Under an early encashment schedule where the charge is 5% in year 1 and reduces by 1% at the end of each year, what is the charge in year 3?

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Prepare for the Qualified Financial Adviser Exam 2 with flashcards and multiple choice questions, complete with hints and explanations. Get exam-ready and increase your confidence with our comprehensive study materials!

Multiple Choice

Under an early encashment schedule where the charge is 5% in year 1 and reduces by 1% at the end of each year, what is the charge in year 3?

Explanation:
The charge falls by 1 percentage point each year. Starting at 5% in year one, the year two rate is 4% (after the end of year one), and the year three rate is 3% (after the end of year two). So the charge in year three is 3%. It wouldn’t be 0% or 1% because only two reductions have occurred by year three, and it wouldn’t stay at 5% because the schedule specifies a yearly reduction.

The charge falls by 1 percentage point each year. Starting at 5% in year one, the year two rate is 4% (after the end of year one), and the year three rate is 3% (after the end of year two). So the charge in year three is 3%. It wouldn’t be 0% or 1% because only two reductions have occurred by year three, and it wouldn’t stay at 5% because the schedule specifies a yearly reduction.

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