I85PREP
⌘ K
FIMM FCE study materials
FIMM FCE study resources

FIMM FCE practice questions

One question at a time. Build your FIMM FCE understanding.

First 50 of 200 questions. Each one lists the choices, the correct answer, and an explanation. The checker at the top of this page saves progress in this browser when it is available.

Continue in the practice tool above to load more questions, 50 at a time.

Question 1Unit Trust Schemes (UTS)

Under the FIMM framework, which party is responsible for holding the assets of a unit trust scheme in safekeeping on behalf of unitholders?

  1. The trustee or custodian Correct answer.
  2. The unit trust consultant
  3. The fund's investment adviser
  4. The management company

Explanation

The trustee or custodian is the party legally charged with safekeeping the scheme's assets and holding them separate from the management company's own assets. This segregation protects unitholders if the management company encounters financial difficulty.

Question 2Unit Trust Schemes (UTS)

A unit trust scheme's net asset value (NAV) is best described as which of the following?

  1. The total value of the fund's assets less its liabilities Correct answer.
  2. The market price at which units trade on a stock exchange
  3. The management company's annual fee expressed as a percentage
  4. The total amount of money investors paid in since launch

Explanation

NAV equals the fund's assets minus its liabilities, normally calculated using the latest market prices of the underlying investments. Dividing NAV by the number of units in issue gives the NAV per unit used for pricing.

Question 3Unit Trust Schemes (UTS)

An investor subscribes to a unit trust scheme at an offer price that includes a sales charge. Which term describes the difference between the offer price and the NAV per unit?

  1. The annual management fee
  2. The preliminary or sales charge Correct answer.
  3. The trustee fee
  4. The redemption charge

Explanation

The preliminary charge, also called the sales charge, is deducted when units are bought and creates the gap between the offer price and NAV per unit. Ongoing charges such as management and trustee fees are levied against the fund over time instead.

Question 4Unit Trust Schemes (UTS)

Which document must a prospective investor in a unit trust scheme be given before subscribing, describing the scheme's objectives, risks and charges?

  1. The audited annual report
  2. The management company's board minutes
  3. The trust deed
  4. The product disclosure document or prospectus Correct answer.

Explanation

The prospectus or product disclosure document is the pre-sale disclosure that sets out investment objectives, risks, fees and other key terms. It must be available to investors so they can make an informed decision before subscribing.

Question 5Unit Trust Schemes (UTS)

What is the primary function of a unit trust scheme's trust deed?

  1. It records the daily buying and selling prices of units
  2. It is the marketing brochure used to promote the fund
  3. It sets out the contractual and fiduciary framework governing the manager, trustee and unitholders Correct answer.
  4. It lists the individual investors who own units

Explanation

The trust deed establishes the legal relationship among the management company, the trustee and unitholders, including powers, duties and investor protections. It is a constitutional document rather than a price record or marketing tool.

Question 6Unit Trust Schemes (UTS)

A unit trust scheme invests in securities denominated in a foreign currency while its own base currency is the domestic currency. Which risk is most directly created by this arrangement?

  1. Currency risk Correct answer.
  2. Concentration risk
  3. Credit risk
  4. Liquidity risk

Explanation

Currency risk arises because movements in exchange rates between the foreign currency and the fund's base currency change the domestic value of the investments. It is distinct from the risk that an issuer defaults or that holdings cannot be sold quickly.

Question 7Unit Trust Schemes (UTS)

Units of an open-ended unit trust scheme are typically created or cancelled in response to which event?

  1. A change in the scheme's investment objective
  2. Investors subscribing for or redeeming units Correct answer.
  3. The scheme's units being listed on a stock exchange
  4. The annual general meeting of unitholders

Explanation

An open-ended scheme expands and contracts its unit count as investors buy and redeem, with the manager creating or cancelling units accordingly. This mechanism keeps the number of units aligned with investor demand.

Question 8Unit Trust Schemes (UTS)

Which body in the FIMM framework is expected to carry out independent oversight of a unit trust scheme's compliance with its trust deed and applicable regulations?

  1. The investment committee of the manager
  2. The fund's auditor
  3. The selling agent
  4. The trustee Correct answer.

Explanation

The trustee provides independent oversight, monitoring the manager's conduct and ensuring the scheme operates within its trust deed and regulatory requirements. This independent check is a core investor protection in the unit trust structure.

