Unit 2 - Extra Flashcards
1
Q
Which of the following would account for UK government debt being considered risk free?
A The Bank of England is a reputable body B The UK is part of NATO C The UK itself controls the printing of money D The UK has an established Keynesian economic policy
A
The correct answer is: C - The UK itself controls the printing of money
Explanation
The yield available on UK gilts is considered the risk-free rate for sterling-denominated bonds - after all, it is the UK government that ultimately controls the printing of sterling, so the UK gilts are effectively credit risk-free.
2
Q
What is a key benefit of using an Inter-Dealer Broker (IDB)?
A Liquidity B Anonymity C Tighter dealing spreads D Creates larger Normal Market Sizes
A
B - Anonymity
Explanation
An IDB allows market makers to trade with each other without revealing their identity.
3
Q
Why would an underwriting firm performing an offer for sale decide to use a fixed price rather than a tender?
A To ensure that the issue is fully subscribed B To allow investors to set the price C To provide more efficient form of pricing D To ensure everyone pays the same price
A
To ensure that the issue is fully subscribed
Explanation
When a fixed-price offer is made, the price is usually fixed just below that at which it is believed the issue should be fully subscribed, so as to encourage an active secondary market in the shares. A tender offer is a more efficient method of pricing, allowing investors to set the price through a bidding process. Both issues allow the investors to pay the same price.
4
Q
What BEST describes the settlement process of UK government debt held within CREST?
A
Settlement would take place on the bargain date
B
Settlement would take place the day after the bargain
C
Settlement would take place during the third day after the bargain has been agreed
D
Settlement would take place 10 days after the bargain date
A
Settlement would take place the day after the bargain
Explanation
Here bargain simply means trade and is only used to confuse. Dematerialised gilts (held in CREST) settle T+1.
5
Q
Which ONE of the following is a criteria for entry on to a junior market of the exchange?
A Minimum trading history B All shares in public hands C All shares freely-transferable D Nominated broker or adviser required, but not both
A
All shares freely-transferable
Explanation
The entry requirements for AIM are much lighter than for the official list.
6
Q
When a company announces its intention to pay a specified dividend on a specified future date this is called the dividend declared date. What is the minimum number of business days between the declaration and the proposed record date?
A 1 B 2 C 6 D 10
A
6
Explanation
The declaration must occur at least six clear business days before the proposed record date, although it usually occurs well before this date (perhaps a month or two earlier).
7
Q
A UK government bond sale takes place 2 days before the ‘coupon paid date’. The trade is known as:
A Ex-coupon B Special ex-coupon C Cum-interest D Cum-coupon
A
Ex-coupon
Explanation
The gilt was bought during the 7-day ‘ex-coupon’ period. The buyer would therefore not be entitled to receive any of the coupon.
8
Q
ADR dividends are paid to the holder in:
A US dollars B the domestic currency of the sponsor company C either Euros or US dollars as specified by the prospectus D the home currency of the depositary bank
A
US dollars
Explanation
When the company pays a dividend, it is paid in the company’s domestic currency to the bank, which then converts the dividend into dollars and passes it on to the DR holders. The US investors therefore need not concern themselves with currency movements. Furthermore, when a DR holder decides to sell, the DRs will be sold on in dollars. This removal of the need for any currency transactions for the US investor is a key attraction of the DR.
9
Q
Which of the following is the lowest form of debt?
A Floater B Asset back security C PIK D Subordinated debt
A
PIK
Explanation
Payment in kind (PIK) if it exists will be even more risky than the subordinated debt. It will rank below other forms of debt but above the equity in a liquidation.
10
Q
An investor has placed their money into an infrequent actively managed account. Which of the following is most likely?
A
In the long run the investor could see enhanced returns to the benchmark
B
The manager will be using strategies like optimisation to enhance returns
C
The beta will allow the investor to determine the performance of the manager
D
They would be subject to much higher charges than a passive fund
A
The correct answer is: A - In the long run the investor could see enhanced returns to the benchmark
Explanation
Active fund management strategies will try to achieve the goal of outperforming a designated benchmark. Those that involve frequent trading generate higher transaction costs which diminish the fund’s return. With an infrequently managed account, this will be less of an impact.
11
Q
A company wishes to raise capital cheaply. From the company’s point of view, which of the following would be seen as the BEST advantage of issuing warrants?
A
It helps raise the company’s profile as it indicates future financial stability
B
To delay the payment of dividends until some time in the future
C
To make a floating charge over assets more attractive to investors
D
To improve the earnings per share
A
The correct answer is: B - To delay the payment of dividends until some time in the future
Explanation
The sale of warrants for cash will raise money for the company, and, if the warrants are exercised, further capital will be raised by the company. Holding the warrant does not entitle the investor to receive dividends or to vote at company meetings, so the capital raised, until the warrant is exercised, could be considered as free.
12
Q
Which of the following is not a consideration in order priority for execution on an exchange order driven system?
A Volume B Price C Date D Time
A
Volume
Explanation
The order priority is by price and then time (date is also captured under time for orders that are instructed to remain on the system after close of day). Volume is not considered for order priority.
13
Q
Which of the following ratios would allow an investor to determine the income returned from equity over the current share price?
A Dividend yield B Return on capital employed C Asset turnover D Dividend cover
A
Dividend yield
Explanation
The dividend yield expresses the total dividends per share paid out over the last year as a percentage of the current share price.
