Chapter 11 – (5marks) Market Information and Research

Question 1

11.1.1: Information providers

Markets move when new information comes into the market, and reflects that new information in the price of the security. To maintain fairness in the markets, there clearly needs to be a system in place to ensure that all market participants receive the information at the same time. Otherwise, if any market participant gets hold of the information before the rest of the market, they would have an unfair advantage.

What is this system in the UK?

Answer 1

Announcements must be published via a regulatory information service known as a primary information provider (PIP).

The LSEs Regulatory News Service (RNS) is the UK’s leading service for regulatory news announcements. They are obliged to disseminate 95% of all regulated information within 5 minutes of receiving it.

The PIP receives announcements from companies and then distributes the information immediately to secondary information providers (SIPs); the SIPs will then distribute the information to their customers.

Question 2

11.1.2: Information sources

It’s not just regulatory information about companies that we need to enable us to make informed investment decisions.

Large investment firms will produce research about companies they believe are good investment prospects. If an investor is buying funds, they need information about the types of assets the funds will be holding and their overall investment objectives. Information regarding the state of the economy, both in the UK and globally, will also have an impact on asset prices.

There is a plethora of information available from various sources. Let’s look at some of them.

Answer 2

News services

News services such as Bloomberg and Reuters provide information on individual securities as well as economic data.

Bloomberg has around a third share of the market.
They provide a global news service via TV, radio, websites and publications. This enables subscribers to analyse information and trade equities.

Reuters accounts for around a quarter of the share of the market.
They provide data services on the internet and via TV.

J12 2024-25 Chapter 11: Market Information and Research
13% COMPLETE
Introduction
11.1: Information Dissemination
11.2: Regulatory Requirements
11.3: Fundamental and Technical Analysis
11.4: Factors Affecting Markets
11.5: Bond Strategies
Chapter Summary
Knowledge check
Lesson 1 - Introduction
Lesson content
Lesson 2 of 8
11.1: Information Dissemination
Let’s start by looking at an example of how real market information might have an impact on investors.

This highlights the importance of information to investors.

Markets move when new information comes into the market, and reflects that new information in the price of the security. In the case of VW, the market believed the emissions scandal would make their cars less desirable, sales would decline, and profits would fall as a result. So, the share price fell too.

Continued
11.1.1: Information providers

As we have seen in chapter 8, under the Listing Rules firms have continuing obligations. One of these is to publish price-sensitive information to the markets as soon as possible.

To maintain fairness in the markets, there clearly needs to be a system in place to ensure that all market participants receive the information at the same time. Otherwise, if any market participant gets hold of the information before the rest of the market, they would have an unfair advantage.

Announcements must be published via a regulatory information service known as a primary information provider (PIP).

The LSEs Regulatory News Service (RNS) is the UK’s leading service for regulatory news announcements. They are obliged to disseminate 95% of all regulated information within 5 minutes of receiving it.

PIPs must be authorised and monitored by the FCA. In addition, they are required to keep records and to send annual reports (including an auditor’s report) to the FCA within 3 months of the anniversary of their authorisation.

The PIP receives announcements from companies and then distributes the information immediately to secondary information providers (SIPs); the SIPs will then distribute the information to their customers.

Depending on the licence, the information may be relayed in real time or with a delay.

Examples of SIPs and who they provide information to are:

Continued
11.1.2: Information sources

It’s not just regulatory information about companies that we need to enable us to make informed investment decisions.

Large investment firms will produce research about companies they believe are good investment prospects. If an investor is buying funds, they need information about the types of assets the funds will be holding and their overall investment objectives. Information regarding the state of the economy, both in the UK and globally, will also have an impact on asset prices.

There is a plethora of information available from various sources. Let’s look at some of them.

News services

News services such as Bloomberg and Reuters provide information on individual securities as well as economic data.

Bloomberg has around a third share of the market.
They provide a global news service via TV, radio, websites and publications.
This enables subscribers to analyse information and trade equities.
Reuters accounts for around a quarter of the share of the market.
They provide data services on the internet and via TV.

In addition, newspapers such as The Financial Times and the Wall Street Journal also provide information on the markets to investors.

