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QIA practice questions

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Question 1Investment advisory regulation and compliance

Under the Investment Advisers Act of 1940, which of the following persons is excluded from the definition of "investment adviser"?

  1. A bank or bank holding company that provides investment advice
  2. A person who publishes a bona fide financial newspaper of general and regular circulation Correct answer.
  3. A person who advises clients on the purchase and sale of securities for compensation
  4. A person whose advice relates solely to securities issued by the United States government

Explanation

Section 202(a)(11) excludes from the adviser definition the publisher of a bona fide newspaper, news magazine, or business or financial publication of general and regular circulation. This publisher's exclusion applies to genuine publications offered to the general public rather than to individualized advice.

Question 2Investment advisory regulation and compliance

A firm manages a private fund with $150 million in regulatory assets under management. For purposes of federal registration, the firm generally must register with the SEC unless:

  1. It qualifies as an exempt reporting adviser because it advises only venture capital funds Correct answer.
  2. It has fewer than 15 employees
  3. All of its investors are accredited investors
  4. It charges performance-based fees

Explanation

Advisers solely to venture capital funds are exempt reporting advisers under the Dodd-Frank regime and file only Form ADV Part 1A rather than full registration. Size alone does not force registration when an exemption applies.

Question 3Investment advisory regulation and compliance

Which standard of care does an investment adviser owe to its clients under federal fiduciary law?

  1. A duty owed only to clients who sign a written advisory agreement
  2. A duty to disclose only conflicts that the client specifically asks about
  3. A duty to guarantee investment results consistent with the client's stated objectives
  4. A fiduciary duty encompassing a duty of care and a duty of loyalty Correct answer.

Explanation

The SEC has interpreted the Advisers Act to impose a fiduciary duty comprising a duty of care and a duty of loyalty. The duty of care includes understanding the client's objectives and providing advice in the client's best interest; the duty of loyalty requires full disclosure of conflicts.

Question 4Investment advisory regulation and compliance

An adviser recommends a mutual fund share class that pays the adviser a 12b-1 fee when a lower-cost share class of the same fund is available to the client. This conduct most directly implicates which fiduciary duty?

  1. The duty of loyalty, because the recommendation may be influenced by the adviser's compensation Correct answer.
  2. The duty to maintain a business continuity plan
  3. The duty to provide custody of client assets
  4. The duty of best execution

Explanation

Selecting a higher-cost share class that generates additional compensation for the adviser creates a conflict of interest and implicates the duty of loyalty. The adviser must act in the client's best interest and disclose or eliminate the conflict.

Question 5Investment advisory regulation and compliance

Under the Advisers Act, an adviser's brochure delivered to a prospective client must be accompanied by which additional disclosure document?

  1. A written acknowledgment of the client's risk tolerance
  2. A brochure supplement containing information about the specific advisory personnel Correct answer.
  3. A privacy notice describing the firm's information-sharing practices
  4. A copy of the adviser's most recent audited financial statements

Explanation

Form ADV Part 2A (the brochure) must be accompanied by Part 2B, the brochure supplement, which provides information about the advisory personnel who actually provide advice to the client. Both must be delivered before or at the time the advisory contract is entered into.

Question 6Investment advisory regulation and compliance

An adviser's client agreement states that the adviser will not be liable for any losses resulting from its own negligence. Under the Advisers Act, this provision is:

  1. Enforceable only for accounts over $1 million
  2. Enforceable if disclosed in the brochure
  3. Enforceable if the client is an accredited investor
  4. Void because advisers may not obtain waivers of liability for negligence Correct answer.

Explanation

Section 215 of the Advisers Act renders void any provision that waives compliance with the Act or that attempts to obtain a waiver of the adviser's federal fiduciary duty. Hedging clauses that purport to waive liability for negligence are therefore unenforceable.

Question 7Investment advisory regulation and compliance

Which of the following is an element of the SEC's marketing rule for investment advisers?