14
Q
In terms of the degree of risk, where does mezzanine debt rank in the order of payment should a company be in liquidation?
A
Between preferential creditors and floating charge holders
B
Between floating charge holders and subordinated debt
C
Between subordinated debt and preference shareholders
D
Between preference shareholders and deferred shareholders
A
Between subordinated debt and preference shareholders
Explanation
Mezzanine debt ranks just below subordinated debt in the order of payment for a company in liquidation.
15
Q
A prime broker provides a number of services for institutional investors, what would be the purpose of stock lending and borrowing?
A Cash management B Liquidity C Securities purchased become property of the fund D Reduction of costs
A
Liquidity
Explanation
If an institutional investor wishes to take advantage of pricing variations but does not have the stock then they can borrow it and return it at a later date.
16
Q
Why would an investor want to deal special-ex?
A To avoid Capital gains tax. B To reduce regulatory reporting requirements C To receive a dividend that they would otherwise be not entitled to D For tax planning purposes
A
For tax planning purposes
Explanation
By dealing special ex the investor does not receive the dividend they are entitled to this may reduce income but not capital gains tax.
17
Q
A Global custodian finds itself in financial difficulty. What should it do to protect its client’s assets?
A
Continue as before segregating its clients’ assets in internal accounts
B
Ask client how to proceed with their assets and follow their instructions to move assets in accordance with the claimants’ wishes
C
Seek permission to legally segregate client assets depending on the outcome of the financial difficulties
D
Use the clients’ assets to provide a capital buffer against the firm’s financial difficulties
A
Continue as before segregating its clients’ assets in internal accounts
Explanation
If the custodian has properly segregated the assets, they are protected from the financial difficulties of the custodian. This is a fundamental obligation of custodians.
18
Q
Which of the following would explain why a company would buy shares in another company to forge a strategic link?
A To expand the company B Shared corporate ethos C Protect supplies D To benefit from dividend income
A
Protect supplies
Explanation
Strategic stakes may be accumulated in order to prevent a company being taken over by a competitor and to influence the company concerned. This may be in order to protect supplies. The company may be a key supplier of raw materials to the strategic stakeholder, without which the strategic stakeholder may have difficulty obtaining the quantity and quality of raw materials it seeks.
19
Q
An investor wishes to spend £15,000 on the purchase of Exchequer 8% 2028 priced at £96. What will be the nominal value of stock purchased?
A £16,350.00 B £15,625.00 C £15,000.00 D £14,400.00
A
£15,625.00
Explanation
To answer this question we need to work out the nominal value from the market price or consideration paid.
To calculate the market price we use the following formula:
Market price = Nominal value x (Price/£100n.v.)
So to get the nominal value, we use the following formula:
Market price or price paid / (Price/£100n.v.)
£15,000 / 96 x 100 = £15,625.
20
Q
Which of the following would not be found on the statement of financial position under intangible non-current assets?
A Goodwill B Capitalised development costs C Work in progress D Patents
A
Work in progress
Explanation
Work in progress will be shown as a current asset.
21
Q
Participants in a dark pool are MOST LIKELY to have chosen this type of execution venue because of:
A Lack of pre-trade transparency B Ability to execute trades at efficient prices C Ability to hide the dealer's identity D Lower costs
A
Ability to execute trades at efficient prices
Explanation
Dark pools offer institutions a facility to deal large blocks of shares anonymously, typically using algorithm driven trading. The size of these orders would make it very difficult to achieve efficient pricing on more traditional venues but the dark pool allows them to do so. Although anonymity is an advantage, this is also available on many other systems, including exchanges.
22
Q
In normal market conditions which of the following statements about interest rates and inflation is most likely?
A
Inflation would be expected to be higher than interest rates
B
Inflation would be expected to be the same as interest rates
C
Inflation would be expected to be lower than interest rates
D
Inflation and interest rates are not linked together
A
Inflation would be expected to be lower than interest rates
Explanation
The interest rate itself is heavily impacted by inflationary expectations. Simplistically, if inflation is expected to be at 4% per annum, the interest rate will have to be greater than this in order to provide the investor with any real return.
23
Q
Which of the following is not associated with order-driven trading systems?
A Orders are displayed by priority of price and time B Trade anonymity C Firm quotes during the MQP D Automatic execution of trades
A
Firm quotes during the MQP
Explanation
Market makers have to provide quotes during the mandatory quote period on quote-driven systems, such as SEAQ.
24
Q
Why would a lead manager be LEAST likely to go through a syndication process and, instead, take responsibility for the entire process themselves?
A It is a bought deal B It is a fixed price re-offer C There is a back stop price D It is a placing
A
It is a placing
Explanation
A placing is where a company simply markets the issue directly to a broker, an issuing house or other financial institution, which in turn places the shares with selected clients. A bought deal is a fully underwritten issue and the lead manager would often enlist the help of a syndicate to do this this. The back-stop price is limit placed on the members of a syndicate limiting the price at which the shares can be sold. Whilst a Fixed Price Re-offer is NOT on the current syllabus, it is synonymous with syndication.
25
A Depositary Receipt may be pre-released however the issuer must deliver the underlying shares for deposit within:
```
A
One month
B
Three months
C
Six months
D
Nine months
```
Three months
Explanation
The issuer of DRs must deliver the underlying shares within three in order to satisfy the rules of the pre-release issue. During the pre-release period the position must be collateralised with cash.
