Questions

Question 1

A 2 year corporate bond has a 100bp spread over LIBOR. What is most likely to be the spread of the corporate bond over a 5 year Gilt?
A0 bp B50 bp C100 bp D150 bp

Answer 1

150 bp,

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 LIBOR.

Question 2

A large organisation is using publicly available third party research rather than internal research. Why might this be seen in an unfavourable context?
AGreater chance of bias BIt is historical date CLack of depth and quality of the data sample DLack of ability to update

Answer 2

Greater chance of bias,

When using third party research or recommendations, the possibility of bias or lack of objectivity should always be considered.

Question 3

Which of the following best differentiates medium term notes (MTNs) from other bond issues?
AThey are cheaper BThey are more expensive CIssuers make payments in kind DIssuers use shelf registration

Answer 3

Issuers use shelf registration,

MTNs are issued on a scheduled funding basis. Shelf registration allows several issues to be authorised under one registration, allowing the company to roll out the issues over the next two years.

Question 4

Why would a lead manager be LEAST likely to go through a syndication process and, instead, take responsibility for the entire process themselves?
AIt is a bought deal BIt is a fixed price re-offer CThere is a back stop price DIt is a placing

Answer 4

It is a placing,

A placing is where a company simply markets the issue directly to a broker, an issuing house or other financial institution, which in turn places the shares with selected clients. A bought deal is a fully underwritten issue and the lead manager would often enlist the help of a syndicate to do this this. The back-stop price is limit placed on the members of a syndicate limiting the price at which the shares can be sold. Whilst a Fixed Price Re-offer is NOT on the current syllabus, it is synonymous with syndication.

Question 5

A Depositary Receipt may be pre-released however the issuer must deliver the underlying shares for deposit within:
AOne month BThree months CSix months DNine months

Answer 5

Three months,

The issuer of DRs must deliver the underlying shares within three in order to satisfy the rules of the pre-release issue. During the pre-release period the position must be collateralised with cash.

Question 6

Which of the following is FALSE regarding a repo?
AAssists with liquidity BThe repo rate is the cost of borrowing the bond CA tripartite repo may involve a custodian DNormally overnight

Answer 6

The repo rate is the cost of borrowing the bond ,

A repo is a sale and repurchase agreement normally involving instruments such as Gilts. The asset is sold and then repurchased at a later date. It is a type of secured borrowing that generates a repo rate. The difference between the sale and repurchase price represents the interest paid on the loan of cash.
Tripartite repos use a custodian to facilitate the transfer of cash and collateral.
Repos can be for any period of time, not just overnight. However overnight repos are the most common.

Question 7

Which one of the following is an electronic platform to facilitate dealer-to-customer trading in bonds?
ABrokertec BLMIL CTradeWeb DMTS Cash

Answer 7

TradeWeb,

TradeWeb is an electronic platform to facilitate dealer-to-customer trading in bonds.

Question 8

When a market maker uses a stock borrowing and lending intermediary to cover a short position by borrowing stock from a fund manager, which of the following best describes the relationship between the SBLI and their counterparties?
AAgent with the market maker and agent with the fund manager BAgent with the market maker and principal with the fund manager CPrincipal with the market maker and agent with the fund manager DPrincipal with the market maker and principal with the fund manager

Answer 8

Agent with the market maker and agent with the fund manager ,

The SBLI acts as intermediary with both parties.

Question 9

Which of the following cash flows would not be listed under operating cash flows in a company’s cash flow statement?
AReceipts from customers on goods sold BPayments to suppliers for stock purchased CProfits realised on disposal of an asset DTax paid to HMRC

Answer 9

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.

Question 10

A medium-term note programme benefits from which of the following?
AShelf-registration BPayment in kind CBook-building DPrime brokerage

Answer 10

Shelf-registration,

Shelf-registration allows several issues to be made from a single registration.

Question 11

When a company announces its intention to pay a specified dividend on a specified future date this is called the dividend declared date. What is the minimum number of business days between the declaration and the proposed record date?
A1 B2 C6 D10

Answer 11

6,

The declaration must occur at least six clear business days before the proposed record date, although it usually occurs well before this date (perhaps a month or two earlier).

Question 12

A UK government bond sale takes place 2 days before the ‘coupon paid date’. The trade is known as:
AEx-coupon BSpecial ex-coupon CCum-interest DCum-coupon

Answer 12

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.

Question 13

Which of the following could make up part of a company’s free float?
AShares held by owners owning 5% of the company’s shares BRestricted holders of the company’s directors CShares held by an institutional investor holding 4% of the company’s shares DA 7% shareholding by the Government

Answer 13

Shares held by an institutional investor holding 4% of the company’s shares,

The free-float or a public float is usually defined as being all shares held by investors other than shares held by owners owning 5% or more of all shares (those could be government holdings, institutional investors, strategic shareholders, founders, executives holdings) and restricted stocks granted to executives.

Question 14

Which of the following would be MOST associated with rollover risk?
ACommercial paper BSpot FX contracts CUnit trusts DRights issues

Answer 14

Commercial paper,

Commercial paper is a rolling form of debt, with new issues generally funding the retirement of old issues, the main risk is that the issuer will not be able to issue new commercial paper. This is called rollover risk.

Question 15

Which of the following is FALSE of a Eurobond?
ATypically traded OTC BRegulated by The International Capital Markets Association CTrades are reported through TRAX DCoupons are paid net

Answer 15

Coupons are paid net,

coupon on Eurobond are paid gross not net

Question 16

All of the following have been deducted prior to calculating earnings per share, except:
AInterest payable on bonds BPreference dividends CEquity dividends DCost of goods sold

Answer 16

Equity dividends,

Earnings per share are the profits available to the ordinary shareholder of the company. This is before the deduction of equity or ordinary dividends.

