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Unit 2 Securities Exam > unit 2 general qs > Flashcards

unit 2 general qs Flashcards

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1
Q

What unique characteristics do medium term notes have

A

coupon rate and maturity set according to market demand

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2
Q

2-5 year german bond

A

bobl

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3
Q

2-50 year french bond

A

OAT

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4
Q

short term german bond 1.75-2.25 years

A

schatz

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5
Q

long term german bond 10years +

A

Bund

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6
Q

US government agencies that issue mortgage-backed securities.

A

Government National Mortgage Association (Ginnie Mae)
Federal Home Loan Mortgage Corporation (Freddie Mac)
Federal National Mortgage Association (Fannie Mae)
Student Loan Marketing Association (Sallie Mae)

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7
Q

lowest rating of an investment grade bond

A

BBB- or for moodys Baa

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8
Q

How are eurbonds quoted (clean/dirty) and how are they settled (clean/dirty)

A

Clean & Dirty

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9
Q

What are credit enhancements

A

Tools used by an issuer to enable bonds to be more highly-rated

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10
Q

When do US bonds settle

A

t+1

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11
Q

when do uk bonds settle

A

t+1

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12
Q

When do french bonds settle

A

t+2

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13
Q

when do german bonds settle

A

t+2

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14
Q

When are coupons of US bonds paid

A

Semi annually

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15
Q

when a uk/us government bond is stripped how do the coupons change

A

they are zero-coupon bonds

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16
Q

are stripped government bonds tradeable

A

yes

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17
Q

Which countries pay an annual bond

A

France and Germany

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18
Q

Which countries pay a semi annual bond

A

Japanese (JGB), UK and USA

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19
Q

Method of pricing used on US treasury bonds

A

Tender

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20
Q

Method of pricing used for UK bonds

A

Competitive

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21
Q

Life on Japanese super long bonds

A

20 years

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22
Q

Who can strip UK gilts

A

GEMMS, Treasury, Bank of England

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23
Q

What inflation index are index-linked gilts linked to

A

RPI

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24
Q

How frequently are ten year treasury notes issues

A. Annually
B. Semi Annually
C. Quarterly
D. Monthly

A

C. Quarterly

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25
Q

Which of the following is true regarding index-linked gilts?

A
Only the coupon is index-linked

B
Only the redemption value is index-linked

C
Both the coupon and the redemption value are index-linked

D
Neither the coupon or the redemption value are index-linked

A

Correct Answer: C

Both the coupon and the redemption value are index-linked to movements in the retail price index.

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26
Q

Medium-term notes generally have a life to maturity of:

A
Three-five years

B
Two-seven years

C
Seven-15 years

D
Two-10 years

A

Explanation - Correct Answer: D

Bills = < two years. Notes = two-10 years. Bonds = >10 years.

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27
Q

Where a bond issuer has set aside a certain amount each year to buy back a certain number of bonds which are deemed callable they would have set up a:

A

Sinking Fund

A sinking fund involves the issuer setting aside a certain amount each year. A sinking fund approach may be combined with a bond issue that is callable. A callable bond is one where the issuer has the right, at specified points during the bond’s life, to redeem some, or all, of the bonds at a pre-agreed amount, often at par value. Obviously, a call provision will give the issuer the ability to redeem a bond early if it is relatively expensive.

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28
Q

What is shelf registration and what type of bonds benefit from it?

A

Medium Term Notes

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

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29
Q

Can US and UK T-Bonds be issued as zero coupon bonds?

A

No.

They are issued with a coupon, although can become zero coupons based when stripped

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30
Q

Modified duration is highest for what type of bonds

A
  • Low coupons
  • Long maturity
  • Low yields
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31
Q

2 Key Characteristics of Property Market

A

Property is generally indivisible

Availability of land can be restricted by legislation

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32
Q

Which of the following statements is TRUE of supply and demand in the property market?

A
Demand and supply are relatively inelastic

B
Demand is relatively inelastic

C
Supply is relatively elastic

D
Supply is relatively inelastic

A

Explanation - Correct Answer: D
The supply of property is relatively inelastic. This means it can’t easily change in line with increasing demand. This is because land is finite and there are a lot regulations, including planning controls.

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33
Q

Does the property market operate on a centralised or decentralised basis

A

decentralised - property is not all traded in one place and subject to one set of supply and demand forces.

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34
Q

Regulator of Eurobonds are?

A

International Capital Markets Association (ICMA).

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35
Q

Characteristics of UK Treasury Bills

With regards to coupon, term, price

A

NO Coupon, Discount to par, 3months to 6 months

The UK Debt Management Office issues T-bills via a weekly COMPETITIVE tender. As bills do NOT pay a coupon, they are always issued and traded at a discount to par, hence the term ‘discounted instruments’. T-bills are usually issued with a three or six month-life. However, the most common is the three-month bill.

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36
Q

Are ADR’s freely-transferrable securities?