26
A company announces an increase in the dividend that it will pay out to shareholders in response to continued profit growth. Assuming all of the following securities are in issue, which of the following is most likely to benefit from this increase in income?
```
A
Depositary receipt holder
B
Equity warrant holder
C
Cumulative preference shareholder
D
Floating rate bond
```
Depositary receipt holder
Explanation
A depositary receipt is a certificate that represents ordinary shares in a company. The benefit of a higher dividend will be passed on to them. Warrants do not pay dividends and cumulative preference shares pay a fixed dividend. Floating rate bond are debt instruments and receive their payment irrespective of profits (unless default occurs).
27
Which of the following is the best definition of a bond 'on the run'?
A
One that trades in an unpopular sector of the market
B
A bond that has suffered a series of downgrades and is heading for default
C
One that is popular with investors due to an unexpectedly positive forecast
D
The most recently issued Treasury bond
The most recently issued Treasury bond
Explanation
On the run bonds refer to those that are most recently issued by the issuer. Those previously issued are often referred to as off the run bonds.
28
'Over the counter' (OTC) markets in recent times seem to be converging with exchange traded markets, which of the following is the most likely explanation?
```
A
Greater demand for OTC products
B
Electronic trading
C
Regulatory changes
D
Straight through processing
```
Regulatory changes
Explanation
This is not specifically mentioned in the manual, so perhaps a trial question, however regulatory requirements in the OTC market are bringing them very much in line with exchange traded markets.
29
If an investor has diversified their risk exposure by asset class, they have:
```
A
entered into derivative positions
B
increased the number and range of their holdings
C
increased their specific risk exposure
D
eliminated systematic risk
```
The correct answer is: B - increased the number and range of their holdings
```
Explanation
Diversification by asset class is achieved by holding a combination of different kinds of asset within a portfolio, possibly spread across cash, fixed-interest securities, equity investments, property-based investments, and other assets.
```
30
If an investor is interested in dark liquidity on the London Stock Exchange, on which platform would they be looking to trade?
```
A
Order driven
B
Quote driven
C
Hybrid system
D
Voice broking systems
```
Order driven
Explanation
Dark pools refer to the non-displayed or hidden nature of the buy and sell orders that reside in a crossing platform. The term dark liquidity can also be applied to all forms of non-displayed liquidity such as the order blotters of buy-side dealing desks.
Even though there are few organised dark pools within Europe, there is dark liquidity. Dark liquidity is provided when exchanges offer iceberg orders which enable traders to have a lot more available to trade than is currently displayed on the screen or in an order book at any moment in time. The biggest sources of dark liquidity are within the investment banks and major brokers.
31
A broker holds the shares of a client in a pooled nominee account. Which of the following would be true?
A
The shares will be registered in the broker's name
B
The shares will be pooled with the firm's shares
C
The issuer of the shares will pay any dividends to the client
D
The client is entitled to receive the benefits of ownership
The client is entitled to receive the benefits of ownership
Explanation
The share will not be registered in the broker's name, but a nominee name. Although the account is referred to as a pooled account, this does not mean that the shares are pooled with those of the firm; instead it means that the shares will be pooled with those of other clients. The issuer will pay any dividends to the broker, as it will not know who the underlying client is. However, the client is entitled to any benefits.
32
Which of the following would be considered an advantage, for the nominee, of individual registration within designated nominee accounts?
A
There are fewer additional costs for the custodian
B
It helps with aspects of auditing and good control mechanisms, where identical trades are executed for different clients
C
Where a company offers extra incentives these can always be received by the beneficiary
D
It will not give rise to additional transactional costs imposed by the custodian for pooled accounts
It helps with aspects of auditing and good control mechanisms, where identical trades are executed for different clients
Explanation
Designation or individual registration can help some aspects of auditing and it affords a good control mechanism where identical trades may have been executed for different clients (for example on the same date, for the same number of shares and for the same settlement consideration).
33
The price of shares in Firm A change relative to those in Firm B. What risk would this represent?
```
A
Market Risk
B
Systematic Risk
C
Specific Risk
D
Non-systemic Risk
```
Specific Risk
Explanation
Specific risk relates directly to the price movement of a single share.
34
Debt with a high interest cover will subsequently affect:
```
A
The ability to meet liabilities should they fall due
B
Market valuation
C
Securitisation
D
Growth prospects
```
Market valuation
Explanation
Interest cover is used to determine how easily a company can pay interest on its outstanding debt. Similar to dividend cover a ratio of lower than 1 means that the company is not generating sufficient revenues to satisfy its interest expense, therefore a measure of risk. The greater the risk, the higher the yield the cheaper the price and visa versa.
35
A bond with a 2-10 year maturity is created from securitised public sector loans and mortgages, where the investor has recourse against the issuer should default occur. The assets backing the bond remain on the issuer's consolidated statement of financial position (balance sheet). This would BEST describe which of the following bonds?
```
A
Medium term note
B
Asset backed security
C
Covered bond
D
Guaranteed bond
```
Covered bond
Explanation
In instances when no SPV is created, the asset-backed bonds are simply referred to as 'covered bonds', referring to the pool of assets that provide the 'cover' to the bondholder. So, with covered bonds, the assets are retained on the statement of financial position of the issuing entity, such as a bank, rather than transferred to an SPV.
36
What is the repo rate?
