ifs Level 3 Certificate in Financial Studies (CeFS) 501/0049/X

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1 ifs Level 3 ertificate in Financial Studies (efs) 501/0049/X Risk and Reward in Personal Finance (RR) M/501/8464 Specimen paper: Length of examination: 60 minutes Instructions to learners 1. Open this question paper when instructed to do so. 2. nswer all questions. 3. Use the examination answer sheets provided for your answers. Please do not note your answers in this booklet, as they will not be recorded. 4. Read the instructions on both sides of the answer sheet carefully. 5. efore you leave the examination room you must hand in all the examination materials including the answer sheet and question paper. Information for learners 1. asic silent desktop calculators with + - x / % and memory functions are allowed. Scientific, programmable or calculators with any additional functions are not allowed. The ifs School of Finance is a not-for-profit professional body and registered charity, incorporated by Royal harter. This qualification is accredited by the regulatory authorities for England, Wales and Northern Ireland and is incorporated into the Qualifications and redit Framework (QF) at Level 3-501/0049/X

2 Risk and Reward in Personal Finance Specimen Paper Published by ifs School of Finance, a non-profit-making registered educational charity incorporated by Royal harter. The ifs School of Finance believes that the sources of information upon which the book is based are reliable and has made every effort to ensure the complete accuracy of the text. However, neither ifs School of Finance, the author nor any contributor can accept any legal responsibility whatsoever for consequences that may arise from any errors or omissions or any opinion or advice given. ll rights reserved. No part of this publication my be reproduced in any material form (including photocopying or storing it in any medium by electronic means and whether or not transiently or incidentally to some other use of this publication) without the prior written permission of the copyright owner except in accordance with the provisions of the opyright, esigns and Patents ct 1988 or under the terms of a licence issued by the opyright Licensing gency Ltd. pplications for the copyright owner's written permission to reproduce any part of this publication should be addressed to the publisher at the address below: ifs School of Finance IFS House 4-9 urgate Lane anterbury Kent T1 2XJ T F E customerservices@ifslearning.com Page 2 of 19

3 Risk and Reward in Personal Finance Specimen Paper Section 1. Prioritising, as part of financial planning, is all about: achieving your easy goals first, irrespective of importance. buying what you most desire. changing goals each month depending on surplus income. deciding what goals you consider most important and ranking them accordingly. 2. Planning to achieve realistic financial goals should always involve an element of which of: flexibility. luck. randomness. risk. 3. Which of the following is true in relation to company shares? ompanies pay their shareholders a fixed rate of interest. Profits are distributed to shareholders through dividends. Shareholders receive a guaranteed income annually. Share prices will not affect the shareholder s initial capital. 4. Which of the following is a key feature of a personal loan? Fixed term repayment. Payment of an arrangement fee. Secured on the borrower s house. Variable rate of interest. Page 3 of 19

4 Risk and Reward in Personal Finance Specimen Paper 5. Which of the following is a legal requirement of the cover provided to the insured by a motor insurance policy? laims by a third party. amage to their vehicle. Injury to the owner. Theft of their vehicle. Page 4 of 19

5 Risk and Reward in Personal Finance Specimen Paper Section begins on Page 6 Page 5 of 19

6 Risk and Reward in Personal Finance Specimen Paper Section ase Study 1 Helen will be 18 years old in six months. She is taking driving lessons that cost 20 each her driving instructor has recommended she needs four lessons per month to pass her test. Her parents have agreed to help her buy a car on her birthday so that she can take her driving test immediately. They have asked that she contributes 500 towards the car, which it is estimated will cost 2,000 and they will pay the remainder. Helen works part-time in a clothes shop. She is paid 5 per hour and works the maximum 48 hours per month permitted by law. She normally earns 240 per month. Her parents help her to pay for the driving lessons by paying half. She estimates her other monthly expenditures at: Type of expenditure mount ( ) Travel to college - 10 miles away 10 Mobile phone bill 20 Music downloads 30 Socialising 50 Total What is the minimum that Helen must save per month to build up the amount she needs to contribute towards the car by her 18 th birthday? Page 6 of 19

7 Risk and Reward in Personal Finance Specimen Paper 7. Should Helen find difficulties in building up her savings, which of the elements of her income and expenditure is flexible and could be changed allowing Helen still to achieve her objective? riving lessons. Music downloads. Part-time work. Travel. 8. Which of the following would be the best for Helen to use to build up her reserves for the deposit of the car? Fixed interest savings bond. Investment trust. Savings account. Unit trust. 9. When choosing between accounts to help her build up her money, which would be the most suitable for her? n account paying: 1% on the first 100 deposited, with the percentage rate rising by 1% on each of the subsequent 100 deposited. a bonus of 5 when the balance reaches 500 and an overall rate of 2% pa. a rate of 4% pa on her balance. interest at a percentage point above the standard rate of 4% and requiring an opening deposit of Which of the following risks would have the biggest impact on Helen s ability to achieve her ambitions? doubling in the inflation rate relating to car prices of 2% to 4%. n increase in travel fares of 5%. Her employer reducing all part-time workers' hours by half. The introduction of a 5 monthly standing charge on her mobile phone. Page 7 of 19