Question 17

Which of the following would be considered the difference between commercial paper in the UK and commercial paper in the US?
AUS commercial paper is normally issued for 1 month and UK commercial paper is normally issued for 4 months BUS commercial paper issued at par and upon maturity will receive interest, whereas UK commercial paper is issued at discount and redeemed at par CUK commecial paper is registered and settles T+2, whereas US commercial paper is bearer and settles T+1 DUK commercial paper has a maturity up to 1 year, whereas US commercial paper has a maturity up to 270 days

Answer 17

UK commercial paper has a maturity up to 1 year, whereas US commercial paper has a maturity up to 270 days,

Commercial paper (CP) is a money market instrument, issued by a company. The money market is the term for the market involving cash deposits and short-term instruments that are issued with less than one year to their maturity. CP is the corporate equivalent of a government’s Treasury bill. CP is issued at a discount to its nominal value and can have a maturity of up to one year in Europe and 270 days in the US; however, it is common to find in both territories that CP will be issued for three months.

Question 18

A company has issued convertible loan stock which can convert into 80 ordinary shares per £100 nominal. The convertible is trading at £160 and the ordinary shares at 180p per share. What is the conversion premium?
A10% B11.1% C20% D25%

Answer 18

11.1% ,

Effective price of share via convertible debt (£160 / 80 shares) £2.
Actual share price £1.80.
Conversion premium is 20p, or expressed as a percentage of share price, (£0.20 / £1.80) 11.1%.

Question 19

Which of the following would explain why a company would buy shares in another company to forge a strategic link?
ATo expand the company BShared corporate ethos CProtect supplies DTo benefit from dividend income

Answer 19

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.

Question 20

Which of the following reserves can a company use to pay a dividend to shareholders?
ARevaluation reserve BCapital redemption reserve CProfit and loss reserve DShare premium account reserve

Answer 20

Profit and loss reserve,

Dividends can only be paid-out of distributable profits: i.e. the profit and loss reserve.

Question 21

Which of the following is the best definition of the gross redemption yield (GRY)?
AThe annual interest rate for a bond held to maturity BThe difference between the current price and nominal value CThe total return if held to maturity DThe annualised total return for a bond held to maturity

Answer 21

The annualised total return for a bond held to maturity,

This is a trickly question. Whilst ‘The annual interest rate for a bond held to maturity’ could be considered correct, ‘The annualised total return for a bond held to maturity’ is the best available definition as it considers the total return, not just the interest rate on the bond.

Question 22

A company wishes to exchange GBP for USD in three months’ time. The current spot rate is 1.4500/05USD, and the company is quoted a 20/18 forward adjustment.
What would be the outright bid on the forward contract?
A1.4520 B1.4480 C1.4523 D1.4487

Answer 22

1.4480,

The forward adjustment is a premium, therefore we subtract from spot. The bid is the price at which the bank will buy our GBP and is the first number in the spread.
1.4500 - 0.0020 = 1.4480

Question 23

what is the difference between government bonds from the US and France

Answer 23

French government bonds settle T+2, whereas US T-bonds settle T+1. French bonds pay an annual coupon whereas US T-bonds pay a semi-annual coupon

Question 24

When a trade settles DvP where does the seller get their confidence in the settlement of the trade from?
AThat both sides of the trade are settling concurrently BThat the settlement systems allow almost instantaneous settlement CThat the seller holds onto the assets until the cash payment is received DThat novation takes away all the settlement risk

Answer 24

That both sides of the trade are settling concurrently,

DvP is delivery versus payment, where both sides of the trade settle concurrently.

Question 25

In which of the following types of issue might a company retain a greenshoe option?
ARights issue BBonus issue CA secondary market activitiy DA secondary offer

Answer 25

A secondary offer,

With a secondary offer of shares, the company may retain a greenshoe option. They would not be used in the issuance of shares through a rights issue or bonus issue. Greenshoe options are used in the primary markets not the secondary markets.

Question 26

Which ONE of the following is a criteria for entry on to a junior market of the exchange?
AMinimum trading history BAll shares in public hands CAll shares freely-transferable DNominated broker or adviser required, but not both

Answer 26

All shares freely-transferable,

The entry requirements for AIM are much lighter than for the official list.

Question 27

A prime broker provides a number of services for institutional investors, what would be the purpose of stock lending and borrowing?
ACash management BLiquidity CSecurities purchased become property of the fund DReduction of costs

Answer 27

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.

Question 28

Why would an investor want to deal special-ex?
ATo avoid Capital gains tax. BTo reduce regulatory reporting requirements CTo receive a dividend that they would otherwise be not entitled to DFor tax planning purposes

Answer 28

For tax planning purposes,

By dealing special ex the investor does not receive the dividend they are entitled to this may reduce income but not capital gains tax.

Question 29

In normal market conditions which of the following statements about interest rates and inflation is most likely?
AInflation would be expected to be higher than interest rates BInflation would be expected to be the same as interest rates CInflation would be expected to be lower than interest rates DInflation and interest rates are not linked together

Answer 29

Inflation would be expected to be lower than interest rates ,

The interest rate itself is heavily impacted by inflationary expectations. Simplistically, if inflation is expected to be at 4% per annum, the interest rate will have to be greater than this in order to provide the investor with any real return.

Question 30

Which is the best description of the Enterprise Value to EBITDA ratio?
AThe securities’ market capitalisation against total revenue BThe cost to buy a company against an adjusted operating profit CThe securities’ market capitalisation against an adjusted operating profit DThe cost to buy a company against total revenue

Answer 30

The cost to buy a company against an adjusted operating profit,

EBITDA is essentially profit before interest and tax (i.e. operating profit), but with depreciation, and amortisation reversed and added back.
EV is a measure of a company’s value and is often used as an alternative to straightforward market capitalisation. A simplified and intuitive way to understand EV is to envisage purchasing an entire business. If you settle with all the security-holders, you have essentially purchased the company at its EV.