A

An ADR is an American form document An American form document is transferable once it has been countersigned by a ‘good-marking name’ such as the DTC.

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37
Q

What is a cross rate?

A

The cross rate is a non-US dollar exchange rate between two countries.

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38
Q

Real estate investment trusts (REITs) must distribute what percentage of their profits as dividends?

A

REITs benefit from tax advantages within the fund. Specifically they do not pay tax on any income or capital growth within the portfolio of assets. As a condition of this tax advantage a REIT must distribute at least 90% of its income to investors.

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39
Q

Difference between a call option and warrant

A

The exercise of a warrant leads to new shares being delivered to the holder, whereas the exercise of a call option leads to existing shares being delivered.

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40
Q

Where one country fixes its currency against another, this is referred to as?

A

Fixed Exchange Rate

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41
Q

Who typically issues covered warrants

A

Investment Banks

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42
Q

How is the interest on eurobonds paid

A

Interest on eurobonds are paid gross

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43
Q

Benefit of using Direct Commerical Paper in regards to costs?

A

To reduce the impact of costs through elimination of broker’s charges

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44
Q

What do Dealer Papers facilitate?

A

Dealer paper uses intermediaries, which facilitate secondary market trading

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45
Q

What is prime brokerage?

A

a collection of services provided by investment banks to their hedge fund clients.

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46
Q

What does the financial term rehypothecation refer to?

A

A prime broker might pledge hypothecated client-owned securities as collateral for a brokerage’s bank loan

prime broker may hold collateral relating to a hedge fund’s portfolio or a charge over such assets; rehypothecation means that the prime broker might also require a right to re-charge the customer’s assets which are subject to the security.

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47
Q

Who are Investment Trusts

A

Investment trusts are companies that are traded on the LSE. As such, they are regulated by the Companies Act and the LSE rules

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48
Q

How are open-ended invesment companies priced?

A

They are priced based on their NAV (net asset value), so based on the underlying value of their shares.

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49
Q

With regard to an open-ended investment company, where would you acquire shares?

A

Authorised corporate director

There is no secondary market with an OEIC, and if you wish to buy shares, you can only deal with the authorised corporate director.

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50
Q

Prime Brokerage Services Are:

A 
Securities lending and borrowing
Leveraged trade execution
Cash management
Core settlement
Custody
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51
Q

What are the B2B Platforms

A

BrokerTec Espeed MTS Cash

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52
Q

What are the B2C platforms

A

MTS bondvision and TradeWeb

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53
Q

If a client wants a specific type of issuance, which type of bond may be issued

A

medium term notes using a reverse enquiry

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54
Q

What is an exchangeable bond?

A

An exchangeable bond is like a convertible bond; however, instead of receiving shares in the issuing company, you receive other shares instead.

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55
Q

In Which country are their local bonds also known as municipal bonds?

A

USA

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56
Q

Prime purpose of an introduction in listing

A

An introduction’s prime purpose is to increase the marketability of company securities. The other methods mentioned in the question are primarily concerned with raising capital.

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57
Q

What is a capitalisation issue?

A

A capitalisation issue is another term for a bonus/scrip issue where the company issues new shares to existing shareholders free of charge.

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58
Q

What is a pre-emptive rights issue?

A

Every existing shareholder will receive a provisional allotment letter
indicating the new shares they have the right to buy.

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59
Q

What is the minimum bid that can be made on UK gilts nominal values?

A

£1,000,000

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60
Q

Stages of a bond issuance

A

Pitching

Indicative bid

Mandate announcement

Credit rating

Roadshow

Listing

Syndication

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61
Q

In an offer for sale to whom does the company sell its shares?

A
Directly to the issuing house

B
Directly to the general public

C
To the general public through an issuing house which acts as agent taking fees only

D
To qualified investors only through an issuing house which acts as principal

A

Explanation - Correct Answer: A
The company seeking to sell the shares in an offer for sale will approach an issuing house (usually an investment bank) that specialises in approaching potential shareholders and preparing the necessary documentation. The issuing company sells its shares to the issuing house (usually an investment bank), which then invites applications from the public at a slightly higher price than the issuing house has paid and based on a detailed prospectus, known as the offer document.

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62
Q

A listed company must adhere to which of the following?

A
Institute of Chartered Accountants

B
IFRS

C
A code of corporate governance

D
Rulebook for sponsors

A

Explanation - Correct Answer: B
A listed company adheres to International Financial Reporting Standards. The advisers, not the company, use the rulebook. There is a company rulebook.
A company does not need to adhere to the corporate governance requirements, they maybe required to ‘comply or explain’.

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63
Q

What is a bought deal?

A

the lead manager of an issuer buys a whole issue at a predetermined price and then places the bonds with its own clients.

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64
Q

What is a fixed price re-offer?

A

the lead manager of an issue distributes bonds to the management group who then place the bonds on with their clients. They are not permitted to place the bonds at a price below the fixed price agreed in advance until the syndicate is broken.

