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QFA Investment study materials
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QFA Investment practice questions

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Question 1Investment products and savings vehicles

Which savings product normally pays a fixed rate of interest for a set term and applies a penalty or loss of interest if the saver withdraws early?

  1. A unit-linked fund
  2. A term deposit Correct answer.
  3. A current account
  4. A tracker bond

Explanation

A term deposit locks funds for a set period at a stated rate, and early access usually triggers a penalty or interest adjustment. Current accounts and market-linked products do not provide that fixed-term fixed-rate structure.

Question 2Investment products and savings vehicles

What is the main characteristic of a money market fund?

  1. It invests mainly in listed shares
  2. It holds short-term quality debt Correct answer.
  3. It guarantees fixed capital
  4. It owns direct physical property

Explanation

Money market funds invest in short-term, high-quality debt instruments such as treasury bills and commercial paper. This gives them lower volatility than equity or property funds, but capital is not guaranteed.

Question 3Investment products and savings vehicles

An ordinary share represents which claim on a company?

  1. A secured loan to the company
  2. Part ownership of the company Correct answer.
  3. A guaranteed fixed coupon
  4. A contractual pension right

Explanation

An ordinary share is an equity claim giving the holder part ownership of the company and a residual right to profits and assets. It is not a loan and does not carry a guaranteed coupon.

Question 4Investment products and savings vehicles

A retail government savings bond is best described as:

  1. An exchange-traded derivative
  2. A private equity commitment
  3. A company's commercial paper
  4. A fixed-term savings product Correct answer.

Explanation

Retail government savings bonds are fixed-term savings products issued to small investors, usually with a stated interest rate or return structure. They are not private equity, derivatives or corporate paper.

Question 5Investment products and savings vehicles

The main purpose of a pension savings vehicle is to provide:

  1. Protection for a car
  2. Funds for daily spending
  3. Cover for travel delays
  4. Income in retirement Correct answer.

Explanation

A pension is a long-term savings vehicle designed to build a fund that provides income in retirement. Other covers relate to general insurance or short-term liquidity needs.

Question 6Investment products and savings vehicles

A collective investment fund primarily:

  1. Issues physical banknotes
  2. Pools money for a portfolio Correct answer.
  3. Lends only to one borrower
  4. Guarantees a set return

Explanation

A collective investment fund pools money from many investors and uses it to buy a diversified portfolio. The fund's value fluctuates with the underlying assets and is not guaranteed.

Question 7Investment products and savings vehicles

A REIT mainly earns income from:

  1. Rental property Correct answer.
  2. Mining royalties
  3. Software licences
  4. Government grants

Explanation

A real estate investment trust owns and operates property and generally derives income from rents. It may also make gains from property sales, but rental income is the core source.

Question 8Investment products and savings vehicles

A life assurance savings policy usually combines:

  1. Only cash deposits
  2. Only equity trading
  3. Protection and saving Correct answer.
  4. Only mortgage loans

Explanation

A life assurance savings policy combines a savings element with life protection, so part of the premium builds value while part funds the cover. It is not a pure deposit or trading product.

Question 9Investment products and savings vehicles

Two deposits offer the same nominal annual rate, but one compounds monthly and the other annually. Which statement is correct?

  1. Monthly compounding raises the effective rate Correct answer.
  2. Effective rates cannot be compared
  3. Annual compounding always raises the effective rate
  4. Both always have identical effective rates

Explanation

The effective annual rate accounts for compounding within the year. For the same nominal rate, more frequent compounding produces a higher effective annual rate than annual compounding.

Question 10Investment products and savings vehicles

Which risk is most associated with direct property investment?

  1. Currency conversion fees
  2. Daily NAV publication
  3. Difficulty selling quickly Correct answer.
  4. Intraday price volatility

Explanation

Direct property is illiquid because a sale can take time and may require a price concession to complete quickly. This liquidity risk is distinct from daily market-price volatility.

Question 11Investment products and savings vehicles

An inflation-linked government bond primarily protects the investor against:

  1. Stock market crashes
  2. Currency conversion
  3. Issuer default risk
  4. Erosion by inflation Correct answer.

Explanation

Inflation-linked bonds adjust principal or coupons in line with an inflation index, helping preserve purchasing power. They do not eliminate credit, market or currency risks.