Question 31

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?
APlimsoll line BHigh water mark CPerformance fees DHurdle rate

Answer 31

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.

Question 32

Which of the following is considered as a sell side to sell side electronic trading platform for bonds?
AMTS Cash BBloomberg bond trader CBondVision DTradeWeb

Answer 32

MTS Cash,

Dealer-to-dealer trading can occur via an electronic market, known as an electronic trading platform, such as Message Transfer System (MTS Cash) or Brokertec.

Question 33

Which of the following is the lowest form of debt?

AFloater BAsset back security CPIK DSubordinated debt

Answer 33

PIK,

Payment in kind (PIK) if it exists will be even more risky than the subordinated debt. It will rank below other forms of debt but above the equity in a liquidation.

Question 34

The Insolvency Act 1986 and the Enterprise Act 2002 define a strict order of repayment of company debts in liquidation. In the order of repayment, who/what is paid before subordinated loan stock?
APreference shareholders BUnsecured loans CPreference ordinary shareholders DMezzanine debt

Answer 34

Unsecured loans

Question 35

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?
AHave a scrip issue BHave a consolidation CHave a stock split DHave a rights issue

Answer 35

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.

Question 36

Participants in a dark pool are MOST LIKELY to have chosen this type of execution venue because of:
ALack of pre-trade transparency BAbility to execute trades at efficient prices CAbility to hide the dealer’s identity DLower costs

Answer 36

Ability to execute trades at efficient prices,

Dark pools offer institutions a facility to deal large blocks of shares anonymously, typically using algorithm driven trading. The size of these orders would make it very difficult to achieve efficient pricing on more traditional venues but the dark pool allows them to do so. Although anonymity is an advantage, this is also available on many other systems, including exchanges.

Question 37

In which of the following funds would you expect to see commercial paper?
ADerivatives fund BMoney market fund CSecurities fund DWarrants fund

Answer 37

Money market fund,

Commercial paper is short-dated debt issued by corporates. CPs have maturities of between seven days and 12 months.

Question 38

A company announces a rights issue where an existing shareholder is currently holding 2000 shares and one new share for every 5 existing is being offered. If the cost of purchasing the new shares is £5.00 and the current share price is £9.20, what will be the nil paid value of the right?
A£3.50 B£4.50 C£5.70 D£8.50

Answer 38

£3.50,

5 existing shares x £9.20 = £46.00 + 1 share x £5.00 gives a total of £51.00
£51.00 divided by the 6 shares = £8.50 (theoretical ex rights price)
£8.50 (theoretical ex rights price) - £5.00 (subscription cost) = £3.50 (theoretical nil paid value).

Question 39

Why would an underwriting firm performing an offer for sale decide to use a fixed price rather than a tender?
ATo ensure that the issue is fully subscribed BTo allow investors to set the price CTo provide more efficient form of pricing DTo ensure everyone pays the same price

Answer 39

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.

Question 40

A household contents insurance company is most likely to invest in:
AT-Bills BISA CMTN DNational Savings Certificates

Answer 40

T-Bills,

General insurance is where insurance is written by an insurance company against short-term personal and commercial risks, such as car or household contents insurance. Because of the short-term nature of the liabilities, the funds from the premiums tend to be invested in low-risk, liquid, short-term assets such as money market instruments.

Question 41

If an investor is interested in dark liquidity on the London Stock Exchange, on which platform would they be looking to trade?
AOrder driven BQuote driven CHybrid system DVoice broking systems

Answer 41

Order driven,

Dark pools refer to the non-displayed or hidden nature of the buy and sell orders that reside in a crossing platform. The term dark liquidity can also be applied to all forms of non-displayed liquidity such as the order blotters of buy-side dealing desks.
Even though there are few organised dark pools within Europe, there is dark liquidity. Dark liquidity is provided when exchanges offer iceberg orders which enable traders to have a lot more available to trade than is currently displayed on the screen or in an order book at any moment in time. The biggest sources of dark liquidity are within the investment banks and major brokers.

Question 42

Which of the following most likely describes the features and benefits of a putable bond?
AThe issuer of a putable bond has the right, but not the obligation, to redeem early repayment of the principal, usually exercisable on specified dates, which is good for the issuer usually when interest rates are rising BThe holder of a putable bond has the right, but not the obligation, to demand early repayment of the principal, usually exercisable on specified dates, which is good for the holder usually when interest rates are rising CThe holder of a putable bond has the right, but not the obligation, to demand early repayment of the principal, usually exercisable on specified dates, which is good for the holder usually when interest rates are falling DThe issuer of a putable bond has the right, but not the obligation, to redeem early repayment of the principal, usually exercisable on specified dates, which is good for the issuer usually when interest rates are falling

Answer 42

The holder of a putable bond has the right, but not the obligation, to demand early repayment of the principal, usually exercisable on specified dates, which is good for the holder usually when interest rates are rising ,

Putable bonds all about the holder having rights, so forget the two answers talking about the issuer. They are particularly useful when interest rates are rising, which generally means that bond prices are falling. When interest rates hit a certain height (and the bond price has fallen a certain amount), provided that the bond is within specified dates, the bond holder can simply hand back the bond to the issuer. This effectively means a putable bond has a price floor, when within those specified dates.

