You’re on a roll
Create a free account to save your ACCA progress, track your accuracy by topic, and pick up right where you left off.
Free Questions › ACCA › Advanced Financial Management
Free ACCA Advanced Financial Management Practice Questions & Answers
400 exam-style Advanced Financial Management questions. Pick your answer, hit Check answer, and see the worked solution — free to start, no signup.
100% free · No login to startQuestion 391
What is 'interest rate risk' for a bond investor (as opposed to a borrower)?
Select an option first.
Correct answer: B — The risk that rising interest rates will reduce the market value of existing bonds — because fixed coupon payments become less attractive relative to new bonds (offering higher coupons at the new market rate). Managed through: duration reduction, floating rate bonds, interest rate swaps (receive fixed, pay floating), or bond futures
Explanation: B is correct. Bond investor: rising rates → existing bond price falls (inverse price-yield relationship). Duration measures this sensitivity. Hedging: reduce portfolio duration (sell long-duration bonds), switch to floating rate (duration ≈ 0), buy interest rate futures (sell bond futures = short interest rates), or enter into a receive-floating/pay-fixed swap. A is credit risk. C is credit risk. D is inflation risk.
Question 392
What is 'securitisation risk' and what lessons were learned from the 2008 financial crisis?
Select an option first.
Correct answer: B — The risk that the structuring of securitised products (e.g., CDOs, RMBS) obscures the true underlying credit risk, leading to systematic mispricing — in 2008, complex multi-layered securitisation masked subprime mortgage risk; credit rating agency models underestimated default correlation; investors did not understand the underlying assets
Explanation: B is correct. 2008 lessons: (1) complexity obscures risk; (2) originate-to-distribute model (originators had no skin in the game); (3) rating agencies had conflicts of interest; (4) correlation risk underestimated; (5) liquidity risk underestimated. Post-crisis: risk retention rules (originators must keep 5% of securitisation), improved transparency, stress testing. A is property risk. C is liquidity risk. D is SPV credit risk.
Question 393
What is a 'total return swap' (TRS) and who uses it?
Select an option first.
Correct answer: B — A derivative where one party receives the total return of an asset (dividends, capital gains/losses) and pays a floating rate (LIBOR/SOFR + spread) — used by: banks (to transfer credit risk while retaining legal ownership), hedge funds (leveraged access to assets without owning them), and for synthetic prime brokerage financing
Explanation: B is correct. TRS: total return recipient gets all economic exposure (dividends + price appreciation/depreciation). TRS payer transfers the economic exposure. Used by: hedge funds (leverage without balance sheet), banks (transfer credit risk), and asset managers (efficient market access). Regulatory: classified as 'economically similar to securities financing transactions' and subject to reporting. A is a currency swap. C is too narrow. D is an equity swap variant.
Question 394
What is 'risk appetite' and how does it relate to risk management policy?
Select an option first.
Correct answer: B — A statement by the board or senior management defining the types and amounts of risk the organisation is willing to accept in pursuit of its strategic objectives — shapes all risk management decisions, determines the scope of hedging, and sets limits on individual risks. Expressed qualitatively and quantitatively
Explanation: B is correct. Risk appetite: governance concept. Qualitative: 'we will not engage in speculative FX trading'. Quantitative: 'maximum 50% of interest rate exposure hedged', 'no single counterparty > 10% of credit exposure'. Sets the framework within which treasury operates. Board-approved. A is wrong. C is regulatory constraint. D is hurdle rate.
Question 395
What is 'scenario testing' vs 'stress testing' in risk management?
Select an option first.
Correct answer: B — Scenario testing assesses a range of plausible future outcomes (each with consistent variable changes) to understand the distribution of outcomes. Stress testing focuses on extreme but plausible adverse scenarios to assess resilience and potential losses in a crisis — regulatory stress tests (bank stress tests) use severe but plausible scenarios prescribed by regulators
Explanation: B is correct. Scenario testing: broad range of scenarios (both favourable and adverse). Stress testing: extreme adverse scenarios (financial crisis, pandemic, rate shock). Reverse stress testing: identify what scenario would cause failure. Regulators (PRA, ECB) require banks to perform annual stress tests. A conflates them. C is wrong (both can be quantitative). D is too narrow.