Investment research

Large investment banks and brokers employ a large number of securities analysts to, as you would guess, analyse securities.

The role of an equity analyst involves researching issuers and their securities within a particular sector, such as financials, pharmaceuticals, technology, energy etc.

These analysts will frequently meet with issuers, their customers and suppliers to get an in-depth view of the company and its future prospects.

Fixed income analysts will research bond issuers within a specific category, such as government bonds, corporate bonds, high-yield bonds, convertible issues, and distressed securities.

The analyst will write up a research report, which will then be distributed to a wide range of participants.

It will not be tailored to a specific client’s needs, so care needs to be taken as any recommendations may not be suitable, depending on their attitude to risk (more on that in chapter 12).

More often than not, the research is produced in the hope that the services of the investment house will be used to execute any recommendations.

Investment firms must either pay for the research themselves or set up a separate research payment account (RPA) with each client.

This sets a specific amount that the client pays, which goes towards the overall research budget of the firm, so the amount spent on research is not linked to the volume of transactions.

Collective research

Collective investment schemes also provide a variety of information regarding their funds.

Monthly fact sheets vary from provider to provider, but typically include information such as the strategy and investment policy, past performance and benchmark, top 10 holdings, geographic and sector exposure, along with measures such as alpha, beta and the risk-adjusted returns ( more on these in chapter 13).

This enables investors to understand the fund better, compare it to other funds and see if it is suitable for their needs.

The fund will also issue interim and annual reports.

There are several online providers that enable investors to find information about the different funds available for comparison purposes.

The most well-known ones include Morningstar, Citywire and Trustnet.
They will only publish information for funds that subscribe to the service (and the funds obviously will have to pay for that), and they may only include a limited range of fund types.

Government resources

The government and central bank also provide several publications and statistics that help investors understand what is going on in the economy.

Economic statistics play a key role in establishing market trends and can help investors understand what the prospects are for specific sectors and individual companies. For example, if a recession is looming then it’s unlikely a retail company will be doing well in the future.

Question 3

11.2: Regulatory Requirements

So, we now know that it’s important to make sure we are well-informed before making any investment decisions. But what if the information that we have been given isn’t true? Or what if someone, by way of their employment for example, was able to access the information before us and use that information to their advantage? That wouldn’t be fair.

As a result, regulations have been put in place to ensure fair markets for all.

The main areas covered are market abuse, insider dealing, and misleading statements and practices.

Question 4

Insider dealing rules apply to:

shares and bonds
depository receipts
warrants, options and futures
CFDs

Do the rules apply to Commodities and shares/units in an OEIC?

Answer 4

It does not apply to commodities (or commodity derivatives) nor units / shares in open-ended collective investment schemes.

Question 5

Penalties for insider dealing

Answer 5

Insider dealing isn’t just covered under MAR (where the regulators can take action against offending individuals), it is also an offence under the Criminal Justice Act.

So, an individual found guilty of insider dealing could also face a 10-year prison sentence if the FCA (who are granted prosecution powers under FCMA) decide to start criminal proceedings.

Question 6

If found guilty of market abuse, then the regulators can take a variety of actions including:

Answer 6

Impose unlimited fine
Make public statements
Apply to court for injunction to stop market abuse
Require person to disgorge profits made / losses avoided due to MA
Pay compensation to victims

Question 7

11.2.3: Public disclosure requirements

To minimise the potential for insider dealing, as part of their continuing obligations, firms are required to publish any relevant information to the market via a regulatory information service as soon as possible.

What happens if it is a global company?

Answer 7

Where information is also released in overseas markets, all info should be given at the same time

Question 8

Sometimes, however, it’s not in the best interests of the firm to disclose any price-sensitive information immediately. In that case, the disclosure of the inside information may be delayed (so long as it is not likely to mislead the public).

Firms are also required to maintain lists of any individuals who have access, either directly or indirectly, to inside information.

Firms must ensure that employees are aware of their legal responsibilities with respect to the inside information and the potential sanctions associated with its misuse.

Question 9

11.2.4: Market manipulation

The last type of market abuse is engaging or attempting to engage in market manipulation.