8 Risk and Reward in Personal Finance Specimen Paper ase Study 2 Jo is starting her second year of a university course in agriculture at the beginning of September. Whilst she will be living in a flat in the university town, she will be required to travel a lot around the UK and Europe to study different agricultural practices. She is receiving financial help from her grandparents, who have agreed to pay her 4,000 at the beginning of each academic year. Jo has also applied for the full student loan and will receive 1,600 at the beginning of the term. The rent of her new flat is 500 per month. When she moves in, she must pay the first month s rent immediately and give a deposit of the same amount to the landlord. Her tuition fees of 1,000 are also payable at the beginning of the term. uring the first month, she has to pay the first instalment of 100 for a field trip to Italy taking place later in the year. Jo is starting work in a bookshop in September and will earn 400 per month paid by cheque at the end of each month. She estimates her other September expenses will be: Type of expense mount ( ) Petrol for her car 60 Food 140 Socialising 200 Motor insurance 300 Total Which of the following expenses is Jo required to pay by law? eposit on field trip. Motor insurance. Petrol. Rent. Page 8 of 19

9 Risk and Reward in Personal Finance Specimen Paper 12. s Jo receives a lump sum support payment from her grandparents in September, at the beginning of the academic year, she must be careful to put aside any surplus money she has at the end of that month so that it is available for the remainder of the year. Taking into account all her planned income and expenses, how much money will Jo have left over as surplus at the end of the month? ,600. 2,800. 3, Jo will want to ensure that the money left over at the end of September is safe, secure and available for use later in the year and is also earning her some return. Which of the following would be best for her to use? Premium onds. Savings account. Shares. Unit trusts. 14. Jo realises that she will often be travelling when the rent on her flat becomes due. Which of the following payment methods could she use to ensure that the payment is made on time? heque. redit card. ebit card. Standing order. Page 9 of 19

10 Risk and Reward in Personal Finance Specimen Paper 15. s a direct implication of undertaking her studies of different agricultural practices, Jo should consider taking out which of the following insurances? ritical illness. Employer's liability. Household. Travel. Page 10 of 19

11 Risk and Reward in Personal Finance Specimen Paper ase study 3 begins on Page 12 Page 11 of 19

12 Risk and Reward in Personal Finance Specimen Paper ase Study 3 rian and Mary are planning to purchase a house. They and their three young children currently rent a property but have been saving to buy their own property and have recently received a small inheritance, which will help them with the deposit. They have 25,000 saved and this means they have a 5% deposit. rian works for a multinational oil company, receives an annual salary of 35,000 and enjoys other employment benefits including a non-contributory pension scheme, death in service benefits, family protection with UP and sick pay for up to a maximum of 6 months. rian s career is progressing well; he is likely to gain a promotion next year and increase his earnings. Mary does not work. They do not want to borrow large amounts of money for long periods; they would prefer to repay part of the mortgage early when their income rises. Interest rates are currently low, although they are predicted to rise a little and the mortgage market is very competitive. 16. Which of the following would have the greatest negative impact on the ability of rian and Mary to obtain the mortgage they require? rian's employment status. The current interest rates. The deposit they have available. Mary's employment status. 17. Which of the following additional protection products would be unnecessary in rian and Mary s situation? uilding insurance. ritical illness cover. Life assurance. Medical insurance. Page 12 of 19

13 Risk and Reward in Personal Finance Specimen Paper 18. Which of the following mortgage arrangements would be most appropriate for rian and Mary? ase rate tracker. apped. Fixed rate. Flexible. 19. rian and Mary face a number of risks but rian s contract of employment is very favourable, providing him with a lot of protection. However, which of the statements best describes their situation? lthough well covered, they do need to consider additional cover for both illness and death. The employment contract provides them with all the life cover the family need. The sickness cover provided will protect them fully in all situations of bad health. They are fully protected by the employment contract in respect of illness but require more cover in respect of death. 20. Given the type of financial products that rian and Mary will be purchasing, which type of adviser would provide them with the most choice and appropriate protection? n: n authorised tied adviser. n authorised independent adviser. n unauthorised independent adviser. n unauthorised tied adviser. Page 13 of 19

