SCI M9 – Life Insurance And Investment-Linked Policies

Correct: Statement II is correct because money market instruments are short-term debt instruments that usually require a minimum investment of S$250,000. Statement III is correct because Treasury bills are sovereign-backed securities sold at a discount and are considered risk-free. Statement IV is correct because the higher interest on time deposits represents a liquidity premium for the commitment of funds.

Incorrect: Statement I is incorrect because the Deposit Insurance Scheme in Singapore specifically excludes foreign currency deposits, such as those held in Asian Currency Units (ACU), from its coverage.

Takeaway: Investors must distinguish between insured Singapore dollar deposits and uninsured foreign currency holdings while understanding that higher yields in time deposits and T-bills reflect duration premiums and risk-free sovereign backing respectively. Therefore, statements II, III and IV are correct.

Correct: The Parametric Model’s reliance on the assumption of a normal distribution is a significant limitation because such distributions are often ineffective at predicting extreme “black swan” events or tail risks.

Incorrect: The description of reorganizing actual historical returns from worst to best refers to the Historical Method, not the Parametric Model. The mention of using random numbers and probabilities to run thousands of computer simulations describes the Monte Carlo Simulation approach. The claim that it cannot express potential losses in simple terms is false, as one of the primary advantages of VAR is its ability to quantify risk in simple, easily understood terms.

Takeaway: The Parametric Model is valued for its ease in determining confidence levels but is limited by its assumption of normal distribution, which may underestimate the likelihood of extreme market shocks.

Correct: The risk that proceeds from maturing securities must be placed into new instruments offering lower yields than the previous ones is the right answer because this defines reinvestment risk. According to the syllabus, money market instruments are short-term, requiring investors to reinvest proceeds frequently; if rates decline, the investor cannot maintain the previous yield level.

Incorrect: The suggestion that corporations will default describes credit risk, which is distinct from the risks associated with interest rate fluctuations. The concern about converting instruments to cash refers to liquidity risk, which is typically low for money market instruments as they are designed for quick conversion. The claim that market values will drop as rates fall is conceptually wrong, as bond prices and interest rates move inversely, and short-term instruments have very low price volatility.

Takeaway: While money market instruments offer high liquidity and low principal risk, they are particularly susceptible to reinvestment risk in a falling interest rate environment.

Correct: Statement II is correct because the Treynor ratio assumes that unsystematic risk is eliminated through diversification, thus using beta to measure systematic risk. Statement III is correct because the Information Ratio is the ratio of the fund’s excess return over its benchmark relative to the tracking error. Statement IV is correct because the Sharpe ratio relates excess return to total risk, which is represented by the standard deviation of the fund’s returns.

Incorrect: Statement I is incorrect because the Sharpe ratio is better suited for assessing a portfolio that constitutes a substantial portion of an investor’s total funds, whereas the Treynor ratio is used to evaluate sub-portfolios within a broader, fully diversified investment.

Takeaway: Investors use different risk-adjusted measures depending on whether they are evaluating total risk (Sharpe Ratio) or systematic risk (Treynor Ratio) within a diversified portfolio. Therefore, statements II, III and IV are correct.

Correct: Statement I is correct because Yankee bonds are defined as US dollar-denominated securities issued by non-U.S. entities and sold specifically within the United States market. Statement III is correct because the source text states that bond prices move inversely to interest rates and that bonds with lower coupon rates are more sensitive to these interest rate changes.

Incorrect: Statement II is incorrect because reinvestment risk is actually higher for bonds with long maturities and high coupons, not short maturities and low coupons, as there is more interest income to be reinvested over a longer duration. Statement IV is incorrect because the description of failing to make timely payments due to lack of collateral refers to default risk; sovereign risk specifically relates to government-imposed restrictions such as exchange controls or payment delays.

Takeaway: Investors must distinguish between issuer-specific default risks and broader sovereign risks, while understanding that bond price sensitivity is driven by coupon rates and maturity lengths. Therefore, statements I and III are correct.