There are four additional types of market abuse (in addition to insider dealing and improper disclosure).

Manipulating transactions
Manipulating Devices
Dissemination of information
Misleading behaviour

Answer 9

Manipulating transactions =
These are transactions or orders to trade that give, or are likely to give, a false impression about the supply of, demand for, or the price of financial instruments. For example, buying or selling investments at the close of the market with the effect of misleading investors who act on the basis of closing prices, other than for legitimate reasons.

Manipulating Devices =
This is behaviour whereby transactions employ fictitious devices or any other form of deception or contrivance.
Examples include:
pump and dump or a trash and cash

Dissemination of information
This consists of information which is likely to give a false or misleading impression to a qualifying investment.
For example, knowingly spreading false or misleading information about an investment through the media, in particular through a regulatory information service.

Misleading behaviour
This is behaviour that is likely to distort the market and would be regarded by the market as a failure of the concerned person to observe the standard of behaviour reasonably expected of a person in their position.
This could include ‘cornering’ the market, where a few participants collaborate to control the supply for a financial instrument, or other examples such as high-frequency trading.

Question 10

What is a pump and dump

What is a trash and cash

Answer 10

pump and dump whereby an investor takes a long position and then disseminates misleading positive information with a view to increasing its price, and

trash and cash whereby an investor takes a short position and then disseminates misleading negative information with a view to driving down its price.

Question 11

disseminate

Answer 11

means to spread (information (in context of this chapter))

Question 12

11.2.5: Misleading statements and practices

The Market Abuse Regulations is not the only legislation that acts on market abuse.

The Financial Services Act 2012 also introduced the offences of:

making or creating false or misleading statements.
making or creating false or misleading impressions.
making or creating false or misleading statements and impressions in relation to specified benchmarks.(brought about as a direct result of the Libor rigging scandal)

Answer 12

Penalties include 6 months imprisonment and / or a maximum fine of £5,000 (magistrate’s court), or 7 years imprisonment and /or unlimited fine (crown court).

Question 13

What are the key differences between:
11.3.1: Fundamental analysis & Technical Analysis

Answer 13

Fundamental analysis is comprised of quantitative analysis and qualitative analysis. It’s important that investors consider both when deciding whether to invest in a company or not.

Quantitative analysis
This involves analysing a company’s financial statements, earnings, expenses, assets and liabilities with a view to understanding the intrinsic value of the company. that means analysing profitability, liquidity, gearing and investor ratios (chapter 7)

Qualitative analysis
This involves looking at other factors that may impact on the value of the company such as economic and industry conditions along with management expertise and how the firm is governed. For example, looking at the business model, management. corporate governance etc

Question 14

What actually is a companies business model?

Answer 14

This is how the company runs its businesses.
Different types of company will have a different business model.
Some are more complex than others and it may be difficult to understand how they can grow profits.

Question 15

What is a share’s intrinic value, nominal value & market value?

Answer 15

1. Intrinsic Value
   Definition: Intrinsic value refers to the actual or “true” value of a share based on fundamental analysis. It considers the company’s financial performance, cash flows, earnings, dividends, growth potential, and other economic factors. Importance: Intrinsic value helps investors decide whether a share is undervalued, overvalued, or fairly priced in the market.

Example: If the intrinsic value of a stock is estimated to be ₹100, but the stock is trading at ₹80, it is considered undervalued and may present a good buying opportunity.

2. Nominal Value (Face Value)
   Definition: Nominal value (or face value) is the fixed value assigned to a share when it is issued by the company. It is usually printed on the share certificate. Face value is important for calculating dividends, issuing bonds, or splitting shares.
3. Market Value
   Example: A share might have a nominal value of ₹10. Even if its market price rises to ₹500, its nominal value remains ₹10.

Definition: Market value is the current price at which a share is bought or sold on the stock exchange. It is determined by the forces of supply and demand in the market. Importance: Market value reflects what investors are willing to pay for a share at a particular moment. It is the value used in trading on stock exchanges.

Example: If the stock of a company is trading at ₹1200 per share on the stock exchange, this is its market value.