  1. Advertisements may not include any extracted performance
  2. All performance advertising must show gross-of-fee returns
  3. Hypothetical performance may be shown to any prospective client without conditions
  4. Testimonials and endorsements are permitted only if the adviser discloses whether the person is a client and whether compensation was paid Correct answer.

Explanation

The marketing rule permits testimonials and endorsements subject to disclosure requirements, including whether the speaker is a client and whether compensation was provided. Additional conditions apply to related performance and hypothetical performance.

Question 8Investment advisory regulation and compliance

An adviser advertises a gross performance figure of 12% annually. Under the marketing rule, the advertisement must also present:

  1. The performance of a broad market index
  2. A hypothetical projection of future returns
  3. The same performance net of fees, with at least equal prominence Correct answer.
  4. The adviser's total assets under management

Explanation

The marketing rule requires that any presentation of gross performance be accompanied by net performance, presented with at least as much prominence and over the same time period. This allows investors to see the effect of fees.

Question 9Investment advisory regulation and compliance

Under the Advisers Act custody rule (Rule 206(4)-2), which situation generally triggers a surprise examination requirement?

  1. The adviser acts as qualified custodian and sends account statements to clients
  2. The adviser has authority to withdraw client funds and does not qualify for an exception Correct answer.
  3. The adviser directly deducts its fees from client accounts
  4. The adviser has discretionary authority to trade securities in client accounts

Explanation

When an adviser has custody through authority to withdraw client funds or securities, it generally must maintain the assets with a qualified custodian and undergo an annual surprise examination unless an exception applies. Fee deduction and trading discretion alone do not create custody.

Question 10Investment advisory regulation and compliance

An adviser that has custody of client funds must generally do which of the following?

  1. Convert client funds to firm assets to simplify billing
  2. Obtain a waiver from the client of all custodial safeguards
  3. Hold the funds in the adviser's own operating account
  4. Maintain the funds with a qualified custodian and provide notice to clients of the custodian's name and address Correct answer.

Explanation

The custody rule requires client funds and securities be maintained with a qualified custodian, with notice to clients of the custodian's identity and address. Additional safeguards, such as account statements and surprise examinations, may also apply.

Question 11Investment advisory regulation and compliance

Which of the following best describes the "pay-to-play" rule for investment advisers?

  1. It limits advertising to government pension plans
  2. It prohibits advisers from making political contributions to officials who can influence the selection of advisers for government plans Correct answer.
  3. It prohibits advisers from accepting performance fees from government clients
  4. It requires advisers to register as lobbyists

Explanation

Rule 206(4)-5 restricts political contributions by advisers and their covered associates to government officials who can influence the award of advisory business. Violations can result in a two-year timeout from compensated government business.

Question 12Investment advisory regulation and compliance

An adviser discovers that a covered associate made a $500 political contribution to a state treasurer who appoints trustees of a public pension plan the adviser serves. Under the pay-to-play rule, the adviser generally:

  1. Must stop receiving compensation from that government client for two years unless an exception applies Correct answer.
  2. May continue the government business if the contribution is refunded within one year
  3. Faces no consequence if the contribution was under $1,000
  4. Must immediately register as a broker-dealer

Explanation

A contribution by a covered associate to an official with influence over the award of business triggers a two-year timeout on receiving compensation from that government client, subject to limited exceptions such as the de minimis exception for certain contributors.

Question 13Investment advisory regulation and compliance

Under the Advisers Act, an adviser must deliver a privacy notice to clients under which regulation?

  1. Regulation S-P Correct answer.
  2. Regulation Best Interest
  3. Regulation SCI
  4. Regulation S-K

Explanation

Regulation S-P requires brokers, dealers, and investment advisers to provide initial and annual privacy notices and to safeguard nonpublic personal information. The other regulations govern disclosure content, broker-dealer conduct, and systems compliance, respectively.

Question 14Investment advisory regulation and compliance

An investment adviser that has discretionary authority over client accounts must generally do which of the following before executing the first trade?

  1. Obtain prior approval from the SEC for each trade
  2. Obtain a signed power of attorney notarized by a third party
  3. Provide the client with a copy of the adviser's tax returns
  4. Obtain written discretionary authorization from the client Correct answer.

