid: 0.60 ÷ 99.40 × 100 = 0.60% over three months.

   Why the other options are wrong

   B

   The gain is £0.60 on £99.40, about 0.6%, not 0.06%.

   C

   That's ten times the actual three-month return.

   D

   That's roughly the annualised return, not the three-month figure.

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