A
The implied interest paid for borrowing securities
B
The implied interest paid for borrowing gilts
C
The implied interest paid for borrowing money
D
The implied interest paid for lending stock
The implied interest paid for borrowing money
Explanation
A repo is an alternative way to borrow money. As.repos settle T+0 they are a means of raising quick cash.
37
At what percentage of share ownership would an investor be forced to make a mandatory bid?
```
A
10%
B
20%
C
30%
D
50%
```
30%
Explanation
If a predator acquires influence over 30% or more of voting rights of a company, it must make an offer for all the remaining shares of the company.
38
Which of the following corporate actions would never be made available to an American depositary receipt holder?
A
The right to vote in the annual general meeting
B
The right to participate in the company's profit
C
The right buy new shares in proportion to existing shares
D
The right to receive the new shares during a scrip issue
The right buy new shares in proportion to existing shares
Explanation
An ADR holder can only receive the nil paid price as result of a rights issue. If they wish to participate in the rights issue to buy the new shares they would have to sell the ADRs and buy the new shares.
39
Where a cum-dividend equity trade fails to settle on contractual settlement what will happen?
A
The client buying will make a claim on the client who is selling
B
The broker of the client buying will make a claim on the client selling
C
The broker of the client buying will make a claim on the broker of the client selling
D
The Client buying will make a claim on the broker of the client selling
The broker of the client buying will make a claim on the broker of the client selling
Explanation
A claim will arise between the brokers on behalf of their clients.
40
Which of the below cash flows incorporate a company's debt obligations?
```
A
Free cash flow
B
Enterprise cash flow
C
Equity cash flow
D
Operating cash flow
```
Equity cash flow
Explanation
Free cash flow represents the amount of cash that has been generated and that the company can choose what to do with. This can be sub-divided into enterprise cash flow and equity cash flow.
The calculation of enterprise cash flow excludes any financing costs, i.e. it is assessed before debt obligations are met.
Debt obligations are incorporated into the calculation of equity cash flow, i.e. equity cash flow is assessed after debt obligations are met, but before dividends are paid.
Operating cash flow (for the exam) will also exclude financing costs.
41
Two eurozone governments' bonds are sold in Europe with identical terms of coupon rate, maturity of redemption, and all other standard terms. However, both still sell into the market with different yields. Which is the most likely reason why?
```
A
Different currencies
B
Different credit ratings
C
The policies of the ECB
D
There is a market anomaly which could be exploited by arbitrage
```
Different credit ratings
Explanation
The eurozone countries all use the euro currency. Therefore, it is not different currencies. It is because different eurozone governments have different credit ratings; for example Greece vs. Germany.
42
Diversification will help to deal with what type of risk?
```
A
Unsystematic
B
Systematic
C
Credit
D
Operational
```
Unsystematic
Explanation
Unsystematic risk is the risk that a particular event will have an adverse effect on a particular share price. The best way for an investor to deal with this is to diversify the portfolio.
43
An investor places a bid in a tender offer. Which of the below BEST explains their allocation of shares?
A
Their allocation will be on a pro rate basis across the board based on the total bids received
B
Their allocation will be taken up at their bid price
C
They will only be successful if their price is above the acceptance level
D
They will receive all of the shares if their bid was on time
They will only be successful if their price is above the acceptance level
Explanation
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.
44
In order to raise capital a company can issue a convertible bond or an exchangeable bond. Would it be possible to have these underwritten with a greenshoe option?
```
A
Yes, only on the convertible bond
B
Yes, only on the exchangeable bond
C
Yes, on both types of bonds
D
A greenshoe can only be used with Equities
```
Yes, on both types of bonds
Explanation
The structure of an offering of a convertible or exchangeable bond mirrors that of equities - the issuer will set a base amount of bonds it wishes to issue and perhaps retain a greenshoe, reserving the right to issue more if demand is strong.
45
What was the primary reason for the introduction of the Continuous Settlement Bank system?
```
A
To ensure certainty of payments
B
To facilitate payment versus payment
C
To mitigate default risk
D
To allow for 24 hour settlement in the foreign exchange markets
```
To mitigate default risk
Explanation
The two parties to an FX transaction will buy and sell the respective currencies exchanged and the payments made will occur simultaneously. Unless such simultaneity in payments is ensured, there is a possibility of settlement risk which is a type of default risk. The first two answers are benefits of CLS not a reason.
46
Which of the following would account for increased volatility in the foreign exchange markets on the first Friday of every month?
```
A
Where currency futures, options and forward contracts expire on that day
B
Issuance of the Non-Farms Payroll
C
Publication of the Fed Funds target rate
D
Publication of the Personal Consumption Expenditure Price Index
```
Issuance of the Non-Farms Payroll
Explanation
The most volatile periods for FX trading are often seen in conjunction with the release of key economic data. The US Labour Department issues its monthly employment data, more commonly known as the Non-Farms Payroll (NFP) report, on the first Friday of each month at 8:30 Eastern time, and it can often be a major mover of foreign exchange rates.
Triple witching takes place 4 times a year, Fed Funds target rates take place 8 times a year and the PCEPI is monthly but not necessarily on the first Friday in every month.
47
A company wishes to raise capital through the issuance of shares through an IPO, but does not wish to lose control of the company. Which of the following would be most suitable?