Explanation

Discretionary authority requires written authorization from the client, typically through the advisory agreement or a limited power of attorney. Oral authority is insufficient for discretionary trading.

Question 15Investment advisory regulation and compliance

Which of the following constitutes a prohibited principal transaction under Section 206(3) of the Advisers Act when done without proper disclosure and consent?

  1. The adviser allocates a block trade among several client accounts
  2. The adviser buys a security for a client account from its own inventory Correct answer.
  3. The adviser purchases a security for a client on a national exchange
  4. The adviser recommends a mutual fund with a sales load

Explanation

Section 206(3) governs principal transactions, where the adviser acts as principal for its own account in a sale or purchase with a client. Such transactions require written disclosure and client consent before completion.

Question 16Investment advisory regulation and compliance

An adviser recommends that a client buy shares of an IPO that the adviser's affiliate is underwriting. This situation requires the adviser to:

  1. Decline the recommendation in all circumstances
  2. Disclose the affiliate relationship and obtain informed consent before the transaction Correct answer.
  3. Wait 90 days after the IPO before recommending the security
  4. Report the transaction only in the annual filing

Explanation

When an adviser recommends a security issued by an affiliate, the conflict must be disclosed and the client's informed consent obtained before the transaction. This addresses the adviser's dual interest in the affiliate's underwriting.

Question 17Investment advisory regulation and compliance

Which of the following is a required element of an investment adviser's compliance program under Rule 206(4)-7?

  1. A guarantee of investment returns
  2. A written code of ethics and annual review of compliance policies by a chief compliance officer Correct answer.
  3. A mandatory arbitration clause in client agreements
  4. A requirement that all employees hold the CFA designation

Explanation

Rule 206(4)-7 requires advisers to adopt written compliance policies and a code of ethics, designate a chief compliance officer, and review the program at least annually. These elements form the core of the compliance rule.

Question 18Investment advisory regulation and compliance

An adviser's chief compliance officer is reviewing the firm's policies after a significant change in business operations. Under Rule 206(4)-7, the firm must:

  1. Review and update its compliance policies at least annually and after material changes Correct answer.
  2. Wait until the next calendar year to update policies
  3. Post the policies on its public website
  4. File the updated policies with the SEC for approval

Explanation

The compliance rule requires an annual review of policies and procedures, and material changes in the business may require more frequent review and updates. The review must be documented.

Question 19Investment advisory regulation and compliance

Under the books and records rule (Rule 204-2), how long must an adviser generally retain most required records?

  1. Three years
  2. Five years Correct answer.
  3. Two years
  4. Ten years

Explanation

Rule 204-2 generally requires advisers to keep most books and records for five years, with the first two years maintained in an easily accessible place. Certain records have different retention periods.

Question 20Investment advisory regulation and compliance

An adviser sends account statements to clients and also has custody of client assets. Under the custody rule, the adviser may avoid the surprise examination requirement if it:

  1. Obtains a client waiver of the examination
  2. Maintains assets in its own name
  3. Relies solely on the adviser's own statements
  4. Sends statements directly to clients and the qualified custodian also sends statements directly to clients Correct answer.

Explanation

The custody rule permits an exception to the surprise examination when the adviser has custody solely because of fee deduction or when the qualified custodian sends account statements directly to clients and the adviser meets related notice conditions. The custodian's direct statements are a key safeguard.

Question 21Investment advisory regulation and compliance

Which of the following best describes the SEC's "best execution" obligation for investment advisers?

  1. A duty to execute all trades on the lowest-cost exchange
  2. A duty to obtain the most favorable terms reasonably available for client transactions under the circumstances Correct answer.
  3. A duty to route all trades to affiliated brokers
  4. A duty to guarantee price improvement on every trade

Explanation

Best execution requires advisers to seek the most favorable terms reasonably available for client transactions, considering price, speed, likelihood of execution, and other factors. It is not a guarantee of the lowest price on every trade.

