R02 Investment trusts and closed-ended funds: free practice questions

1. Question 1 of 5

   Why is an investment trust described as closed-ended?

   Option A: It has a fixed end dateOption B: It can only invest in the UKOption C: It's closed to new investors after launchOption D: It has a fixed number of shares in issue

   Show answer

   The answer is D: It has a fixed number of shares in issue

   Investment trusts are PLCs, regulated by company law and listed on the London Stock Exchange, with a fixed number of shares. Investors buy and sell shares in the market.

   Why the other options are wrong

   A

   Conventional trusts usually have an indefinite life.

   B

   It can invest anywhere in the world.

   C

   Investors can buy its shares on the stock exchange.

2. Question 2 of 5

   An investment trust's shares trade at 230p and its NAV per share is 200p. How would you describe the shares?

   Option A: At a discount of 15%Option B: At a premium of 15%Option C: At a premium of 30%Option D: At a premium of 13%

   Show answer

   The answer is B: At a premium of 15%

   Premium = (230 − 200) ÷ 200 = 15%. Premiums are rare and occur when demand for a trust is particularly high.

   Why the other options are wrong

   A

   The price is above NAV, so it's a premium.

   C

   That treats the 30p difference as a percentage.

   D

   That divides by the share price instead of NAV.

3. Question 3 of 5

   Why do HMRC-approved investment trusts often pay little or no corporation tax?

   Option A: Gains are exempt, and expenses offset taxable interest incomeOption B: They never receive any interest incomeOption C: They're registered as charities with the Charity CommissionOption D: They pay all their tax through shareholders' dividends

   Show answer

   The answer is A: Gains are exempt, and expenses offset taxable interest income

   Approved trusts pay no tax on gains or on franked UK dividends. Corporation tax on interest is reduced by offsetting management fees and interest paid on borrowings.

   Why the other options are wrong

   B

   Many receive interest, which is taxable.

   C

   That isn't the reason.

   D

   The trust is taxed on unfranked income.

4. Question 4 of 5

   A class of zeros has asset cover of 1. What does this mean?

   Option A: Assets available exactly cover its redemption valueOption B: The trust's assets cover it twice overOption C: Only 1% of its redemption value is covered by assetsOption D: It will be repaid in one year

   Show answer

   The answer is A: Assets available exactly cover its redemption value

   Asset cover is the ratio by which a class's predetermined redemption value is covered by available assets, after prior-ranking classes. 1 means exactly covered; 0.5 means half covered.

   Why the other options are wrong

   B

   That would be a cover of 2.

   C

   A cover of 1 means 100%.

   D

   Cover isn't a measure of time.

5. Question 5 of 5

   Which charge applies when buying investment trust shares but not when buying unit trust units?

   Option A: A dilution levyOption B: VAT at 20% on the purchaseOption C: An annual management chargeOption D: Stamp duty or SDRT of 0.5%

   Show answer

   The answer is D: Stamp duty or SDRT of 0.5%

   Investment trust shares are bought like other shares, so stamp duty or SDRT of 0.5% applies, along with the market spread and any dealing charges.

   Why the other options are wrong

   A

   Dilution levies apply to single-priced open-ended funds.

   B

   VAT doesn't apply to buying shares.

   C

   Both types of fund have management charges.

R0 Exam Prep is an independent revision tool. It is not produced, endorsed by or affiliated with the Chartered Insurance Institute (CII). Questions and explanations are original. Use it alongside the official study text. About R0 Exam Prep