Mock exam Flashcards
1
Q
Which of the following could make up part of a company’s free float?
A
Shares held by an institutional investor holding 4% of the company’s shares
2
Q
6% bond can be redeemed at £100 in 1 year. What is the maximum you would pay today?
A
£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.
3
Q
What is the chief role that a trustee is appointed to fulfil when debenture stock is issued to investor in the UK?
A
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.
4
Q
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:
A
The fund manager and the trustee
5
Q
Why is it important that ‘request for quote’ systems run alongside the dealer-to-customer market?
A
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.
6
Q
A large organisation is using publicly available third party research rather than internal research. Why might this be seen in an unfavourable context?
A
Greater chance of bias
When using third party research or recommendations, the possibility of bias or lack of objectivity should always be considered.
7
Q
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?
A
Where there has been a rapid decline in the value of the market for it then to recover relatively quickly
8
Q
Who is the legal owner of the shares that underlie an ADR?
A
The depositary bank
9
Q
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?
A
High P/E ratio : low dividend yield
Higher market price is always looked at for future growth prospects
10
Q
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?
A
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
11
Q
Which of the following is a major benefit of a quote-driven market?
A
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.
12
Q
A Depositary Receipt may be pre-released however the issuer must deliver the underlying shares for deposit within:
A
Three months
13
Q
Why would an investor want to deal special-ex?
A
INVESTOR!!
For tax planning purposes
14
Q
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?
A
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.
15
Q
What is the purpose of an ICEBERG order?
A
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
16
Q
When can an investor sell a share in an OEIC?
A
Any period specified by the OEIC prospectus
17
Q
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?
A
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.
18
Q
An investor receives a provision allotment letter from a company performing an offer for sale. What does this confirm about the investor?
A
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.
19
Q
The providers of which of the following services would be considered a participant in the wholesale market?
A
Derivatives trading
20
Q
Which of the following cash flows would not be listed under operating cash flows in a company’s cash flow statement?
A
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.
21
Q
Which of the following would explain why a company would buy shares in another company to forge a strategic link?
A
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.
22
Q
In normal market conditions which of the following statements about interest rates and inflation is most likely?
A
Inflation would be expected to be lower than interest rates
23
Q
Why would an underwriting firm performing an offer for sale decide to use a fixed price rather than a tender?
A
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.
24
Q
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?
A
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
25
Floating rate bonds offer greater protection against inflation risk than fixed interest bonds because:
Their interest rates tend to rise to offset the impact
26
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
27
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.
28
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.
29
What is deferred tax
Non-current liability??
30
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
31
In which market can companies use an offer for subscription as a method to float their share to raise capital?
Primary
32
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.
33
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.
34
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.
35
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
36
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.
37
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.
38
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
39
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.
40
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
41
What do T bonds settle through
US T-Bonds settle through the Fixed Income Clearing Corporation (FICC)
42
JGB day count convention
actual over 365 day-count convention
43
44
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.
45
Which of the following is most likely to offer a crossing network or matching engine for execution of securities trading?
Investment firms
46
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
47
Which of the following is TRUE of an omnibus nominee account?
Only one holding appears on the company register
48
Which of the following best indicates the returns on money market instruments?
Low risk, variable returns
49
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
50
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
51
In which of the following ways are commercial property returns are typically measured?
Rental yields
52
If an investor is interested in dark liquidity on the London Stock Exchange, on which platform would they be looking to trade?
Order driven
53
'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
54
What is the repo rate?
The implied interest paid for borrowing money
55
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.
56
Debt with a high interest cover will subsequently affect
Market valuation
57
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
58
The best description of an inter-dealer broker would be:
Acts as agent between dealers
59
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
59
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
60
Which of the below would NOT appear on a company's financial statements?
Disclosures in relation to contingent liabilities
61
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
62
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
63
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.
64
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.
65
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.
66
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.
67
Any company traded on an exchange must, according to company legislation do which of the following?
Hold annual general meetings
68
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%
69
A secondary issue would take place to serve which purpose?