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65
Q

A company has successfully released shares into the market through an initial public offer. The members of the board of directors have personal debts which they wish to pay off. Which of the following BEST describes the method used to help achieve their objective?

A
A follow-on bonus issue

B
A free-float issue

C
A dilutive secondary issue

D
A non-dilutive secondary issue

A

Explanation - Correct Answer: D
As it is the directors of the company that have the debt, their best course of action is to release their existing shares to the free float. No new shares are created and the company will not benefit from the sale of these shares.

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66
Q

What is a principal trade

A

When the firm is an actual party to the transaction

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67
Q

What type of index is the FTSE 100?

A
Unweighted arithmetic index of stock prices

B
Unweighted geometric index of stock prices

C
Weighted geometric index of stock prices

D
Weighted arithmetic index of stock prices

A

Explanation - Correct Answer: D

It is weighted according to each constituent’s market capitalisation.

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68
Q

Business-to-customer bond dealing platforms

A

MTS, BondVision and TradeWeb

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69
Q

Business-to-business / Dealer-to-dealer bond trading platforms

A

Brokertec, eSpeed and MTS Cash

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70
Q

Offer price is also known as?

A

Ask price

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71
Q

Bid price is also be thought of as?

A

The price someone is willing to purchase at

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72
Q

What type of execution occurs on auction call periods?

A

No execution

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73
Q

Which one of the following services offered by a prime broker would be used by a hedge fund to cover a short position?

A
Rehypothecation

B
Leveraged trade execution

C
Securities lending and borrowing

D
Core settlement

A

Explanation - Correct Answer: C
Securities lending and borrowing is used to cover short positions by hedge funds in long/short strategy.

Leveraged trade execution is where the prime broker lends cash to the fund to finance trades.

Rehypothecation is a process whereby the prime broker reuses collateral posted by the hedge fund for their own purposes.

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74
Q

Do Eurobond quoted prices include accrued interest?

A

No, they are always quoted as clean prices

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75
Q

On an exchange’s order-driven platform, during which of the following periods is a member firm not permitted to delete orders?

A
Continuous order book trading

B
Opening auction period

C
Housekeeping period

D
Closing algorithm

A

Explanation - Correct Answer: D

A member cannot enter, amend or delete orders during the running of the uncrossing algorithm.

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76
Q

Which stock index is regarded as a ‘broad measure’ of performance?

A

Nikkei 225

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77
Q

Which stock index is regarded as a ‘narrow measure’ of performance?

A

CAC 40

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78
Q

Which stock index is regarded as a ‘narrow measure’ of performance, due to 30 share requirement?

A

DJIA (Dow Jones Industrial Average)

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79
Q

Which stock index in the asian market is regarded as a ‘broad measure’ of performance?

A

Hang Seng

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80
Q

Algorithmic trading (inc. high frequency trading) has been criticised for?

A

systemic risks or flash crashes that it can create.

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81
Q

A rights offer where shareholders can not sell their rights is called?

A

Open offer

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82
Q

When would you use a share premium account

A

An acceptable use of the share premium account is to account for IPO costs and cover the nominal value of new shares issed via a capitalisation issue (bonus issue).

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83
Q

When are minority interests recorded?

A

A minority interest is recorded when a subsidiary is not 100% owned by the parent company.

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84
Q

Which of the following is the key difference between the current ratio and the quick ratio?

A
Debt

B
Fixed assets

C
Inventory

A

Explanation - Correct Answer: C
Current ratio = Current assets ÷ Current liabilities
and
Quick ratio = (Current assets - Inventories) ÷ Current liabilities

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85
Q

What is a prospective p/e ratio?

A

Prospective P/E ratio is based on the current financial year’s forecast earnings. This is also known as the forward or estimated P/E ratio.

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86
Q

What is an uncovered dividend?

A

An uncovered dividend is a dividend that cannot be paid from the current year’s profits. The company is therefore paying the dividend out of the retained earnings.

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87
Q

What is policy switching?

A

Selling shorter dated, low-duration bonds and buying longer-dated, high-duration bonds in expectation of a cut in interest rates

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88
Q

What is anomaly switching?

A

Anomaly switching involves moving between two bonds similar in all respects apart from the yield and price on which each trades. This pricing anomaly is exploited by switching away from the more to the less highly priced bond.

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89
Q

What is an inter market spread switch?

A

Moving between government bonds and corporate bonds when it is believed that the difference in the yield doesn’t reflect the risk premium correctly

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90
Q

Example of low risk investment

A

uk government bonds

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91
Q

Example of medium risk investment

A

Equities/portfolio of equities

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92
Q

Example of high risk investment

A

Derivatives or other leveraged securities

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93
Q

What is immunisation

A

Its the process of buying instruments that have a duration that matches the liability in question.

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94
Q

What is novation about

A

Managing credit risk exposure

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95
Q

What are the benefits of a CCP

A

Reduced counterparty risk, providing total anonymity, reduced administration, faciliating netting and improved pricing due to anonymity

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96
Q

What are two price weighted indicies

A

DIJA, Nikkei 225

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97
Q

Dow Jones Divisor formula is?