A
Float 20% of issued share capital on the official list as convertible preference shares
B
Issue 20% of issued share capital OTC as ordinary shares
C
Float 20% of issued share capital on AIM as cumulative preference shares
D
Issue unsecured corporate loan stock on the LSE
Float 20% of issued share capital on AIM as cumulative preference shares
Explanation
To be listed on the official list, a company would need to place no less that 25% of the issued share capital in the public hands. This restriction does not apply to AIM. Ordinary shares carry with them a right to vote, which would dilute the control of the directors of the company. Corporate loans are not shares.
48
An investor relinquishes their investment directly with an authorised corporate director. Which investment vehicle are they using?
```
A
Unit trust
B
OEIC
C
Investment Trust
D
Special purpose vehicle
```
OEIC
Explanation
In both a unit trust and OEIC, the investor buys and sells directly with the fund manager. In an ICVC/OEIC, the fund manager is known as the authorised coporate director.
49
What is the purpose of a trading platform providing liquidity rebates?
A
To ensure best execution is provided to consumers at all times
B
To encourage market makers to use their systems by offering them commission on trades
C
To improve liquidity in illiquid shares by offering customers a discount on quoted prices
D
To provide information on the implicit cost of liquidity (or illiquidity) in a share
To encourage market makers to use their systems by offering them commission on trades
Explanation
One area of competition among exchanges is to encourage market makers to use their platforms over others by providing liquidity rebates for each share that is sold to or purchased from each posted bid or offer. The market makers are paid a commission on all transactions that use their systems.
50
Which one of the following institutions would most likely manage cash transactions and perform foreign exchange transactions on behalf of clients, whilst also looking after secutrities which belong to those clients and ensuring they are properly protected.
```
A
Investment Bank
B
Custodian
C
Insurance Company
D
Private Bank
```
Custodian
Explanation
Custodians are banks that specialise in safe custody services, looking after portfolios of shares and bonds on behalf of others. This would include cash transactions, for example paying for shares bought by clients and FX deals if the stock was in a foreign currency.
51
An investor chooses to buy a bond and sell it before maturity. Which of the following poses a risk for them?
```
A
Reduction of the capital value.
B
Default on coupon payments
C
Price increases above the nominal value
D
Price falls below the nominal value
```
Price falls below the nominal value
Explanation
The capital value of the bond remains the same and does not change. If the investor sells the bond, they would not be entitled to the coupons anyways. If the price falls below the nominal value they would lose as had they held the bond to maturity then they would have received the nominal value.
52
How are shares held when using a corporate nominee account?
A
Shares of each investor is held separately
B
Investor can choose how they wish for them to be held
C
Nominee would be kept separate to the register
D
Shares of all investors are pooled together
Shares of all investors are pooled together
Explanation
The corporate nominee is a halfway house between the pooled and the designated nominee structures offered by stockbrokers. It will result in a single entry for all the shareholders together in the company's register (like the pooled nominee) but beneath this the issuing company (or its registrar) will be aware of the individual holdings that make up the nominee.
53
With regard to a unit trust, who retains the names of the unit holders?
```
A
The unit trust manager
B
The beneficiaries
C
The settlor
D
The trustee
```
The trustee
Explanation
The trustee looks after the assets of the fund and the register of members.
54
A bond's annual income is based on which of the following?
```
A
Price of the bond
B
Capital value of the bond
C
Interest rates
D
Inflation rates
```
Capital value of the bond
Explanation
A bond's income (coupon) is expressed as a percentage of the nominal value which represents the capital value of the bond.
55
Which of the following would BEST describe the point when a pension fund interest in shares of another company would no longer be considered in the free float?
```
A
3%
B
5%
C
Greater than 5%
D
Shares held by the pension fund will always be considered in the free float
```
5%
Explanation
The free-float or a public float is usually defined as being all shares held by investors. Shares held by owners owning 5% of all shares (those could be institutional investors (such as pension funds), strategic shareholders, founders, executives, and other insiders' holdings);
56
An issuer of convertible and exchangeable bonds is considering a greenshoe option.
Which of the following is TRUE?
A
This would be allowed on both types of bond
B
This would be allowed on the convertible bond only
C
This would be allowed on the exchangeable bond only
D
This would not be allowed. It is for equity only
This would be allowed on both types of bond
Explanation
A greenshoe option refers to the ability of the lead manager to ask the issuing company to issue more bonds. It is effectively a type of call option held by the lead manager.
A greenshoe option is permitted on both of these types of bonds if there is sufficient demand.
57
A share offer is made on the junior market of an exchange, which of these offers warrants the need to produce a prospectus?
A
An offer of £9m to the general public
B
An offer of £6m to 101 qualified investors
C
An offer of £5m to 50 qualified investors
D
Offers on the junior markets require an admission document rather than a prospectus
An offer of £9m to the general public
Explanation
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).
58
When global depositary receipts are issued, whose name appears on the company's register of owners?
```
A
Bearer holder
B
Depositary bank
C
The issuing company
D
The bank that issued the GDR
```
Depositary bank
Explanation
This seems a tricky question as it may be possible that the bank issuing may be holding the shares themselves but is not always the case and therefore in line with the CISI book, the depositary bank is the best answer.
59
Euroclear UK and Ireland run a settlement system for UK securities called CREST. Other than arranging payment and delivery of securities, what extra service does CREST arrange?
