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Which of the following is generally regarded as a defining feature of a hedge fund relative to a traditional long-only fund?
A
B
C
D
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2026 Statistics
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 Practice Questions
Verified exam format metadata for IFoA SP5 Investment and Finance Specialist Principles is pending. The practice questions above remain available while official exam length, timing, passing score, fee, and administrator details are reviewed.