To satisfy a large debt
70
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
71
Which of the following financial statements will show dividend payments made?
Cash flow statement
72
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.
73
Which one of the following statements about hybrid trading systems used by exchanges is true?
They feature both order-drive and quote-driven systems
74
Which types of bonds are most commonly purchased following a carry trade in the foreign exchange markets?
Bonds with high yields
75
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
76
With regard to a unit trust, who is appointed protect the interests of the unitholders?
TRUSTEE not UNIT TRUST MANAGER
77
Who decides whether a company is appropriate to apply for a quotation on the junior market of an exchange?
Listing agent/NOMAD
78
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.
79
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
80
Which of the below is a benefit of using a central counterparty service?
Improved prices
81
In order to raise capital a company can issue a convertible bond or an exchangeable bond. Would it be possible to have these underwritten with a greenshoe option?
Yes, on both types of bonds
82
A company has performed well during the course of the year. In which way is it MOST likely to reward its shareholders?
Declare a high final dividend
Dividends are usually paid twice a year and are expressed in pence per share. Interim dividends (based on the first six months' results) are paid in the second half of a company’s accounting period, while final dividends, usually the larger of the two payments, are paid after the end of the company’s accounting year.
83
Which of the following bond issuances would ensure the bonds purchased were at the highest price at which they could ALL be sold?
Tender
The tender offer is the lowest successful price and everyone will pay this price. As this price applies to all the bonds purchased this is the highest price that will be paid for ALL the bonds issued.
84
An investor has held a 2.75% Treasury 2037 gilt for 2 years and are just about to receive the income payment. How much would they receive expressed as a percentage?
1.375%
Semi annual payment
85
When global depositary receipts are issued, whose name appears on the company's register of owners?
Depositary bank
86
Inflation is expected to rise from 1.9% to 2.9% how or when could an investor achieve the same real return as before?
There is a decrease in the nominal rate of interest
87
A firm has received a sell limit order from a professional client. The order is the tenth order received from that client over a period of three months. The order cannot be executed immediately through the firm.
Which of the following reasons would justify the firm not making the order public on the LSE?
The client has instructed otherwise
88
The term 'high water mark' relates to which of the following in a fund?
The annual management fee
NOT PERFORMANCE FEE
89
An investor sells Malaysian shares and wants to exchange the proceeds into Brazilian currency. If the currencies are not quoted against each other directly, using which type of rate would the investor be able to convert?
Cross rate
90
A bond's annual income is based on which of the following?
Capital value of the bond
A bond's income (coupon) is expressed as a percentage of the nominal value which represents the capital value of the bond.
91
A US company has an obligation to pay a British supplier; the current exchange rate is 1GBP:1.5251USD. They approach their bank to enquire the exchange rate and are quoted 240/262. At what price will they be able to convert into sterling
The buyer's rate and seller's rate refer to buying and selling dollars respectively. The difference between the buyer's and seller's rates is generally referred to as the bid-offer spread. It enables the bank offering the deals to make money.
How much will an investor get if the above spot rate is applied? If the investor wants to sell $50,000 for pounds sterling, he will get £32,761.10. This is based on the seller's rate of $1.5262:£1.
A typical sterling/dollar spot quote might look something like this: GBP/USD spot rate 1.5240-1.5262
Buyer's rate: £1 buys $1.5240
Seller's rate: $1.5262 buys £1
92
Which of the following would lead and manage the sale of shares in an Initial
Public Offering?
An investment bank
93
Which of the following factors determines whether bonds can be traded
electronically?
Liquidity
94
Which method is the least expensive for a company to raise funds?
Placing
95
The use of a designation on an account is primarily used:
as a reference to identify the account
96
In which type of issue in the Eurobond market is the lead manager MOST likely
to place the entire deal themselves without forming a syndicate?
A bought deal
97
Why might an organisation build a strategic stake in a listed company?