Question 22Investment advisory regulation and compliance

An adviser receives research services from a broker in exchange for directing client commissions. Under Section 28(e), the adviser may do so only if:

  1. The research is used only for the adviser's personal trading
  2. The broker is unaffiliated with the adviser
  3. The client provides written consent for each trade
  4. The research provides lawful and appropriate assistance to the adviser in its investment decision-making and the commission is reasonable relative to the services Correct answer.

Explanation

Section 28(e) provides a safe harbor for soft-dollar arrangements when the adviser determines in good faith that the commissions are reasonable in relation to the value of brokerage and research services received, and the services assist in investment decision-making.

Question 23Investment advisory regulation and compliance

Which of the following statements about an adviser's obligation to update Form ADV is correct?

  1. The adviser may wait until a client requests updated information
  2. The adviser must file updates only when it adds new clients
  3. The adviser must refile the entire brochure every month
  4. The adviser must file an annual updating amendment within 90 days of the end of its fiscal year Correct answer.

Explanation

Advisers must file an annual updating amendment to Form ADV within 90 days of the end of their fiscal year, and must promptly file other-than-annual amendments when certain information becomes inaccurate.

Question 24Investment advisory regulation and compliance

An adviser that manages a hedge fund and charges a performance fee to qualified clients must ensure that:

  1. The adviser is registered as a broker-dealer
  2. The client meets the qualified client standard and the fee arrangement is disclosed Correct answer.
  3. The performance fee is capped at 1%
  4. The fund has at least 100 investors

Explanation

Section 205(a)(1) permits performance-based compensation only for clients meeting the qualified client standard, and the arrangement must be fully disclosed. The qualified client threshold is periodically adjusted by the SEC.

Question 25Investment advisory regulation and compliance

Which of the following is a key purpose of the Advisers Act's anti-fraud provisions in Section 206?

  1. To set minimum capital requirements for advisers
  2. To mandate specific investment strategies
  3. To require advisers to register with the states
  4. To prohibit advisers from engaging in deceptive or manipulative practices against clients and prospective clients Correct answer.

Explanation

Section 206 is a broad anti-fraud provision that prohibits advisers from employing devices, schemes, or artifices to defraud clients or prospective clients, and from engaging in deceptive or manipulative practices. It reaches conduct even absent a securities transaction.

Question 26Investment advisory regulation and compliance

Under the Investment Advisers Act of 1940, which of the following is required for a person to be considered an investment adviser?

  1. The person must be registered with the SEC.
  2. The person must provide advice exclusively through written publications.
  3. The person must be compensated for providing advice about securities as part of a business. Correct answer.
  4. The person must have discretionary authority over client accounts.

Explanation

The definition of investment adviser under Section 202(a)(11) includes any person who, for compensation, engages in the business of advising others as to the value of securities or the advisability of investing in securities. Discretionary authority and SEC registration are not elements of the definition; they relate to other regulatory requirements.

Question 27Investment advisory regulation and compliance

Which of the following statements about the fiduciary duty of an investment adviser under the Advisers Act is most accurate?

  1. The duty requires the adviser to act solely in the client's best interest and to make full disclosure of material conflicts. Correct answer.
  2. The duty is limited to the specific duties enumerated in the advisory contract.
  3. The duty is satisfied if the adviser obtains the client's written consent to all trades.
  4. The duty applies only when the adviser has discretionary authority over the account.

Explanation

The Supreme Court in SEC v. Capital Gains Research Bureau held that the Advisers Act imposes a fiduciary duty on advisers, requiring them to act in the client's best interest and to disclose material conflicts of interest. This duty exists regardless of whether the adviser has discretion and cannot be waived by a general consent.

Question 28Investment advisory regulation and compliance

An investment adviser registered with the SEC is required to adopt a written code of ethics under which rule?

  1. Rule 206(4)-2
  2. Rule 204A-1 Correct answer.
  3. Rule 204-2
  4. Rule 206(4)-7

Explanation

Rule 204A-1 under the Advisers Act requires SEC-registered investment advisers to adopt a written code of ethics that sets forth standards of conduct and addresses personal trading. Rule 206(4)-7 requires compliance policies and procedures generally, while Rule 204-2 governs books and records and Rule 206(4)-2 governs custody.