Question 43

what is an asset backed bond where no SPV is created

Answer 43

covered bond

Question 44

‘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?
AGreater demand for OTC products BElectronic trading CRegulatory changes DStraight through processing

Answer 44

Regulatory changes

Question 45

A company’s operating loss is £6m. If work in progress has fallen by £2m and there is an increase in receivables and payables of £1m each, what is the operating cash flow?
AMinus £8 million BMinus £6 million CMinus £4 million DMinus £2 million

Answer 45

Minus £4 million,

Operating cash flow is calculated as follows:
Operating loss of £6m.
Add any decrease in inventory - so, minus £6m plus £2m gives minus £4m.
Add back increase in payables £1m and subtact increase in receivables £1m, these two will net each other off.
So, operating cash flow = minus £4m.

Question 46

what is the stupid equation for operating cash flow

Answer 46

operating profit/loss - increase in inventory + increase in payables - increase in receivables

Question 47

Debt with a high interest cover will subsequently affect:

AThe ability to meet liabilities should they fall due BMarket valuation CSecuritisation DGrowth prospects

Answer 47

Market valuation,

Interest cover is used to determine how easily a company can pay interest on its outstanding debt. Similar to dividend cover a ratio of lower than 1 means that the company is not generating sufficient revenues to satisfy its interest expense, therefore a measure of risk. The greater the risk, the higher the yield the cheaper the price and visa versa.

Question 48

Which of the following is a reason for diversifying a portfolio? To reduce:
AMarket risk BSystematic risk CBusiness risk DUnsystematic risk

Answer 48

Unsystematic risk,

Market/Systematic/Business risk are ways of referring to the risks affecting all companies in the market. They cannot be diversified away. Inherent/Unsystematic can be reduced by diversification.

Question 49

Which of the following statements is most likely to be FALSE regarding a company with a low P/E ratio relative to its sector?
AThe market perceives it to have low growth prospects BIt might be regarded as being more risky than its sector CIt is perceived to be underperforming by investors DIt is likely to have a low dividend yield

Answer 49

It is likely to have a low dividend yield,

The P/E ratio and dividend yield tend to have an inverse relationship; i.e. a company with a relatively low P/E ratio will tend to have a high dividend yield. A company that pays most of its profit out as dividends (and therefore has a high dividend yield) will not have much profit to reinvest for future growth (and thus has a low P/E).

Question 50

A broker might use which one of the following system to trade bonds with an investor?
AMTS BBondVision CGlobalVision DBrokertec

Answer 50

BondVision ,

bondvision is b2c

Question 51

Which of the below cash flows incorporate a company’s debt obligations?
AFree cash flow BEnterprise cash flow CEquity cash flow DOperating cash flow

Answer 51

Equity cash flow,

Free cash flow represents the amount of cash that has been generated and that the company can choose what to do with. This can be sub-divided into enterprise cash flow and equity cash flow.
The calculation of enterprise cash flow excludes any financing costs, i.e. it is assessed before debt obligations are met.
Debt obligations are incorporated into the calculation of equity cash flow, i.e. equity cash flow is assessed after debt obligations are met, but before dividends are paid.
Operating cash flow (for the exam) will also exclude financing costs.

Question 52

On a company’s statement of financial position (balance sheet), there may be liabilities based on past events for which there is an obligation but the exact amount is yet to be established. How is this commonly referred?
AProvision BPast activity CEstimated expense DEstimated liability

Answer 52

Provision,

Such provisions may arise as a result of the company undergoing a restructuring, for example. Given the uncertainty surrounding the extent of such liabilities, companies are required to create a realistic and prudent estimate of the monetary amount of the obligation, once it is committed to taking a certain course of action.

Question 53

An investor is looking to switch a large portion of their portfolio from equity to bonds as they believe the markets are going to fall. Which of the following best explains the reason for their actions?
AThey are looking to make better use of diversification to achieve an uncorrelated portfolio BThey have been advised that their portfolio is too concentrated on equities CThey are looking to rebalance their portfolio as they are approaching retirement DThey wish to lock in the most possible capital growth before moving into a security that can give a more reliable income

Answer 53

They wish to lock in the most possible capital growth before moving into a security that can give a more reliable income,

Fixed-interest securities, such as government bonds, give a secure income and known redemption value at a fixed future date. Equities can be used to produce a potentially increasing dividend income and capital growth.

Question 54

Who are usually the direct issuers of Commercial Paper?

ASME BThe Government CThe Treasury DFinancial companies

Answer 54

Financial companies

Question 55

where do US t-bonds settle

Answer 55

fixed income clearing corporation (FICC)

Question 56

Company C wishes to issue and engages the help of Company A and Company B. Company A is responsible for 75% of the issuance and placing through to large companies and institutional investors. Company B issues to the other 25% and deals with smaller companies. Which BEST describes Company B’s role.
ALead manager BCo-lead manager CBroker DBookrunner

Answer 56

Co-lead manager ,

If the size of the issue is large enough there can be several lead managers, known as co-lead managers.

Question 57

Why might an investor be more interested in using net debt to equity ratio instead of total debt to equity?
ATo see if the company holds substantial cash and short term investments BTo determine if the company has been running for less than 3 years CThe company has an interest cover less than 5 DTo assess why the total debt to gearing ratio appears very low

Answer 57

To see if the company holds substantial cash and short term investments ,

Gearing ratios tend to look at the total debt compared to equity. Sometimes this ratio may be less useful because, as well as holding substantial amounts of debt, the company also holds substantial cash and short-term investments that could be used to repay the debt. So the company is not as risky as it might have seemed.

Question 58

Which of the following would NOT be considered an advantage of using a central counterparty?
AImproved prices BReduced initial margin payments COperational efficiency DReduced counterparty risk

Answer 58

Reduced initial margin payments,

The use of a central counterparty provides certain benefits to market participants, particularly:

• Reduced counterparty risk - the risk that the other side of the transaction will default is reduced because they are replaced by one of the CCPs, both of which are well capitalised and have insurance policies in place lessening the risk of default. This reduces the risk of systemic collapse of the financial system;
• Providing total anonymity - both sides of the trade do not discover who is the original counterparty.
• Reduced administration - all trades are settled with one of the two CCPs, rather than a variety of counterparties improving operational efficiency.
• Facilitating netting of transactions - because all the trades are with a CCP, receipts and payments for transactions in the same share that settle on the same day can be netted against each other.
• Improved prices - because more participants are willing to transact anonymously, it is argued that a CCP results in improvements in price.