Correct: Statement I is correct because a beta of less than 1 indicates the fund is less volatile than the market and has a lower expected return. Statement II is correct because Jensen’s Alpha measures the excess return over the CAPM prediction, reflecting a manager’s skill in stock picking. Statement IV is correct because the market risk premium is defined as the difference between the market rate of return and the risk-free rate to compensate for uncertainty.

Incorrect: Statement III is incorrect because the text states that when risk aversion rises, investors require a higher return, which forces the market price of risky assets to fall to achieve that higher yield, rather than increasing the price.

Takeaway: Understanding the components of CAPM and Jensen’s Alpha allows investors to distinguish between market-driven returns and manager-driven performance on a risk-adjusted basis. Therefore, statements I, II and IV are correct.

Correct: The statement that it accounts for compounding and provides an accurate growth rate is correct because Geometric Return reflects the time-weighted rate of return over multiple periods, capturing the actual wealth accumulation an investor experiences.

Incorrect: The suggestion that it is easier to calculate or used for marketing is incorrect because Arithmetic Return is mathematically simpler and typically yields a higher average figure, which is often used misleadingly in marketing materials. The claim that it focuses on risk-adjusted performance is wrong as it does not incorporate standard deviation; that is the function of specific risk-adjusted indicators like the Sharpe or Treynor ratios. The idea that it removes the need to consider inflation or taxes is false, as these factors require separate adjustments to determine the real after-tax rate of return.

Takeaway: Geometric Return is the preferred method for evaluating multi-period performance because it captures the cumulative effect of compounding over time.

Correct: The putable feature is the correct choice because it grants the investor the right to sell the bond back to the issuer at par value. This specific mechanism allows an investor to exit a bond that has lost market value due to rising interest rates and receive the full face value instead.

Incorrect: The callable feature is incorrect because it is an option exercised by the issuer, not the investor, typically when interest rates fall so the issuer can refinance at a lower cost. The convertible feature is incorrect because it provides an option to exchange the bond for equity shares, which does not directly address the risk of declining bond prices due to interest rate hikes. The secured feature is incorrect because it refers to the collateralization of the debt with specific assets to protect against default, rather than providing a mechanism to hedge against interest rate fluctuations.

Takeaway: Putable bonds provide investors with a floor value by allowing them to sell the security back to the issuer at par, effectively mitigating the capital risk associated with rising market interest rates.

Correct: Statement II is correct because the source text specifies that in discounting, the present value (PV) moves in the opposite direction from the number of periods (n) and the interest rate (i). Statement III is correct because the relationship between present and future values is represented by a curve, which reflects the application of compound interest rather than simple interest.

Incorrect: Statement I is incorrect because it describes the process of discounting, not compounding; compounding involves money today growing into a larger future amount. Statement IV is incorrect because an increase in the interest rate leads to a steeper slope on the value curve, thereby increasing the difference between the present value and the future value for the same time period.

Takeaway: The time value of money relies on the mathematical link of compound interest, where future value increases with time and rates, while present value decreases as those factors rise. Therefore, statements II and III are correct.

Correct: Simple interest is calculated solely on the original principal sum, while compound interest is calculated on the principal plus any interest accumulated from previous periods. This is the right answer because simple interest only applies the rate to the initial amount, whereas compound interest allows the investment to grow faster by earning interest on interest.

Incorrect: The statement that simple interest includes accumulated interest is wrong because that describes the mechanism of compounding. The claim that these interest types are exclusive to specific product terms like short-term or long-term is incorrect as both can be applied across various financial instruments. The assertion regarding the necessity of a financial calculator for simple interest is false, as the text notes formulas are used for simple problems.

Takeaway: The core distinction between simple and compound interest is whether the interest earned in previous periods is included in the base for future interest calculations.