Question 9Unit Trust Schemes (UTS)

A scheme's NAV is 120 million and there are 100 million units in issue. If the manager applies a 5% preliminary charge, what is the approximate offer price per unit?

  1. 1.05
  2. 1.20
  3. 1.14
  4. 1.26 Correct answer.

Explanation

NAV per unit is 120 million divided by 100 million, which equals 1.20. Applying a 5% preliminary charge gives an offer price of approximately 1.20 multiplied by 1.05, which equals 1.26 per unit.

Question 10Unit Trust Schemes (UTS)

An investor holds units in a scheme that charges a 2% annual management fee and a 0.1% trustee fee, both accrued daily against fund assets. How do these charges affect the investor?

  1. They are paid by the trustee out of its own capital
  2. They reduce the fund's NAV over time rather than being invoiced to the investor separately Correct answer.
  3. They are deducted from the investor's bank account each month
  4. They are charged only when the investor redeems units

Explanation

Ongoing charges are accrued within the fund and reflected in the NAV, so investors bear them indirectly through a slightly lower unit price. They are not separately invoiced to the investor's bank account.

Question 11Unit Trust Schemes (UTS)

A fund holds an illiquid corporate bond that cannot be sold quickly without a significant price concession. Which risk does this most clearly illustrate?

  1. Currency risk
  2. Inflation risk
  3. Liquidity risk Correct answer.
  4. Interest-rate risk

Explanation

Liquidity risk is the risk that a holding cannot be converted to cash quickly at a fair price, forcing a discount. The scenario describes exactly this difficulty in selling a bond without loss.

Question 12Unit Trust Schemes (UTS)

A unit trust consultant recommends a scheme to a client whose stated objective is capital preservation over two years, but the scheme invests mainly in emerging-market small-cap equities. What has the consultant most likely failed to ensure?

  1. That the client has signed the trust deed
  2. That the scheme's trustee has approved the sale
  3. Suitability of the recommendation to the client's objectives and risk profile Correct answer.
  4. That the fund's NAV is calculated daily

Explanation

Recommendations must be matched to the client's objectives, time horizon and risk tolerance, and a volatile equity scheme is generally unsuitable for short-term capital preservation. The mismatch indicates a suitability failure.

Question 13Unit Trust Schemes (UTS)

A scheme's NAV per unit is 2.50. An investor redeems 10,000 units and the manager applies a 1% redemption charge. What amount is the investor approximately paid?

  1. 2,475
  2. 24,750 Correct answer.
  3. 25,000
  4. 27,500

Explanation

Gross redemption value is 10,000 units multiplied by 2.50, which equals 25,000. Deducting a 1% redemption charge of 250 gives approximately 24,750 payable to the investor.

Question 14Unit Trust Schemes (UTS)

During a market downturn, many unitholders in an open-ended scheme redeem simultaneously while the fund holds thinly traded securities. Which consequence is most likely?

  1. The redemption charge is refunded to redeeming investors
  2. The manager may need to sell assets at depressed prices, diluting remaining unitholders Correct answer.
  3. The NAV per unit automatically rises for remaining investors
  4. The trustee must suspend the fund permanently

Explanation

Forced selling of illiquid assets to meet redemptions can crystallise losses that are borne by the fund and thus by continuing unitholders. This is why managers may use dilution levies or temporary suspension tools in stressed conditions.

Question 15Unit Trust Schemes (UTS)

Which statement best explains why a unit trust scheme's assets are held by a trustee rather than by the management company?

  1. Segregation protects unitholders if the management company becomes insolvent Correct answer.
  2. It guarantees that the fund will not make investment losses
  3. It allows the manager to avoid preparing financial statements
  4. It removes the need for an independent auditor

Explanation

Holding assets with an independent trustee keeps them separate from the manager's own estate, so they are not available to the manager's creditors on insolvency. This segregation is a fundamental investor protection.

Question 16Unit Trust Schemes (UTS)

A scheme's prospectus states that it may use derivatives for efficient portfolio management. Which use is consistent with that stated purpose?

  1. Guaranteeing a fixed return to unitholders
  2. Borrowing to double the fund's equity exposure
  3. Speculating on short-term commodity price movements
  4. Hedging currency exposure on existing holdings Correct answer.

Explanation

Efficient portfolio management covers techniques such as hedging and reducing risk or cost without changing the fund's investment profile. Speculative positioning or leverage to enhance exposure falls outside that purpose.