Question 59

what is a capitalisation issue

Answer 59

an issue of new shares to existing shareholders in proportion to their existing shareholding

Question 60

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?
ADepositary receipt holder BEquity warrant holder CCumulative preference shareholder DFloating rate bond

Answer 60

Depositary receipt holder,

A depositary receipt is a certificate that represents ordinary shares in a company. The benefit of a higher dividend will be passed on to them. Warrants do not pay dividends and cumulative preference shares pay a fixed dividend. Floating rate bond are debt instruments and receive their payment irrespective of profits (unless default occurs).

Question 61

Which of the following would be considered the difference between commercial paper in the UK and commercial paper in the US?
AUS commercial paper is normally issued for 1 month and UK commercial paper is normally issued for 4 months BUS commercial paper issued at par and upon maturity will receive interest, whereas UK commercial paper is issued at discount and redeemed at par CUK commecial paper is registered and settles T+2, whereas US commercial paper is bearer and settles T+1 DUK commercial paper has a maturity up to 1 year, whereas US commercial paper has a maturity up to 270 days

Answer 61

UK commercial paper has a maturity up to 1 year, whereas US commercial paper has a maturity up to 270 days,

Commercial paper (CP) is a money market instrument, issued by a company. The money market is the term for the market involving cash deposits and short-term instruments that are issued with less than one year to their maturity. CP is the corporate equivalent of a government’s Treasury bill. CP is issued at a discount to its nominal value and can have a maturity of up to one year in Europe and 270 days in the US; however, it is common to find in both territories that CP will be issued for three months.

Question 62

Which of the following would be considered as passive bond strategy?
AAnomaly swapping BDuration Immunisation CRiding the yield curve DInter-market switch

Answer 62

Duration Immunisation ,

Duration-based immunisation involves constructing a bond portfolio with the same initial value as the present value of the liability it is designed to meet and the same duration as this liability. A portfolio that contains bonds that are closely aligned in this way is known as a bullet portfolio. Alternatively, a barbell strategy can be adopted. If a bullet portfolio holds bonds with durations as close as possible to ten years to match a liability with ten-year duration, a barbell strategy may be to hold bonds with a durations of five and 15 years. Barbell portfolios necessarily require more frequent rebalancing than bullet portfolios.

Question 63

Which instrument would be likely to provide the best indicator of long term interest rates?
ABond futures BBond ETF prices CCurrent interest rates DShare prices

Answer 63

Bond futures ,

Futures prices are generally regarded as being indicative of the market’s view. It is worth keeping in mind, of course, that while this represents market consensus, such consensus is not guaranteed to be correct!

Question 64

Which of the below would be a consideration when calculating earnings per share of a company?
IProfit after tax
IIProfit before tax
IIIShares excluding preference shares
IVShares including preference shares
AI and II BII and IV CIII and IV DI and III

Answer 64

I and III,

EPS = Profit available to ordinary shareholders / number of ordinary shares

Question 65

Which of the following would be considered an advantage, for the nominee, of individual registration within designated nominee accounts?
AThere are fewer additional costs for the custodian BIt helps with aspects of auditing and good control mechanisms, where identical trades are executed for different clients CWhere a company offers extra incentives these can always be received by the beneficiary DIt will not give rise to additional transactional costs imposed by the custodian for pooled accounts

Answer 65

It helps with aspects of auditing and good control mechanisms, where identical trades are executed for different clients ,

Designation or individual registration can help some aspects of auditing and it affords a good control mechanism where identical trades may have been executed for different clients (for example on the same date, for the same number of shares and for the same settlement consideration).

Question 66

Which of the following best defines the conversion ratio on a convertible bond?
AMarket price of bond per number of shares available BThe difference between the market price and the effective price on conversion CThe nominal value of the bond divided by the conversion price of the shares DThe percentage difference between the price paid for the shares and the market price of the shares

Answer 66

The nominal value of the bond divided by the conversion price of the shares,

Question 67

Which of the following corporate actions would never be made available to an American depositary receipt holder?
AThe right to vote in the annual general meeting BThe right to participate in the company’s profit CThe right buy new shares in proportion to existing shares DThe right to receive the new shares during a scrip issue

Answer 67

The right buy new shares in proportion to existing shares

An ADR holder can only receive the nil paid price as result of a rights issue. If they wish to participate in the rights issue to buy the new shares they would have to sell the ADRs and buy the new shares.

Question 68

When issuing equity a company will appoint a sponsor, who will provide all of the following services EXCEPT:
AAssessing the company’s suitability for listing BCo-ordinating the production of the prospectus CFacilitating the marketing of the share to interested parties DAssessing the best method of marketing the shares to investors

Answer 68

Facilitating the marketing of the share to interested parties,

Facilitating the marketing of shares is the responsibility of the corporate broker. Although these could be part of the same institution, the exam will treat them separately.

Question 69

Which of the following is true with regard to the dividend on a preference share?
AFixed and paid at the discretion of the board BFixed and paid irrespective of companies performance CVariable and paid at the discretion of the board DVariable and paid irrespective of companies performance

Answer 69

Fixed and paid at the discretion of the board ,

The dividend on a preference share is fixed (as a percentage of its nominal value), but in the event of a company performing poorly the directors can decide not to pay the preference share dividend. Note that preference share dividends should be paid in full before ordinary shareholders receive any dividend.

