IMC Asset Classes 2

Question 1

What is 'duration' in fixed income investing?

Accepted Answer

A measure of a bond's price sensitivity to interest rate changes, expressed in years

Answer

Duration (specifically modified duration) measures how sensitive a bond's price is to a 1% change in interest rates. A bond with duration of 5 years will fall approximately 5% in price if rates rise by 1%. It incorporates both maturity and coupon payments.

Question 2

What is a 'yield curve' and what does a normal (upward sloping) yield curve indicate?

Accepted Answer

A chart showing yields at different maturities; upward sloping means longer maturities have higher yields

Answer

A yield curve plots yields against maturity for bonds of similar credit quality. A normal upward-sloping curve means longer-dated bonds yield more than short-dated ones, compensating investors for the greater uncertainty and inflation risk over time.

Question 3

What is a 'collective investment scheme' (CIS)?

Accepted Answer

A pooled investment vehicle where multiple investors' funds are combined and managed collectively

Answer

A CIS pools money from multiple investors to invest collectively in a portfolio of assets. Examples include unit trusts, OEICs, and investment trusts. Pooling allows diversification and professional management for smaller investors.

Question 4

What is the primary difference between an open-ended fund (OEIC/unit trust) and a closed-ended fund (investment trust)?

Accepted Answer

Open-ended funds create/cancel units based on demand; closed-ended funds have a fixed number of shares traded on a stock exchange

Answer

Open-ended funds (OEICs, unit trusts) expand and contract by creating or cancelling units as investors buy or sell, pricing at NAV. Closed-ended funds (investment trusts) have a fixed share capital listed on a stock exchange and can trade at a premium or discount to NAV.

Question 5

What are 'alternative investments' in portfolio management?

Accepted Answer

Asset classes other than traditional equities, bonds, and cash — such as hedge funds, private equity, real estate, and commodities

Answer

Alternative investments encompass asset classes beyond traditional equities, bonds, and cash. They include hedge funds, private equity, real assets (property, infrastructure, commodities), and are often used for diversification and return enhancement.

IMC Practice Test

IMC Practice Test

IMC Asset Classes 2