Extra exam stuff I didnt know

Question 1

PIBS are irredeemable fixed-interest securities issued by mutual building societies. What does ireedeemable mean in this context?

Answer 1

The term “irredeemable” means that the securities do not have a maturity date on which the issuer is obligated to repay the principal to the holder.

This is one of the big differences of these types of bonds when compared to other fixed interest securities (they also dont necessarily pay a fixed interest and their is no obligation for missed coupons to be paid) they are therefore risky stuff

Question 1

Remember: BONDs cashflows include.

All half yearly interest payments & maturity payment

DO NOT FORGET THE MATURITY PAYMENT

Question 2

What are GILT strips?

Answer 2

GILT STRIPS (Separate Trading of Registered Interest and Principal Securities) are a type of UK government bond that has been split into two separate components: the interest payments (coupons) and the principal repayment.

Each of these components is traded individually as zero-coupon bonds, meaning they do not pay periodic interest and are sold at a discount to their face value. Each cash flow becomes a standalone security.

ie, someone could own the part that gives the coupon and not the principle repayment or someone could own the principle payment but not the interest part

ALL GAINS AND LOSSES ARE TAXED AS INCOME ON AN ANNUAL BASIS, NOT AS A CAPITAL GAIN/LOSS

Question 3

Which of the two allow the investor to call for early repayment of a bond?

Callable bonds

Puttable bonds

Answer 3

Puttable bonds

Puttable bonds = Investor has control
Investor has right to sell bonds back to issuer when they want

Callable bonds = Issuer has control
Issuer have right to buy back bond from investor when they want

Question 4

What does the spot curve plot?

Answer 4

Zero coupon bonds yield

This can take the same shapes redemption yield graphs (normal, inverted or flat)

Question 5

What is the Macavay duration of a bond

Answer 5

The higher the Macaulay duration, the longer it will take for the price of the bond to be repaid by the bond’s cashflows, and therefore the riskier the bond is.

Maturity: the longer the maturity, the longer the duration
Coupon: the lower the coupon, the longer the duration
Yield: the lower the yield, the longer the maturity

LOW & LONG = HIGHER RISK

Question 6

With bonds, the ex date is how many business days before the coupon date?

Answer 6

7 business days

Question 7

For retail clients, best execution of trades is judged by total consideration. What does this mean

Answer 7

Consideration = total costs and price

Best execution therefore means they should get the best total costs and price when a trade is made

Question 8

Equity trades = T + 2

Answer 8

e

Question 9

Definisive shares = BETA LESS THAT 1

Aggresive shares = Beta more than 1

Question 10

Retail companies = Profit per square foot

Question 11

Systematic and market risk are the same thing!!!!!!!

Question 12

Full replication

Stratified Sampling

Synthetic/optimisation

Answer 12

Full replication = the fund fully replicates the index

Stratified Sampling = Fund uses stratification which means it holds a sample of the index within the fund

Synthetic/optimisation = The funds tracks a selection of the index’s shares by using derivatives. Uses a computerised model to buy and sell stocks in the index. Often cheapest

Question 13

Split/capital investment trusts

Question 14

Return of equity =

Answer 14

Amount returned compared to the amount of equity (funds) provided by shareholders

Question 15

Operating profit

Answer 15

Operating profits is the profits made after paying for costs of operation to sell those goods (sales or general costs, administration costs etc)

Does not include tax payable, financing (interest paid), effects of investments

Question 16

The 4 main currency pairs quoted on the foreign exchange market

Answer 16

ALL contain USD

EUR/USD
USD/JPY
GBP/USD
USD/CHF

CHF = Swiss franc

Question 17

What does the Total Expense Ratio of a fund consist of?

Answer 17

The AMC
Trustee Fees
Depositary fees
Custodian fees
Auditor fees
Registrar fees

Question 18

What is Herstatt risk and what is it also known as?

Answer 18

Also known as Settlement Risk

It is the risk that arises from the time lag that occurs when trading currencies

Payment vs payment systems are used to eliminate this risk

Question 19

Unfettered/fettered Funds of fund, fund?