Question 29Investment advisory regulation and compliance

Under the Advisers Act, an investment adviser that has discretionary authority over client accounts must generally do which of the following before effecting transactions for the account?

  1. Obtain the client's consent for each individual transaction.
  2. Obtain written discretionary authority from the client within a specified time after account opening. Correct answer.
  3. File a copy of the advisory contract with the SEC.
  4. Provide the client with a copy of the adviser's code of ethics.

Explanation

Under Section 205 and related rules, an adviser with discretionary authority must obtain written authorization from the client, typically within a specified period (e.g., promptly after account opening). The adviser does not need consent for each trade, nor is filing the contract with the SEC generally required.

Question 30Investment advisory regulation and compliance

Which of the following best describes the primary purpose of the anti-fraud provisions in Section 206 of the Advisers Act?

  1. To establish a registration system for investment advisers.
  2. To set minimum capital requirements for advisers.
  3. To prohibit advisers from engaging in fraudulent, deceptive, or manipulative practices. Correct answer.
  4. To require advisers to maintain a minimum net worth.

Explanation

Section 206 is the general anti-fraud provision of the Advisers Act, making it unlawful for any adviser to employ any device, scheme, or artifice to defraud clients or to engage in deceptive practices. It does not address registration, capital, or net worth requirements.

Question 31Investment advisory regulation and compliance

An adviser that is registered with the SEC must deliver a brochure (Part 2A of Form ADV) to clients under which circumstance?

  1. Only if the adviser has custody of client assets.
  2. At or before the time the advisory contract is entered into. Correct answer.
  3. Only upon the client's request.
  4. Annually, regardless of changes.

Explanation

Rule 204-3 requires an adviser to deliver a copy of its brochure (Part 2A) to each client at or before the time the advisory contract is entered into, and to deliver annually thereafter. Delivery is not dependent on client request or custody.

Question 32Investment advisory regulation and compliance

An adviser discovers that a client has been overcharged advisory fees due to a billing error. Under the Advisers Act, the adviser should:

  1. Disclose the error in the next annual brochure delivery.
  2. Wait until the client complains before taking action.
  3. Apply the excess to future fees without notifying the client.
  4. Promptly refund the excess fees to the client. Correct answer.

Explanation

The fiduciary duty and anti-fraud provisions require an adviser to act in the client's best interest and to correct errors promptly. Retaining overcharged fees would constitute a breach of fiduciary duty and potentially a fraudulent practice. Waiting for a complaint or applying credits without notice is not sufficient.

Question 33Investment advisory regulation and compliance

Under the Advisers Act, which of the following is considered a prohibited principal transaction unless the client consents after full disclosure?

  1. An adviser allocates a block trade among several client accounts.
  2. An adviser purchases a security for a client on a national securities exchange.
  3. An adviser directs a client trade to a broker-dealer that provides research.
  4. An adviser sells a security from its own inventory to a client account. Correct answer.

Explanation

Section 206(3) prohibits an adviser from acting as principal for its own account in a transaction with a client without disclosing the capacity and obtaining the client's consent. Selling from its own inventory is a principal transaction. Agency trades on an exchange, directed brokerage, and allocation are not principal transactions.

Question 34Investment advisory regulation and compliance

An adviser has custody of client funds and is subject to the custody rule. Which of the following is generally required?

  1. Quarterly reporting to the SEC of all client transactions.
  2. A surety bond equal to the amount of client funds.
  3. A monthly audit by the SEC.
  4. A surprise examination by an independent public accountant. Correct answer.

Explanation

Rule 206(4)-2 generally requires advisers with custody to undergo an annual surprise examination by an independent public accountant, unless an exemption applies (e.g., pooled vehicles audited annually). The SEC does not conduct monthly audits, and a surety bond is not a general requirement.