It wants to exert influence on the decision making of the other company
98
A significant benefit of utilising a central counterparty system is that it:
reduces systemic risk
99
Which of the following is TRUE regarding the different trading approaches
between equities and bonds?
D Unlike equities, bonds are usually traded away from exchanges in a
decentralised dealer market
100
Which of the following is a key difference when comparing a company's profit
against cash?
Recognition of revenues at point of sale
101
What does the Return on Capital Employed (ROCE) figure for a company
represent?
D It compares money invested with generated returns
102
Why would an investment bank use a "dark pool" for selling securities?
To sell a large quantity of shares without price disclosure to the market
103
An investor is deemed to be a potential predator regarding the shares in
Company X and has already notified X that it holds 4% of its shares.
The investor must now notify the company if:
the holding falls to 2.95%
104
The ratio of enterprise value to EBIT represents the:
cost of purchasing a business from its security holders over its net revenue
105
Stockbrokers can receive remuneration by charging:
A fees and commissions only
105
63 What key benefit usually arises from the use of central counterparties when
executing trades on an exchange's order book?
B Improved prices
106
8 Which type of entity within the wholesale sector of the financial services market
is most likely to engage in treasury dealing for corporate clients?
Investment banks
107
How do listed companies most commonly satisfy the EU's Transparency
Regulations when disseminating information?
By making use of:
A a primary information provider
108
Which of the following risks could increase as a consequence of high frequency
trading?
Systemic
109
A key benefit of an investor purchasing residential properties for investment
purposes is:
A key benefit of an investor purchasing residential properties for investment
purposes is:
110
Which of the following is the best description of a bond's coupon at par?
The interest rate that the borrower pays to the bondholder
111
When considering the operation and characteristics of private equity funds, a
fund manager should be aware that
returns are usually correlated with the economic cycle
112
A market participant, which makes equity offerings, should comply with reporting
requirements to ensure that:
potential investors are kept informed of the progress of the company
113
A key consideration to a broker who is considering placing clients' investments
in emerging and frontier markets is that:
these markets do not have the same degree of sophistication as developed
markets
114
When a nominee company takes registered title to shares, it becomes the:
legal owner
115
Within a cash flow statement, dividends received should appear under which
heading?
Investing activity
116
The yen spot rate is 105.5. What is the three-month forward rate if interest rates in USA are at 2% pa, and 0.5% pa in Japan?
105.11
The three-month forward rate would be calculated as follows.
F/S = (1+r(var)) / (1+r(base))
Remember to treat the rate as an annualised rate unless specifically told otherwise, so we would need to de-annualise this rate.
F / 105.5 = (1 + 0.005 x 3/12) / (1 + 0.02 x 3/12)
F = 0.99627 x 105.5
F = 105.11
117
With regard to companies listed on a junior market e.g. the LSE's Alternative Investment Market , which of the following must stay with the company for the duration of the listing?
Broker and advisor
118
The behaviour rules for broker/dealer firms trading on an exchange would be overseen by:
The exchange
119
What trades on a 'request for quote' system?
High yielding bonds
High yield bonds, bonds from developing markets and asset-backed securities tend to trade on RFQ systems.
120
Which of the following is the best description of a manufactured dividend?
Payments passed back to the lenders of shares to compensate them for any missed dividends issued by the company
NOT
A dividend issued by a company which has a dividend cover ratio less than one, therefore has had to make use of company reserves to make up the lack of earnings to fund the dividend
121
The types of order accepted on order driven systems are:
orders that will either execute or cancel immediately, or will go to the buyers and sellers queue
122
Where do corporate bonds mostly trade?
OTC
123
Who sets the rules for members of an exchange governing their trading practices?
The exchange
124
XYZ is a company established in the UK as a public limited company. Which of the below must ALWAYS be true:
It will be restricted in relation to how much share capital it can issue
A listed company must be a plc but not all plc's have to be listed. If a company issues shares to the public, it may do this through an offer for subscription, an offer for sale or through a placing. A plc will have an authorised share capital that restricts how many shares it can issue.
