Mock exam Flashcards
Which of the following could make up part of a company’s free float?
Shares held by an institutional investor holding 4% of the company’s shares
6% bond can be redeemed at £100 in 1 year. What is the maximum you would pay today?
£106
Of the answer available, £106 is the best answer. An investor can receive £6 in coupons and £100 in redemption value over the next year. If the rate of return used was 0%, the value of the bond would be £106.
What is the chief role that a trustee is appointed to fulfil when debenture stock is issued to investor in the UK?
To ensure that the issuer adheres to the terms of the indenture
The corporate trustee must keep track of all bonds sold, verifying that the amount issued is not greater than what is stated in the indenture (legal structure of the debt issuance) and making sure that the corporation complies with all covenants, which are the terms of the indenture, while the bond issue is outstanding.
An authorised unit trust is essentially a unit trust that is allowed to be marketed to the investing public, and must be constituted by a trust deed made between:
The fund manager and the trustee
Why is it important that ‘request for quote’ systems run alongside the dealer-to-customer market?
To achieve better prices
RFQ systems bring dealers into direct competition with each other which should deliver price improvement for investors. They also offer a significant improvement over voice communication in terms of ease and speed of trading.
A large organisation is using publicly available third party research rather than internal research. Why might this be seen in an unfavourable context?
Greater chance of bias
When using third party research or recommendations, the possibility of bias or lack of objectivity should always be considered.
Modern electronic trading environments lend themselves to algorithmic trading, a negative aspect of high frequency trading is the possibility of a ‘flash crash’ which can be summarised as which of the following?
Where there has been a rapid decline in the value of the market for it then to recover relatively quickly
Who is the legal owner of the shares that underlie an ADR?
The depositary bank
Financial ratio analysis can be used to assess many aspects of a company. Which of the following would be used to identify potentially high future growth prospects?
High P/E ratio : low dividend yield
Higher market price is always looked at for future growth prospects
A bank is assisting a client to issue securities in emerging and frontier markets. Which considerations should specifically be stated in relation to the client?
There is likely to be less liquidity in the primary markets
We are looking at advice to an issuer of securities. Their goal is to raise capital on the primary markets. The most relevant consideration to them is how much liquidity there is in this market. The secondary markets may well be less sophisticated, and the economy may be more volatile, but these are more issues for investors than issuers. It is true that fraud and money laundering risk may be higher, but stating it is always so is too strong
Economic volatility is more an issue for issuer than investor
Which of the following is a major benefit of a quote-driven market?
Increased liquidity
A quote-driven market, through the use of market makers, always has buyers and sellers in the market. Market makers are often referred to as liquidity providers for that reason.
A Depositary Receipt may be pre-released however the issuer must deliver the underlying shares for deposit within:
Three months
Why would an investor want to deal special-ex?
INVESTOR!!
For tax planning purposes
Sometimes there are periods when US Treasury cash balances are particularly low and there is a need to raise money for less than a month. At these times, the US Treasury is likely to issue which of the following?
Cash Management Bill
During periods when Treasury cash balances are particularly low, the Treasury may sell cash management bills (or CMBs). These are sold at a discount and by auction just like weekly T-bills. They differ in that they are irregular in amount; term (often less than 21 days); and day of the week for auction, issuance, and maturity.
What is the purpose of an ICEBERG order?
To reduce market impact
ICEBERG orders were introduced in September 2003 and are available on SETS and the international order book. Previously, market participants with large orders to execute would have been reluctant to route these through the order book because of the potentially adverse market impact.
An ICEBERG order manages this problem by allowing the order to be partially hidden from the market view.
PARTIALLY HIDDEN BUT NOT ANONYMOUS
When can an investor sell a share in an OEIC?
Any period specified by the OEIC prospectus
If the price of the investment falls in a year only to rise again in the next, the fund manager will not become eligible to receive an additional fee, until the previous maximum fund price is surpassed. This would be the best description of which of the following?
High water mark
A high water mark which is usually associated with UCIS funds and especially hedge funds. It means that if the price of the investment falls in a year only to rise again in the next, the manager will not become eligible to receive an additional fee, until the previous maximum fund price is surpassed.
An investor receives a provision allotment letter from a company performing an offer for sale. What does this confirm about the investor?
She is an existing shareholder
Existing shareholders receive a provisional allotment letter, which tells them how many shares they are entitled to and what the price will be when the company performs a rights issue.
Note: this is not to be confused with an over-allotment (or greenshoe) option.
The providers of which of the following services would be considered a participant in the wholesale market?
Derivatives trading
Which of the following cash flows would not be listed under operating cash flows in a company’s cash flow statement?
Profits realised on disposal of an asset
Profits are not a cash flow and would not be shown on the cash flow statement. The proceeds on disposal of an asset would be considered a cash flow and would typically be shown in investing cash flows.
Which of the following would explain why a company would buy shares in another company to forge a strategic link?
Protect supplies
Strategic stakes may be accumulated in order to prevent a company being taken over by a competitor and to influence the company concerned. This may be in order to protect supplies. The company may be a key supplier of raw materials to the strategic stakeholder, without which the strategic stakeholder may have difficulty obtaining the quantity and quality of raw materials it seeks.