A

Price/Divisor = Change

If less than 1 then the index is larger than the sum of the prices of the components

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98
Q

What type of index is the FTSE 100

A

Weighted ARITHEMETIC NOT GEOMETRIC

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99
Q

What happens is a listing authority suspends a security>

A

It is removed from the order book

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100
Q

What is the uncrossing price

A

The price is calculated as the price at which the max volume of shares can be uncrossed

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101
Q

A fixed interest market maker must trade with whom once they have displayed two-way prices on a dealing system?

A

Customers

102
Q

What is the purpose of the LSE CCP

A

To reduce default risk through margin

103
Q

A limit order will never execute at its limit price during the

A

Opening auction period as no automatic execution

104
Q

Which Market does the MSCI World Index cover

A

Global developed

105
Q

In Regards to gilt trading, who are allowed to deal in principal?

A

Broker-dealers and GEMMs

106
Q

What is the best offer price in an electronic order book?

A

The lowest priced sell order

107
Q

What is the best bid price in an order book

A

The highest priced buy order

108
Q

What is the minimum number of market makers a stock may have on a hybrid system of an exchange

A

0

109
Q

What is the job of Continuos linked systems (CLS)

A

To prevent Herstatt risk in FX Trading

110
Q

How should an international bank avoid settlement risk on a fx transaction

A

PvP

111
Q

Straight Line method formula

A

Annual Depreciation = (original cost - expected residual value)/expected useful life

112
Q

What is the settlement time for German equity trades settling through Clearstream?

A

German equities settle on a T+2 basis

113
Q

What would be the primary consideration of a company choosing a market on which to float?

A

High liquidity to enable price discovery

A company would primarily look at liquidity. A company’s aim in floating their company is to generate capital. The more liquid the market, the more likely the company is to raise capital.

114
Q

Which of the following statements does not apply to both limit orders and execute and eliminate orders?

A
Specify a volume

B
Set a ‘no worse than’ price

C
Participate in the opening auction

D
May be entered during continuous trading

A

Explanation - Correct Answer: C

Only limit and market orders are available for input during the opening auction.

115
Q

When assets have been rehypothecated, to whom do they then belong?

A
Prime broker

B
Customer

C
Hedge fund

D
Mortgage company

A

Explanation - Correct Answer: A
Rehypothecation is where the hedge fund hands over-hypothecated assets to the prime broker so that he can use them as collateral for a further finance.
Effectively the assets have been hypothecated twice - rehypothecated.

116
Q

EPS Formula

A

EPS= Profit available to ordinary shareholders / no of ordinary shares

Profit available to ordinary shareholders = Profit after tax - preference dividends - Minority interest

117
Q

P/E Ratio

A

P/E= Price per share/ EPS

A high ratio indicates high growth prospects and is highly rated

118
Q

EV/EBITDA

A

It gives an idea of how highly a company is valued and allows comparability regardless of capital structure

119
Q

Dividend Yield Formula

A

Gross Div Yield= Div per share/ Market price per sharex100

A low dividend yield may indicate high future growth or a company going bust

120
Q

Dividend cover formula and interpretation?

A

Gross div cover= eps/ div per share
It gives investors an idea how likely it is to maintain the current level of dividend, the higher the cover, the more likely a company is to sustain that level of dividend

121
Q

Gearing ratio

A

Debt/Equity Ratio = Interest bearing debt/ Equity shareholders fundsx 100

Interest bearing debt includes pref shares and overdrafts

It can be interpreted as the risk to shareholder dividends as divs are discretionary whereas the interest on debt is obligatory

122
Q

Current ratio and Quick Ratio/Acid Test formulas?

A

Current ratio = Current assets/Current liabilities

Quick Ratio = (Current assets - inventory)/ Current liabilities

123
Q

Return on Capital employed / ROA formula

A

Operating Profits/Capital employed x 100

Capital employed = total assets - current liabilities = equity + non current assets

124
Q

What is a special ex-bargain?

A

A special ex-bargain allows the investor to perform a trade in the cum-dividend period (where the buyer is entitled to the dividend), but strip the dividend from the share making it ex-dividend (out of dividend). Essentially, the seller keeps the rights to the next dividend and the buyer, having given-up this right, can buy the share more cheaply.

125
Q

Return on Equity

A

ROE = Net income/ Shareholders equity x 100

126
Q

Profit Margin formula

A

Profit margin = profit/revenues
This is the % of revenues a company converts to profit after considering the costs of sales

OP Profit margin is the % of revenues a company converts to profit after considering costs of sales and other op cost

127
Q

In a stock borrowing and lending agreement which of the following is borrower not obligated to pass back to the lender?

