unit 2 general qs Flashcards
1
Q
What unique characteristics do medium term notes have
A
coupon rate and maturity set according to market demand
2
Q
2-5 year german bond
A
bobl
3
Q
2-50 year french bond
A
OAT
4
Q
short term german bond 1.75-2.25 years
A
schatz
5
Q
long term german bond 10years +
A
Bund
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)
7
Q
lowest rating of an investment grade bond
A
BBB- or for moodys Baa
8
Q
How are eurbonds quoted (clean/dirty) and how are they settled (clean/dirty)
A
Clean & Dirty
9
Q
What are credit enhancements
A
Tools used by an issuer to enable bonds to be more highly-rated
10
Q
When do US bonds settle
A
t+1
11
Q
when do uk bonds settle
A
t+1
12
Q
When do french bonds settle
A
t+2
13
Q
when do german bonds settle
A
t+2
14
Q
When are coupons of US bonds paid
A
Semi annually
15
Q
when a uk/us government bond is stripped how do the coupons change
A
they are zero-coupon bonds
16
Q
are stripped government bonds tradeable
A
yes
17
Q
Which countries pay an annual bond
A
France and Germany
18
Q
Which countries pay a semi annual bond
A
Japanese (JGB), UK and USA
19
Q
Method of pricing used on US treasury bonds
A
Tender
20
Q
Method of pricing used for UK bonds
A
Competitive
21
Q
Life on Japanese super long bonds
A
20 years
22
Q
Who can strip UK gilts
A
GEMMS, Treasury, Bank of England
23
Q
What inflation index are index-linked gilts linked to
A
RPI
24
Q
How frequently are ten year treasury notes issues
A. Annually
B. Semi Annually
C. Quarterly
D. Monthly
A
C. Quarterly
25
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
Correct Answer: C
| Both the coupon and the redemption value are index-linked to movements in the retail price index.
26
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
Explanation - Correct Answer: D
| Bills = < two years. Notes = two-10 years. Bonds = >10 years.
27
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:
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.
28
What is shelf registration and what type of bonds benefit from it?
Medium Term Notes
Shelf-registration allows several issues to be made from a single registration.
29
Can US and UK T-Bonds be issued as zero coupon bonds?
No.
They are issued with a coupon, although can become zero coupons based when stripped
30
Modified duration is highest for what type of bonds
- Low coupons
- Long maturity
- Low yields
31
2 Key Characteristics of Property Market
Property is generally indivisible
Availability of land can be restricted by legislation
32
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
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.
33
Does the property market operate on a centralised or decentralised basis
decentralised - property is not all traded in one place and subject to one set of supply and demand forces.
34
Regulator of Eurobonds are?
International Capital Markets Association (ICMA).
35
Characteristics of UK Treasury Bills
With regards to coupon, term, price
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.
36
Are ADR's freely-transferrable securities?
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.
37
What is a cross rate?
The cross rate is a non-US dollar exchange rate between two countries.
38
Real estate investment trusts (REITs) must distribute what percentage of their profits as dividends?
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.
39
Difference between a call option and warrant
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.
40
Where one country fixes its currency against another, this is referred to as?
Fixed Exchange Rate
41
Who typically issues covered warrants
Investment Banks
42
How is the interest on eurobonds paid
Interest on eurobonds are paid gross
43
Benefit of using Direct Commerical Paper in regards to costs?
To reduce the impact of costs through elimination of broker's charges
44
What do Dealer Papers facilitate?
Dealer paper uses intermediaries, which facilitate secondary market trading
45
What is prime brokerage?
a collection of services provided by investment banks to their hedge fund clients.
46
What does the financial term rehypothecation refer to?
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.
47
Who are Investment Trusts
Investment trusts are companies that are traded on the LSE. As such, they are regulated by the Companies Act and the LSE rules
48
How are open-ended invesment companies priced?
They are priced based on their NAV (net asset value), so based on the underlying value of their shares.
49
With regard to an open-ended investment company, where would you acquire shares?
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.
50
Prime Brokerage Services Are:
```
Securities lending and borrowing
Leveraged trade execution
Cash management
Core settlement
Custody
```
51
What are the B2B Platforms
BrokerTec Espeed MTS Cash
52
What are the B2C platforms
MTS bondvision and TradeWeb
53
If a client wants a specific type of issuance, which type of bond may be issued
medium term notes using a reverse enquiry
54
What is an exchangeable bond?