A
Novation of trades performed on LSE's SETS system
B
Collects payment for SDRT and transfers them directly to HMRC
C
Creates invoices for each member for net SDRT payments at the end of each day
D
Acts as depository for bearer documents in the UK
Collects payment for SDRT and transfers them directly to HMRC
Explanation
CREST will collect SDRT on behalf of Her Majesty's Revenue and Customs (HMRC). However, these will be collected for each purchase. There is no netting of SDRT.
60
Which of the following would be considered a benefit of an investment trust over an authorised unit trust?
A
The ability to buy from and sell to the fund manager gives greater liquidity
B
The fund manager can have a longer time horizon in terms of investment
C
The value of the share is set at its net asset value
D
Share price stability
The fund manager can have a longer time horizon in terms of investment
Explanation
Investment Trusts as closed-ended vehicles, the number of shares in issue in an investment trust is not affected by the day-to-day purchases and sales by investors, which allow the managers to take a long-term view of the investments of the trust. With an open-ended scheme, such as an OEIC, if there are more sales of units or shares by investors than purchases, the number of units reduces and the fund must pay out cash. As a result, the managers may need to sell investments, even though it may not be the best time to do so from a strategic and long-term viewpoint.
As secondary market shares, the shares of an investment trust company can suffer from volatility caused by changes in supply and demand.
61
The types of order accepted on order driven systems are:
A
at best, limit, execute and eliminate and iceberg orders only
B
market orders and orders which will execute against a matching price or better immediately
C
orders to sell and buy are ranked by price then time priority
D
orders that will either execute or cancel immediately, or will go to the buyers and sellers queue
orders that will either execute or cancel immediately, or will go to the buyers and sellers queue
Explanation
Market orders, execute and eliminate, and fill or kill orders will execute immediately or will be cancelled. Limit orders and iceberg orders not executed immediately will go to the order book and placed in the Bid/Offer queue.
62
With regard to companies listed on a junior market e.g. the LSE's Alternative Investment Market , which of the following must stay with the company for the duration of the listing?
```
A
Nominated advisor
B
Broker
C
Advisor and accountants
D
Broker and advisor
```
Broker and advisor
Explanation
AIM rules stipulate that the nominated advisor and the corporate broker continue their relationship with the company for the duration of the listing.
63
A company has annouced they are going to pay a dividend. Some of the company's shares are being borrowed from a pension fund in a stock lending agreement. Which of the following BEST describes the payment of the dividend?
A
The pension fund will accept in all cases under the securities lending agreement that they will lose all benefits
B
The borrower will receive all dividend payments from the company, but in most cases the dividends will also be passed to the pension fund as a manufactured dividend
C
The issuing company's chairman will be informed of the agreement and these shares will no longer be considered outstanding and therefore no dividend payment will be made
D
As the legal owner of the shares the company will pay the dividend directly to the pension fund
The borrower will receive all dividend payments from the company, but in most cases the dividends will also be passed to the pension fund as a manufactured dividend
Explanation
When a security is loaned, the title of the security transfers to the borrower. This means that the borrower has the advantages of holding the security, just as though they owned it. Specifically, the borrower will receive all coupon and/or dividend payments, and any other rights such as voting rights.
In most cases, these dividends or coupons will also be passed to the lender in the form of what is referred to as a manufactured dividend.
64
Why is it important that 'request for quote' systems run alongside the dealer-to-customer market?
```
A
To cater for large volumes
B
To achieve better prices
C
To avoid volatility
D
To compensate for inflation risk
```
To achieve better prices
Explanation
RFQ systems bring dealers into direct competition with each other which should deliver price improvement for investors. They also offer a significant improvement over voice communication in terms of ease and speed of trading.
65
If an investor placed an order in a competitive gilt auction, which of the following best describes the price the investor will pay?
A
The investor will pay the price they bid if they are successful
B
The investor will pay the lowest successful price in the auction
C
The investor will pay a volume weighted average price
D
The investor will pay the uncrossing price
The investor will pay the price they bid if they are successful
Explanation
In a competitive gilt auction, investors pay the price they bid if they are successful. In a non-competitive gilt auction, investors pay a volume weighted average price of the successful competitive bids.
The investor will pay the lowest successful price in a tender offer.
66
What are the responsibilities of a market maker outside of the exchange's open hours?
A
To provide two-way prices to the market and exchange
B
A market maker has no responsibilities during this time
C
To report all trades within three minutes
D
To enter trade reports of trades that took place outside the mandatory quote period (MQP)
A market maker has no responsibilities during this time
Explanation
From 5.15 pm until 7.15 am, no trade reports can be submitted and the market is not open therefore no prices are entered. As a result the market maker has no responsibility during this time.
67
In relation to an IPO, which of the below will be involved in completing the due diligence in the production of the company's prospectus?
```
A
Legal advisors only
B
Sponsor and reporting accountants
C
Legal advisor and sponsor only
D
Legal advisor and reporting accountants
```
Legal advisor and reporting accountants
Explanation
Sponsor is responsible for the co-ordination and production of the prospectus. The reporting accountants will attest to the validity of the financial information provided in the prospectus. The legal advisers will make sure that all relevant matters are covered in the prospectus and the statements made are justified. The combination of the reporting accountants and the legal
advisers is said to be providing due diligence for the prospectus - making sure the document is
accurate and complies with the regulations.
68
Who sets the rules for members of an exchange governing their trading practices?