A
Cash dividend

B
Rights issues

C
Voting rights

D
Scrip dividends

A

Explanation - Correct Answer: C
If the lender wants to exercise its right to vote, they should recall the stock in good time so that a proxy voting form can be completed and returned to the registrar by the required deadline. Issues involved in other corporate actions such as capitalisation issues and the consequences arising from any corporate action by the issuer of a security, such as a rights issue, when that security has been lent to another would, prima facie, be to the benefit/cost of the borrower. Under the terms of the loan, it is customary that these costs/benefits flow back to the lender, and the exact manner in which this is implemented should be reflected in the securities lending agreement.

128
Q

The measure of income return provided by an equity investment is known as which ratio

A

Dividend Yield

129
Q

Formula for conversion premium

A

Warrant price + exercise price - strike price

130
Q

What is the system for reporting Eurobond trades

A

TRAX within 30 minutes of publication and by 10pm on the day of the trade

131
Q

Flat Yield Formula

A

FY = Gross annual coupon / market price x 100

132
Q

What rate is a Non-deliverable forward settled at?

A

In a non-deliverable forward, the exchange rate is set for some date in the future, but at that date the quoted currency is not exchanged. Instead, the rate is compared against the PREVAILING SPOT RATE . The profit or loss is calculated as if a reverse transaction had been completed. This is the amount that is settled.

133
Q

What is the elasticity of supply in the property market?

A

It is relatively inelastic as finite lands and heavy regulations.

134
Q

When are share premium accounts used?

A

to account for IPO costs and cover the nominal value of new shares issed via a capitalisation issue (bonus issue).

135
Q

What have longer leases residential or commercial properties

A

Commercial properties are typically longer

136
Q 
What is not deducted prior to calculating EPS 
Interest payable on bonds 
Preference dividends
 Equity dividends 
 Cost of goods sold
A

Equity dividends

137
Q

In what type of market would derivatives trading be in, wholesale or retail

A

Wholesale/professional

138
Q

What is a high water mark

A

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.

139
Q

define GRY

A

The annualised total return for a bond held to maturity

140
Q

What type of issue improves liquidity but not reduce the nominal value of the shares

A

Scrap

141
Q

How does a seller have confidence in DVP

A

Both sides are settling concurretly

142
Q

What are the returns like on money market instruments

A

Low risk with variable returns

143
Q

What is an exchangeable bond

A

A bond that pays a coupon and has a set redemption date. It gives the holder the ability to exchange debt for a set number of shares of another company shares already held by the issuer

144
Q

What is the Repo Rate

A

This is the implied interest paid for borrowing money

Repos are an alternative way to borrow money and they settle at t+0 so they are quick

145
Q

What is the meaning of a on the run bond

A

The most recently issued treasury bond

146
Q

Who are usually the direct issuers of commercial paper

A

Financial companies

147
Q

Which of the following is most likely to offer a crossing network or matching engine for execution of securities trading?

A

Investment firms

148
Q

What certificate shares in a company

A

Depositary receipt holder

149
Q

What do US T bonds settle through

A

US T-Bonds settle through the Fixed Income Clearing Corporation (FICC)

150
Q

Describe key points of a JGB

A

JGBs - Valued in decimals, paying a semi-annual coupon, with an actual over 365 day-count convention and can be either registered or bearer documents

151
Q

The conversion ratio in relation to a corporate bond describes the:

A

Number of shares the bond can convert into

152
Q

Describe the features and benefits of a putable bond

A

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

153
Q

Which of the following best defines the conversion ratio on a convertible bond?

A

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

154
Q

What is duration matching/Immunisation

A

Matching the duration of the bond to the liability

155
Q

What is cash matched/ dedicated portfolios

A

Matching cash flows of the bond to the liability

156
Q

What is policy switching

A

Exploiting market shifts caused by e.g interest rates

157
Q

What is anomaly switching

A

Exploiting mispricing in the bond market

158
Q

Inter market switching definition?

A

Trading on the spread between a bond and its benchmark

159
Q

Riding the yield curve?

A

Buying a longer term bond than required and leaving before maturity

160
Q

the accounting equation can be written as A=E+L and also as….?

A

Non current assets + Current assets = Capital + Reserves + Liabilities

161
Q

Capital reserves description

A

Capital reserves - capital reserves include revaluation reserves and the share premium account. The revaluation reserve arises from the upward revaluation of non-current assets, and the share premium reserve arises when the company issues shares at a price above their nominal value. Capital reserves are not distributable to the company’s shareholders in the form of dividends, as they form part of the company’s capital base, although they can be converted into a bonus issue of ordinary shares

162
Q

What is the conversion ratio

A

Nominal Value of Bond / Conversion price of shares

163
Q

What is a bond ‘on the run’

A

Most recently issued bonds by issuer

164
Q

What are covered bonds?

A

These are asset backed bonds in instances where no SPV is created.

165
Q

What is the purpose of a trading platform providing liquidity rebates?

A

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

166
Q

What is a tender offer

A

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.

