R02 Exchange-traded products, property funds and private equity: free practice questions

1. Question 1 of 5

   What is an exchange-traded fund (ETF)?

   Option A: A bond issued by a bank and linked to an indexOption B: An index-tracking fund traded like a share on a stock exchangeOption C: A unit trust that can only be bought from the manager directOption D: An actively managed hedge fund

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   The answer is B: An index-tracking fund traded like a share on a stock exchange

   ETFs track an index and are listed and traded like shares, with prices updated through the day. They combine the flexibility of a share with the diversification of a fund.

   Why the other options are wrong

   A

   That's an exchange-traded note.

   C

   ETFs trade on exchanges throughout the day.

   D

   ETFs are index trackers.

2. Question 2 of 5

   What is the key extra risk of an exchange-traded note (ETN) compared with an ETF?

   Option A: It pays a high fixed rate of interestOption B: It always holds the physical underlying assets in fullOption C: It's an unsecured bond, so it depends on the issuing bankOption D: It can't be traded at all during the trading day

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   The answer is C: It's an unsecured bond, so it depends on the issuing bank

   An ETN is a bank's unsecured bond whose return is linked to an index. Its value falls if the bank is downgraded, even if the index doesn't move, and investors could receive nothing if the bank defaults.

   Why the other options are wrong

   A

   ETNs pay no interest.

   B

   ETNs don't hold the assets they track.

   D

   ETNs trade throughout the day.

3. Question 3 of 5

   Which of the following are conditions for a UK company to qualify as a REIT? 1. At least 75% of profits from property rental 2. At least 75% of assets in the property rental business 3. At least 90% of net rental income distributed 4. It must be structured as an OEIC

   Option A: 2, 3 and 4 onlyOption B: 1, 2, 3 and 4Option C: 1 and 2 onlyOption D: 1, 2 and 3 only

   Show answer

   The answer is D: 1, 2 and 3 only

   REITs are UK-resident, listed, closed-ended companies with one class of ordinary share. At least 75% of profits and assets must be in the rental business, 90% of net rental income must be distributed, and interest must be covered 1.25 times.

   Why the other options are wrong

   A

   REITs must be closed-ended, not OEICs.

   B

   A REIT can't be an OEIC.

   C

   The 90% distribution requirement also applies.

4. Question 4 of 5

   An investor subscribes £60,000 for new shares in a qualifying EIS company in 2026/27. How much income tax relief can he claim, if his tax liability is high enough?

   Option A: £12,000Option B: £18,000Option C: £30,000Option D: £60,000

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   The answer is B: £18,000

   EIS income tax relief is 30%: £60,000 × 30% = £18,000. It's withdrawn if the shares are disposed of within three years.

   Why the other options are wrong

   A

   That uses 20%, the VCT rate.

   C

   That uses 50%, the SEIS rate.

   D

   Relief is a percentage of the amount invested.

5. Question 5 of 5

   Which of the following are tax features of VCTs for individual investors? 1. Dividends are free of income tax 2. Gains on disposal are exempt from CGT 3. Losses on disposal can be set against other gains 4. Income tax relief is clawed back if shares are sold within five years

   Option A: 1, 2 and 4 onlyOption B: 1 and 2 onlyOption C: 2, 3 and 4 onlyOption D: 1, 2, 3 and 4

   Show answer

   The answer is A: 1, 2 and 4 only

   VCT dividends are tax-free and gains are exempt, whether shares were subscribed for or bought. Losses aren't allowable, and income tax relief on new shares is clawed back if they're held for less than five years.

   Why the other options are wrong

   B

   The five-year clawback also applies.

   C

   Losses aren't allowable; dividends are tax-free.

   D

   VCT losses aren't allowable losses for CGT.

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