Correct: Inflation can lead to significant interest rate volatility, causing price fluctuations and potential capital losses if the bonds are sold before maturity. This is because the coupon rate is fixed for the life of the issue and cannot move up in response to inflation, and changes in interest rates produce dramatic fluctuations in the market prices of these securities.

Incorrect: The suggestion that issuers can adjust coupon rates downwards is false as the coupon rate remains fixed for the life of the bond regardless of economic shifts. The claim regarding bondholders receiving voting rights is incorrect because bondholders are creditors and do not possess the same rights as ordinary shareholders, such as voting in company meetings. The statement about inflation improving secondary market liquidity is wrong because the Singapore secondary market is characterized as small and inactive for most retail participants.

Takeaway: Inflation poses a dual threat to fixed income investors by eroding purchasing power and causing interest rate volatility that leads to capital losses for those not holding to maturity.

Correct: Statement I is correct because the current yield is defined as the ratio of the annual coupon payment to the current market price of the security. Statement III is correct because the source material explicitly states that price volatility is higher for bonds with longer periods to maturity.

Incorrect: Statement II is incorrect because bond prices and interest rates have an inverse relationship; when market interest rates rise, bond prices fall. Statement IV is incorrect because the current yield ignores the principal sum to be paid at maturity, whereas the Yield to Maturity (YTM) is the measure that accounts for this and is considered the most important yield concept.

Takeaway: Bond prices move inversely to market interest rates, and the length of maturity is a primary determinant of a security’s price volatility and interest rate risk. Therefore, statements I and III are correct.

Correct: Statement I is correct because the source text states that Singapore Savings Bonds (SSB) can be redeemed in multiples of $500 before maturity without any loss in capital. Statement II is correct because the interest rates for each SSB issue are based on the average yields of Singapore Government Securities (SGS) from the preceding month.

Incorrect: Statement III is incorrect because bonds rated BBB by S&P or Baa by Moody’s are considered the minimum threshold for investment-grade quality, not speculative-grade. Statement IV is incorrect because interest income from Singapore Savings Bonds is explicitly exempt from tax, rather than being subject to personal income tax.

Takeaway: Singapore Savings Bonds offer capital preservation and tax-exempt step-up interest, while credit ratings distinguish between investment-grade and speculative-grade debt based on default risk. Therefore, statements I and II are correct.

Correct: Statement I is correct because the Rule of 72 provides the approximate doubling time by dividing 72 by the annual interest rate (72 / 6 = 12). Statement III is correct because the text explicitly states that the greater the frequency with which compounding occurs, the greater the effect on the growth of a future value.

Incorrect: Statement II is incorrect because the effective interest rate is greater than the nominal interest rate, as the nominal rate is “in name only” and does not account for the effects of compounding. Statement IV is incorrect because more frequent discounting results in a lower present value; for instance, the text notes that the present value of $1,000 is $857.34 with annual discounting but only $854.80 with semi-annual discounting.

Takeaway: Increasing the frequency of compounding raises the effective interest rate and future value, whereas increasing the frequency of discounting reduces the present value of a future sum. Therefore, statements I and III are correct.

Correct: S$12,155.06 is the right answer because the future value of a single sum is calculated by multiplying the present value (S$10,000) by the factor (1 + i) raised to the power of n. In this scenario, 1.05 raised to the fourth power equals approximately 1.215506, which when multiplied by the initial deposit results in a final sum of S$12,155.06.

Incorrect: The value of S$12,000.00 is incorrect because it represents a simple interest calculation (S$10,000 + [S$500 x 4]) rather than compound interest, failing to account for interest earned on interest. The value of S$11,576.25 is wrong as it calculates the compounding effect for only three years instead of the required four-year period. The value of S$12,762.82 is incorrect because it applies the compounding formula for five years, which exceeds the specified investment horizon.

Takeaway: The future value of a single sum is determined by compounding the present value at a specific interest rate over a defined number of periods using the formula FV = PV x (1 + i)^n.