125
An investor buys a gilt for settlement on 2nd January which has 90 days interest accrued. Upon which date will the investor receive the next coupon payment?
1st April
Gilts pay a coupon on a semi-annual basis.
The gilt bought already has 90 days interest accrued, implying that the last coupon date was in early October. The next coupon date will be 6 months later on 1st April, based on the information within the question and the available dates.
126
In the offering of a bond issue, which of the following would NOT be a responsibility of the listing agent?
Servicing
127
A market analyst produces a report on market depth and liquidity. What would be the sources of this report?
Exchanges and trade reports
Trade reporting is a mechanism to feedback to the marketplace on market depth and liquidity - a measure of market transparency. Trade reporting assists in price formation. Trade reports must include a variety of details, including the identity of the reporting member firm, the date and time of the transaction, the security traded and the type of trade.
128
Which one of the following is most likely to have a narrow spread between its bid and offer price, an annual management fee of 0.5% or less and investor would incur a stockbrokers commission when buying and selling?
ETF
Shares in ETFs are bought and sold through a stockbroker on a stock exchange and exhibit the following
charges:
There is a spread between the price at which investors buy the shares and the price at which they can sell them. This can often be very narrow.
An annual management charge is deducted from the fund, which is typically 0.5% or less.
The investors pay stockbroker's commission when they buy and sell.
129
How are Sterling Treasury Bills issued?
T Bills are issued through a competitive auction. Interested parties tender a price and if successful they pay the price they submitted.
By tender
130
Under which of the following would companies that trade on the junior market be required to provide half yearly reports?
The exchange
An AIM company must prepare a half-yearly report in respect of the six month period from the end of the financial period for which financial information has been disclosed in its admission document and at least every subsequent six months thereafter (apart from the final period of six months preceding its accounting reference date for its annual audited accounts). All such reports must be notified without delay and in any event not later than three months after the end of the relevant period.
131
By hedging a position, which one of the following is the most likely outcome?
You will limit or reduce the potential upside
132
Which of the following would be considered 'revenue expenditure'?
Payments to a firm providing security services
133
When wouldn't you get the limit price on your order?
In the opening auction
134
What is the pricing mechanism for shares of Exchange Traded Funds?
Value can be monitored continuously
135
Which of the following would be considered a benefit of an investment trust over an authorised unit trust?
The fund manager can have a longer time horizon in terms of investment
136
Which of the following is the prime role of the primary markets?
enable surplus funds to be matched against investment opportunities
137
Considering the price/earnings ratio and the dividend yield respectively, what would an investor NORMALLY expect if a company continuously shows rapidly increasing profits?
The correct answer is: B - High / low
Price / earnings ratio is calculated as Share price / Earnings per share Dividend yield is calculated as Dividend / Share price
Share prices are normally based on expectations of future earnings of a company. If the market assumes that profits will continue to increase the share price is likely to reflect this. Therefore with consistent increasing profits we would expect to see a high share price. The high share price compared to earnings or dividends gives a high P/E but low dividend yield.
138
Organisation X is acting as a dealer on a stock exchange. As a consequence, they are most likely to be operating as:
A gilt market maker
139
How would an investor determine the issuance price in an offer for subscription?
By the prospectus
140
An institutional investor is looking to invest in a 'carry trade'. Which of the following describes such a trade?
They would need to borrow funds in a currency where there is a relatively low borrowing rate, and will invest those funds, after converting to another currency where there is a higher rate of interest available for short-term deposits
141
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
142
The UK Debt Management Office announces the results of an auction, upon which of the following will it have an immediate impact?
Interest rates
143
Which of the following describes how corporate bonds being traded, along with their prices, can be discovered?
Dealers give prices within separate pools of liquidity
Dealing in corporate bonds tends to be away from the major exchanges in what is commonly described as a decentralised dealer market. The dealers provide liquidity by being willing to buy or sell the bonds. There are numerous systems that dealers use to display their willingness to deal, with each system being described as a separate pool of liquidity.
144
Why would a company want to use a rights issue to raise capital?