SUMMARY:
Nominal value is the base or original value of a share.
Intrinsic value is the fair value derived from the company’s financial health and growth prospects.
Market value is the price at which the share is currently trading on the stock market

Investors often compare intrinsic value (through fundamental analysis, which includes both Quantative and Qualitative measures) with market value to identify profitable opportunities in the stock market

Question 16

11.3.2: Technical analysis

Answer 16

Technical analysis, also known as chartism, is the interpretation of historical prices to establish trends regarding the future direction of asset prices. It is built on three main assumptions:

Price reflect all available info
History repeats in self (based on behavioural finance, specifically crowd theory)
Price move in trends

Question 17

Trends

There are three types of trend:
Uptrend
Downtrend
Sideways

Trends can be categorised as:

Long-term: lasting > 1 year.
Intermediate: lasting between 1 and 3 months.
Short-term: lasting less than 1 month.

Answer 17

Long-term: lasting > 1 year.

Intermediate: lasting between 1 and 3 months.

Short-term: lasting less than 1 month.

Question 18

LEARN FOR TRADING 212

technical analysis - Charting essentials

The mainstay of charting is the trendline. Generally, investors trade with the trend (remember ‘the trend is your friend’) and so establishing the trend is key to understanding the future possible direction of prices.

Trendlines are lines drawn on historical price charts constructed either by joining:

successive troughs for an uptrend, or
successive peaks for a downtrend
Valid trendlines should be touched a minimum of three times…

The upward trendline joins successive low points.
We can see that the trendline establishes a level of support in the market.
As the market falls and nears the trendline it ‘bounces off’ and rises again.
If the market starts to fall again then it provides a price level where traders could expect to see the price rising again i.e. a buy signal.
The upward trend would be a long-term trend whereas the downward ‘corrections’ would be intermediate trends.

The downward trend joins successive high points.
The trendline establishes a level or resistance in the market.
As the market rises and nears the trendline it ‘bounces off’ and falls again.
If the market subsequently starts to rise, the trendline will indicate where the price is expected to fall again i.e. a sell signal.
In this case, the downward trend would be a long-term trend whereas the upward ‘corrections’ would be intermediate trends.

Answer 18

Resistance and support levels can also be identified by previous highs and lows.

If any resistance or support level is breached, i.e. the price trades above a resistance level or below a support level, then this signifies a reversal of the trend.

For example, if the price trades below the support line in an upward trend, then this would suggest the market will now move lower in the future. The support level is reversed and now becomes a resistance level i.e. if the market moves above this level, then it would suggest the market will move higher and the original support level becomes a level of resistance.

Similarly, if a resistance level is breached in a downward trend, this would suggest that the market is now going to move higher. The previous resistance level now becomes a support level.

This is where we really see the combination of crowd-theory and self-fulfilment in operation.

The support and resistance levels become self-fulfilling; if they are breached, then the market will use that as a signal to buy or sell en masse.

Question 19

Channels have two parallel trendlines showing string levels of resistance and support. The upper trendline joins successive highs whilst the lower trendline joins successive lows; they can be established for upward, downward or sideways trends.

In a channel, it is expected that the security will trade between the two trendlines.
If the price breaks out of the channel, either going above the upper line of support or below the line of the resistance, then traders can expect a sharp price movement in that direction.

Question 20

technical analysis- Charting essentials

HEAD AND SHOULDERS RESERSAL PATTERN
If the price falls below the neckline after the right shoulder, then that signals that the market is likely to fall sharply.
An inverse head and shoulders is the opposite. If the market trades above the right inverse shoulder it signals that the market should rise rapidly.

DOUBLE TOP REVERSAL PATTERN
This is one of the most reliable and frequently used patterns to signal intermediate and long-term trends.
The market tests the support level twice and on failing to break through, the trend subsequently reverses.
A double bottom is the opposite, with prices failing to break through resistance levels twice.
This signals that prices will then rise.

Answer 20

There are 3 types of triangle pattern: ascending, descending and symmetrical.
With a symmetrical triangle, the 2 trendlines converge (as shown on the left).
A breakout on the upside will establish an upward trend; a breakout on the downside will establish a downward trend.
An ascending triangle is a bullish pattern that has have a flat upper trendline and an ascending lower line.
A descending triangle is a bearish pattern and has a flat lower trendline and descending upper trendline.