Correct: Equity holders are entitled to residual claims on income and assets after all creditors are paid, and their potential loss is limited to the amount invested. This is the right answer because equity represents ownership; investors only receive what remains after contractual obligations to creditors are met. Limited liability ensures that the maximum loss is the paid-up capital or the purchase price in the secondary market.

Incorrect: The claim about contractual rights to fixed income and priority repayment is wrong because these are features of debt or fixed-income securities, not equity. The statement regarding personal liability for debts is incorrect because equity holders benefit from limited liability, meaning they cannot lose more than their initial investment. The mention of fixed tenure and mandatory repayment at maturity is false because equity is assumed to have an indefinite or perpetual lifespan.

Takeaway: Equity investors hold residual claims on a company’s assets and enjoy limited liability, distinguishing their risk-reward profile from that of contractual debt holders.

Correct: Statement I is correct because the interest rate (i) is located in the denominator of the Present Value formula; therefore, an increase in the interest rate results in a lower Present Value. Statement II is correct because a decrease in the time period (n) means there is less time for interest to compound, necessitating a larger initial sum (higher PV) to reach the same future goal. Statement IV is correct because it accurately defines the fundamental concept of Present Value as the amount needed today to accumulate to a specific future sum.

Incorrect: Statement III is incorrect because the Present Value is inversely related to the time period; as the number of years (n) increases, the denominator in the formula grows larger, which causes the Present Value to decline rather than increase.

Takeaway: The Present Value of a future sum is inversely related to both the interest rate and the length of the time period until the sum is received. Therefore, statements I, II and IV are correct.

Correct: Statement I is correct because preferred shareholders are entitled to receive a specified liquidation value in full before any proceeds are distributed to ordinary shareholders. Statement II is correct because the cumulative provision requires the corporation to settle all unpaid past dividends and the current year’s preferred dividend before ordinary shareholders can receive any payment.

Incorrect: Statement III is incorrect because preferred shares typically offer only modest potential for capital gains and do not allow holders to enjoy the full benefits of capital appreciation as the company prospers. Statement IV is incorrect because the source text explicitly states that the practice of designating non-traded Class A shares with superior voting rights to insulate management is done in the U.S. and China, but not in Singapore.

Takeaway: Preferred shares prioritize income stability and liquidation preference over the voting rights and capital appreciation potential characteristic of ordinary shares. Therefore, statements I and II are correct.

Correct: Statement I is correct because subscription rights allow existing shareholders to purchase new shares at a discounted price, usually in proportion to their current holdings, before the shares are offered to the public. Statement II is correct because the text identifies liquidity as a key feature of shares traded on exchanges, noting they can be realized with greater ease than physical real estate or corporate bonds.

Incorrect: Statement III is incorrect because fluctuations in the general level of interest rates are classified as market risks (external factors), while specific risks refer to company-specific uncertainties like management changes or losses. Statement IV is incorrect because the source text explicitly states that from 1969 to 2009, the real return of US stocks (6.4%) compared better than the yield of long-term government bonds after adjusting for inflation.

Takeaway: Ordinary shares provide benefits like liquidity and subscription privileges but carry both market and specific risks that distinguish them from fixed-income or physical assets. Therefore, statements I and II are correct.

Correct: Statement I is correct because the text explicitly states that future value increases as the number of years (n) increases. Statement II is correct because the text confirms that future value falls as the interest rate (i) is lowered. Statement III is correct because the FVIF is defined as the factor used to multiply the present value to reach the future value, meaning the factor itself equals the future value divided by the present value.

Incorrect: Statement IV is incorrect because the formula FV = PV x (1 + i)n demonstrates a direct relationship; an increase in the initial present value results in a higher future value, whereas an inverse relationship would imply the opposite.

Takeaway: The future value of an investment is determined by the interaction of the principal, the interest rate, and time, all of which have a positive correlation with the final amount. Therefore, statements I, II and III are correct.