Question 70

Which of the below is a definition of a dealer member of an exchange?
AA member who trades for the firm’s own books BA member who trades on behalf of their clients CA member who deals directly with the issuer DA member who is able to deal for their own books as well as their clients

Answer 70

A member who trades for the firm’s own books ,

By definition a dealer member can only trade for themselves. 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.

Question 71

Which of the following best outlines the main role of a listing agent/nominated adviser after the company has been admitted for trading?
AOnly sponsors have continuing obligations BTo support trading in the company’s shares CProvide advice on exchange rules DTo assist in pricing and marketing in a flotation

Answer 71

Provide advice on exchange rules,

The listing agent/nomad must be available at all times to advise and guide the directors of its clients about their obligations and to ensure compliance with the exchange rules.
Supporting trading in the company’s shares and assisting in pricing and marketing in a flotation are the roles of the brokers.

Question 72

Which of the following offers a guaranteed yield?

ALinkers BEquity CGuaranteed bonds DUK gilts

Answer 72

UK gilts

Question 73

John is less than 30 years old and is in a good health. John’s personal pension is most likely to be predominently invested in?
AGilts BVolatile commodity funds CEmerging markets equities DCorporate bonds

Answer 73

Emerging markets equities ,

Given John’s age the best answer is equities, which would be considered to be medium risk, whereas gilts and corporate bonds will have a lower risk profile.
It is possible that John could hold some volatile commodity funds, but these would not be main asset type.

Question 74

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?
A3% B5% CGreater than 5% DShares held by the pension fund will always be considered in the free float

Answer 74

5%,

The free-float or a public float is usually defined as being all shares held by investors. Shares held by owners owning 5% of all shares (those could be institutional investors (such as pension funds), strategic shareholders, founders, executives, and other insiders’ holdings);

Question 75

An investor relinquishes their investment directly with an authorised corporate director. Which investment vehicle are they using?
AUnit trust BOEIC CInvestment Trust DSpecial purpose vehicle

Answer 75

OEIC ,

In both a unit trust and OEIC, the investor buys and sells directly with the fund manager. In an ICVC/OEIC, the fund manager is known as the authorised coporate director.

Question 76

How are shares held when using a corporate nominee account?
AShares of each investor is held separately BInvestor can choose how they wish for them to be held CNominee would be kept separate to the register DShares of all investors are pooled together

Answer 76

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.

Question 77

What is the purpose of a trading platform providing liquidity rebates?
ATo ensure best execution is provided to consumers at all times BTo encourage market makers to use their systems by offering them commission on trades CTo improve liquidity in illiquid shares by offering customers a discount on quoted prices DTo provide information on the implicit cost of liquidity (or illiquidity) in a share

Answer 77

To encourage market makers to use their systems by offering them commission on trades,

One area of competition among exchanges is to encourage market makers to use their platforms over others by providing liquidity rebates for each share that is sold to or purchased from each posted bid or offer. The market makers are paid a commission on all transactions that use their systems.

Question 78

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?
AIf the client was insistent and is placing execution only instructions BIf the client were experienced in buying UCITS funds CIf the client currently performed an approved role DIf the client were a sophisticated or high net worth individual

Answer 78

If the client were a sophisticated or high net worth individual,

UCISs cannot be promoted to retail investors unless they meet specific exemptions; for example they can be shown to be sophisticated or high net worth investors. Hedge funds (UCIS) are not authorised, they cannot be freely marketed. This combined with the requirement to invest substantial minimum amounts, means that hedge funds tend to be accessible only to institutional investors and high net worth individuals.

Question 79

What shows the expected change in a fixed income instrument’s price, given a specified change in interest rates?
AModified duration BImmunisation CThe yield curve DMacaulay duration

Answer 79

Modified duration,

The Macaulay duration calculates the weighted average time before a bondholder would receive the bond’s cash flows. Conversely, modified duration measures the price sensitivity of a bond when there is a change in the yield/interest rate to maturity.

Question 80

what is revenue expenditure

Answer 80

purchases that have an immediate impact on the income statement

Question 81

Any company traded on an exchange must, according to company legislation do which of the following?
AProduce interim financial statements BHold annual general meetings CMake all information available to directors available to shareholders DMake sure shareholder rights are upheld in merger situations

Answer 81

Hold annual general meetings ,

Company legislation details the requirements for companies generally, such as the requirement to prepare annual accounts, to have accounts audited and for Annual General Meetings. Of particular significance to the LSE are the Companies Act requirements to enable a company to be a plc, since one of the requirements for a company to be listed and traded on the exchange is that the company is a plc.

Question 82

When global depositary receipts are issued, whose name appears on the company’s register of owners?
ABearer holder BDepositary bank CThe issuing company DThe bank that issued the GDR

Answer 82

Depositary bank ,

This seems a tricky question as it may be possible that the bank issuing may be holding the shares themselves but is not always the case and therefore in line with the CISI book, the depositary bank is the best answer.

Question 83

A company performs a 2:1 bonus issue, which of the following is most likely?
AThe market capitalisation of the company will fall BThe share price will increase CThe share premium account will fall DThe earning per share will increase

Answer 83

The share premium account will fall

Question 84

Which of the following is ALWAYS true for participating preference shares?
AHave voting rights BCompany has a legal obligation to pay a dividend CCan participate in the profits of the company DCan convert into ordinary shares

Answer 84

Can participate in the profits of the company ,

Preference shares usually don’t have voting rights but can be evoked in some cases in relation to unpaid dividends. A company never has an obligation to pay a dividend and convertible preference shares have the conversion rights to ordinary shares. Participating preference shares may receive a bonus dividend if the company is highly profitable.

