Do not open this examination paper until the presiding officer or an invigilator tells you to.

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1 Please complete this box: Candidate number: as indicated on your admission slip Desk number: If you are using a calculator, please enter the make and model number: Make (company name): Model number: Subject no. 51B Paper 3 Investment Tuesday afternoon, 6 June 2017 Time allowed: 1 hour 30 minutes Do not open this examination paper until the presiding officer or an invigilator tells you to. You must not take this paper out of the examination room. The examination paper contains 18 questions and is divided into three sections. You must attempt all questions in Section A and Section B and two questions in Section C. Section A contains 15 marks, Section B contains 30 marks, and Section C contains 30 marks. There are 75 marks available in total for the paper. You should allow yourself approximately 20 minutes in total to answer the questions in Section A, 30 minutes in total to answer the questions in Section B, and 20 minutes for each of the questions attempted in Section C. You may continue your answers on a separate sheet of paper if necessary. Separate answer sheets are available from the invigilator. Note: Unless otherwise specified, you should assume that an Act or an organisation referred to in the questions is a UK Act or organisation. ICSA, 2017 Page 1 of 20

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3 Section A Answer all questions in this section. Continue your answers on a separate sheet of paper if necessary. 1 What does it mean if a company is described as being highly-geared? (1 mark) 2 Give two reasons why companies select commercial paper (CP) as a means of obtaining short-term finance. i ii (2 marks) 3 Plain vanilla interest rate swaps involve counterparties exchanging both capital and interest rate streams. Is this true or false? (Tick one box only) True False (1 mark) 4 In the UK, the difference between government expenditure and tax revenue is referred to as: (1 mark) ICSA, 2017 Page 3 of 20

4 5 In the financial year 2016/2017, an engineering company made a gross profit of 63 million (net 35 million). The company s dividend cover figure was 7. Consequently, the company will: (Tick one box only) A B C D retain 5 million for growth and pay 30 million to ordinary shareholders. retain 9 million for growth and pay 54 million to ordinary shareholders. retain 30 million for growth and pay 5 million to ordinary shareholders. retain 54 million for growth and pay 9 million to ordinary shareholders. (1 mark) 6 What aspect of a derivative instrument is derived from an underlying asset? (1 mark) 7 Give three conditions which must be fulfilled in order for a perfect market to exist. i _ ii iii (3 marks) 8 Give two recognised grades of corporate bond. i ii (2 marks) ICSA, 2017 Page 4 of 20

5 9 Give an example of a way in which a company can help to ensure the success of its rights issue. (1 mark) 10 When an issuer calls a callable bond there are other, less favourable, options available for the investor who still wants to invest in bonds. Give two examples of what the investor could do instead. i ii (2 marks) _ Total for Section A = 15 marks ICSA, 2017 Page 5 of 20

6 Section B Answer all questions in this section. Continue your answers on a separate sheet of paper if necessary. 11 Explain why an increasing number of employers no longer provide defined benefit (DB) pension schemes to their employees. (6 marks) ICSA, 2017 Page 6 of 20

7 12 Explain how a company can benefit from issuing preference shares. (6 marks) ICSA, 2017 Page 7 of 20

8 13 (i) In relation to gilts, state the purpose of the gross redemption yield (GRY). (2 marks) (ii) An institutional investor purchased 10 million of UK Treasury 8% 2021 gilts at per 100 nominal. Showing your workings in the box below, calculate the annual gross redemption yield. Note: Assume a period of exactly 8 years from the date of purchase to final redemption. Annual Gross Redemption Yield = (4 marks) ICSA, 2017 Page 8 of 20

9 14 List the details included in a futures contract specification. (6 marks) ICSA, 2017 Page 9 of 20

10 15 Explain how interest rates are used to influence demand during inflationary and recessionary periods. (6 marks) _ Total for Section B = 30 marks ICSA, 2017 Page 10 of 20

11 Section C Answer two questions only. Continue your answers on a separate sheet of paper if necessary. 16 Evaluate the potential challenges which investors in both open-ended and closed-ended collective investment schemes may encounter during an economic downturn. (15 marks) ICSA, 2017 Page 11 of 20

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14 17 Analyse the factors which may cause a currency s exchange rate to fluctuate. (15 marks) ICSA, 2017 Page 14 of 20

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17 18 Ordinary shareholders do not always receive their anticipated returns, in terms of capital growth and of income. Using appropriate examples, discuss the reasons why ordinary shareholders may not receive their anticipated returns. (15 marks) ICSA, 2017 Page 17 of 20

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20 _ Total for Section C = 30 marks Total for paper = 75 marks The scenarios included here are entirely fictional. Any resemblance of the information in the scenarios to real persons or organisations, actual or perceived, is purely coincidental. END ICSA, 2017 Page 20 of 20

21 Do not write on this page examiner use only Section A Section B Section C Question Question Question Total Total Total Total marks for paper: Marker (full name): Reviewer (full name): Clerical check (full name): Examiner review:

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