Correct: Statement I is correct because unit trusts allow retail investors to access institutional markets and specialized asset classes that usually require high minimum investment thresholds. Statement II is correct because the fund is managed by professional managers who possess the expertise and resources to monitor markets and make informed investment decisions. Statement IV is correct because unit trusts enable investors to achieve broad diversification across various securities and sectors with a relatively small initial capital outlay.

Incorrect: Statement III is incorrect because unit trusts are generally not capital-guaranteed products; while specific ‘capital guaranteed’ funds exist as a sub-category, the standard unit trust structure does not provide an inherent legal guarantee against capital loss or market volatility.

Takeaway: Unit trusts provide retail investors with professional management and diversification benefits, though they typically do not offer a guarantee on the principal investment. Therefore, statements I, II and IV are correct.

Correct: Statement II is correct because the internal aspect of investment specifically relates to the investor’s personal objectives and their psychological attitude towards risk. Statement III is correct because having a clear understanding of these internal aspects helps investors stay focused on their long-term goals and prevents them from making impulsive, ad hoc revisions to their asset allocation during periods of market distress.

Incorrect: Statement I is incorrect because an investment policy should consider both internal and external aspects rather than prioritizing external market conditions for short-term gains. Statement IV is incorrect because an investor’s investment style is determined by their own resources, time constraints, and risk tolerance, rather than being defined by external regulatory constraints.

Takeaway: A comprehensive investment policy must balance internal personal factors with external market conditions to ensure the investor remains disciplined and avoids emotional decision-making during market volatility. Therefore, statements II and III are correct.

Correct: Statement I is correct because historical data indicates that ordinary shares have substantially outperformed corporate bonds and inflation over long-term periods. Statement III is correct because spreading investments across various sectors and geographical regions is a recognized strategy to reduce specific risk and portfolio volatility. Statement IV is correct because the Securities and Futures Act (Cap. 289) mandates that MAS authorize collective investment schemes before they are offered to the Singapore public.

Incorrect: Statement II is incorrect because the responsibility for portfolio management and administering the buying and selling of units lies with the fund manager, not the trustee. The trustee’s primary role is to hold the pool of money and assets in trust for the unitholders.

Takeaway: Collective investment schemes are regulated structures that allow for professional management and risk reduction through diversification, with clearly defined roles for the fund manager and the trustee. Therefore, statements I, III and IV are correct.

Correct: The statement that the sum assured is paid on a specific maturity date or upon the death of the life insured, whichever occurs first, is the right answer. According to the regulatory principles for endowment insurance, these policies are structured to provide a guaranteed payout at a certain stage, either at the end of a fixed term (maturity) or if the insured passes away before that date.

Incorrect: The claim that the sum assured is paid only upon the death of the life insured describes a whole life policy rather than an endowment policy. The statement that the sum assured is paid only if the life insured survives until the end of the term is incorrect because endowment policies also include a death benefit if the insured dies before maturity. The suggestion that the payout is a series of annual income payments upon surrender is incorrect as endowment policies are designed to provide a lump sum payout at maturity or death.

Takeaway: Endowment insurance policies provide a guaranteed payout at a predetermined maturity date or upon the death of the insured, whichever is earlier, making them suitable for specific future financial goals.

Correct: The observation that the expected arithmetic return remains relatively constant across different investment time horizons is supported by the MSCI U.S. Index data, which shows the mean return staying within a narrow range of 10.3% to 12.3% regardless of the duration.

Incorrect: The suggestion that expected returns increase significantly over time to compensate for inflation is incorrect as the data shows the arithmetic mean is relatively unaffected by the horizon length. The claim that expected returns decrease as the standard deviation reduces is wrong because, while risk (volatility) falls, the average expected return remains stable. The idea that expected returns fluctuate wildly is incorrect because a narrowing range between the highest and lowest returns actually indicates more predictable outcomes over longer periods.

Takeaway: While lengthening the investment time horizon significantly reduces risk and volatility, it has a minimal impact on the expected arithmetic return of the investment.