Question 35Investment advisory regulation and compliance

An adviser receives research services from a broker in exchange for directing client commissions. Under Section 28(e), the adviser must determine that:

  1. The research services provide lawful and appropriate assistance in the performance of investment decision-making responsibilities. Correct answer.
  2. The commissions paid are the lowest available in the market.
  3. The research services are provided by an affiliate of the adviser.
  4. The client has provided written consent to the arrangement.

Explanation

Section 28(e) provides a safe harbor for advisers who pay more than the lowest commission in exchange for brokerage and research services, provided the adviser determines that the services provide lawful and appropriate assistance to its investment decision-making. The safe harbor does not require lowest commissions, affiliate status, or client consent.

Question 36Investment advisory regulation and compliance

An adviser's client agreement includes a clause stating that the adviser is not liable for any losses unless caused by gross negligence. Under the Advisers Act, this clause is:

  1. Enforceable only if the client is an accredited investor.
  2. Unenforceable because it attempts to waive the adviser's fiduciary duty. Correct answer.
  3. Enforceable because clients can waive fiduciary duties in writing.
  4. Unenforceable only if the adviser has custody of client assets.

Explanation

Under Section 215 of the Advisers Act, any provision in an advisory contract that waives compliance with the Act or attempts to waive the adviser's fiduciary duty is void. Hedge clauses that limit liability for simple negligence are generally unenforceable. The client's status or custody does not change this.

Question 37Investment advisory regulation and compliance

Which of the following statements about the SEC's "pay-to-play" rule for investment advisers is correct?

  1. It applies only to advisers with more than $100 million in assets under management.
  2. It prohibits advisers from providing advisory services for compensation to a government entity for two years after a covered associate makes a political contribution to certain officials. Correct answer.
  3. It prohibits all political contributions by advisers and their employees.
  4. It requires advisers to register as lobbyists if they solicit government clients.

Explanation

Rule 206(4)-5 limits political contributions by advisers seeking government clients. If a covered associate makes a contribution to an official who can influence the selection of advisers, the adviser is generally barred from receiving compensation from that government entity for two years. It does not ban all contributions or require lobbyist registration.

Question 38Investment advisory regulation and compliance

Under the Advisers Act, an investment adviser may assign an advisory contract to another party only if which condition is satisfied?

  1. The assignment is approved by a majority of the adviser's advisory clients.
  2. The client consents to the assignment after receiving written notice of the proposed change. Correct answer.
  3. The adviser provides the client with a revised brochure within ninety days.
  4. The adviser files a notice of the assignment with the SEC within thirty days.

Explanation

Section 205(a)(2) of the Advisers Act makes an advisory contract void if it permits assignment without the client's consent. Consent must be obtained, and the SEC interprets this to require informed written client consent rather than mere notification.

Question 39Investment advisory regulation and compliance

A newly formed adviser intends to rely on the private adviser exemption from SEC registration. Which circumstance would cause the adviser to lose eligibility for that exemption?

  1. The adviser holds itself out to the public as an investment adviser. Correct answer.
  2. The adviser manages assets of less than $25 million.
  3. The adviser's only clients are three private funds.
  4. The adviser has eleven clients, all of whom are natural persons.

Explanation

The private adviser exemption is available only to advisers that have fewer than fifteen clients and that neither hold themselves out to the public as investment advisers nor advise registered investment companies. Publicly presenting oneself as an adviser defeats the exemption regardless of client count.

Question 40Investment advisory regulation and compliance

An adviser recommends that a client buy a security in which the adviser's owner has a substantial personal position, and the adviser does not disclose this interest. Which principle of the Advisers Act is most directly implicated?

  1. The books and records rule, because personal holdings must be logged as advisory records.
  2. The prohibition on fraudulent and deceptive practices, because the undisclosed conflict prevents the client from assessing the advice objectively. Correct answer.
  3. The pay-to-play rule, because the owner's position is a form of political contribution.
  4. The custody rule, because holding a personal position in a recommended security constitutes client asset custody.

