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100+ Free IFoA SP5 Practice Questions

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Key Facts: IFoA SP5 Exam

3h20m

Exam Duration

IFoA curriculum

200 hrs

Study Hours

IFoA syllabus

GBP 385

Standard Fee

IFoA fees page

Written

Answer Format

IFoA exam format

2 per year

Exam Sessions

IFoA exam schedule

SP stage

Qualification Level

IFoA curriculum

IFoA SP5 Investment and Finance is a Specialist Principles fellowship exam sat as a 3 hour 20 minute online open-book written paper of short and long answers, not multiple choice. The IFoA assumes about 200 study hours and lists a standard fee of GBP 385 (GBP 220 reduced rate), with sittings in April and September/October. The syllabus spans investment markets and instruments, portfolio construction, asset-liability management, valuation, market efficiency and behavioural finance, performance measurement, and investment risk and regulation. This free prep set provides 100 technical multiple-choice questions as knowledge practice for that written exam.

Sample IFoA SP5 Practice Questions

Try these sample questions to test your IFoA SP5 exam readiness. Each question includes a detailed explanation. Start the interactive quiz above for the full 100+ question experience with AI tutoring.

1An equity has a current price of 200p, an expected dividend in one year of 8p, and a constant expected dividend growth rate of 4% per annum. Using the dividend discount (Gordon growth) model, what required rate of return is implied?
A.8%
B.10%
C.12%
D.6%
Explanation: The Gordon growth model gives price P = D1 / (r - g), so r = D1/P + g = 8/200 + 0.04 = 0.04 + 0.04 = 0.08, i.e. 8%. The dividend yield (4%) plus the growth rate (4%) equals the required return.
2Which characteristic best distinguishes ordinary shares (equities) from conventional bonds as an asset class?
A.Ordinary shares give a fixed contractual income, whereas bonds pay a variable dividend
B.Ordinary shares rank behind bondholders on a winding-up and have no fixed redemption date
C.Ordinary shares are always secured on company assets, whereas bonds are unsecured
D.Ordinary shares carry a legal obligation for the company to pay an annual coupon
Explanation: Equity is residual (risk) capital: shareholders rank after all creditors including bondholders on a winding-up, and ordinary shares are irredeemable with no fixed maturity. Dividends are discretionary, not contractual, so equity returns are more variable than bond returns.
3A conventional fixed-interest government bond trades above par (at a premium). Which statement about its yields is correct?
A.The running yield is below the coupon rate, but the redemption yield exceeds the running yield
B.The running yield exceeds the coupon rate
C.The gross redemption yield is below the running yield, which is below the coupon rate
D.The gross redemption yield equals the coupon rate
Explanation: When a bond trades at a premium, the price is above par, so the running yield (coupon/price) is below the coupon rate. The redemption yield is lower still because the investor suffers a capital loss to par at redemption. Hence GRY < running yield < coupon.
4Which feature is the defining characteristic of an index-linked government bond compared with a conventional government bond?
A.It is redeemable at the option of the issuer at any time
B.It pays no coupon and is issued at a deep discount to par
C.It pays a higher fixed coupon to compensate for default risk
D.Its coupon and redemption payments are adjusted in line with a specified inflation index
Explanation: Index-linked bonds protect against inflation by uprating both coupon and principal in line with a price index (e.g. RPI or CPI), giving a more stable real return. Conventional bonds pay fixed nominal amounts whose real value is eroded by inflation.
5An investor buys a property let on a full repairing and insuring (FRI) lease. What is the principal advantage of an FRI lease to the landlord?
A.The tenant bears the cost of repairs and insurance, so the rent received is effectively net to the landlord
B.The landlord can increase the rent without an open-market review
C.The lease guarantees that the property value will rise with inflation
D.The tenant is prohibited from assigning or subletting the property
Explanation: Under an FRI lease the tenant is responsible for repairing and insuring the property, so the landlord receives rent free of these outgoings. This makes the income stream cleaner and more predictable, a key reason institutions favour FRI terms.
6Which of the following is a key disadvantage of direct property investment relative to listed equities for an institutional investor?
A.Property is highly liquid and can be traded instantly
B.Property involves large unit sizes and high transaction costs, reducing marketability
C.Property values are continuously and objectively marked to market
D.Property income is more volatile than equity dividends
Explanation: Direct property suffers from large lot sizes, high dealing costs (stamp duty, legal, agents), and slow, infrequent transactions, making it illiquid and difficult to value precisely. Valuations rely on periodic surveyor appraisals rather than continuous market prices.
7A forward contract and a futures contract on the same underlying differ primarily because futures are:
A.Free of counterparty credit risk because they are unfunded
B.Privately negotiated and settled only at maturity
C.Exchange-traded, standardised, and subject to daily margining through a clearing house
D.Always physically settled rather than cash settled
Explanation: Futures are standardised, exchange-traded contracts cleared through a central clearing house with daily marking-to-market and variation margin, which greatly reduces counterparty risk. Forwards are bespoke OTC agreements settled at maturity with direct counterparty exposure.
8An investor writes (sells) a European call option on a share. What is the maximum loss the writer can face, ignoring the premium received?
A.Limited to the current share price
B.Limited to the strike price
C.Limited to the premium received
D.Theoretically unlimited as the share price rises
Explanation: A naked call writer is obliged to deliver the share at the strike if exercised. Because the share price can in principle rise without bound, the writer's potential loss is theoretically unlimited. The premium received only partly offsets this exposure.
9In a plain vanilla interest rate swap, one counterparty typically agrees to:
A.Pay a fixed rate and receive a floating rate (or vice versa) on a notional principal
B.Deliver a physical commodity at a future date
C.Buy protection against a reference entity's default
D.Exchange principal amounts at the start and end of the contract
Explanation: A plain vanilla interest rate swap exchanges a stream of fixed-rate interest payments for floating-rate payments (e.g. linked to SONIA) on a notional principal. The notional is not exchanged; only the net interest cash flows are settled periodically.
10Which statement best describes a credit default swap (CDS)?
A.A contract to exchange two currencies at a fixed future rate
B.A derivative in which the protection buyer pays a periodic premium and receives a payout if a reference entity suffers a defined credit event
C.An equity option giving the right to buy shares at a fixed price
D.A bond whose coupon is linked to an inflation index
Explanation: A CDS transfers credit risk: the buyer pays a regular premium (the spread) and, if the reference entity experiences a defined credit event such as default or restructuring, the seller compensates the buyer for the loss. It functions like insurance against credit risk.