```
A
The regulator
B
The exchange
C
The listing authority
D
The central bank
```
The exchange
Explanation
The exchange sets the rules for its member firms.
69
When referring to index-linked gilts, which of the following is true?
A
The nominal value and the coupon are linked to the consumer price index
B
The coupon only is linked to retail prices
C
The redemption value only is linked to retail prices
D
The redemption value and the coupon are linked to retail prices
The redemption value and the coupon are linked to retail prices
Explanation
The coupon is adjusted for inflation throughout the life of the bond, but the capital is only adjusted on redemption.
70
The behaviour rules for broker/dealer firms trading on an exchange would be overseen by:
```
A
The central bank
B
The exchange
C
The regulator
D
The listing authority
```
The exchange
Explanation
Listing and disclosure rules are set and overseen by the United Kingdom Listing Authority (UKLA). However, day to day behaviour rules regarding trading etc. are overseen by the exchange.
71
When wouldn't you get the limit price on your order?
```
A
In the opening auction
B
The uncrossing period
C
It matches with a Fill or Kill order
D
It matches with a best offer order
```
In the opening auction
Explanation
During the opening auction no matching takes place.
72
Once the terms have been agreed between buyer and seller and the trade executes it next enters the:
```
A
Post settlement phase
B
Settlement phase
C
Netting phase
D
Clearing phase
```
Clearing phase
Explanation
Clearing phase - as soon as a trade has been executed, a number of procedures and checks must be conducted before settlement can be completed. These include matching the trade instructions supplied by each counterparty to ensure that the details they have supplied for the trade correspond. It also involves conducting checks to ensure that the seller has sufficient securities to deliver and that the buyer has sufficient funds to cover the purchase cost.
73
You buy US treasury bonds when they are issued. The method of pricing used would be:
```
A
Tap
B
Tender
C
Auction
D
Competitive
```
Tender
Explanation
Whilst the US use a Dutch Auction method to issue T-Bonds. Although it is called an auction, the price of the issue is assessed tender-style, with investors paying a common strike price.
74
Which of the following would describe how UK T-bills are issued?
```
A
Auctions
B
Shelf registration
C
Cash box
D
Tenders
```
Tenders
Explanation
In the UK, T-bills are issued at weekly auctions, known as tenders, held by the DMO at the end of the week (usually a Friday). These tenders are open to bids from a group of eligible bidders which include all of the major banks.
Note: In a tender process, successful bidders would all pay the same price and for this reason, UK offerings of T-bills are not strictly tenders. However they are referred to as 'tenders' and for this reason, it is the correct answer in the exam!
75
During an initial public offer of shares, how is the price usually determined?
```
A
Completely at the discretion of the issuer
B
Through a tender process
C
Through an auction process
D
Through a reverse enquiry
```
Through a tender process
Explanation
Auction process applies to UK government bond issues. Although a US government bond issue is called an auction, it is priced tender-style. Reverse enquiry applies to corporate bonds. Other answer could be a fixed price offer where the issuing house issues shares just below a point they expect a full subscription.
76
A company has enlisted the help of financial professionals to issue a large number of new shares to the market. Which of the following would agree to support the price by buying back the newly issued shares in the market if the price falls below a certain level, therefore stabilising the price?
```
A
Lead manager
B
Underwriter
C
Sponsor
D
Book runner
```
Lead manager
Explanation
Stabilisation is the process whereby, to prevent a substantial fall in the value of securities when a large number of new securities is issued, the lead manager of the issue agrees to support the price by buying back the newly issued securities in the market if the market price falls below a certain pre-defined level. This is done in an attempt to give the market a reasonable chance to adjust to the increased number of securities that have become available, by stabilising the price at which they are traded.
77
What is the role of a note trustee?
A
To represent the interests of holders of issues of securities, while providing guidance to the issuer
B
To take charge of a security for the benefit of various secured parties
C
To hold the shares in an issuing special purpose vehicle (SPV) in order to ensure off-balance-sheet treatment
D
To provide for banks which need to resign because of conflicts of interest
To represent the interests of holders of issues of securities, while providing guidance to the issuer
Explanation
To take charge of a security is a security trustee; to hold the shares in an issuing special purpose vehicle is a share trustee; and to provide for banks which need to resign would be the successor trustee.
78
The spot rate is currently 1EUR : 0.8900GBP. If the interest rates in the UK are 4% pa, and in the eurozone are 2% pa, calculate the six-month forward foreign exchange rate using interest rate parity.
```
A
0.8988GBP
B
0.8813GBP
C
0.9075GBP
D
0.8729GBP
```
The correct answer is: A - 0.8988GBP
Explanation
Firstly we would need to de-annualise the interest rates:
UK = 4%/2 = 2% for six months Eur = 2%/2 = 1% for six months
Then use the interest rate parity formula:
F = (1+r.var) / (1+r.base) x spot (In the question the Euro is quoted as the '1' value and is therefore the base currency)
F = 1.02/1.01 x 0.8900
F = 0.8988
79
An offer for subscription must:
```
A
Be made available to the general public
B
Be made available to selected investors
C
Be made available to all existing shareholders
D
Be made available to selected shareholders
```
Be made available to the general public
Explanation
An offer for subscription is a general marketing technique for issuing new shares (as well as an offer for sale) and must be made available to all investors, meaning the general public.
A placing is a selective technique, where new shares are only offered to selected investors.