Question 12Investment products and savings vehicles

A key difference of an ETF compared with a traditional mutual fund is that an ETF:

  1. Cannot hold equity securities
  2. Can only be bought at day-end NAV
  3. Trades intraday on an exchange Correct answer.
  4. Always pays a guaranteed return

Explanation

Exchange-traded funds are listed and can be bought or sold during the trading day at market prices. Traditional open-ended mutual funds are typically priced at the end-of-day net asset value.

Question 13Investment products and savings vehicles

A capital-protected structured product's promised repayment depends mainly on:

  1. Central bank money printing policy
  2. Historical share price moves
  3. Issuer credit and payoff rules Correct answer.
  4. Investor age and gender

Explanation

The promise to return capital is only as strong as the issuer's creditworthiness, and the actual payout depends on the product's defined participation or payoff rules. Past price moves alone do not determine the contractual repayment.

Question 14Investment products and savings vehicles

With-profits life funds typically add value through:

  1. Regular and final bonuses Correct answer.
  2. Guaranteed index returns
  3. Daily trading of shares
  4. Fixed deposit coupons

Explanation

With-profits funds may declare regular bonuses during the policy term and a final or terminal bonus at maturity. These bonuses depend on the fund's experience and are not the same as guaranteed index returns.

Question 15Investment products and savings vehicles

If a corporate bond's credit spread widens while its coupon and maturity stay unchanged, its market price normally:

  1. Rises sharply
  2. Falls Correct answer.
  3. Stays exactly fixed
  4. Becomes zero

Explanation

A wider credit spread means the market requires a higher yield for the same bond. Because the coupon is fixed, the bond's price must fall to raise the yield to the new market level.

Question 16Investment products and savings vehicles

Hedge funds commonly impose which feature on investors?

  1. Daily redemption at NAV
  2. No management fee
  3. Lock-up periods Correct answer.
  4. A government guarantee

Explanation

Hedge funds often restrict withdrawals through lock-up periods and notice requirements because their strategies may hold illiquid or long-term positions. They are not government-guaranteed and normally charge management and performance fees.

Question 17Investment products and savings vehicles

A regular savings plan into a volatile fund can benefit from:

  1. Elimination of all risk
  2. Cost averaging over time Correct answer.
  3. Guaranteed capital growth
  4. Fixed tax-free returns

Explanation

Investing fixed amounts regularly buys more units when prices are low and fewer when prices are high, which is cost averaging. It smooths the entry price but does not remove investment risk or guarantee growth.

Question 18Investment products and savings vehicles

A deposit guarantee scheme generally protects:

  1. Bond default losses
  2. Property price falls
  3. Equity fund losses
  4. Eligible bank deposits Correct answer.

Explanation

Deposit guarantee schemes protect eligible deposits held with participating banks up to specified limits if the bank fails. They do not insure investment losses on funds, bonds or property.

Question 19Investment products and savings vehicles

An investment trust's shares can trade at a discount to net asset value because:

  1. It holds only cash
  2. It must redeem shares on demand
  3. It is closed-ended Correct answer.
  4. Its net asset value is fixed daily

Explanation

An investment trust is a closed-ended company whose shares trade on an exchange, so supply and demand can push the share price above or below net asset value. It does not continuously redeem shares at NAV as an open-ended fund does.

Question 20Investment products and savings vehicles

Commodity exposure through futures or exchange-traded commodities typically involves:

  1. Roll and storage costs Correct answer.
  2. Guaranteed inflation protection
  3. No ongoing costs
  4. Regular dividend income

Explanation

Futures-based commodity exposure requires rolling contracts as they expire, and physical commodities can involve storage and insurance costs. Commodities generally produce no dividend income.

Question 21Investment products and savings vehicles

A bond with higher duration is generally:

  1. More yield-sensitive Correct answer.
  2. Free from interest rate risk
  3. Less exposed to credit risk
  4. Always rated triple-A

Explanation

Duration measures a bond's price sensitivity to changes in yield. A higher duration means the bond's price will generally move more for a given change in interest rates.