Question 85

An investor chooses to buy a bond and sell it before maturity. Which of the following poses a risk for them?
AReduction of the capital value. BDefault on coupon payments CPrice increases above the nominal value DPrice falls below the nominal value

Answer 85

Price falls below the nominal value,

The capital value of the bond remains the same and does not change. If the investor sells the bond, they would not be entitled to the coupons anyways. If the price falls below the nominal value they would lose as had they held the bond to maturity then they would have received the nominal value.

Question 86

Which one of the following statements about hybrid trading platforms e.g. SETSqx is false?
AUncrossing periods take place on five occasions each day BUncrossing periods are also known as periodic auctions CIt was introduced to help market participants to comply with MiFID DThe minimum number of market makers required for a stock is one

Answer 86

The minimum number of market makers required for a stock is one,

There is no required minimum number of market makers for SETSqx stocks.

Question 87

A share offer is made on the junior market of an exchange, which of these offers warrants the need to produce a prospectus?
AAn offer of £9m to the general public BAn offer of £6m to 101 qualified investors CAn offer of £5m to 50 qualified investors DOffers on the junior markets require an admission document rather than a prospectus

Answer 87

An offer of £9m to the general public,

A prospectus is not required for admission to junior markets unless it is a public offer (raising more than £5 million from 150 or more non-qualified investors in any EU member state).

Question 88

what is the capital value of a bond

Answer 88

nominal value

Question 89

A bond’s annual income is based on which of the following?

APrice of the bond BCapital value of the bond CInterest rates DInflation rates

Answer 89

Capital value of the bond

Question 90

Which of the below would not appear on a company’s financial statements?
AAverage net assets over an accounting period BCash the company generated over the accounting period CSummary of the trading activities of the company over the year DDisclosures in relation to contingent liabilities

Answer 90

Disclosures in relation to contingent liabilities,

The answers are describing a balanch sheet, cash flow statement and income statement. There may be other information that needs to be disclosed in the notes but would not appear in the financial statements itself.

Question 91

With regard to a unit trust, who retains the names of the unit holders?
AThe unit trust manager BThe beneficiaries CThe settlor DThe trustee

Answer 91

The trustee

Question 92

at least what percentage of the shares must be available for free float

Answer 92

25%

Question 93

Which of the following is required for a company seeking to be admitted to a premium market of an exchange?
AIndependently audited accounts covering at least three years. BA 15% free float CRegulator approval D1 year of working capital

Answer 93

Independently audited accounts covering at least three years,

The issuer must have published 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 £700,000 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 25% 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.

Question 94

An investor places a bid in a tender offer. Which of the below BEST explains their allocation of shares?
ATheir allocation will be on a pro rate basis across the board based on the total bids received BTheir allocation will be taken up at their bid price CThey will only be successful if their price is above the acceptance level DThey will receive all of the shares if their bid was on time

Answer 94

They will only be successful if their price is above the acceptance level ,

In a tender offer, you will only be successful if the bid price is above the acceptance level and if successful the price paid is the same for all.

Question 95

What does immobilisation mean in the context of Eurobonds?
AThey are held in depositaries BThey can only be settled through one CSD CThey can only be issued by a single bank DThey can not be sold in countries with exchange rate controls in place

Answer 95

They are held in depositaries

Question 96

Which of the following would be considered ‘revenue expenditure’?
APayments to a firm providing security services BCost of extending warehouse and storage area CPurchase of company-wide security systems DCost of purchasing new machinery

Answer 96

Payments to a firm providing security services

Question 97

How are Sterling Treasury Bills issued?

AAt a fixed price BBy tender CBought deal DNon competitive auction

Answer 97

By tender,

T Bills are issued through a competitive auction. Interested parties tender a price and if successful they pay the price they submitted.

Question 98

When wouldn’t you get the limit price on your order?
AIn the opening auction BThe uncrossing period CIt matches with a Fill or Kill order DIt matches with a best offer order

Answer 98

In the opening auction,

During the opening auction no matching takes place.

Question 99

If a predator pays more for a target than its net asset value, due to loyal customer base and innovation in the market, how will this be justified in financial statements?
AInvestments BGoodwill CDevelopment costs DPotential earnings

Answer 99

Goodwill ,

The excess would be referred to as goodwill on the balance sheet and goodwill is classified as an intangible asset.
The company will need to record an asset because otherwise the cash paid for the company will not match the assets recorded on the group balance sheet.

Question 100

Why might a hedge fund wish to use a prime broker?
AAll hedge funds have to use a prime broker as part of their business BThe prime broker provides a securities clearing facility CA more tailored and bespoke range of services is offered to them DThe prime broker offers acquisition advice to hedge funds

Answer 100

A more tailored and bespoke range of services is offered to them

Question 101

Which of the following would be considered a benefit of an investment trust over an authorised unit trust?
AThe ability for the investor to buy and sell gives greater liquidity BThe fund manager can have a longer time horizon in terms of investment CThe value of the share will be its net asset value DTransparency of pricing

Answer 101

The fund manager can have a longer time horizon in terms of investment,

Investment Trusts as closed-ended vehicles, the number of shares in issue in an investment trust is not affected by the day-to-day purchases and sales by investors, which allow the managers to take a long-term view of the investments of the trust. With an open-ended scheme, such as an OEIC, if there are more sales of units or shares by investors than purchases, the number of units reduces and the fund must pay out cash. As a result, the managers may need to sell investments, even though it may not be the best time to do so from a strategic and long-term viewpoint.

Question 102

When referring to index-linked gilts, which of the following is true?
AThe nominal value and the coupon are linked to the consumer price index BThe coupon only is linked to retail prices CThe redemption value only is linked to retail prices DThe redemption value and the coupon are linked to retail prices

Answer 102

The redemption value and the coupon are linked to retail prices,

The coupon is adjusted for inflation throughout the life of the bond, but the capital is only adjusted on redemption.