Question 17Unit Trust Schemes (UTS)

An investor compares two schemes with identical gross returns, but scheme A has a total expense ratio of 0.8% and scheme B has 1.9%. What is the most direct effect on the investor's net return?

  1. The expense ratio affects only the trustee, not the investor
  2. Scheme A retains roughly 1.1 percentage points more of the gross return than scheme B Correct answer.
  3. Both schemes produce identical net returns because gross returns are equal
  4. Scheme B produces a higher net return because higher fees signal better management

Explanation

Higher ongoing charges are deducted from fund assets, so they reduce the return delivered to unitholders. With equal gross returns, the scheme with the lower expense ratio keeps about 1.1 percentage points more for investors.

Question 18Unit Trust Schemes (UTS)

Which situation would most likely justify a temporary suspension of the calculation of a scheme's NAV and of dealings in its units?

  1. A single unitholder requests a large redemption
  2. A significant portion of the portfolio cannot be reliably valued because the relevant market is closed Correct answer.
  3. The fund's annual audit is scheduled for next month
  4. The manager wishes to change its marketing strategy

Explanation

Suspension is generally permitted where the fund's assets cannot be accurately valued, for example when a market is closed or disrupted, because fair pricing is impossible. Ordinary commercial or administrative events do not meet that threshold.

Question 19Unit Trust Schemes (UTS)

A client asks a unit trust consultant to explain why the offer price of a scheme exceeds its NAV per unit. Which explanation is most accurate?

  1. The excess is the trustee's annual fee collected in advance
  2. The offer price includes a preliminary charge that is paid to the distributor or manager Correct answer.
  3. The NAV per unit is calculated incorrectly on the day of purchase
  4. The excess represents a tax that is refunded on redemption

Explanation

The offer price is built from NAV per unit plus the preliminary charge, which compensates the distributor or manager for the sale. It is a designed pricing feature rather than an error or a tax.

Question 20Unit Trust Schemes (UTS)

A scheme's investment mandate permits it to hold up to 30% of NAV in a single issuer. Which risk control does this limit most directly address?

  1. Operational risk
  2. Concentration risk Correct answer.
  3. Regulatory risk
  4. Settlement risk

Explanation

Issuer concentration limits cap exposure to any one obligor so that a single default or price collapse cannot dominate fund performance. This is a direct control on concentration risk.

Question 21Unit Trust Schemes (UTS)

A scheme holds a bond whose coupon is fixed at 4% while prevailing market interest rates rise sharply. What is the most likely effect on the bond's market value and the scheme's NAV?

  1. The bond's value falls and the NAV declines, all else being equal Correct answer.
  2. The NAV rises because higher rates increase the coupon received
  3. The bond's value rises and the NAV increases, all else being equal
  4. The bond's value is unchanged because the coupon is fixed

Explanation

When market yields rise above a bond's fixed coupon, the bond's price must fall so its yield matches the market, reducing the fund's NAV. This inverse relationship is the core of interest-rate risk for fixed-income holdings.

Question 22Unit Trust Schemes (UTS)

A scheme's trust deed allows the manager to apply a dilution levy on subscriptions and redemptions. Which outcome is the levy designed to achieve?

  1. Removing the need to calculate the fund's NAV each day
  2. Guaranteeing a minimum redemption price to exiting investors
  3. Protecting continuing unitholders from bearing the transaction costs caused by other investors' deals Correct answer.
  4. Increasing the manager's performance fee during periods of high inflows

Explanation

A dilution levy shifts the dealing costs created by incoming or outgoing investors onto those investors themselves, rather than diluting the continuing unitholders. It is a fairness mechanism, not a performance-fee or pricing substitute.

Question 23Unit Trust Schemes (UTS)

A management company delegates portfolio management to an external adviser. Which statement best reflects the manager's position under the unit trust framework?

  1. Responsibility transfers entirely to the adviser once delegation occurs
  2. The trustee becomes responsible for the adviser's investment decisions
  3. The manager retains responsibility for the scheme and must oversee the delegate's activities Correct answer.
  4. Unitholders must approve each individual trade made by the adviser

Explanation

Delegation does not extinguish the manager's duties; the manager remains accountable and must supervise the delegate and ensure compliance. This preserves a clear chain of responsibility for unitholders.

Question 24Unit Trust Schemes (UTS)

An investor redeems units two days after subscribing to a scheme that applies a preliminary charge on purchase and a redemption charge on exit. Which statement best describes the investor's likely outcome if the NAV is unchanged?