Answer 19

Unfettered = external funds are used

Fettered = Only funds from same management group are used

Question 20

In a GILT auction what is the bid to cover ratio

If the bid to cover ratio is high what does this mean about the auction

Answer 20

In a Gilt auction, the bid-to-cover ratio measures the level of demand for the government securities being auctioned. It is calculated as the ratio of the total amount of bids received to the amount of bonds being offered for sale.

(dont remember this) Bid-to-CoverRatio= TotalBidsReceived/ TotalAmountOffered (by gov)

​
High Ratio: High demand. For example, a ratio of 2 means there were twice as many bids as bonds available, suggesting competitive bidding and investor confidence.

Low Ratio: Low demand, signalling less interest in the auctioned securities.

Question 21

What is the most commonly used way of issuing shares?

Answer 21

Offer for sale

The other methods are

Offer for subscription
A placing
An introduction

Question 22

How long does the automatic execution suspension period in a stock exchange last for?

How long does a market order extension last?

Answer 22

automatic execution suspension period = 5 mins, where no trades can be made

orders can be made, amended or deleted during that time tho

A market order extension lasts for 2 mins

Answer 23

A script dividend is an alternative form of dividend payment that allows shareholders to receive their dividend in the form of new shares rather than cash. (Dilutive as new shares are issued)

A dividend reinvestment plan (DRIP) = When the company pays a dividend, the amount is automatically used to buy more shares of the stock. (Not dilutive as no new shares are issued)

A rights issue is a way for companies to raise additional capital by offering existing shareholders the opportunity to purchase new shares at a discounted price before the company offers them to the public. It gives shareholders the “right” but not the obligation to buy these additional shares, usually in proportion to their existing holdings.

A script issue is a corporate action where a company issues new shares to its existing shareholders free of charge, in proportion to their current shareholding. It is often referred to as a bonus issue. (It is dilutive as new shares are issued)

Question 24

What is a shareholders pre-emption rights?

Answer 24

The right that shareholders have to be offered any newly issued shares first before third parties (this is a rights issue)

Question 25

Historic Priced/Forward Priced basis for unit trust

Question 26

What is credit risk

Answer 26

Credit risk refers to the possibility that a borrower or counterparty will fail to meet their financial obligations as agreed, such as repaying a loan, paying interest, or fulfilling a contractual agreement. This type of risk is a fundamental concern for lenders, investors, and businesses involved in financial transactions.

It relates mainly to fixed interest securities

Question 27

Qualifying Corporate Bonds and Gilts are liable to income tax?

Answer 27

True (as savings income)

Question 28

Calculating Alpha, Sharpe Ratio & information ratio

Calculating EPS/ Dividend Yield/ Dividend Cover / Price/ earning ratio/ Nav

Question 29

In the event of liquidation HMRC is now classed as an unsecured creditor

Question 30

In relation to depository receipts, what does the DR ratio refer to

Answer 30

The number of shares each depository receipt represents

Question 31

Ongoing supervision of an OEIC is carried out by who?

Answer 31

The OEICs depository and the FCA

Question 32

What is an exchange traded note

Answer 32

A type of bond issued by a bank

Question 33

Private Company Limited By Shares
Private Company Limited By Guarantee
Private Unlimited Company
Public Limited Company

Answer 33

P

Question 34

Redeemable shares =

Answer 34

Shares can be repurchased (redeemed) by the company. Undated and dividends are payable until they are redeemed

Used as a form of temp finance by the company

Question 35

Do bearer shares have the holders name on it?

Answer 35

No

Whoever holds the certificate owns the share

Question 36

What special power do shareholders with more than 10% voting rights have?

Answer 36

They can call extraordinary general meeting (EGM)

Question 37

Covered warrants parity calcs (Look at camera roll)

Question 38

What is the infaltion measure used for index linked Gilts?

Answer 38

RPI

Question 39

A currency can either be bought on a spot market or a forward market. What is the difference?

Question 40

The marketing of new company shares in known as what?