An exchangeable bond is like a convertible bond; however, instead of receiving shares in the issuing company, you receive other shares instead.
55
In Which country are their local bonds also known as municipal bonds?
USA
56
Prime purpose of an introduction in listing
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.
57
What is a capitalisation issue?
A capitalisation issue is another term for a bonus/scrip issue where the company issues new shares to existing shareholders free of charge.
58
What is a pre-emptive rights issue?
Every existing shareholder will receive a provisional allotment letter
indicating the new shares they have the right to buy.
59
What is the minimum bid that can be made on UK gilts nominal values?
£1,000,000
60
Stages of a bond issuance
Pitching
Indicative bid
Mandate announcement
Credit rating
Roadshow
Listing
Syndication
61
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
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.
62
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
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'.
63
What is a bought deal?
the lead manager of an issuer buys a whole issue at a predetermined price and then places the bonds with its own clients.
64
What is a fixed price re-offer?
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.
65
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
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.
66
What is a principal trade
When the firm is an actual party to the transaction
67
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
Explanation - Correct Answer: D
| It is weighted according to each constituent's market capitalisation.
68
Business-to-customer bond dealing platforms
MTS, BondVision and TradeWeb
69
Business-to-business / Dealer-to-dealer bond trading platforms
Brokertec, eSpeed and MTS Cash
70
Offer price is also known as?
Ask price
71
Bid price is also be thought of as?
The price someone is willing to purchase at
72
What type of execution occurs on auction call periods?
No execution
73
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
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.
74
Do Eurobond quoted prices include accrued interest?
No, they are always quoted as clean prices
75
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
Explanation - Correct Answer: D
| A member cannot enter, amend or delete orders during the running of the uncrossing algorithm.
76
Which stock index is regarded as a 'broad measure' of performance?
Nikkei 225
77
Which stock index is regarded as a 'narrow measure' of performance?
CAC 40
78
Which stock index is regarded as a 'narrow measure' of performance, due to 30 share requirement?
DJIA (Dow Jones Industrial Average)
79
Which stock index in the asian market is regarded as a 'broad measure' of performance?
Hang Seng
80
Algorithmic trading (inc. high frequency trading) has been criticised for?
systemic risks or flash crashes that it can create.
81
A rights offer where shareholders can not sell their rights is called?
Open offer
82
When would you use a share premium account
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).
83
When are minority interests recorded?
A minority interest is recorded when a subsidiary is not 100% owned by the parent company.
84
Which of the following is the key difference between the current ratio and the quick ratio?
A
Debt
B
Fixed assets
C
Inventory
Explanation - Correct Answer: C
Current ratio = Current assets ÷ Current liabilities
and
Quick ratio = (Current assets - Inventories) ÷ Current liabilities
85
What is a prospective p/e ratio?
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.
86
What is an uncovered dividend?
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.
87
What is policy switching?
Selling shorter dated, low-duration bonds and buying longer-dated, high-duration bonds in expectation of a cut in interest rates
88
What is anomaly switching?
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.
89
What is an inter market spread switch?
Moving between government bonds and corporate bonds when it is believed that the difference in the yield doesn't reflect the risk premium correctly
90
Example of low risk investment
uk government bonds
91
Example of medium risk investment
Equities/portfolio of equities
92
Example of high risk investment
Derivatives or other leveraged securities
93
What is immunisation
Its the process of buying instruments that have a duration that matches the liability in question.
94
What is novation about
Managing credit risk exposure
95
What are the benefits of a CCP
Reduced counterparty risk, providing total anonymity, reduced administration, faciliating netting and improved pricing due to anonymity
96
What are two price weighted indicies
DIJA, Nikkei 225
97
Dow Jones Divisor formula is?
Price/Divisor = Change
If less than 1 then the index is larger than the sum of the prices of the components
98
What type of index is the FTSE 100
Weighted ARITHEMETIC NOT GEOMETRIC
99
What happens is a listing authority suspends a security>
It is removed from the order book
100
What is the uncrossing price
The price is calculated as the price at which the max volume of shares can be uncrossed
101
A fixed interest market maker must trade with whom once they have displayed two-way prices on a dealing system?