Correct: Life annuities are specifically designed to provide a vehicle for supporting living expenses after retirement for as long as the annuitant lives, effectively protecting against the risk of outliving one’s financial resources.

Incorrect: The statement regarding a lump sum benefit for premature death describes the primary purpose of life insurance, which guards against living too short a life rather than too long. The description of a short-term debt instrument with a maturity of less than one year refers to money market instruments, not annuities. The claim that it is a structured product guaranteeing fixed returns regardless of equity performance describes a different asset class and ignores the longevity protection core to annuities.

Takeaway: Life insurance and annuities serve opposite primary risks; life insurance protects against premature death, while annuities protect against the risk of outliving one’s assets during retirement.

Correct: Statement I is correct because the text explicitly states that the investment element of investment-linked life insurance policies fluctuates daily according to the performance of the underlying assets. Statement III is correct because an immediate annuity is defined as a contract purchased with a single lump sum (single premium) where payments to the annuitant begin as soon as it is purchased.

Incorrect: Statement II is incorrect because bonuses on traditional life policies follow performance only in a distant fashion and cannot match daily fluctuations as they are generally declared on a yearly basis. Statement IV is incorrect because the purpose of an annuity is to protect against the loss of income arising from excessive longevity (outliving one’s income), which is the opposite of life insurance that protects against premature death.

Takeaway: Investment-linked policies provide direct exposure to daily market fluctuations, while annuities are specifically designed to manage longevity risk by providing guaranteed income for life. Therefore, statements I and III are correct.

Correct: The statement that middle-aged investors have reached peak earning power and possess the financial knowledge to take a more active investment approach is correct. According to the text, middle age is the stage where individuals are at the peak of their career and earning power, often possessing the experience and available funds to undertake higher-risk investments to make their money grow faster.

Incorrect: The claim that middle-aged investors have a longer investment time horizon than young adults is incorrect because young adults, by definition, have the longest time horizon to ride out volatility. The idea that regulatory guidelines require a shift to aggressive growth is false, as the choice of risk level is a personal decision based on individual objectives. The suggestion that middle-aged investors have lower wealth levels than young adults is wrong, as the text explicitly states they have an abundance of funds compared to early adulthood.

Takeaway: An investor’s life cycle stage significantly influences their risk capacity, with middle age often representing a period of peak earnings and active investment strategy.

Correct: Statement I is correct because the source text explicitly states that unlike futures contracts, Contracts for Difference (CFDs) have no fixed expiry date. Statement II is correct because the most significant advantage for an option buyer is that the only amount of money to be lost is the purchase price (premium) of the option.

Incorrect: Statement III is incorrect because European options are exercisable only on the expiration date, while American options are exercisable any day up to the expiration date. Statement IV is incorrect because the text states that CFDs allow investors to speculate on price movements without the need for ownership of the underlying shares, and specifically notes that share options do not provide voting privileges or ownership interest.

Takeaway: While both options and CFDs are leveraged derivatives, options provide a floor on potential losses (the premium), whereas CFDs have no fixed expiry and do not grant the holder any ownership rights in the underlying asset. Therefore, statements I and II are correct.

Correct: Capital gains from Singapore unit trusts are non-taxable for individuals, while offshore investments may be subject to capital gains tax in the jurisdiction where they are held. This is consistent with Singapore’s tax laws and the regulatory warnings regarding the globalization of finance and offshore trading.

Incorrect: The statement about bond income is incorrect because income from bonds and savings accounts has been exempt from tax in Singapore since 11 January 2005. The claim regarding the Code on Collective Investment Schemes is wrong because investment-linked life insurance policies were required to comply with similar guidelines starting 1 October 2011. The description of the Supplementary Retirement Scheme is inaccurate because contributions are eligible for tax relief and 50% of withdrawals are taxable at retirement.

Takeaway: While Singapore provides tax exemptions for local capital gains and bond income, investors must remain aware of MAS regulatory requirements and potential tax obligations for offshore assets.