14 Risk and Reward in Personal Finance Specimen Paper ase Study 4 Mr and Mrs Green, aged 58 and 55 respectively, currently in good health, live in a large house valued at 300,000. They both work, full-time, Mr Green earning 25,000pa, and Mrs Green, part-time, earning 10,000pa. They have paid off their mortgage and their two children have left home and are financially independent. They have recently inherited 100,000 from Mrs Green s mother and are deciding how best to invest the money. They are both rather cautious and wish the money to grow but do not wish to take any risks. They both have pensions, Mr Green through his employer, where he benefits from a good non-contributory final salary scheme, and Mrs Green through a private pension arrangement. Their long-term ambitions following retirement are to move out of the city where they currently live and buy a property in the countryside. They are a little anxious about the possibility of illness in later life, as two of their close friends have suffered serious illness recently. urrently they do not have any type of health insurance cover. They are shortly going to meet an adviser from their bank who mentioned on the phone that they were 'tied' they re not quite sure what that means. 21. Which of the following risks is likely to have the least harmful affect upon the Green s financial situation? n increase: in the ank of England bank rate. in the rate of commission charged by estate agents on property sales. in the rate of stamp duty on property transactions. on the rate of income tax charged on interest from savings. Page 14 of 19

15 Risk and Reward in Personal Finance Specimen Paper 22. If they wished to provide themselves with cover against the most serious types of medical problems, which of the following would give them the highest value financial protection? ritical illness cover. Income Protection Insurance. Medical insurance. Payment protection plan. 23. Which would best describe the source of advice they have chosen for the potential investment of their 100,000? n adviser: able to give guidance about investments up to a limited value. providing a full choice of products from different providers. providing information about a limited range of products and alternatives. who could potentially be influenced by commission paid by different institutions. 24. Which of the following savings and investment products would best suit the Greens' situation and attitude? Investment trust. National Savings and Investments account. Open-ended investment company. Shares. 25. Which of the following investment and savings products may provide them with the opportunity for a saving in tax payments? uilding society savings account. Gilt edged securities. Individual savings account (IS). Unit trusts. Page 15 of 19

16 Risk and Reward in Personal Finance Specimen Paper ase Study 5 Harry, aged 72, lives on his own in rented accommodation. His children are grown up and are financially independent but are not able to provide their father with any support. He has a small pension from his lifetime employment, which is paid monthly into his bank account and which is sufficient for his everyday needs. He has a small amount of savings of approximately 12,000, which he has always kept in a National Savings account. He feels he needs to keep some of his savings available for emergencies but could invest part of it for a longer term and hopes that it will grow. friend of his has provided him with some advice about how to improve the return on his investment. Harry is quite happy to consider a wide range of investment and saving opportunities, even the more recently introduced services. 26. Harry is considering putting his savings into shares. Which of the following is the most important for Harry to consider before investing? s a shareholder he will have a vote at the company GM. He may not receive any dividends if the companies he invests in make a loss. The dividends from the shares are likely to vary. The value of the shares can go up and down. 27. Harry is keen to leave something to his children when he dies and is worried about the loss in value of his savings. Which of the following risks is the most likely to have an effect upon their value? apital gains tax payable by his benefactors. Possible rises in inflation and the retail prices index. The amount of income tax payable on his interest. The inheritance tax payable on his estate. Page 16 of 19

17 Risk and Reward in Personal Finance Specimen Paper 28. Which of the following is likely to offer the highest rate of interest for Harry s savings? ank savings account. uilding society fixed interest bond. uilding society share account. National savings fixed interest account. 29. Which of the following is the most appropriate product for Harry to use for his emergency fund? ank deposit account. Endowment policy. National savings certificates. Unit trust. 30. Which of the following should Harry approach for the widest range of advice? uthorised building society mortgage adviser. hartered accountant. FS authorised bank employee. Independent financial adviser. Page 17 of 19

18 Risk and Reward in Personal Finance Specimen Paper ase Study 6 li, aged 20, is a trainee accountant. He has recently passed his driving test and has decided to buy a car, which he has seen at his local garage. The interest rate they have quoted him for the finance is much higher than the cost of borrowing the money from his bank, so he arranges the loan through the bank. He is also interested in ways that he can most easily finance the running costs, especially for routine repairs and fuel, as he does not wish to use his savings for this. He is confident that he can meet these monthly costs from his income. espite advice from his parents, li takes out a third party, fire and theft insurance policy on his car, which he pays monthly by direct debit. Unfortunately, one day, li has an accident. He was driving too close to the car in front of him and when it braked he crashed into the back of it, damaging both cars, causing slight injury to himself and breaking his laptop, which fell off the passenger seat on impact. 31. The interest rate that the garage and bank both would have quoted li is the: ER. PR. ank rate. Loan rate. 32. efore the bank agreed li's loan, they would have completed which of the following on li? redit scoring. Guarantee insurance. Payment protection. Risk reduction. Page 18 of 19

19 Risk and Reward in Personal Finance Specimen Paper 33. Which of the following would be the best way for li to pay for his car running costs and fuel? redit card. Mortgage. Personal loan. Store card. 34. Which of the following would be an unplanned expense for li in respect of his car? Fuel. Insurance. Repairs. Road tax. 35. Which of the following would be covered by li's car insurance if the claim was a result of his error? amage to his car. amage to the other car. His injury. Repair to his laptop. Page 19 of 19