About the IFoA SP5 Exam

IFoA SP5 Investment and Finance Specialist Principles develops the ability to evaluate investments, construct portfolios suited to investor needs and liabilities, and manage the associated investment risks, covering markets, valuation, asset-liability management, performance, and regulation.

Assessment

Online open-book written paper of short-answer and long-answer questions

Time Limit

3 hours 20 minutes

Passing Score

No fixed published pass mark; the Board of Examiners sets the cut score each session and reports a pass/fail with a grade band

Exam Fee

GBP 385 (GBP 220 reduced rate) (Institute and Faculty of Actuaries (IFoA))

IFoA SP5 Exam Content Outline

~25%

Investment markets and instruments

Equities, conventional and index-linked bonds, property and leases, derivatives including futures, options, swaps and credit default swaps, money market instruments, overseas investment and currency risk, and alternatives such as private equity, hedge funds, commodities and infrastructure.

~25%

Portfolio construction and management

Modern portfolio theory and the efficient frontier, CAPM and beta, the capital market line, diversification, active versus passive styles, strategic and tactical asset allocation, benchmarks, rebalancing, lifestyling, and factor (smart beta) investing.

~25%

Asset-liability management and valuation

Immunisation and Redington's conditions, cash-flow matching, duration, liability-driven investment, interest rate and inflation hedging with swaps, liability benchmark portfolios, and the valuation of equities, bonds and property.

~25%

Performance, risk, behaviour and regulation

Sharpe, Treynor, Jensen and information ratios, attribution analysis, time- versus money-weighted returns, market efficiency, behavioural finance biases, value at risk and expected shortfall, stress testing, and the regulation of investment markets.

How to Pass the IFoA SP5 Exam

What You Need to Know

  • Passing score: No fixed published pass mark; the Board of Examiners sets the cut score each session and reports a pass/fail with a grade band
  • Assessment: Online open-book written paper of short-answer and long-answer questions
  • Time limit: 3 hours 20 minutes
  • Exam fee: GBP 385 (GBP 220 reduced rate)

Keys to Passing

  • Work through all 100 available questions
  • Review every answer and explanation
  • Track weak areas and revisit them
  • Use our AI tutor for tough concepts

IFoA SP5 Study Tips from Top Performers

1Treat SP5 as an applied subject: practise linking each instrument or technique back to a real investor's liabilities, objectives, and constraints rather than memorising definitions in isolation.
2Be fluent with the core formulae, such as the Gordon growth model, CAPM, duration, and the Sharpe, Treynor, Jensen and information ratios, so calculations are quick under time pressure.
3Master asset-liability management, including immunisation, Redington's conditions, cash-flow matching, and liability-driven investment, as it is a recurring theme in SP5 questions.
4Practise explaining behavioural finance biases and market-efficiency arguments in clear, structured points, because the written paper rewards reasoned discussion as well as numerical answers.
5Work past papers and examiners' reports under timed open-book conditions so your pace and answer structure match the 3 hour 20 minute written format.

Frequently Asked Questions

What format is the IFoA SP5 exam?

SP5 is an online open-book computer-based examination answered in Word. It is a written paper of short-answer and long-answer questions, not a multiple-choice test, lasting 3 hours 20 minutes.

How long is the IFoA SP5 exam?

Candidates have 3 hours 20 minutes. The IFoA added 5 minutes to the writing time to allow for downloading or printing the paper. SP5 assumes roughly 200 hours of study to prepare.

What is the pass mark for IFoA SP5?

The IFoA does not publish a fixed numeric pass mark for SP5. The Board of Examiners sets the cut score for each session, and candidates receive a pass or fail with a grade band rather than a percentage.

How much does the IFoA SP5 exam cost?

The standard SP5 exam fee is around GBP 385, with a reduced rate of about GBP 220 for eligible candidates. Fees are reviewed by the IFoA, so confirm the current figure on the IFoA fees page before booking.

Which topics does IFoA SP5 cover?

SP5 covers investment markets and instruments, portfolio construction and management, asset-liability management, valuation of investments, market efficiency and behavioural finance, performance measurement, and investment risk and regulation.

When can I sit IFoA SP5?

SP5 is offered in two sessions each year, in April and in September/October. Candidates register as IFoA students and book through the IFoA exam booking system.