In normal market conditions which of the following statements about interest rates and inflation is most likely?
Inflation would be expected to be lower than interest rates
Why would an underwriting firm performing an offer for sale decide to use a fixed price rather than a tender?
To ensure that the issue is fully subscribed
When a fixed-price offer is made, the price is usually fixed just below that at which it is believed the issue should be fully subscribed, so as to encourage an active secondary market in the shares. A tender offer is a more efficient method of pricing, allowing investors to set the price through a bidding process. Both issues allow the investors to pay the same price.
A 2 year corporate bond has a 100bp spread over the published reference interest rate. What is most likely to be the spread of the corporate bond over a 5 year Gilt?
One would expect gilt yields to be less than the inter-bank rate. This would mean that the spread between gilts and corporate bonds is likely to be wider than the corporate bond’s spread to the published reference interest rate.
150 bp
Floating rate bonds offer greater protection against inflation risk than fixed interest bonds because:
Their interest rates tend to rise to offset the impact
Which of the following would determine the credit rating of a company by a credit rating agency?
To assess whether the issuer’s cash flow will comfortably service and repay its obligations
Which of the following could result in a ‘rebate’ in a stock lending situation?
Cash is used as collateral
If the agreed form of collateral is cash, then the fee may be quoted as a rebate, meaning that the lender will earn all of the interest that accrues on the cash collateral, and will rebate an agreed rate of interest to the borrower.
A prime broker provides a number of services for institutional investors, what would be the purpose of stock lending and borrowing?
Liquidity
If an institutional investor wishes to take advantage of pricing variations but does not have the stock then they can borrow it and return it at a later date.
What is deferred tax
Non-current liability??
Participants in a dark pool are MOST LIKELY to have chosen this type of execution venue because of:
Ability to execute trades at efficient prices
In which market can companies use an offer for subscription as a method to float their share to raise capital?
Primary
A UK government bond sale takes place 2 days before the ‘coupon paid date’. The trade is known as:
Ex-coupon
The gilt was bought during the 7-day ‘ex-coupon’ period. The buyer would therefore not be entitled to receive any of the coupon.
Where a company wants to improve the liquidity of its shares but not reduce the nominal value of the shares it is most likely to perform which of the following?
Having a rights issue is wrong
Have a scrip issue- A scrip issue is also known as a bonus issue. It’s a free issue of shares to existing shareholders and is performed to reduce an ‘expensive’ share price. A stock split would produce the same result, but it is achieved by reducing the nominal value of shares and increasing the number of shares issued.
When a trade settles DvP where does the seller get their confidence in the settlement of the trade from?
That both sides of the trade are settling concurrently
DvP is delivery versus payment, where both sides of the trade settle concurrently.
A Global custodian finds itself in financial difficulty. What should it do to protect its client’s assets?
Continue as before segregating its clients’ assets in internal accounts
Which of the following would account for UK government debt being considered risk free?
The UK government can simply raise taxes
The yield available on UK gilts is considered the risk-free rate for sterling-denominated bonds - after all, the UK government can simply raise taxes to repay its debt and that ultimately the UK controls the printing of sterling, so the UK gilts are effectively credit risk-free.
What BEST describes the settlement process of UK government debt held within CREST, which is an example of Model 1 as defined by the Bank for International Settlements?
Settlement would take place the day after the bargain
Here bargain simply means trade and is only used to confuse. Dematerialised gilts (held in CREST) settle T+1.
A broker holds the shares of a client in a pooled nominee account. Which of the following would be true?
The client is entitled to receive the benefits of ownership
Shares held in NOMINEE name not BROKER name
A request for quote system would usually be used in relation to which one of the following?
A request for quote system would usually be used for lower liquidity, high volatility bonds. It is an OTC broker to client (B2C) platform that allows investors to request quotes from a number of dealers simultaneously.
Consider two companies, one big and the other small. Which of the following would be most likely with regards to P/E ratio and dividend yield?
The smaller company would have a higher P/E ratio and lower dividend yield
small companies expected to grow
What do T bonds settle through
US T-Bonds settle through the Fixed Income Clearing Corporation (FICC)
JGB day count convention
actual over 365 day-count convention
A company has a market capitalisation of £30m when it announces a three for one scrip issue. If the shares are currently trading at £2.75 the theoretical ex-scrip price would be:
In a scrip issue three new shares are being offered for one existing share. Before the issue one share is worth £2.75 or 275 pence and after the issue 4 shares are now worth £2.75 in total or approximately £0.69 or 69 pence each.
Which of the following is most likely to offer a crossing network or matching engine for execution of securities trading?
Investment firms
A bond’s dirty price is the same as its clean price. Which of the following would help explain this situation?
The settlement date is the same as the coupon date
Which of the following is TRUE of an omnibus nominee account?
Only one holding appears on the company register
Which of the following best indicates the returns on money market instruments?
Low risk, variable returns
Participants in a dark pool are MOST LIKELY to have chosen this type of execution venue because of:
Ability to execute trades at efficient prices
ABC plc’s 3 year bond has a yield of 4.5% and its 10 year bond is yielding 6.5%. If an investor believes that the yield spread between the two bonds will increase to 250 basis points. If he is correct, which of the following strategies would be profitable?