Question 22Investment products and savings vehicles

The 'J-curve' in private equity refers to:

  1. A guaranteed exit price
  2. Early losses then later gains Correct answer.
  3. A steady annual dividend
  4. A fixed coupon paid each quarter

Explanation

Private equity funds often show negative early returns because fees and initial write-downs occur before portfolio companies mature. Later gains can produce a J-shaped return pattern over the fund's life.

Question 23Investment products and savings vehicles

A convertible bond's market value is influenced by:

  1. Only deposit rates
  2. The next coupon payment date and amount
  3. Only the issuer's logo
  4. Equity upside and credit risk Correct answer.

Explanation

A convertible bond combines a bond's credit exposure with an option to convert into equity, so its value reflects both credit risk and the value of the underlying shares. Coupon timing is only one minor input.

Question 24Investment products and savings vehicles

A currency-hedged share class of an equity fund mainly reduces:

  1. Company bankruptcy risk
  2. Market timing risk
  3. Currency fluctuation risk Correct answer.
  4. Stock selection risk

Explanation

A currency-hedged share class uses hedging transactions to reduce the effect of exchange-rate movements between the fund's assets and the investor's currency. It does not remove the risk of the underlying equities falling.

Question 25Investment products and savings vehicles

Compared with a distributing share class, an accumulating fund class normally:

  1. Avoids all investment market risk
  2. Pays all income out as cash
  3. Guarantees a fixed cash payout
  4. Reinvests income in the fund Correct answer.

Explanation

An accumulating class retains income within the fund and reinvests it, which tends to increase the fund's net asset value. A distributing class instead pays income out to investors.

Question 26Investment products and savings vehicles

A demand deposit account is best described as an account that:

  1. pays interest only at a fixed maturity date
  2. allows withdrawal on demand without notice or penalty Correct answer.
  3. guarantees a return above the rate of inflation
  4. is traded on a recognised stock exchange

Explanation

A demand deposit can be withdrawn immediately, usually without notice or penalty. Term deposits require funds to remain on deposit for a set period, and listed securities are bought and sold on an exchange.

Question 27Investment products and savings vehicles

A Treasury bill is a short-term government security that typically:

  1. is issued at a discount and redeemed at face value Correct answer.
  2. gives the holder the right to convert into government shares
  3. pays a fixed coupon every six months until maturity
  4. is secured by a specific pool of corporate assets

Explanation

Treasury bills are short-term government borrowings sold below face value; the investor receives face value at maturity. The difference is the return, and no coupon is paid.

Question 28Investment products and savings vehicles

Commercial paper is unsecured short-term debt issued mainly by:

  1. households borrowing for home purchase
  2. central banks managing foreign exchange reserves
  3. governments financing long-term infrastructure
  4. large corporations needing short-term funding Correct answer.

Explanation

Commercial paper is short-term unsecured debt issued by large companies to fund working capital and other immediate needs. Governments issue bills and bonds rather than commercial paper.

Question 29Investment products and savings vehicles

On a company liquidation, ordinary shareholders rank:

  1. after both creditors and preference shareholders Correct answer.
  2. before all creditors but after preference shareholders
  3. before preference shareholders but after creditors
  4. before both creditors and preference shareholders

Explanation

Ordinary shareholders are residual owners and are paid last after creditors and preference shareholders. Preference shareholders rank ahead of ordinary shareholders but behind creditors.

Question 30Investment products and savings vehicles

An open-ended investment fund is one that:

  1. issues and redeems units as investors buy or sell Correct answer.
  2. invests only in physical property
  3. must be liquidated at a predetermined future date
  4. has a fixed number of shares traded on an exchange

Explanation

An open-ended fund can expand or contract by issuing and redeeming units at the fund's net asset value. A closed-ended fund has a fixed number of shares, and property funds are only one possible type.

Question 31Investment products and savings vehicles

A money market fund primarily invests in:

  1. long-dated government bonds with fixed coupons
  2. unlisted private companies
  3. short-term, high-quality debt instruments Correct answer.
  4. listed equities with high dividend yields

Explanation

Money market funds invest in short-term instruments such as Treasury bills, commercial paper and certificates of deposit. They aim for liquidity and capital preservation rather than long-term growth.