Customers
102
What is the purpose of the LSE CCP
To reduce default risk through margin
103
A limit order will never execute at its limit price during the
Opening auction period as no automatic execution
104
Which Market does the MSCI World Index cover
Global developed
105
In Regards to gilt trading, who are allowed to deal in principal?
Broker-dealers and GEMMs
106
What is the best offer price in an electronic order book?
The lowest priced sell order
107
What is the best bid price in an order book
The highest priced buy order
108
What is the minimum number of market makers a stock may have on a hybrid system of an exchange
0
109
What is the job of Continuos linked systems (CLS)
To prevent Herstatt risk in FX Trading
110
How should an international bank avoid settlement risk on a fx transaction
PvP
111
Straight Line method formula
Annual Depreciation = (original cost - expected residual value)/expected useful life
112
What is the settlement time for German equity trades settling through Clearstream?
German equities settle on a T+2 basis
113
What would be the primary consideration of a company choosing a market on which to float?
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
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
Explanation - Correct Answer: C
| Only limit and market orders are available for input during the opening auction.
115
When assets have been rehypothecated, to whom do they then belong?
A
Prime broker
B
Customer
C
Hedge fund
D
Mortgage company
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
EPS Formula
EPS= Profit available to ordinary shareholders / no of ordinary shares
Profit available to ordinary shareholders = Profit after tax - preference dividends - Minority interest
117
P/E Ratio
P/E= Price per share/ EPS
A high ratio indicates high growth prospects and is highly rated
118
EV/EBITDA
It gives an idea of how highly a company is valued and allows comparability regardless of capital structure
119
Dividend Yield Formula
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
Dividend cover formula and interpretation?
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
Gearing ratio
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
Current ratio and Quick Ratio/Acid Test formulas?
Current ratio = Current assets/Current liabilities
Quick Ratio = (Current assets - inventory)/ Current liabilities
123
Return on Capital employed / ROA formula
Operating Profits/Capital employed x 100
Capital employed = total assets - current liabilities = equity + non current assets
124
What is a special ex-bargain?
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
Return on Equity
ROE = Net income/ Shareholders equity x 100
126
Profit Margin formula
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
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
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
The measure of income return provided by an equity investment is known as which ratio
Dividend Yield
129
Formula for conversion premium
Warrant price + exercise price - strike price
130
What is the system for reporting Eurobond trades
TRAX within 30 minutes of publication and by 10pm on the day of the trade
131
Flat Yield Formula
FY = Gross annual coupon / market price x 100
132
What rate is a Non-deliverable forward settled at?
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
What is the elasticity of supply in the property market?
It is relatively inelastic as finite lands and heavy regulations.
134
When are share premium accounts used?
to account for IPO costs and cover the nominal value of new shares issed via a capitalisation issue (bonus issue).
135
What have longer leases residential or commercial properties
Commercial properties are typically longer
136
```
What is not deducted prior to calculating EPS
Interest payable on bonds
Preference dividends
Equity dividends
Cost of goods sold
```
Equity dividends
137
In what type of market would derivatives trading be in, wholesale or retail
Wholesale/professional
138
What is a high water mark
A high water mark which is usually associated with UCIS funds and especially hedge funds. It means that if the price of the investment falls in a year only to rise again in the next, the manager will not become eligible to receive an additional fee, until the previous maximum fund price is surpassed.
139
define GRY
The annualised total return for a bond held to maturity
140
What type of issue improves liquidity but not reduce the nominal value of the shares
Scrap
141
How does a seller have confidence in DVP
Both sides are settling concurretly
142
What are the returns like on money market instruments
Low risk with variable returns
143
What is an exchangeable bond
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
What is the Repo Rate
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
What is the meaning of a on the run bond
The most recently issued treasury bond
146
Who are usually the direct issuers of commercial paper
Financial companies
147
Which of the following is most likely to offer a crossing network or matching engine for execution of securities trading?
Investment firms
148
What certificate shares in a company
Depositary receipt holder
149
What do US T bonds settle through
US T-Bonds settle through the Fixed Income Clearing Corporation (FICC)
150
Describe key points of a JGB
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
The conversion ratio in relation to a corporate bond describes the:
Number of shares the bond can convert into
152
Describe the features and benefits of a putable bond
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
Which of the following best defines the conversion ratio on a convertible bond?