Buy the 3 year and sell the 10 year
In which of the following ways are commercial property returns are typically measured?
Rental yields
If an investor is interested in dark liquidity on the London Stock Exchange, on which platform would they be looking to trade?
Order driven
‘Over the counter’ (OTC) markets in recent times seem to be converging with exchange traded markets, which of the following is the most likely explanation?
Regulatory changes
What is the repo rate?
The implied interest paid for borrowing money
Which of the following is the best definition of a bond ‘on the run’?
The most recently issued Treasury bond
On the run bonds refer to those that are most recently issued by the issuer. Those previously issued are often referred to as off the run bonds.
Debt with a high interest cover will subsequently affect
Market valuation
Two eurozone governments’ bonds are sold in Europe with identical terms of coupon rate, maturity of redemption, and all other standard terms. However, both still sell into the market with different yields. Which is the most likely reason why?
Different credit ratings
The best description of an inter-dealer broker would be:
Acts as agent between dealers
A UK investor has substantial holding in European investments. There has not been a significant price change in the companies they are holding yet the investor has seen the total value of the investments change dramatically. Which of the following could be the reason for this change?
The change in the value of the Euro
A company announces an increase in the dividend that it will pay out to shareholders in response to continued profit growth. Assuming all of the following securities are in issue, which of the following is most likely to benefit from this increase in income?
Depositary receipt holder
NOT WARRANT- assume they have not exercised it
Which of the below would NOT appear on a company’s financial statements?
Disclosures in relation to contingent liabilities
Which of the following is NOT an advantage of REITs?
Shareholders do not pay tax on income received
Shareholders do pay personal tax on income and capital gains received from REITs, but they avoid double taxation as REITs do not pay corporate taxes
What is the purpose of a trading platform providing liquidity rebates?
To encourage market makers to use their systems by offering them commission on trades
Which of the following is required for a company seeking to be admitted to a premium market of an exchange?
The issuer must have produced consolidated, independently audited accounts covering at least three years.
The expected market value of all securities issued by the company, and to be listed, must be at least £30,000,000 for shares and £200,000 for debt securities. (There are exceptions where the amount of debt securities is not fixed, and also if the securities of the same class are already listed).
At least 10% of the shares must be available for public trading, i.e., not be held by directors or significant shareholders (5%+). This is known as free float.
How are shares held when using a corporate nominee account?
Shares of all investors are pooled together
The corporate nominee is a halfway house between the pooled and the designated nominee structures offered by stockbrokers. It will result in a single entry for all the shareholders together in the company’s register (like the pooled nominee) but beneath this the issuing company (or its registrar) will be aware of the individual holdings that make up the nominee.
Which of the following would account for increased volatility in the foreign exchange markets on the first Friday of every month?
Issuance of the Non-Farms Payroll
The US Labour Department issues its monthly employment data, more commonly known as the Non-Farms Payroll (NFP) report, on the first Friday of each month at 8:30 Eastern time, and it can often be a major mover of foreign exchange rates.
Which of the below is a definition of a dealer member of an exchange?
A member who trades for the firm’s own books
They would need a broker dealer membership to trade for both themselves and clients. A broker can only trade as an agent of the client.
Any company traded on an exchange must, according to company legislation do which of the following?
Hold annual general meetings
Which of the following would BEST describe the point when a pension fund interest in shares of another company would no longer be considered in the free float?
5%
A secondary issue would take place to serve which purpose?
To satisfy a large debt
An investor holds a position in UK equity and decides to hedge by buying put options. Which of the following statements is true?
The value of this right will be increasingly valuable as the price falls
Which of the following financial statements will show dividend payments made?
Cash flow statement
A company wishes to raise capital through the issuance of shares through an IPO, but does not wish to lose control of the company. Which of the following would be most suitable?
Float 5% of issued share capital on AIM as cumulative preference shares
To be listed on the official list, a company would need to place no less that 10% of the issued share capital in the public hands. This restriction does not apply to AIM. Ordinary shares carry with them a right to vote, which would dilute the control of the directors of the company. Corporate loans are not shares.
Which one of the following statements about hybrid trading systems used by exchanges is true?
They feature both order-drive and quote-driven systems
Which types of bonds are most commonly purchased following a carry trade in the foreign exchange markets?
Bonds with high yields
Bill is a closed-ended fund manager and Andy is an authorised open-ended fund manager. Which of the following is TRUE?
Both funds can invest in quoted companies
With regard to a unit trust, who is appointed protect the interests of the unitholders?
TRUSTEE not UNIT TRUST MANAGER
Who decides whether a company is appropriate to apply for a quotation on the junior market of an exchange?
Listing agent/NOMAD
A benefit of a central counterparty service is:
Reduced administration
However, there is a reduction in administration thanks to the ability to settle on a net basis with a single counterparty, such as LCH.
In which of the following circumstances would it be possible for a hedge fund (Unregulated Collective Investment Scheme) to market itself to a retail investor?
If the client were a sophisticated or high net worth individual
