IMC Asset Classes and Valuation 2

Question 1

What does 'duration' measure in the context of bond investment?

Accepted Answer

The sensitivity of a bond's price to changes in interest rates

Answer

Duration (specifically modified duration) measures a bond's price sensitivity to changes in interest rates. A bond with a duration of 5 years would see approximately a 5% price change for a 1% change in yield. Higher duration means greater interest rate risk.

Question 2

A futures contract differs from a forward contract primarily because:

Accepted Answer

Futures are standardised and traded on an exchange with daily margin settlement

Answer

Futures contracts are standardised instruments traded on regulated exchanges (e.g., ICE Futures Europe) with daily mark-to-market and margin requirements. Forward contracts are bespoke, over-the-counter agreements between two parties, which carry higher counterparty risk.

Question 3

In equity valuation, what does the price-to-book (P/B) ratio compare?

Accepted Answer

Market price per share to net asset value per share

Answer

The price-to-book ratio divides the market price per share by the book value (net asset value) per share. A P/B above 1 suggests the market values the company at more than its accounting net worth, potentially reflecting intangible assets, growth prospects, or brand value.

Question 4

Which of the following is a feature of an index-linked gilt?

Accepted Answer

Its coupon and principal are adjusted in line with the UK Retail Prices Index (RPI)

Answer

Index-linked gilts have both their coupon payments and principal value adjusted in line with the UK Retail Prices Index (RPI), providing protection against inflation. The real return is fixed, but the nominal payments increase with the price level.

Question 5

What is a Real Estate Investment Trust (REIT) in the UK?

Accepted Answer

A listed company that owns and manages income-producing property and must distribute at least 90% of rental profits

Answer

A UK REIT is a listed company that holds income-generating property and is required to distribute at least 90% of its rental income to shareholders. REITs benefit from tax transparency on qualifying property income, making them a tax-efficient way for investors to gain property exposure.

IMC Practice Test

IMC Practice Test

IMC Asset Classes and Valuation 2