The nominal value of the bond divided by the conversion price of the shares
154
What is duration matching/Immunisation
Matching the duration of the bond to the liability
155
What is cash matched/ dedicated portfolios
Matching cash flows of the bond to the liability
156
What is policy switching
Exploiting market shifts caused by e.g interest rates
157
What is anomaly switching
Exploiting mispricing in the bond market
158
Inter market switching definition?
Trading on the spread between a bond and its benchmark
159
Riding the yield curve?
Buying a longer term bond than required and leaving before maturity
160
the accounting equation can be written as A=E+L and also as....?
Non current assets + Current assets = Capital + Reserves + Liabilities
161
Capital reserves description
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
What is the conversion ratio
Nominal Value of Bond / Conversion price of shares
163
What is a bond 'on the run'
Most recently issued bonds by issuer
164
What are covered bonds?
These are asset backed bonds in instances where no SPV is created.
165
What is the purpose of a trading platform providing liquidity rebates?
To encourage market makers to use their systems by offering them commission on trades
166
What is a tender offer
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
What is the difference between guaranteed bonds, covered bonds and 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. 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
What is a dealer member
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
What trades on a 'request for quote' system?
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
How should price sensitive information such as announcement of a new project be disclosed
Through a PIP
171
A bond's annual income is based on which of the following?
A bond's income (coupon) is expressed as a percentage of the nominal value which represents the capital value of the bond.
172
What is the capital value of a bond?
This is the nominal value, it does not change
173
Which of the following would account for increased volatility in the foreign exchange markets on the first Friday of every month?
Issuance of the Non-Farms Payroll
174
Reason for an introduction excluding marketing
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
A share offer is made on the junior market of an exchange, which of these offers warrants the need to produce a prospectus?
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
If you decide to not redeem a convertible bond what happens?
The holder receives the redemption value of the bond
177
Company legislation for companies on exchanges include?
prepare annual accounts,
to have accounts audited
Annual General Meetings.
178
An investor sells Malaysian shares and wants to exchange the proceeds into Brazilian currency. If the currencies are not quoted against each other directly, using which type of rate would the investor be able to convert
Cross rates enable effective rates to be calculated where the currencies concerned are not quoted directly against each other
179
What is the role of a nominated adviser
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
What trades on a 'request for quote' system?
Low liquidity, high volatile bonds.
High yield bonds, bonds from developing markets and asset-backed securities tend to trade on RFQ systems.
181
Difference between fixed charge bonds, floating charge bonds, covered bonds and guaranteed bonds?
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
Characteristics of a closed ended investment trust UNIQUE to OEICs
* 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
Characteristics of authorized OEICs?
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
Characteristics of both OEIC and Closed ended investment trusts?
Both funds can offer bid/offer pricing, both can invest in quoted companies
185
Prospectus warrants required on junior market (AIM) in what case?
raising more than £5 million from 150 or more non-qualified investors in any EU member state
186
Real interest rate formula?
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
What economic data releases may impact and create fx volatility?
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
When listed on a junior market such as LSE AIM, who must stay with a company during the duration of the listing
Broker and Advisor
189
A market analyst produces a report on market depth and liquidity. What would be the sources of this report?
Exchanges and trade reports
190
Organisation X is acting as a dealer on a stock exchange. As a consequence, they are most likely to be operating as:
A gilt market maker
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
Manufactured Dividend
Payments passed back to the lenders of shares to compensate them for any missed dividends issued by the company
192
Which one of the following is most likely to have a narrow spread between its bid and offer price, an annual management fee of 0.5% or less and investor would incur a stockbrokers commission when buying and selling?
ETF
193
What is the key benefit of purchasing shares in an investment trust compared to a comparable unit trust?
Potential to invest at a discount to the net asset value
194
Which of these would normally be used to establish the owner of a UK share?
Company Register
195
What is pull to redemption
As the bond approaches maturity its price will approach its par
196
Which of the below techniques is a method used for passive investment?
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
On an electronic order book system, a market order to buy will:
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
Basic earnings per share are calculated from which of the following?
Shares in issue excluding preference shares and net income minus preference dividend
199
A government bond wishing to be admitted to the main market of an exchange so that it may be traded, must be granted permission from the:
The listing Authority
200
Which of these allows rights to be sold at the 'nil paid price'?
Rights issue
201
Which of the following would be considered an advantage of a regional custodian over a local custodian?
They offer custody services across multiple markets
202
On an order driven platform, when might a limit order to buy not achieve its limit price on execution?