  1. The investor receives the offer price back in full
  2. The investor breaks even because the NAV has not moved
  3. The investor bears both the preliminary charge and the redemption charge, producing a net loss Correct answer.
  4. The preliminary charge is refunded because the holding period was short

Explanation

With an unchanged NAV, the investor still loses the front-end sales charge already paid and the exit charge now applied, so the round trip produces a net loss. Short holding periods magnify the impact of entry and exit costs.

Question 25Unit Trust Schemes (UTS)

A scheme's reported NAV per unit is calculated using stale prices for a significant holding whose market has been closed for several days. Why is this a concern for investors subscribing during that period?

  1. Stale prices automatically increase the preliminary charge
  2. New investors may pay a price that does not reflect the holding's current economic value, disadvantaging existing unitholders Correct answer.
  3. The trustee is legally required to close the fund whenever any market is shut
  4. The management fee is suspended while prices are stale

Explanation

If a material holding is valued on outdated prices, the NAV may misstate true value, so subscribers could buy too cheaply or too expensively at the expense of continuing investors. Fair valuation adjustments or suspension may be needed to prevent this cross-subsidy.

Question 26Unit Trust Schemes (UTS)

In a unit trust scheme structured under the FIMM framework, which party holds legal title to the scheme's underlying investments on behalf of unitholders?

  1. The unit trust consultant who distributes the units
  2. The management company that operates the scheme
  3. The unitholders collectively as beneficial owners
  4. The trustee or custodian appointed for the scheme Correct answer.

Explanation

The core structural feature of a unit trust is the separation of management from custody: the trustee (or custodian) holds legal title to scheme assets and safeguards them, while the management company runs the portfolio. Unitholders hold beneficial interests but not legal title to individual assets. This separation is the primary investor protection mechanism in the structure.

Question 27Unit Trust Schemes (UTS)

Which document sets out the constitution of a unit trust scheme, including the powers and duties of the manager and trustee and the investment parameters?

  1. The product highlight sheet
  2. The annual report
  3. The subscription form
  4. The trust deed Correct answer.

Explanation

The trust deed is the constitutional document that establishes the scheme and defines the legal relationship between manager, trustee and unitholders. It contains the investment powers, fee provisions and operational rules. Disclosure documents such as the prospectus and product highlight sheet summarise but do not create those obligations.

Question 28Unit Trust Schemes (UTS)

A scheme's prospectus states that its investment objective is to provide regular income with some capital growth by investing mainly in investment grade corporate bonds. Which scheme category does this best describe?

  1. An equity growth scheme
  2. A property scheme
  3. A bond or fixed income scheme Correct answer.
  4. A money market scheme

Explanation

The stated objective and asset focus on investment grade corporate bonds with an income bias identify a bond or fixed income scheme. Scheme categorisation follows the disclosed investment objective and permitted asset class. Money market, equity and property schemes have materially different permitted portfolios.

Question 29Unit Trust Schemes (UTS)

An investor wants to buy units of a unit trust scheme. Which price will the investor normally pay under a single-pricing regime?

  1. The NAV per unit plus any applicable preliminary charge or duties Correct answer.
  2. The highest price quoted for the scheme during the previous month
  3. The trustee's independently negotiated price for each transaction
  4. The NAV per unit less any redemption charge

Explanation

Under single pricing, subscriptions and redemptions are struck at the same NAV per unit, with any preliminary charge and applicable duties added on subscription. Redemption charges, where used, apply on exit rather than entry. Prices are not negotiated individually or drawn from historical quotes.

Question 30Unit Trust Schemes (UTS)

Which party is responsible for issuing the manager's periodic reports to unitholders and for ensuring the scheme's accounts are audited?

  1. The unitholders, who appoint the auditor at each general meeting
  2. The securities regulator, which prepares the financial statements
  3. The unit trust consultant, who prepares the reports for each client
  4. The management company, with the trustee providing oversight and the auditor appointed under the deed Correct answer.

Explanation

The management company is operationally responsible for producing periodic reports and financial statements, while the trustee oversees the scheme and an independent auditor is appointed as required by the deed and regulations. Consultants distribute but do not prepare scheme accounts. Regulators supervise but do not produce the statements.

Question 31Unit Trust Schemes (UTS)

What is the primary purpose of a product highlight sheet issued for a unit trust scheme?