Question 21

technical analysis - Charting essentials

Flags and pennants

These patterns are formed after a rapid increase (or decrease) in price followed by a sideways movement. Prices then generally continue in the original direction of the trend and so are considered to be continuation patterns.

Question 22

Charting essentials

Volume

Answer 22

Volume

The volume associated with price movements is also of paramount concern to chartists (i.e. those that employ technical trading). Any price movement that is accompanied with high volumes will be considered to be a stronger signal than one associated with lower trading volumes.

Question 23

Types of chart

Answer 23

Line charts
Bar charts
Candlestick
Point and figure

Question 24

11.3.3: Differences between fundamental and technical analysis

Some people are fundamental traders and argue that technical trading is a load of “mumbo-jumbo” but many argue that the key is to use a combination of both.

So, use fundamental analysis to decide which stocks you would like to buy and technical analysis to decide when to buy or to give you target buying or selling prices.

Answer 24

So, use fundamental analysis to decide which stocks you would like to buy and technical analysis to decide when to buy or to give you target buying or selling prices.

Most of the questions that BTS have seen on this section revolve more around the differences between technical analysis and fundamental analysis, rather than testing the trends and patterns themselves. That said, never say never!

Question 25

Fundamental analysis = companies financial statements, qualitative and quantitative. Long term approach to investing

Technical analysis =
Charts to analyse trends in prices often short term or long term

Question 26

11.4: Factors Affecting Markets

11.4.1: Economic indicators . Economic indicators can be leading, coincident or lagging.

Answer 26

Leading =
Change before the economy does, so are useful short-term forecasts for the economy.
Examples include stock markets, building permits and money supply.

Coincident =
Change at the same time as the economy.
Examples include GDP, sales, industrial production and personal finance.

Lagging =
Tell us what has already happened and are used to set a trend.
Examples include unemployment and consumer confidence.

Question 27

11.4.2: Central bank and political announcements

The market will also keep a keen eye out for any central bank or political announcements that could signal future action. These actions, such as interest rate rises or changes in fiscal policy (tax and spending by the government), can have a huge impact on the direction of share prices.

And it’s not just confined to UK announcements either. Markets across the globe have become increasingly correlated and announcements in the US can and often do have a knock-on effect on the UK equity and bond markets.

Answer 27

11.4.2: Central bank and political announcements

The market will also keep a keen eye out for any central bank or political announcements that could signal future action. These actions, such as interest rate rises or changes in fiscal policy (tax and spending by the government), can have a huge impact on the direction of share prices.

And it’s not just confined to UK announcements either. Markets across the globe have become increasingly correlated and announcements in the US can and often do have a knock-on effect on the UK equity and bond markets.

Question 28

11.4.4: Other factors influencing the market

Answer 28

Credit rating announcements: Any change in the credit rating of a government or company will affect bond yields and prices.

Financial bubbles: These occur when investors buy assets in anticipation of share prices rising rather than on their fundamental value. Bubbles eventually correct themselves, as investors realise the shares have become too expensive relative to their fundamental value, potentially resulting in a stock market crash.

Socio-economic factors: Our aging population and declining birth rates are leading to an increasing dependency ratio (the ratio of a nation’s dependents such as pensioners divided by its workforce). In the long run, this leads to a fall in economic output and greater pressures on public finances, both of which will have major implications on investments and markets.

Technology: Increasing technological advances pave the way for new high-growth but potentially more risky investment opportunities.

Takeovers: Any information regarding takeovers will impact the share prices of the companies involved, with the target company share price often increasing.

Question 29

11.5: Bond Strategies

Bond traders will spend most of their time analysing the differences in yield between different bonds. These differences are known as spreads and are measured in basis points (1 basis point = 0.01%). 

Main types of spread are:
Term spreads
Credit or default spreads
Sovereign spreads

11.5.2: Policy switches

If traders believe that these spreads will change, due to any of the factors listed in the previous section, then there are several strategies that they can employ to take advantage of those changes. These are commonly referred to as policy switches. (look at table in 11.5)

Answer 29

1. Term spreads: This is the difference between a long-dated bond’s gross redemption yield and a short-dated bond’s gross redemption yield, usually measured as the difference between the 2-year government bond yield and the 10-year government bond yield. It is known as the 2/10 spread.