167
Q

What is the difference between guaranteed bonds, covered bonds and fixed charge

A

Fixed charge debt provides holders with the legal right to particular company asset (e.g. land, buildings etc.) in the event of a liquidation. Both floating and covered bonds are backed by a pool of assets. Guaranteed debt is when a guarantee is provided by someone other than the issuer. The guarantor is typically the parent company, or another company in the same group

168
Q

What is a dealer member

A

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

169
Q

What trades on a ‘request for quote’ system?

A

A ‘request for quote’ (RFQ) system is where clients can request a price for certain types of financial instruments.
High yield bonds, bonds from developing markets and asset-backed securities tend to trade on RFQ systems.

170
Q

How should price sensitive information such as announcement of a new project be disclosed

A

Through a PIP

171
Q

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

A

A bond’s income (coupon) is expressed as a percentage of the nominal value which represents the capital value of the bond.

172
Q

What is the capital value of a bond?

A

This is the nominal value, it does not change

173
Q

Which of the following would account for increased volatility in the foreign exchange markets on the first Friday of every month?

A

Issuance of the Non-Farms Payroll

174
Q

Reason for an introduction excluding marketing

A

An introduction is used by a company that does not need to raise extra capital through share issues, but wishes to gain the extra liquidity in its shares that a listing provides. This might be a company that is already listed on another, overseas stock exchange, a new company formed from two previously listed companies that have merged, or a demutualised organisation.

175
Q

A share offer is made on the junior market of an exchange, which of these offers warrants the need to produce a prospectus?

A

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)

176
Q

If you decide to not redeem a convertible bond what happens?

A

The holder receives the redemption value of the bond

177
Q

Company legislation for companies on exchanges include?

A

prepare annual accounts,
to have accounts audited
Annual General Meetings.

178
Q

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

A

Cross rates enable effective rates to be calculated where the currencies concerned are not quoted directly against each other

179
Q

What is the role of a nominated adviser

A

The nominated adviser (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 nominated brokers

180
Q

What trades on a ‘request for quote’ system?

A

Low liquidity, high volatile bonds.

High yield bonds, bonds from developing markets and asset-backed securities tend to trade on RFQ systems.

181
Q

Difference between fixed charge bonds, floating charge bonds, covered bonds and guaranteed bonds?

A

Fixed charge: Fixed charge debt provides holders with the legal right to particular company asset (e.g. land, buildings etc.) in the event of a liquidation

Floating charge bond: Both floating and covered bonds are backed by a pool of assets - SPV Based

Covered bond: Both floating and covered bonds are backed by a pool of assets - Bank based, non-SPV

Guaranteed bond: Guaranteed debt is when a guarantee is provided by someone other than the issuer. The guarantor is typically the parent company, or another company in the same group

182
Q

Characteristics of a closed ended investment trust UNIQUE to OEICs

A
  • invest in unquoted private companies as well as quoted companies
  • provide venture capital to new companies or companies requiring new funds for expansion.
  • borrow money to help them achieve their objectives
183
Q

Characteristics of authorized OEICs?

A

Authorised open-ended collective schemes’ powers to borrow are more limited.

The ability to borrow allows an investment trust to leverage returns for the investor. Such gearing also increases the volatility of returns.

184
Q

Characteristics of both OEIC and Closed ended investment trusts?

A

Both funds can offer bid/offer pricing, both can invest in quoted companies

185
Q

Prospectus warrants required on junior market (AIM) in what case?

A

raising more than £5 million from 150 or more non-qualified investors in any EU member state

186
Q

Real interest rate formula?

A

Real interest rate = [(1 + nominal interest rate) / (1 + inflation rate)] - 1.

Therefore if inflation is rising, an investor will need to earn a higher nominal rate in order to maintain a ‘real’ return.

187
Q

What economic data releases may impact and create fx volatility?

A

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

Triple witching takes place 4 times a year

Fed Funds target rates take place 8 times a year

PCEPI is monthly

188
Q

When listed on a junior market such as LSE AIM, who must stay with a company during the duration of the listing

A

Broker and Advisor

189
Q

A market analyst produces a report on market depth and liquidity. What would be the sources of this report?

A

Exchanges and trade reports

190
Q

Organisation X is acting as a dealer on a stock exchange. As a consequence, they are most likely to be operating as:

A

A gilt market maker
Explanation
The term dealer is used when a financial institution is trading in principal with its clients, typically the institution is also known as a market maker, even though also known as an investment bank the answer given would be the better description.

Acting as a dealer is often described as dealing as principal, because the dealer is taking a principal position by either buying or selling the securities. The dealer on an exchange can be referred to as acting as a market maker.

191
Q

Manufactured Dividend

A

Payments passed back to the lenders of shares to compensate them for any missed dividends issued by the company

192
Q

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?

A

ETF

193
Q

What is the key benefit of purchasing shares in an investment trust compared to a comparable unit trust?

A

Potential to invest at a discount to the net asset value

194
Q

Which of these would normally be used to establish the owner of a UK share?