80
Investors have been asked to give tender offers for an 'offer for sale'. The minimum price indicated by the company is 400, you give a bid of 600 and the highest bid is 660. The strike price is 490. What will you pay?
```
A
400
B
490
C
600
D
660
```
490
Explanation
In a tender offer such as this, investors will pay the same price, i.e. the strike price
81
An investor chooses to invest in the forward foreign exchange market rather than the spot market. Which of the following statements is true?
A
GBP is always base in the spot markets
B
Spot markets do not quote foreign exchange rates as a bid/offer spread
C
Both spot and forward markets settle two business days after the deal
D
Forward markets settle on a pre-agreed date three days or more after the deal
Forward markets settle on a pre-agreed date three days or more after the deal
Explanation
Although spot markets settle T+2, the forward markets will settle on a pre-agreed date. The examiner specifies three days or more after the deal as, if it were less, it would be a spot transaction.
82
An inter-dealer broker:-
```
A
May be a subsection of a broker dealer
B
Matches market makers trades
C
Can take principal positions
D
Provides prices for a market maker
```
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.
83
Which of the following would explain why an investor wishes to use a net total return index rather than a price return index?
A
They wish to factor in the effects of further tax on their returns
B
They wish to observe the effects of market capitalisation
C
They wish to factor in the effects of dividend reinvestment
D
They wish to observe the effects of mean variance returns
They wish to factor in the effects of dividend reinvestment
Explanation
Price return, which measures the price performance and, therefore, disregards income from dividends. Total return, which measures the performance of both price return and dividend reinvestment. Net total return, which accounts for dividend reinvestment after the deduction of a withholding tax.
84
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
B
Produce annual accounts
C
Appoint directors
D
Issue shares
```
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.
85
Which members would be involved in a subscription IPO?
```
A
Lead manager and Co-managers
B
Underwriters
C
Issuer
D
Corporate Broker
```
Issuer
Explanation
An offer of subscription involves a company issuing shares directly to the general public
86
Which one of the following is a description of a corporate nominee system?
A
An investor's shares are held in a designated nominee account
B
An investor's shares are held in a pooled nominee account
C
It is a hybrid which has characteristics of pooled and designated
D
An investor's shares are held in the investor's own name within a nominee account
It is a hybrid which has characteristics of pooled and designated
Explanation
The corporate nominee is a halfway house between the pooled and the designated nominee structures offered by stockbrokers. It will result in a single entry for all the shareholders together in the company's register (like the pooled nominee) but beneath this the issuing company (or its registrar) will be aware of the individual holdings that make up the nominee. In a similar way to the designated nominee structure, the company will be able to forward separate dividend payments to each of the individual shareholders, as well as voting rights and other potential shareholder perks.
87
hich of the following would not be found on the statement of financial position under intangible non-current assets?
```
A
Goodwill
B
Capitalised development costs
C
Work in progress
D
Patents
```
Work in progress
Explanation
Work in progress will be shown as a current asset.
88
If a limit order is entered onto the order book with no specific time of when to expire, if it does not execute, when will it normally be removed from the order book?
```
A
After 90 days
B
End of the week
C
End of the day
D
After the uncrossing period
```
End of the day
Explanation
If no time limit is specified the limit order will expire at the end of the trading day on which the order was placed.
89
With respect to the issuing company which of the following would be considered a benefit to issuing warrants rather ordinary shares?
A
They will be able to issue shares at a higher price
B
It will ensure their employees are more motivated to work harder
C
It will allow the company to recall these warrants at any time in the future preventing possible dilution of ownership
D
They will be able to gain extra income when the warrants are traded in the secondary market
They will be able to issue shares at a higher price
Explanation
If the shares are currently trading at 77p each, the warrant owner has the right, but not the obligation, to buy shares at £1 each, then this will be at a higher than current price. The sale of warrants for cash will raise money for the company, and, if the warrants are exercised, then further capital will be raised by the company.
90
A firm lends out client stock, who would make the trade report?
```
A
It is not a reportable trade
B
The firm
C
It will be automatic
D
The custodian
```
It is not a reportable trade
Explanation
There is not enough to assume any selling has taken place so therefore it implies collateral lending and this is not a reportable trade.
91
For issuance of securities the members of a syndicate would be:
```
A
an investment bank and its subsidiaries
B
the lead manager and co-lead managers
C
an issuing house and its competitors
D
the lead manager, sponsor, reporting accountants, corporate broker, legal advisors and public relations
```
the lead manager and co-lead managers
Explanation
The sponsor will generally act as the lead manager of the syndicate, appointing a number of co-managers to assist.
92
An income statement would be best described as a:
A
Moving picture showing income and expenses over a given period of time.
B
Statement of financial position at a specific time
C
Summary of profits and losses over a given period of time
D
Statement of a company's income in relation to its current financial position.
Moving picture showing income and expenses over a given period of time.
93
According to corporate governance requirements for a listed company, a company must:
```
A
Disclose price sensitive information
B
Ensure that management responsibilities are shared within a firm
C
Have a trading record of three years
D
Produce quarterly accounts
```
Ensure that management responsibilities are shared within a firm
Explanation
Corporate governance - ensures that the directors are responsible and accountable for the running of the firm. It also ensures that the responsibilities are shared and that too much influence is not placed with one person.
Reporting (ensuring that all shareholders are given an equal opportunity to access price-sensitive information) is a continuing obligation, but not covered by corporate governance.