Question 32Investment products and savings vehicles

A level annuity provides:

  1. a guaranteed income for life in exchange for a lump sum Correct answer.
  2. an investment whose capital value keeps pace with inflation exactly
  3. a savings account that offers instant access without penalty
  4. a single lump sum paid at retirement with no continuing income

Explanation

A level annuity converts a lump sum into a guaranteed income for life, with the payment amount fixed at outset. It does not automatically rise with inflation unless an escalating option is chosen.

Question 33Investment products and savings vehicles

An index-tracking fund aims to:

  1. guarantee a minimum positive return each year
  2. invest only in companies not included in the index
  3. outperform the index through active stock selection
  4. replicate the performance of a specified market index Correct answer.

Explanation

An index tracker is designed to mirror the constituents and returns of a specified index rather than try to beat it. The result is usually a low-cost, passively managed fund.

Question 34Investment products and savings vehicles

A certificate of deposit differs from an ordinary term deposit mainly because a certificate of deposit is:

  1. cannot be held by institutional investors
  2. always pays a variable rate linked to inflation
  3. tradable in the money market before maturity Correct answer.
  4. available only to government bodies

Explanation

Certificates of deposit are negotiable money market instruments, so the holder can sell them before maturity. A term deposit is generally not transferable and must be held to maturity or broken with a penalty.

Question 35Investment products and savings vehicles

An investor wants to earn some interest on savings but may need the money in about 30 days. The most suitable product is a:

  1. current account with no credit interest
  2. five-year fixed-rate term deposit
  3. 30-day notice deposit account Correct answer.
  4. long-dated government bond

Explanation

A notice account matches the investor's liquidity need because funds can be withdrawn after the required notice period while still earning interest. A term deposit locks funds for a fixed term and a current account earns little or no interest.

Question 36Investment products and savings vehicles

For an Irish resident individual, Deposit Interest Retention Tax (DIRT) is generally:

  1. charged only on interest above €10,000
  2. a voluntary tax paid on request
  3. paid only when a deposit account is closed
  4. deducted at source from deposit interest Correct answer.

Explanation

DIRT is deducted by the financial institution from interest paid on deposits held by Irish resident individuals. It removes the need for the depositor to include that interest in an annual tax return.

Question 37Investment products and savings vehicles

An investor holds a fixed-coupon bond until maturity. If market yields rise immediately after purchase, the bond's market price will normally:

  1. rise, because the coupon is fixed
  2. rise, because the bond becomes more liquid
  3. fall, because the fixed coupon is less attractive Correct answer.
  4. remain unchanged until maturity

Explanation

Bond prices and market yields move inversely. When yields rise, the fixed coupon stream is worth less in present value terms, so the price falls.

Question 38Investment products and savings vehicles

A zero-coupon bond:

  1. pays no periodic interest and is issued below face value Correct answer.
  2. can be converted into shares at the holder's option
  3. pays interest only when the issuer reports a profit
  4. pays a fixed coupon every year and is issued at par

Explanation

A zero-coupon bond pays no periodic coupon; it is bought at a discount and redeemed at face value. The investor's return comes from the difference between purchase price and redemption amount.

Question 39Investment products and savings vehicles

A corporate bond rated BBB- by a major rating agency is generally classified as:

  1. investment grade Correct answer.
  2. defaulted
  3. unrated
  4. sub-investment grade

Explanation

The lowest investment-grade rating is BBB- from S&P (Baa3 from Moody's). Ratings below that are sub-investment grade or speculative.

Question 40Investment products and savings vehicles

A company has earnings per share of €3.00 and pays a dividend per share of €1.50. Its dividend cover is:

  1. 1.0 times
  2. 0.5 times
  3. 2.0 times Correct answer.
  4. 4.5 times

Explanation

Dividend cover is earnings per share divided by dividend per share, so €3.00 ÷ €1.50 = 2.0 times. It shows how many times earnings could cover the dividend.