To prevent dilution of current shareholders’ interests
145
Frontier and emerging market equities trade mostly on:
Stock exchanges
146
Which of the following items would you find in a cash flow statement?
Tax paid
147
Which of the following statement regarding the Eurobond market is FALSE?
Prices are quoted inclusive of accrued interest
Prices of Eurobonds, like any other bond is quoted clean, accrued interest is added for the settlement price, which is also known as the dirty price.
148
A trade has moved to the confirmation stage with a central counterparty. Which of the following has occurred immediately prior to this?
The trade has been executed on an exchange
Confirmation occurs after execution where a central counterparty (CCP) calculates the obligations of the buyer and seller. The security can then move to settlement where the buyer pays and the seller delivers. This would be delivery versus payment.
149
Structured products run for a defined term but typically no longer than:
7 years
Structured products run for a defined term, typically at least 18 months but not more than 7 years.
150
How do Electronic Communication Networks (ECNs) benefit clients of trading firms?
Lower transaction costs for trading
151
Issuers of government bonds can attempt to counter currency risk for potential investors by:
Issuing in a foreign currency
152
A company wants to do a placing but has already issued shares in a country that insists on pre-emption rights. Which of the following must they do?
Put it to shareholders
153
What is the main purpose of a dividend paid by a UK company?
To distribute profits to the owners of the company
154
Money transmission services are most likely to be provided by:
Retail banks
155
hich of the following countries is considered the largest centre globally for fund management?
US
156
How in 2008 did the US Securities and Exchange Commission (SEC)change the exchange-traded fund (ETF) market, which has seen a migration away from traditional collective investment schemes (CIS)?
They authorised the creation of actively-managed funds which are fee based rather than commission based
157
Which of the following is true of a capital investment in a structured investment?
There are penalties if redeemed early
Most structured products run for a fixed term and there are penalties if the product is redeemed early. Although designed to be tax efficient, they are rarely tax free. The bespoke nature of the product often make the fees relatively high. There is no protection under the FSCS for structured investments.
158
Which document must clearly state the investment strategy and objectives of a Unit Trust, so that investors can determine the suitability of each trust?
Trust deed
159
The securities lending market developed to:
Cover settlement failure
160
Where an investor places some of their funds in a structured deposit, they should be made aware that:
Interest may not be payable
161
What are the rules for stripping UK exchequer bonds?
Only designated gilts can be stripped and only by the DMO, Bank of England and GEMMs
162
How would a trader normally gain dark liquidity?
MTF
Dark pools are a form of MTF (or alternative trading system (ATS) in the US).
163
Investor uses an index weighted by dividend yields, an example of:
A
Smart beta
Smart beta is the term for an investment strategy that does not use the traditional market capitalisation weighting system, but instead uses alternative weighting systems, for example weighting constituents equally, or based on dividends paid, sales revenues or cash flow generation.
164
Which of the following are thought to be reasons for China's equity market becoming more sophisticated?
China’s rapid development and the size of its economy
165
An inter-dealer broker:-
Matches market makers trades
An inter-dealer broker deals between market makers to ensure that they remain anonymous. IDB's are not allowed to take principal positions (speculative positions on the market) but must settle transactions as if they were principal.
166
On an electronic order book system, a market order to buy will:
Execute against the best priced sell orders immediately and if not completely filled the remainder will be cancelled
Market orders are executed immediately, and any unfilled portion is cancelled. They do not use a limit price - therefore if there is sufficient liquidity in the order book they will always be executed.
167
Once the terms have been agreed between buyer and seller and the trade executes it next enters the:
Clearing phase
Clearing phase - as soon as a trade has been executed, a number of procedures and checks must be conducted before settlement can be completed. These include matching the trade instructions supplied by each counterparty to ensure that the details they have supplied for the trade correspond. It also involves conducting checks to ensure that the seller has sufficient securities to deliver and that the buyer has sufficient funds to cover the purchase cost.
168
When comparing a company quoted on the London Stock exchange with one that is not, the quoted company must do which of the following?