Question 103

The interaction between the cash price of bonds and the futures prices is a dynamic two-way process. This is an example of:
Asystematic risk Barbitrage trading Cdiversification Didiosyncratic risk

Answer 103

arbitrage trading,

The interaction between the cash price of bonds and the futures prices is a dynamic two-way process in which prices are constantly being adjusted through arbitrage and through the activities of hedgers as well as speculators.

Question 104

What is the profitability ratio?
ATotal debt / Equity funds BProfit before interest and tax / Capital employed CEarnings per share / dividend per share DDividend per share / Market price per share

Answer 104

Profit before interest and tax / Capital employed

Question 105

An investor is looking to buy shares on a ‘special cum-div’ basis. What is the latest day on which he/she can do this?
A2 days before the ex-date B3 days before the record date CThe day before the payment date D3 days before the payment date

Answer 105

The day before the payment date,

Shares can be bought on a special cum-div basis up to the day before the dividend payment date.

Question 106

What is the maximum time that an equity can be bought, where an arrangement is agreed that the seller does receive the dividend?
A24 hours B96 hours C5 days D10 days

Answer 106

10 days,

The SPECIAL EX DATE is the first date in the cum-div period from which SPECIAL EX transactions can be agreed. A special ex-bargain is a transaction carried out in the cum-div period, but contracted ex-div. The buyer will not receive the next dividend. The special ex-div date is ten business days before the ex-div date itself.

Question 107

In relation to an IPO, which of the below will be involved in completing the due diligence in the production of the company’s prospectus?
ALegal advisors only BSponsor and reporting accountants CLegal advisor and sponsor only DLegal advisor and reporting accountants

Answer 107

Legal advisor and reporting accountants,

Sponsor is responsible for the co-ordination and production of the prospectus. The reporting accountants will attest to the validity of the financial information provided in the prospectus. The legal advisers will make sure that all relevant matters are covered in the prospectus and the statements made are justified. The combination of the reporting accountants and the legal
advisers is said to be providing due diligence for the prospectus - making sure the document is
accurate and complies with the regulations.

Question 108

What is the minimum number of market makers for any share trading on an exchange’s order driven system?
A0 B1 C2 D3

Answer 108

0!!!!

Question 109

Which of the following bonds pay an annual coupon?

AGilts BJapanese Government Bonds COATs DT-Bonds

Answer 109

OATs,

French government bonds which pay annual coupons

Question 110

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?
ANominated advisor BBroker CAdvisor and accountants DBroker and advisor

Answer 110

Broker and advisor,

AIM rules stipulate that the nominated advisor and the corporate broker continue their relationship with the company for the duration of the listing.

Question 111

A market analyst produces a report on market depth and liquidity. What would be the sources of this report?
AExchanges and trade reports BApproved reporting mechanisms and clearing houses CTransaction reports and alternative trading systems DInternal desk research and central security depositories

Answer 111

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.

Question 112

A company when bringing securities to the primary market are not required to fulfil publishing requirements in which of the following situation?
AOffer for sale BOffer for subscription CSelective marketing DRights issue

Answer 112

Selective marketing,

When doing a financial promotion a prospectus is not required if you are selling to professional clients, this is most commonly known as ‘placing’ it is a selective marketing technique.

Question 113

ILG

Answer 113

index linked gilt

Question 114

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?
AETF BUnit Trust COEIC DREIT

Answer 114

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.

Question 115

Why is it important that ‘request for quote’ systems run alongside the dealer-to-customer market?
ATo cater for large volumes BTo achieve better prices CTo avoid volatility DTo compensate for inflation risk

Answer 115

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.

Question 116

What is a reverse repo?
ATransactions involving cash and bonds being deposited with an independent custodian BA transaction where one party sells stock to the other, agreeing at the same time to repurchase the equivalent securities at an agreed price and on an agreed date in the future CA transaction where one party sells stock to the other, agreeing at the same time to repurchase the equivalent securities at an agreed price and at no fixed time in the future DA transaction where one party purchases stock from the other, agreeing at the same time to resell the equivalent securities at an agreed price and on an agreed date in the future

Answer 116

A transaction where one party purchases stock from the other, agreeing at the same time to resell the equivalent securities at an agreed price and on an agreed date in the future

Question 117

Where a bond is trading below par, which of the following statements is TRUE with regard to redemption value and yields?
AThere would be capital gain: the flat yield will be less than the gross redemption yield BThere would be capital loss: the flat yield will be less than the gross redemption yield CThere would be capital gain: the flat yield will be greater than the gross redemption yield DThere would be capital loss: the flat yield will be greater than the gross redemption yield

Answer 117

there would be capital gain: the flat yield will be less than the gross redemption yield,

Key to remember Price > Nominal then Coupon > Flat yield > Gross redemption yield and vice versa.

Question 118

Which of the following would NOT be an intangible non-current asset?
ATrademark BCapitalised development costs CTrade creditors DGoodwill

Answer 118

Trade creditors,

Intangible non-current assets are those assets that, although without physical substance, can be separately identified and are capable of being sold. Ownership of an intangible non-current asset confers rights known as intellectual property. These rights give a company a competitive advantage over its peers and commonly include brand names, patents, trademarks, capitalised development costs and purchased goodwill.

Question 119

The types of order accepted on order driven systems are:
Aat best, limit, execute and eliminate and iceberg orders only Bmarket orders and orders which will execute against a matching price or better immediately Corders to sell and buy are ranked by price then time priority Dorders that will either execute or cancel immediately, or will go to the buyers and sellers queue

Answer 119

orders that will either execute or cancel immediately, or will go to the buyers and sellers queue,

Market orders, execute and eliminate, and fill or kill orders will execute immediately or will be cancelled. Limit orders and iceberg orders not executed immediately will go to the order book and placed in the Bid/Offer queue.