  1. To guarantee a minimum return to the investor
  2. To record the investor's risk tolerance for the distributor
  3. To summarise key features, risks and charges in a short, comparable format Correct answer.
  4. To replace the prospectus as the legally binding offer document

Explanation

A product highlight sheet condenses the essential features, risks, fees and charges of a scheme so investors can compare products quickly. It supplements rather than replaces the prospectus and does not guarantee returns. It is a disclosure document, not a client suitability record.

Question 32Unit Trust Schemes (UTS)

An investor holds 50,000 units in a scheme and the manager declares a distribution of 0.04 per unit. What gross amount is the investor entitled to before any tax?

  1. 20,000
  2. 2,000 Correct answer.
  3. 200
  4. 1,250

Explanation

The entitlement is the number of units multiplied by the distribution rate per unit: 50,000 × 0.04 = 2,000. The calculation is a straightforward per-unit entitlement applied to the holding. Tax treatment, if any, is applied after the gross entitlement is determined.

Question 33Unit Trust Schemes (UTS)

Which statement best describes an open-ended unit trust scheme?

  1. Units are listed and traded at prices set by market supply and demand alone
  2. Units may only be redeemed at the end of a fixed lock-in period
  3. The number of units in issue can expand or contract as investors subscribe and redeem Correct answer.
  4. The number of units is fixed and can only change through a secondary market trade

Explanation

Open-ended schemes create units when investors subscribe and cancel them when investors redeem, so the unit count varies with demand. Pricing is based on NAV rather than on secondary market supply and demand. Closed-end structures, by contrast, have a fixed number of units traded on an exchange.

Question 34Unit Trust Schemes (UTS)

A scheme's NAV is 80 million with 40 million units in issue. A subscription of 4 million in cash is received and units are created at the prevailing NAV per unit. What is the NAV per unit immediately after the subscription, ignoring charges?

  1. 2.20
  2. 2.00 Correct answer.
  3. 2.10
  4. 1.90

Explanation

The NAV per unit before subscription is 80m ÷ 40m = 2.00. The cash increases both assets and units proportionally: new NAV is 84m and new units are 42m, giving 84 ÷ 42 = 2.00. A correctly priced creation is NAV-neutral to existing unitholders.

Question 35Unit Trust Schemes (UTS)

A scheme's prospectus permits the manager to borrow for temporary liquidity purposes up to 10% of NAV. Which situation is the most appropriate use of that facility?

  1. Meeting redemption requests while holdings are being sold in an orderly manner Correct answer.
  2. Financing the purchase of additional equities to enhance returns
  3. Covering a permanent shortfall caused by investment losses
  4. Paying the manager's performance fee when cash is low

Explanation

Borrowing limits in unit trust schemes exist to bridge temporary timing gaps, most commonly when redemptions must be met before assets can be sold without damaging prices. Using gearing to enhance returns or pay fees is not a permitted purpose, and borrowing cannot cure permanent losses. The facility is a liquidity tool, not an investment strategy.

Question 36Unit Trust Schemes (UTS)

A management company wishes to appoint a sub-manager to run part of the scheme's portfolio. Which statement best describes the manager's position under the FIMM framework?

  1. The manager remains accountable to unitholders and the trustee for the delegated function Correct answer.
  2. The sub-manager must deal directly with unitholders on all complaints
  3. The manager's responsibilities transfer entirely to the sub-manager once appointed
  4. The trustee assumes responsibility for the sub-manager's investment decisions

Explanation

Delegation of an investment function does not transfer the manager's regulatory and contractual accountability. The manager must oversee the delegate, and the trustee continues to monitor the scheme as a whole. Unitholders' relationship remains with the manager and trustee, not the delegate.

Question 37Unit Trust Schemes (UTS)

A scheme invests 45% of its NAV in a single issuer even though its deed caps single-issuer exposure at 10%. Which control is designed to prevent this outcome?

  1. Ongoing compliance monitoring with breach reporting and escalation to the trustee Correct answer.
  2. The appointment of a unit trust consultant
  3. The publication of the product highlight sheet
  4. The annual audit of the financial statements

Explanation

Investment limits are enforced through continuous pre-trade and post-trade compliance monitoring, with breaches reported and escalated to the trustee so they can be rectified. Audits provide retrospective assurance but do not prevent a breach occurring. Disclosure documents and distributors are not control functions.

Question 38Unit Trust Schemes (UTS)

An investor subscribes 10,000 into a scheme with a 3% preliminary charge. The NAV per unit at the next valuation point is 1.25. How many units will the investor receive, ignoring rounding and other charges?