A

Company Register

195
Q

What is pull to redemption

A

As the bond approaches maturity its price will approach its par

196
Q

Which of the below techniques is a method used for passive investment?

A

A tracker fund is a portfolio designed to replicate the returns of benchmark. There are a number of ways of achieving this, the most obvious is called REPLICATION (buying ALL of the benchmark shares in the index), as well as SAMPLING (buying only the most influential shares) SYNTHETIC (buying futures and holding cash in the bank) and OPTIMISATION (using historic analysis to determine which stocks have most accurately tracked the index in the past).

197
Q

On an electronic order book system, a market order to buy will:

A

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

198
Q

Basic earnings per share are calculated from which of the following?

A

Shares in issue excluding preference shares and net income minus preference dividend

199
Q

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:

A

The listing Authority

200
Q

Which of these allows rights to be sold at the ‘nil paid price’?

A

Rights issue

201
Q

Which of the following would be considered an advantage of a regional custodian over a local custodian?

A

They offer custody services across multiple markets

202
Q

On an order driven platform, when might a limit order to buy not achieve its limit price on execution?

A

There is no execution in the opening or closing auction. Limit order can be executed against a better price but this can only occur either during the uncrossing period or when the limit order is first entered.

203
Q

An investor chooses to invest in the forward foreign exchange market rather than the spot market. Which of the following statements is true?

A

Forward markets settle on a pre-agreed date three days or more after the deal

204
Q

What is the longest time available for settlement

A

T+25

205
Q

Which one of the following is a description of a corporate nominee system?

A

It is a hybrid which has characteristics of pooled and designated

206
Q

A company wishes to reduce its share price without it going below its nominal value. Which of these is the best course of action?

A

Stock split
Explanation
Both a bonus issue and a stock split would reduce the stock price more than a rights issue. A stock split will also reduce the NV in similar ratio as the share price.

Only a stock split will reduce the nominal value
Explanation
Both will result is a reduction in the share price.
Both result in new shares being issued for free, but the resulting reduction is the share price will result in the market capitalisation remaining unchanged.
A reverse stock split is know as a consolidation, not a stock split.

207
Q

An inter-dealer broker:

A

Matches market makers trades
Explanation
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.

208
Q

When comparing a company quoted on the London Stock exchange with one that is not, the quoted company must do which of the following?

A

Produce a half yearly report
Explanation
All companies issue shares, have directors and produce annual accounts. But quoted companies also produce a half yearly report.

209
Q

Why do non-controlling interests needs to be disclosed in group accounts?

A

Group accounts consider the the whole groups assets, liabilities and revenues, so a separate identification is needed

210
Q

The main users of the primary investment markets are

A

Institutional investors

211
Q

Which of the following is considered the main risk of investing in emerging/frontier markets as opposed to emerged markets?

A

Potential political and economic volatility

212
Q

Client holdings in a pooled nominee account are:

A

All held in the name of one nominee company. This is a single entry together in the company’s register

213
Q

The market is showing signs of unrest. If an investor wishes to pursue a flight to quality, which of the following bonds might they choose?

A

Recently issued 10-year US T-bond

214
Q

Which of the following is true of companies that use GAAP?

A

Standardises how particular transactions are shown

215
Q

Shelf registration for the issue of bonds usually lasts for a maximum period of:

A

helf registration was introduced that enabled a single registration to be used for a number of bond issues over a period of up to two years

216
Q

A bond issuer will facilitate the buying back of bonds in the open market if they are trading below par by making use of:

A

A sinking fund involves the issuer setting aside a certain amount of funds toward the maturity repayment each year. The money is often paid to a separate trustee, who will either hold the money until the scheduled maturity date, or buy back bonds in the open market if they are trading at below par.

217
Q

What should investors be aware of when investing in structured deposits as opposed to structured investments?

A

That they could benefit from services such as the UK’s compensation scheme

218
Q

The coupon of a bond is BEST described as the bond’s:

A

IR

219
Q

Where can authorised participants buy exchange traded funds (ETFs) directly from a fund manager?

A

In the Primary market

220
Q

Why would a company perform a stock split, rather than a capitalisation issue?

A

To ensure there is no change in the share capital line

221
Q

Which of the following BEST describes a “spread” when referring to corporate debt?

A

The return premium over comparable benchmark bond

222
Q

Investor uses an index weighted by dividend yields, an example of

A

Smart beta

223
Q

Where an investor is intending to place funds in the Chinese market, they should be aware that

A

A-shares are traded on the mainland exchanges and are gradually being opened up to enable purchase by overseas investors. H-shares are mainland Chinese companies listed in Hong Kong and are available to, and popular with, global investors.

224
Q

Frontier and emerging market equities trade mostly on:

A

Stock exchanges

225
Q

How would a trader normally gain dark liquidity?