If the 2/10 spread is positive, it indicates a normal upward sloping yield curve; a negative spread indicates an inverted yield curve.

2. Credit or default spreads: These represent the difference in yield between a corporate bond and a government bond. These spreads tend to widen (get bigger) during an economic downturn and narrow (get smaller) during times of prosperity. They can also represent the difference between a high-yielding corporate bond and an investment grade bond.
3. Sovereign spreads: These represent the difference in yield between the government bonds of different sovereigns. E.g. 10 year Greek government bond yield versus 10 year German government bond yields.

Question 30

Information dissemination

Information is disseminated by primary information providers such as LSE’s Regulatory News Service (RNS).
They pass the information on to secondary information providers (SIPs) such as Thomson Reuters and Bloomberg who distribute the information to their customers via a variety of platforms.
Information can come from a wide range of sources, including news services, investment and collectives research, and various government resources.
HM Treasury provide forecasts for the UK economy.
The Office for National Statistics (ONS) produces key official economic statistics; the blue book contains national account data, and the pink book contains balance of payments data.
The Bank of England provides reports on financial stability and monetary policy as well as a quarterly bulletin and minutes of the MPC meetings.
Regulatory requirements

Regulations have been put in place to ensure fair markets for all.
Market abuse includes insider dealing, unlawful disclosure and market manipulation.
Penalties include unlimited fines, public statements, court injunctions, disgorging of profits and / or payment of compensation.
Insider information is information that is non-public, precise and price sensitive.
It includes front running and information about proposed takeovers.
Firms must maintain insider lists.
Insiders may have acquired information as a result of being an employee, by virtue of their occupation or from someone else who is one of these.
Insiders may be prosecuted under the CJA and face a maximum term of 10 years in prison and / or an unlimited fine.
Firms are required to publish any relevant information to the market via a regulatory information service as soon as possible.
There are four types of market manipulation: manipulating transactions, manipulating devices, dissemination, and misleading behaviour.
It is also an offence under the Financial Services Act 2012 to make or create false or misleading statements or impressions, punishable by 6 months in prison and / or a maximum fine of £5,000 if prosecuted through the magistrate’s court, and 7 years / unlimited fine if tried through the crown court.
Fundamental and technical analysis

Fundamental analysis is made up of quantitative analysis and qualitative analysis.
Quantitative analysis involves analysing a company’s financial statements, earnings, expenses, assets and liabilities with a view to understanding the intrinsic value of the company.
Qualitative analysis looks at the firm’s business model, corporate governance, competitive advantage, company management and industry.
Technical analysis, also known as chartism, is the interpretation of historical prices to establish trends regarding the future direction of asset prices.
The foundations of technical analysis are that the market action discounts everything, that history repeats itself, and that prices move in trends.
Up trends are where each successive peak and trough is higher; downtrends are where the peaks and troughs are getting lower.
Trend lines can be constructed by joining successive troughs for an uptrend and successive peaks for a downtrend.
If a resistance or support level is broken, this indicates the reversal of a trend. The support level then becomes a resistance level and vice versa once the trend is broken.
Trends that are accompanied by high volume levels will be stronger than those established with weak volume.
Reversal patterns include head and shoulders, inverse head and shoulders, double top and double bottom patterns.
Flags and pennants are continuation patterns.
Factors that influence the markets

Factors that influence the markets include liquidity, key economic indicators, publications and announcements, credit ratings changes, takeovers, financial bubbles, technology, and socio-economic issues.
Economic indicators can be leading, lagging or coincident.
Bond strategies

Bond traders analyse the differences in yield between different bonds known as spreads.
Spreads are measured in basis points where 1 basis point = 0.01%.
Term spreads measure the yield spread between bonds with different maturities.
Credit or default spreads measure the yield spreads between bonds with different credit ratings.
Sovereign spreads measure the spread between different sovereign government bonds.
Policy switches involve switching bonds to benefit from anticipated changes in the market.