Question 41Investment products and savings vehicles

Units in an open-ended investment fund are normally bought and sold using:

  1. a forward price based on the next valuation point Correct answer.
  2. the previous day's closing stock exchange price
  3. a fixed price set at launch
  4. the highest price paid in the previous year

Explanation

Open-ended funds use forward pricing: an order is priced at the next valuation point after the order is received, not at a historical exchange price.

Question 42Investment products and savings vehicles

An ETF has a total expense ratio of 0.20%. Its benchmark index returns 8.00% while the ETF returns 7.60%. The approximate tracking difference is:

  1. +7.40%
  2. -0.40% Correct answer.
  3. +0.40%
  4. -0.20%

Explanation

Tracking difference is the fund return minus the index return: 7.60% − 8.00% = −0.40%. The TER is one contributor, but tracking difference also reflects fees, sampling and other costs.

Question 43Investment products and savings vehicles

Gearing in an investment trust means that the trust:

  1. guarantees a fixed dividend to shareholders
  2. trades at a fixed premium to net asset value
  3. holds only cash and short-term deposits
  4. borrows money to invest, magnifying gains and losses Correct answer.

Explanation

Gearing means borrowing to add to the portfolio. It can increase returns when investments rise but also magnifies losses when they fall.

Question 44Investment products and savings vehicles

A Personal Retirement Savings Account (PRSA) is designed to:

  1. guarantee a defined benefit at retirement
  2. provide immediate access to a tax-free lump sum at any age
  3. allow tax-relieved saving for retirement on a portable basis Correct answer.
  4. replace a deposit account for short-term savings

Explanation

A PRSA is a portable, tax-relieved retirement savings account that an individual can open and carry between employers. It is not a short-term deposit or a defined benefit promise.

Question 45Investment products and savings vehicles

An Approved Retirement Fund (ARF) allows a retiree to:

  1. keep the fund invested and draw income under set conditions Correct answer.
  2. receive a fixed annuity for life with no investment risk
  3. avoid all tax on pension drawdowns
  4. transfer the fund to a current account tax-free

Explanation

An ARF keeps the retirement fund invested after maturity and allows the owner to draw down income, subject to revenue conditions. It does not provide a guaranteed annuity.

Question 46Investment products and savings vehicles

Irish Prize Bonds are savings products that:

  1. are available only to institutional investors
  2. repay capital and pay returns through prize draws Correct answer.
  3. are listed on the stock exchange and trade daily
  4. pay a fixed rate of interest plus a monthly bonus

Explanation

Prize Bonds repay the original capital and pay returns through periodic prize draws rather than regular interest. They are aimed at capital security with a chance of a prize.

Question 47Investment products and savings vehicles

A bond with a 4% coupon is trading at a price above its par value. Its yield to maturity is:

  1. equal to 4%
  2. above 4%
  3. below 4% Correct answer.
  4. zero

Explanation

When a bond trades above par, the investor pays more than the face value and still receives only the coupon and par at maturity. The yield to maturity must therefore be lower than the coupon rate.

Question 48Investment products and savings vehicles

A bond has a modified duration of 5. If its yield to maturity rises by 1 percentage point, the approximate percentage change in its price is:

  1. +1%
  2. -5% Correct answer.
  3. +5%
  4. -1%

Explanation

Modified duration approximates the percentage price change for a 1 percentage point change in yield: −5 × 1% = −5%. The actual change may differ slightly because of convexity.

Question 49Investment products and savings vehicles

A principal disadvantage of a fund of funds compared with a directly invested fund is that it:

  1. adds a layer of fees and reduces transparency Correct answer.
  2. cannot diversify across asset managers
  3. must invest only in government bonds
  4. has no professional management

Explanation

A fund of funds invests in other funds, so investors may pay both the underlying funds' charges and the fund of funds' own charges. This layered fee structure can reduce net returns and make holdings less transparent.

Question 50Investment products and savings vehicles

An investor expects market interest rates to fall. Which bond would normally produce the largest capital gain?

  1. A money market instrument
  2. A short-dated bond with a high coupon
  3. A long-dated bond with a low coupon Correct answer.
  4. A floating-rate note

Explanation

Long-dated, low-coupon bonds have the greatest price sensitivity to yield changes. When yields fall, their prices rise more than those of short-dated or high-coupon bonds.