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
An investor chooses to invest in the forward foreign exchange market rather than the spot market. Which of the following statements is true?
Forward markets settle on a pre-agreed date three days or more after the deal
204
What is the longest time available for settlement
T+25
205
Which one of the following is a description of a corporate nominee system?
It is a hybrid which has characteristics of pooled and designated
206
A company wishes to reduce its share price without it going below its nominal value. Which of these is the best course of action?
Stock split
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
An inter-dealer broker:
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
When comparing a company quoted on the London Stock exchange with one that is not, the quoted company must do which of the following?
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
Why do non-controlling interests needs to be disclosed in group accounts?
Group accounts consider the the whole groups assets, liabilities and revenues, so a separate identification is needed
210
The main users of the primary investment markets are
Institutional investors
211
Which of the following is considered the main risk of investing in emerging/frontier markets as opposed to emerged markets?
Potential political and economic volatility
212
Client holdings in a pooled nominee account are:
All held in the name of one nominee company. This is a single entry together in the company's register
213
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?
Recently issued 10-year US T-bond
214
Which of the following is true of companies that use GAAP?
Standardises how particular transactions are shown
215
Shelf registration for the issue of bonds usually lasts for a maximum period of:
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
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 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
What should investors be aware of when investing in structured deposits as opposed to structured investments?
That they could benefit from services such as the UK’s compensation scheme
218
The coupon of a bond is BEST described as the bond’s:
IR
219
Where can authorised participants buy exchange traded funds (ETFs) directly from a fund manager?
In the Primary market
220
Why would a company perform a stock split, rather than a capitalisation issue?
To ensure there is no change in the share capital line
221
Which of the following BEST describes a “spread” when referring to corporate debt?
The return premium over comparable benchmark bond
222
Investor uses an index weighted by dividend yields, an example of
Smart beta
223
Where an investor is intending to place funds in the Chinese market, they should be aware that
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
Frontier and emerging market equities trade mostly on:
Stock exchanges
225
How would a trader normally gain dark liquidity?
mtf
226
Money market funds aim to achieve maximum returns while minimising credit, market and liquidity risks. These funds typically invest in:
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
Calculate the present value of a two year stripped 2% Treasury using yields of 8% pa.
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
Which of the following is true of a capital investment in a structured investment?
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
A trade has moved to the confirmation stage with a central counterparty. Which of the following has occurred immediately prior to this?
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
Where there is a sub-custody agreement, which of the following describes the correct set of relationships?
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
Which of the following has the largest impact upon the price of a corporate bond?
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
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?
Euros can only be printed in the Eurozone
233
A bond is classified as being a floating-rate note.
Its coupon will be based on a published rate of interest
234
A risk-averse investor looking to invest in bonds would most likely choose to invest in:
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
Which of the following is a characteristic of coupons on convertible bonds?
They have a lower coupon compared with coupon on an otherwise identical bond
236
How frequently does a STANDARD listed UK company need to produce accounts?
Every 6 months
237
What are the rules for stripping UK exchequer bonds
Only designated gilts can be stripped and only by the DMO, Bank of England and GEMMs
238
hy would an investment trust not be allowed to be an exchange-traded fund?
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
Money transmission services are most likely to be provided by:
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
The UK Debt Management Office announces the results of an auction, upon which of the following will it have an immediate impact
The government bond provides the benchmark rate for measuring interest rates or the cost of borrowing for the UK governmen
241
Which of the following describes how corporate bonds being traded, along with their prices, can be discovered?
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
High frequency trading (HFT) creates which of the following risks?
Systemic
243
Where an investor places some of their funds in a structured deposit, they should be made aware that
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
Under the BIS model 3 for effecting delivery versus payment, when does the book-entry transfer of securities take place?
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
Which of the following could be described as a main benefit of a central counterparty?
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
interest parity formulae
future/spot = 1+relative/1+base (account for months as necessary)
247
owner of shares in ADR
Depository bank
248
monoline insurer with tax break
municipal bond
249
how long is a MTN issued
2-10 years (the shelf reg is up to 2 years)
250
least risky corporate debt
as it is corporate T bills is not the answer (from the CISI guy it is commercial paper)
251
company dual listed in UK & USA - are they co-managers or co lead managers
UK firm handling UK listing would be who in syndicate co lead (as per book)