Explanation

Section 206 imposes a fiduciary duty that bars advisers from engaging in deceptive practices, and failing to disclose a material conflict of interest is a classic breach. The client cannot evaluate the recommendation without knowing the adviser's owner stands to benefit.

Question 41Financial markets and investment products

Which type of financial market is used for the initial sale of newly issued securities by a company to investors?

  1. Money market
  2. Derivatives market
  3. Primary market Correct answer.
  4. Secondary market

Explanation

The primary market is where new securities are issued and sold directly by the issuer to investors, raising fresh capital. The secondary market is where already-issued securities trade among investors.

Question 42Financial markets and investment products

A government sells a 91-day Treasury bill at a discount to its face value. This instrument is best classified as a:

  1. Money market instrument Correct answer.
  2. Derivative contract
  3. Capital market instrument
  4. Equity security

Explanation

Money market instruments are short-term debt securities with original maturities of one year or less, which includes 91-day Treasury bills. Capital market instruments have longer maturities.

Question 43Financial markets and investment products

An investor buys shares of a company on a stock exchange from another investor. This transaction occurs in the:

  1. Money market
  2. Primary market
  3. Secondary market Correct answer.
  4. Foreign exchange market

Explanation

Trades between investors in already-issued securities take place in the secondary market. The issuer receives no new capital from such trades.

Question 44Financial markets and investment products

Which of the following best describes a bond?

  1. A contract to buy an asset in the future
  2. An ownership stake in a company
  3. A pooled fund managed by professionals
  4. A loan made by the investor to the issuer Correct answer.

Explanation

A bond is a debt security in which the investor lends money to the issuer in exchange for periodic interest and repayment of principal. It does not confer ownership.

Question 45Financial markets and investment products

Which characteristic distinguishes ordinary shares from preference shares?

  1. Ordinary shares typically carry voting rights Correct answer.
  2. Ordinary shares pay a fixed dividend
  3. Ordinary shares have a guaranteed return
  4. Ordinary shares rank ahead of debt on liquidation

Explanation

Ordinary (common) shares generally carry voting rights and a variable dividend, whereas preference shares typically pay a fixed dividend and usually lack voting rights.

Question 46Financial markets and investment products

An investor wants exposure to a diversified basket of securities with professional management. Which product most directly meets this need?

  1. A currency forward
  2. A single corporate bond
  3. A collective investment scheme Correct answer.
  4. A Treasury bill

Explanation

Collective investment schemes pool money from many investors to buy a diversified portfolio managed by professionals. A single bond, bill, or forward does not provide diversified professional management.

Question 47Financial markets and investment products

Which of the following is a derivative instrument?

  1. A bank deposit
  2. A government bond
  3. An exchange-traded option contract Correct answer.
  4. A company's ordinary shares

Explanation

A derivative is a financial contract whose value is derived from an underlying asset, and an option contract is a classic example. Bonds, shares, and deposits are direct instruments.

Question 48Financial markets and investment products

What does the bid-ask spread represent in a securities market?

  1. The difference between the issue price and face value
  2. The total commission charged by the exchange
  3. The annual dividend yield of a security
  4. The difference between the highest buying price and lowest selling price quoted Correct answer.

Explanation

The bid-ask spread is the gap between the best price a buyer is willing to pay (bid) and the best price a seller will accept (ask). It is a measure of transaction cost and market liquidity.

Question 49Financial markets and investment products

A company's share price is 50 and it pays an annual dividend of 2.50 per share. What is the dividend yield?

  1. 5.0% Correct answer.
  2. 2.5%
  3. 10.0%
  4. 20.0%

Explanation

Dividend yield equals annual dividend divided by share price: 2.50 / 50 = 0.05, or 5.0%. It expresses the income return from dividends relative to price.

Question 50Financial markets and investment products

A bond has a face value of 1,000 and a coupon rate of 4% paid annually. What annual coupon payment does the holder receive?

  1. 4
  2. 1,040
  3. 400
  4. 40 Correct answer.

Explanation

The annual coupon equals the coupon rate multiplied by the face value: 4% × 1,000 = 40. The face value is repaid at maturity and is not the annual payment.