Question 31

Which of the following is an example of market manipulation?

Disclosing information about a takeover that has not been made publicly available.

Dealing on information gained on a company through auditing its accounts.

Buying shares and then spreading a misleading positive statement so that the price of the shares rises.

Encouraging someone else to trade on inside information.

Answer 31

Buying shares and then spreading a misleading positive statement so that the price of the shares rises.

A is unlawful disclosure, B and D are insider dealing.

Question 32

Ahmed is analysing a company through inspection of the company’s financial statements. Jose is studying charts of historical prices for the same company. What type of analysis are they most likely to be using?

Ahmed is using fundamental analysis and Jose technical analysis.

Ahmed is using technical analysis and Jose fundamental analysis.

Both are using fundamental analysis.

Both are using technical analysis.

Answer 32

Ahmed is using fundamental analysis and Jose technical analysis.

Fundamental analysis is about understanding the fundamental value of a business through both quantitative (inspecting financial statements) and qualitative analysis.

Technical analysis involves looking for patterns in the historical prices.

Question 33

An upward trendline is constructed by joining the successive…

peaks on the historical price chart.

troughs on the historical price chart.

opening prices on the historical price chart.

closing prices on the historical price chart.

Answer 33

troughs on the historical price chart.

For an uptrend, you join successive troughs, for a downtrend you join successive peaks.

Question 34

The ONS Blue book provides:

information regarding inflation data on a quarterly basis.

quarterly estimates of GDP data.

an annual report on the balance of payments.

an annual report on national accounts statistics.

Answer 34

An annual report on national accounts statistics.

A is the inflation report published by the bank of England.

B are issued by the ONS but not in the blue book.

C is the ONS pink book.

ONS = Office for National Statistics

Question 35

Front running is an example of:

insider dealing.

improper disclosure.

manipulating transactions.

misleading statements.

Answer 35

Insider dealing includes front running or revealing information about a takeover that is not available to the public.

Question 36

The stock market is generally considered to be a:

leading indicator.

coincident indicator.

lagging indicator.

trailing indicator.

Answer 36

leading indicator.

Stock markets usually start to decline before a recession takes hold and start to rise earlier than the economy recovers. They therefore are a leading indicator of the economy.

Question 37

If a 3% 2035 government bond is trading a yield of 5%, and a corporate bond that pays a coupon of 4% also matures in 2035 and has a yield of 6.5%, the credit spread is:

1 basis points.

100 basis points.

1.5 basis points.

150 basis points.

Answer 37

150 basis points.

The credit spread is the difference between the yield on a corporate bond and an equivalent government bond. In this case 6.5%-5% = 1.5%.

1 basis point = 0.01% so 1.50% equates to 1.5 ÷ 0.01 = 150 basis points.

Question 38

The 2/10 spread is an example of a:

maturity spread.

term spread.

liquidity spread.

credit spread.

Answer 38

term spread.

The 2/10 spread represents the yield difference between a 10-year government bond and a 2-year government bond.

Question 39

The Bank of England announce that they are increasing the base rate to 5.5%. The most likely impact of this will be:

a steepening of the yield curve.

a flattening of the yield curve.

the yield curve becoming inverted.

the yield curve having a ‘hump’ in the middle.

Answer 39

the yield curve becoming inverted.

If the Bank of England increase rates now, then the market will be expecting rates to fall in the future. That leads to short term rates being higher than long term rates i.e. an inverted yield curve.

The answer could be B i.e. the curve will flatten before it becomes inverted, but C is the most likely answer.

Question 40

The CPI figure is released and is much higher than expected, along with strong economic growth figures. What is the likely impact as a result?

The MPC will cut the base rate at its next meeting.

The government will announce large scale spending in the economy.

Bond prices will fall.

The government will cut taxes.

Answer 40

Bond prices will fall.

If inflation is high and economic growth is strong, then the MPC will look to put interest rates up to help slow the economy down and bring inflation in line with its target of 2%.

The government will also not look to stimulate the economy, as this could lead to further inflationary pressures and so they would not cut taxes nor increase spending.

Higher inflation will feed through to the search for higher bond yields, which will cause bond prices to fall.