Get the full ACCA question bank — free
Drop your email and we'll send you fresh ACCA practice questions, fully worked solutions and exam-deadline reminders. No spam — unsubscribe in one click.
Want to save your score and take a full mock exam? Create a free account →
Question 396
What is 'commercial paper' (CP) and how does it fit into a treasury funding mix?
Select an option first.
Correct answer: B — A short-term (typically 1–270 days) unsecured debt instrument issued by investment-grade companies in the money markets — issued at a discount to face value, used for working capital and short-term liquidity. Cheaper than bank borrowing for short-term needs. Typically backed by a revolving credit facility (backstop)
Explanation: B is correct. CP: issued at a discount, redeemed at par (return = discount). Only accessible to investment-grade issuers (no credit rating = no CP market access). Cheaper than drawn RCF. Treasury management: diversify funding sources (CP + RCF + term loans + bonds). A is long-term (wrong). C is a trade document. D is a bank facility.
Question 397
What is a 'bond indenture' (trust deed in the UK) and what key protections does it contain?
Select an option first.
Correct answer: B — The legal contract governing a bond issue — contains: coupon rate, payment dates, maturity, covenants (positive and negative), events of default, ranking (seniority), and security (if secured). Administered by a trustee (in the UK) who acts on behalf of bondholders
Explanation: B is correct. Bond indenture (UK: trust deed): governed by a trustee (acts on behalf of all bondholders collectively). Key covenants: financial (interest cover, leverage), negative (restrictions on additional debt, asset sales, dividends). Events of default: triggers that give bondholders the right to demand early repayment. A is a credit report. C is board minutes. D is a prospectus.
Question 398
What is 'FX translation risk' and how is it managed in practice?
Select an option first.
Correct answer: B — The risk that reported financial results change due to exchange rate movements when consolidating foreign subsidiaries' results — a non-cash accounting risk. Managed through: currency matching of assets and liabilities (natural hedge), foreign currency debt financing of foreign assets, cross-currency swaps, and sometimes hedging the equity investment
Explanation: B is correct. Translation risk: balance sheet risk — foreign subsidiary net assets translated at closing rate. Income statement translated at average rate. Companies often do not hedge translation risk (non-cash, no impact on operating cash flows). Those that do: issue foreign currency debt (natural hedge reduces net asset exposure), or use cross-currency swaps. A is transaction risk. C is capital repatriation risk (different).
Question 399
What is 'treasury policy' and what should it contain?
Select an option first.
Correct answer: B — A board-approved policy document governing the treasury function's activities — typically contains: risk appetite statements, approved financial instruments and markets, counterparty credit limits, hedging ratios and targets, liquidity requirements, and reporting and control requirements. Ensures treasury operates within defined parameters
Explanation: B is correct. Treasury policy: governance document approved at board level. Defines: what instruments may be used (e.g., no speculative positions), counterparty limits (maximum credit exposure per bank), hedging ratios (e.g., hedge 50–80% of FX exposure), liquidity targets (minimum cash/RCF headroom), and reporting frequency. A is accounting policy. C is business strategy. D is wrong — not universally mandated.
Question 400
What is 'payment factory' in multinational treasury management?
Select an option first.
Correct answer: B — A centralised structure that processes payments on behalf of subsidiaries through a single or small number of bank relationships — achieves economies of scale, improves payment controls, reduces banking costs, and enables better cash management. Subsidiaries initiate payments but the payment factory executes them through the central account
Explanation: B is correct. Payment factory: concentration of payment processing in a central treasury or shared service centre. Benefits: reduced banking relationships, better negotiated FX rates, improved controls (central authorisation), standardised processes, and reduced operational risk. A is wrong. C is trade finance operations. D describes a treasury centre's debt management function.
More free ACCA topics
Management Accounting401
Financial Accounting400
Corporate and Business Law400
Performance Management400
Financial Reporting400
Financial Management400
Strategic Business Reporting400
Advanced Performance Management400
Advanced Taxation400
Business and Technology300
Taxation300
Audit and Assurance300
Strategic Business Leader300
Advanced Audit and Assurance296
Ten questions in
- The ones you miss are saved as a drill you can repeat
- Your place is kept, on this device and any other
- A streak, if that is the thing that gets you back tomorrow
Every question on this page stays free and open either way.