All companies issue shares, have directors and produce annual accounts. But quoted companies also produce a half yearly report.
169
With respect to the issuing company which of the following would be considered a benefit to issuing warrants rather ordinary shares?
They will be able to issue shares at a higher price
If the shares are currently trading at 77p each, the warrant owner has the right, but not the obligation, to buy shares at £1 each, then this will be at a higher than current price. The sale of warrants for cash will raise money for the company, and, if the warrants are exercised, then further capital will be raised by the company.
170
Gilt inter-dealer brokers are:
matching agents
171
If a limit order is entered onto the order book with no specific time of when to expire, if it does not execute, when will it normally be removed from the order book?
End of the day
172
Which is true in regards to shareholders?
Votes are proportional to the number of shares held
173
According to corporate governance requirements for a listed company, a company must:
Ensure that management responsibilities are shared within a firm
174
A government bond wishing to be admitted to the main market of an exchange so that it may be traded, must be granted permission from the
The listing Authority
175
What is the role of a note trustee?
To represent the interests of holders of issues of securities, while providing guidance to the issuer
176
How many days in feb
28 days
177
A central bank has just announced a change to its country’s interest rate.
This is most likely to have an immediate impact on:
Currency markets
178
Currency markets
Investment income
179
Which of the following is key advantage for a portfolio manager to hedge with futures?
It leads to lower portfolio disruption
Hedging with futures creates an offsetting position in the portfolio reducing exposure to price volatility and reducing portfolio disruption. This is the key advantage.
180
Which of the following would describe how UK T-bills are issued?
In the UK, T-bills are issued at weekly auctions, known as tenders, held by the DMO at the end of the week (usually a Friday). These tenders are open to bids from a group of eligible bidders which include all of the major banks.
Note: In a tender process, successful bidders would all pay the same price and for this reason, UK offerings of T-bills are not strictly tenders. However they are referred to as 'tenders' and for this reason, it is the correct answer in the exam!
181
On an order driven platform, when might a limit order to buy not achieve its limit price on execution?
During an uncrossing period following an auction
182
A corporate bond's current price will mostly depend on:
The internal rate of return
183
During an initial public offer of shares, how is the price usually determined?
Through a tender process
Auction process applies to UK government bond issues. Although a US government bond issue is called an auction, it is priced tender-style. Reverse enquiry applies to corporate bonds. Other answer could be a fixed price offer where the issuing house issues shares just below a point they expect a full subscription.
184
A company wishes to reduce its share price without it going below its nominal value. Which of these is the best course of action?
Stock split
185
When is it possible for a limit order residing on a London Stock Exchange platform to achieve a better price than its limit order?
When the uncrossing algorithm is run at the start or end of the trading day, or during any of the two intraday auctions
186
An income statement would be best described as a:
Moving picture showing income and expenses over a given period of time.
187
What is idiosyncratic risk
specific risk
188
High frequency trading (HFT) creates which of the following risks?
Systemic risk
189
190
Minimum investment grade
BBB-
191
What is liquidity risk
Liquidity risk is the inability to sell easily with the market displaying a wide spread between buying and
selling prices.
192
. Which of the following ratios effectively provides a yield for the whole company being
analysed?
Return on capital employed
193
. Which of the following would be a reason for holding shares in a designated rather than a
pooled nominee account?
The shareholder requires any dividends to be mandated to a particular bank account
194
Agreeing procedures for settling a transaction typically forms part of which stage of the
clearing and settlement process?
clearing
195
Which of the following measures is the same as the internal rate of return of a bond?
GRY
196
Other words for dark pool
Dark pools are a form of:
MTF
ATS- in europe
197
The allocation of the estimated cost of an intangible asset as it is used up over its useful
economic life is known as which of the following?
The annual expense for using up a non-current asset is termed depreciation if the asset is tangible, and
amortisation if the asset is intangible.
198
All of the following are expenses charged in the income statement, except:
dividends - ON CASH FLOW