A

mtf

226
Q

Money market funds aim to achieve maximum returns while minimising credit, market and liquidity risks. These funds typically invest in:

A

Money market funds are managed funds that invest in short-term, low-risk credit securities. They aim to achieve maximum returns while minimising credit, market and liquidity risks. They typically invest in assets such as government securities, short-term bonds, commercial paper (CP), repurchase agreements or even other money market fund

227
Q

Calculate the present value of a two year stripped 2% Treasury using yields of 8% pa.

A

As the bond is stripped there are no coupons to discount, therefore it is only for the principal that we need to find the present value. £100 ÷ 1.08^2 = £85.73

228
Q

Which of the following is true of a capital investment in a structured investment?

A

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

229
Q

A trade has moved to the confirmation stage with a central counterparty. Which of the following has occurred immediately prior to this?

A

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.

230
Q

Where there is a sub-custody agreement, which of the following describes the correct set of relationships?

A

The client is the client of the global custodian, whereas the local custodian is the agent of the global custodian

Explanation - Correct Answer: D
A sub-custodian is employed by a global custodian as its local agent to provide settlement and custody services for assets that it holds on behalf of investor clients in a foreign market. A sub-custodian effectively serves as the eyes and ears of the global custodian in the local market, providing a range of clearing, settlement and asset servicing duties.

231
Q

Which of the following has the largest impact upon the price of a corporate bond?

A

Explanation - Correct Answer: A
The government bond markets are the facilities that enable investors to buy and sell bonds issued by the relevant government. They are important as they provide the benchmark yield against which the return provided by corporate bonds is judged

232
Q

Eurozone investor buys a US T-bond denominated in Euros. For which reason will they need to sacrifice the risk free return commonly associated with government debt?

A

Euros can only be printed in the Eurozone

233
Q

A bond is classified as being a floating-rate note.

A

Its coupon will be based on a published rate of interest

234
Q

A risk-averse investor looking to invest in bonds would most likely choose to invest in:

A

Holding a bond to redemption reduces the risk of a bond (all other things being equal) as the redemption value is fixed irrespective of market price. The put provision allows the holder to redeem the bond early at that value. It may not be the best return – convertible/exchangeable would give higher returns – but of the four choices available, the putable bond offers the lowest risk.

235
Q

Which of the following is a characteristic of coupons on convertible bonds?

A

They have a lower coupon compared with coupon on an otherwise identical bond

236
Q

How frequently does a STANDARD listed UK company need to produce accounts?

A

Every 6 months

237
Q

What are the rules for stripping UK exchequer bonds

A

Only designated gilts can be stripped and only by the DMO, Bank of England and GEMMs

238
Q

hy would an investment trust not be allowed to be an exchange-traded fund?

A

An investment trust is a closed-ended vehicle, whereas exchange-traded funds (ETF) are open-ended. This would prohibit the investment trust becoming an ETF. It is true that investment trusts are listed and can be leveraged, but so can ETFs, so this would not be prohibitive in itself

239
Q

Money transmission services are most likely to be provided by:

A

Explanation - Correct Answer: C
Retail banks provide services such as taking deposits from, and lending funds to, retail customers, as well as providing payment and money transmission services. They may also provide similar services to business customers

240
Q

The UK Debt Management Office announces the results of an auction, upon which of the following will it have an immediate impact

A

The government bond provides the benchmark rate for measuring interest rates or the cost of borrowing for the UK governmen

241
Q

Which of the following describes how corporate bonds being traded, along with their prices, can be discovered?

A

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

242
Q

High frequency trading (HFT) creates which of the following risks?

A

Systemic

243
Q

Where an investor places some of their funds in a structured deposit, they should be made aware that

A

Explanation - Correct Answer: B
They are designed to return at least the initial amount deposited at the end of the product’s life. However there is no guarantee that interest will be paid

244
Q

Under the BIS model 3 for effecting delivery versus payment, when does the book-entry transfer of securities take place?

A

A difficult and contentious question, however we have to go with the official training manual, where it states; “book entry transfers of securities do not occur until the end of the processing cycle

245
Q

Which of the following could be described as a main benefit of a central counterparty?

A

A central counterparty (CCP) provides certain benefits to market participants, in particular significantly reduced counterparty [credit] risk. Due to the CCP’s guarantee, risk of default is reduced, but not eliminated, since it is theoretically possible that the CCP itself could become insolvent and default. Reducing by largely reducing counterparty risk, the CCP thereby reduces the risk of systemic collapse of the financial system.

246
Q

interest parity formulae

A

future/spot = 1+relative/1+base (account for months as necessary)

247
Q

owner of shares in ADR

A

Depository bank

248
Q

monoline insurer with tax break

A

municipal bond

249
Q

how long is a MTN issued

A

2-10 years (the shelf reg is up to 2 years)

250
Q

least risky corporate debt

A

as it is corporate T bills is not the answer (from the CISI guy it is commercial paper)

251
Q

company dual listed in UK & USA - are they co-managers or co lead managers

A

UK firm handling UK listing would be who in syndicate co lead (as per book)

Unit 2 Securities Exam (2 decks)

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