AFAI1 — Investment — Unit 1

What AFAI1 covers

• •Inflation, interest rates, fiscal vs monetary policy and their effect on asset prices
• •Cash, gilts, corporate bonds, equities, property and alternatives
• •Collectives: unit trusts, OEICs, investment trusts and ETFs
• •ISAs, Junior ISAs, LISAs and the annual ISA allowance
• •Risk vs return, diversification and correlation
• •Charges, ongoing costs and the effect of compounding

3 free AFAI1 practice questions

Straight from Mock Paper 1, in the real exam style — no sign-up, no paywall.

1. Q1.The Bank of England's Monetary Policy Committee is tasked with keeping CPI inflation at which target?

   1. A0%
   2. B2%
   3. C2.5%
   4. D3%
   Reveal the answer

   B is correct. The Government sets the MPC's inflation target at 2% CPI. If inflation is more than one percentage point away from target, the Governor must write an open letter to the Chancellor explaining why and what the Bank will do.

2. Q2.When the Bank of England raises Bank Rate, which outcome is most likely in the short run?

   1. ABond prices rise and mortgage rates fall
   2. BBond prices fall and savings account rates tend to rise
   3. CEquity prices always rise because companies earn more interest
   4. DInflation immediately falls to the 2% target
   Reveal the answer

   B is correct. Higher interest rates make new bonds more attractive, so existing bond prices typically fall (yields and prices move inversely). Lenders usually pass higher base rates through to savers and borrowers. Equity effects are uncertain and not automatic.

3. Q3.Which feature most distinguishes cash from other main asset classes?

   1. AIt offers the highest long-run real return
   2. BCapital is not exposed to equity market volatility, but inflation can erode its purchasing power
   3. CReturns are always linked to company profits
   4. DIt must be held only in a current account
   Reveal the answer

   B is correct. Cash is low volatility in nominal terms but carries inflation risk — the real value can fall if interest earned is below inflation. It does not participate in equity dividends or property rental income.

How to pass AFAI1

• ✓Know what happens to bond prices when yields rise — inverse, not correlated.
• ✓Investment trusts can trade at a premium or discount to NAV; OEICs cannot.
• ✓LISA is 25% bonus on up to £4,000, first-home or age 60, 25% withdrawal penalty otherwise.

AFAI1 exam — common questions