Trading

Question 1

What are the two main venues for trading shares and bonds?

Answer 1

On exchange and off exchange.

Question 2

What does ‘on exchange’ mean?

Answer 2

Trading through a recognised stock exchange.

Question 3

What are the two types of trading systems?

Answer 3

• Quote driven
• Order driven

Question 4

In a quote driven market, who provides bid and offer prices?

Answer 4

Market makers.

Question 5

What is an order driven system characterized by?

Answer 5

An electronic order book.

Question 6

How are buyers and sellers matched in an order driven system?

Answer 6

By price and quantity of shares being traded.

Question 7

What are the two forms in which shares can be issued?

Answer 7

• Registered
• Bearer

Question 8

What does registered form of shares mean?

Answer 8

The investor’s name is recorded on the share register.

Question 9

What defines bearer shares?

Answer 9

Ownership passes with the share certificate.

Question 10

What is settlement in trading?

Answer 10

The transfer of legal title of a security from seller to buyer.

Question 11

What is the term commonly used for the settlement system?

Answer 11

Crest.

Question 12

What are the key features of the Crest system?

Answer 12

• Real time matching of trades
• Settlement in sterling, euros or US dollars
• Electronic transfer of title on payment

Question 13

What are bonds?

Answer 13

A loan from an investor with a repayment date and interest payments.

Question 14

Who can issue bonds?

Answer 14

• Government
• Corporations

Question 15

What are the two main types of government bonds?

Answer 15

• Conventional bonds
• Index linked bonds

Question 16

What is a conventional bond characterized by?

Answer 16

A fixed coupon and a single repayment date.

Question 17

What are index linked bonds linked to?

Answer 17

Inflation.

Question 18

What are corporate bonds sometimes secured by?

Answer 18

Some form of security attached to reassure the investor.

Question 19

What is a call provision in a corporate bond?

Answer 19

The issuer’s option to buy back all or part of the bond before maturity.

Question 20

What are medium-term notes?

Answer 20

Corporate bonds that normally mature up to 5 years.

Question 21

What are floating rate notes?

Answer 21

Bonds with variable interest rates linked to a benchmark rate.

Question 22

What do hybrid bonds combine?

Answer 22

Elements of equity and debt.

Question 23

What is a zero coupon bond?

Answer 23

A bond that pays no interest.

Question 24

What are asset backed securities?

Answer 24

Marketable securities resulting from bundling non-marketable assets.

Question 25

What is the largest type of asset backed security?

Answer 25

Mortgage backed securities.

Question 26

What is default risk?

Answer 26

The risk that a company could go bankrupt.

Question 27

What is seniority risk?

Answer 27

The risk related to the ranking of corporate debt in liquidation.

Question 28

What does inflation risk entail?

Answer 28

The risk of inflation eroding the real value of bond payments.

Question 29

What is liquidity risk?

Answer 29

The ease with which a security can be converted into cash.

Question 30

What does exchange rate risk refer to?

Answer 30

Risk from bonds or payments in a foreign currency.

Question 31

What is flat yield?

Answer 31

The coupon divided by the price expressed as a percentage.

Question 32

What is the flat yield of a bond with a coupon of 1% trading at £100?

Answer 32

1%.

Question 33

What is the flat yield of a bond with a coupon of 1.5% trading at £98?

Answer 33

1.53%.

Question 34

What is the flat yield of a 0.375% Treasury stock priced at £100.70?

Answer 34

0.372%.

Question 35

Who are the three biggest corporate rating agencies?

Answer 35

* Standard & Poor's * Moody's * Fitch Ratings