Answer 40

Book building

The lead in charge of the marketing is known as the book runner and their goal is to build up as many investors as possible for when the IPO is released

Question 41

If the DMO are only offering competitive Bids, what is the minimum that each bid must be?

Answer 41

£1,000,000

Question 42

What is the free float of shares

Answer 42

This is what is freely available to the investing public. This means there is an active market for the shares

Question 44

1.
A bullet strategy.
2.
A barbell strategy.
3.
A ladder strategy.

Answer 44

1. Bullet Strategy

A bond investment strategy where all bonds mature around the same time, targeting a specific financial goal at a future date.

Example
An investor needs $100,000 in 10 years to pay for a child’s education. They invest in bonds maturing around the 10-year mark, such as buying a mix of 9-, 10-, and 11-year bonds, ensuring the funds are available when needed.

2. Barbell Strategy

A strategy that combines short-term and long-term bonds, avoiding intermediate maturities, to balance yield and liquidity.

2. Barbell Strategy Example

An investor splits $100,000 into two parts:
• $50,000 in 1-year bonds to provide liquidity and allow reinvestment if interest rates rise.
• $50,000 in 20-year bonds to earn higher long-term yields.

The portfolio avoids bonds with intermediate maturities (e.g., 5–10 years).

3. Ladder Strategy

An investment approach where bonds with staggered maturities are held, ensuring consistent cash flow and diversification.

An investor buys $100,000 in bonds with equal allocations to 1-, 3-, 5-, 7-, and 10-year maturities:
• $20,000 matures every 2 years.
When a bond matures, the principal is reinvested into a new 10-year bond, maintaining the ladder structure.

Question 46

Order driven markets are both good pre & post trade transparency.

What gives quote driven systems these benefits

Answer 46

Pre trade transparency- because all orders can be seen on the book at any time. This gives a clear insignt into what is happening in the market

Post trade transparency = orders that occur on the exchange are reported automatically whereas orders that occur outside of the exchange (broker) must be reported promptly after execution. This prevents another investor unfairly getting a better price when buying or selling than you.

In order driven systems the best orders buy and sell orders are matched together and should jump ahead of all other orders for execution

NOTE: Dark pools are simply a type of trading venue (where trades can occur) that don’t have these pre/post trade requirements

MTF’s are just another alternative for a trading venue. For example, if you didn’t want your use the main regualted markets like the LSE you could use an MTF (like supermarkets). MTFs do satisfy pre and post trafe transparency rules

Systematic internalisers are just investment firms that act as its own mini exchange (they can match it’s client orders internally). Must satisfy pre and post trade rules

Organised trading facilities are the same as MTF’s (except u cant trade equities)

Question 47

Sometimes broker firms may have serveral orders that need fulfilling at once.

Can they put all orders in as one (called aggregation) or must they do them all separately under best execution regulations?

Answer 47

Firms are allowed to aggregate orders together BUT THEY MUST TELL THE CLINET THAT THIS MAY DISADVANTAGE THEM AT TIMES

Question 48

What is a market order extension?

What is a price monitoring extension?

What is an Automatic Execution Suspension Period?

Answer 48

All the below apply to London Stock Exchange.

Pre market = market order extension = if there are unexecuted orders before market opening, then the opening is delayed bu 2 mins followed by random period of 30 seconds

Pre market = price monitoring extension =
If opening auction price is greater than 5% from previous close, opening is delayed by 5 mins with a random 30 seconds maximum

During market: Automatic Execution Suspension Period = if price moves by a certain amount during the market being active. this suspends trading for 5 mins followed by period of 30seconds

Question 49

What is a market order extension?

What is a price monitoring extension?

What is an Automatic Execution Suspension Period?

Answer 49

All the below apply to London Stock Exchange.

market order extension = if there are unexecuted orders before market opening, then the opening is delayed bu 2 mins followed by random period of 30 seconds

price monitoring extension =
If opening auction price is greater than 5% from previous close, opening is delayed by 5 mins with a random 30 seconds maximum

Automatic Execution Suspension Period = if price moves by a certain amount during the market being active. this suspends trading for 5 mins followed by period of 30seconds