  1. 10,000
  2. 6,200
  3. 7,760 Correct answer.
  4. 8,000

Explanation

The preliminary charge is deducted from the subscription: 10,000 × (1 − 0.03) = 9,700 is invested. Units are then 9,700 ÷ 1.25 = 7,760. The charge reduces the amount invested rather than the unit price in this calculation.

Question 39Unit Trust Schemes (UTS)

A scheme holds a large position in a small-cap stock that represents 12% of NAV and trades thinly. A redemption request arrives that requires selling part of the position. Which risk is most directly relevant?

  1. Currency risk arising from foreign exchange movements
  2. Interest rate risk arising from changes in bond yields
  3. Counterparty risk arising from a derivative counterparty default
  4. Liquidity risk arising from the mismatch between redemption terms and asset marketability Correct answer.

Explanation

Liquidity risk is the risk that assets cannot be sold quickly at a fair price to meet redemptions. A concentrated, thinly traded holding magnifies this because selling pressure moves the price against the fund. Currency, interest rate and counterparty risks are distinct exposures not described by the facts.

Question 40Unit Trust Schemes (UTS)

A scheme's trustee resigns. Which statement best describes the required response under the scheme's governing arrangements?

  1. The scheme must be wound up immediately with no replacement permitted
  2. A replacement trustee must be appointed in accordance with the deed and regulatory requirements to maintain the scheme's structure Correct answer.
  3. Unitholders must vote individually to take custody of the assets
  4. The management company may assume the trustee's custodial duties on a permanent basis

Explanation

The trustee is essential to the unit trust structure, so a resignation requires prompt appointment of a qualified replacement under the deed and regulatory approval process. The manager cannot permanently absorb the trustee's custodial role because that would destroy the separation of functions. Immediate winding up is not the automatic consequence.

Question 41Unit Trust Schemes (UTS)

Which fee arrangement aligns the manager's remuneration most directly with the investment performance of the scheme?

  1. A performance fee payable only when returns exceed a stated benchmark or hurdle Correct answer.
  2. A preliminary charge levied on each subscription
  3. A trustee fee based on the scheme's net asset value
  4. A fixed annual management fee based on NAV

Explanation

A performance fee tied to outperforming a benchmark or exceeding a hurdle links part of the manager's remuneration to results. Fixed management and trustee fees accrue regardless of performance, and preliminary charges relate to distribution rather than investment outcomes.

Question 42Unit Trust Schemes (UTS)

A scheme's NAV per unit is 1.80 and the manager applies a dilution levy of 0.5% on both subscriptions and redemptions. What is the practical effect of the levy?

  1. It protects continuing unitholders from the dealing costs caused by inflows and outflows Correct answer.
  2. It increases the manager's annual management fee
  3. It replaces the trustee's oversight of the pricing process
  4. It guarantees a minimum return to exiting investors

Explanation

A dilution levy passes the estimated cost of buying or selling underlying assets on to the investors who cause the dealing, protecting those who remain in the scheme. It is not manager remuneration and does not affect the trustee's role. It reduces, rather than guarantees, amounts paid or received.

Question 43Unit Trust Schemes (UTS)

An investor compares two schemes with the same gross return over a year. Scheme A has a total expense ratio of 0.7% and scheme B has 1.6%. Assuming all else equal, which conclusion is correct?

  1. Both schemes deliver identical net returns because gross returns are equal
  2. The total expense ratio has no effect on the return received by unitholders
  3. Scheme A delivers a higher net return to unitholders because lower ongoing costs reduce the drag on performance Correct answer.
  4. Scheme B delivers a higher net return because higher fees signal better management

Explanation

Net return is gross return less ongoing costs, so a lower total expense ratio leaves more of the gross return with unitholders. Higher fees do not by themselves improve results. Because the expense ratios differ, the net returns cannot be identical.

Question 44Unit Trust Schemes (UTS)

A scheme's deed allows the manager to suspend dealings in exceptional circumstances. Which circumstance most appropriately supports suspension?

  1. The manager expects redemptions to be higher than usual next quarter
  2. A market disruption prevents reliable valuation of a substantial portion of the portfolio Correct answer.
  3. A new distributor has been appointed to sell the scheme
  4. The scheme's performance has fallen behind its benchmark for two months

Explanation

Suspension protects unitholders when fair valuation or orderly dealing is impossible, such as during a market disruption affecting a large part of the portfolio. It is not a tool for managing expected redemption flows, poor relative performance or distribution changes. Those situations are handled through normal pricing and business processes.

Question 45Unit Trust Schemes (UTS)

A scheme's prospectus states that it may enter into securities lending arrangements. Which control is most important to manage the resulting exposure?

  1. Obtaining adequate collateral and monitoring the credit quality of the borrower Correct answer.
  2. Increasing the preliminary charge to compensate for the risk
  3. Suspending NAV calculation whenever securities are lent
  4. Transferring the lending decisions to the trustee

Explanation

Securities lending exposes the scheme to borrower default, so the key control is high quality, sufficiently margined collateral together with borrower credit monitoring. Charges and suspension are unrelated to this risk, and the trustee oversees rather than executes lending decisions.

Question 46Unit Trust Schemes (UTS)

A scheme's NAV per unit is 3.00. An investor redeems 8,000 units and the manager applies a 2% redemption charge that is retained within the scheme. What net amount does the investor receive?

  1. 22,000
  2. 23,520 Correct answer.
  3. 24,480
  4. 24,000

Explanation

Gross redemption proceeds are 8,000 × 3.00 = 24,000. The 2% charge reduces the payout to 24,000 × 0.98 = 23,520. The charge is retained in the scheme to offset the cost of the redemption.

Question 47Unit Trust Schemes (UTS)

An investment committee is reviewing whether a scheme's use of derivatives for efficient portfolio management is acceptable. Which use is consistent with that purpose?

  1. Entering derivatives with no identified exposure or hedging rationale
  2. Using derivatives to circumvent the scheme's single-issuer investment limit
  3. Using index futures to adjust portfolio exposure temporarily while cash flows are invested Correct answer.
  4. Taking a large speculative position in a commodity future to boost returns

Explanation

Efficient portfolio management covers techniques that reduce risk or cost, or generate additional capital or income with low risk, such as using futures to gain exposure while cash is being invested. Speculation, circumventing limits and undocumented exposures fall outside that purpose.

Question 48Unit Trust Schemes (UTS)

A scheme holds assets denominated in a foreign currency while its base currency is the domestic currency, and the foreign currency depreciates sharply. Which statement best describes the effect on the scheme's reported NAV per unit?

  1. The NAV per unit is unaffected because the trustee bears all currency losses
  2. The domestic currency value of the foreign assets falls, reducing NAV per unit unless the exposure is hedged Correct answer.
  3. The NAV per unit rises because a weaker foreign currency makes exports more competitive
  4. The NAV per unit is unaffected because the assets remain unchanged in their own currency

Explanation

NAV is reported in the base currency, so foreign assets are translated at current exchange rates; a depreciation reduces their domestic currency value and hence NAV per unit unless hedging offsets it. The assets' local currency value is irrelevant to the translated figure. Currency losses fall on the scheme, not the trustee.

Question 49Unit Trust Schemes (UTS)

A scheme's deed permits a performance fee of 20% of the excess return above a benchmark, subject to a high water mark. The scheme underperformed the benchmark last year and outperformed it this year, but remains below the previous peak NAV. What fee is payable this year?

  1. A full performance fee on this year's excess return over the benchmark
  2. No performance fee, because the high water mark has not been exceeded Correct answer.
  3. A performance fee equal to 20% of the scheme's entire NAV
  4. A performance fee calculated on total return rather than excess return

Explanation

A high water mark requires the scheme to recover previous losses before a performance fee is earned, so outperformance in a single year is insufficient if NAV remains below the prior peak. The fee applies to excess return above the benchmark, not total return or total NAV. The high water mark therefore eliminates the fee this year.

Question 50Unit Trust Schemes (UTS)

A scheme's reported NAV per unit uses stale prices for a significant holding whose market has been closed for several days while other markets moved sharply. Which action best protects unitholders?

  1. Suspend all subscriptions permanently until the market reopens
  2. Apply fair value pricing to the affected holding before striking the NAV Correct answer.
  3. Continue using the last traded price regardless of market movements
  4. Publish the NAV without disclosing the valuation uncertainty

Explanation

When market prices are stale or unavailable, fair value pricing estimates the price that would prevail in an orderly transaction, preventing one group of investors from gaining at the expense of others. Using stale prices transfers value between incoming and outgoing unitholders. Permanent suspension and non-disclosure are disproportionate or non-compliant responses.