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SIAA Securities & Managed Investments study materials
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SIAA Securities & Managed Investments practice questions

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Question 1Securities markets, market participants and regulatory framework

Which body is the primary statutory regulator of the securities industry in Singapore?

  1. Singapore Exchange Regulation
  2. Central Provident Fund Board
  3. Monetary Authority of Singapore Correct answer.
  4. Accounting and Corporate Regulatory Authority

Explanation

The Monetary Authority of Singapore administers the Securities and Futures Act and the Financial Advisers Act, making it the principal statutory regulator for capital markets and licensed intermediaries. Exchange-level front-line supervision is delegated but statutory powers remain with the Authority.

Question 2Securities markets, market participants and regulatory framework

A prospectus registered with the Monetary Authority of Singapore is required primarily to achieve which outcome?

  1. Guaranteeing the issuer a minimum subscription level
  2. Ensuring full and true disclosure to prospective investors Correct answer.
  3. Providing a government backing for the issue
  4. Setting a fixed offering price for the securities

Explanation

Registration of a prospectus is a disclosure-based mechanism: investors are given the information needed to make an informed assessment, and the regulator does not merit-review the offer. It confers no price guarantee, subscription guarantee or state backing.

Question 3Securities markets, market participants and regulatory framework

In a typical securities trade executed on an exchange, what does the clearing house interpose between the counterparties?

  1. An indemnity from the exchange's listing committee
  2. A novation creating the clearing house as counterparty to each side Correct answer.
  3. A lien over the clients' other assets
  4. A fiduciary duty owed to both sides

Explanation

Through novation the clearing house becomes buyer to every seller and seller to every buyer, replacing bilateral counterparty exposure with exposure to the clearing house. This is supported by margin, a default fund and other risk controls.

Question 4Securities markets, market participants and regulatory framework

Which activity requires a Capital Markets Services licence under the Securities and Futures Act?

  1. Publishing general economic commentary in a newspaper
  2. Listing a company's shares on an overseas exchange
  3. Dealing in capital markets products for clients as a business Correct answer.
  4. Auditing the financial statements of a fund manager

Explanation

Dealing in capital markets products is a regulated activity, and carrying it on as a business requires a Capital Markets Services licence unless an exemption applies. Media commentary, overseas listings and statutory audits fall outside that licensing regime.

Question 5Securities markets, market participants and regulatory framework

What is the principal role of a market maker on an exchange?

  1. Providing continuous two-way quotes to support liquidity Correct answer.
  2. Setting the official closing price each day
  3. Approving new listings for admission to trading
  4. Guaranteeing investors against losses on their holdings

Explanation

A market maker stands ready to buy and sell at quoted prices, narrowing spreads and improving liquidity in assigned securities. It does not insure investors, fix closing prices by fiat, or decide listing admissions.

Question 6Securities markets, market participants and regulatory framework

Which statement best describes a collective investment scheme?

  1. A single investor's discretionary portfolio managed by a broker
  2. A pool of assets managed as a whole for the benefit of multiple participants Correct answer.
  3. A bilateral currency swap between two banks
  4. A company's employee share option plan

Explanation

A collective investment scheme involves arrangements in respect of property where participants do not have day-to-day control and share in the profits or income of the pooled assets. Single-investor mandates and bilateral contracts lack the pooling element.

Question 7Securities markets, market participants and regulatory framework

Which of the following is a key difference between a stock exchange and an over-the-counter market?

  1. Exchange trades cannot be cleared through a central counterparty
  2. Exchanges operate centralised order matching under published rules Correct answer.
  3. Over-the-counter markets prohibit trading in equity securities
  4. Over-the-counter trades are always settled on the same day

Explanation

An exchange provides a centralised, rule-governed trading venue with transparent price discovery, whereas over-the-counter trading is decentralised and negotiated between parties. Neither market type is defined by same-day settlement or by an absolute product prohibition.

Question 8Securities markets, market participants and regulatory framework

What is the main purpose of a central securities depository?

  1. To hold securities in book-entry form and effect transfers Correct answer.
  2. To underwrite new issues of securities
  3. To advise retail investors on portfolio allocation
  4. To set monetary policy for the jurisdiction

Explanation

A central securities depository immobilises or dematerialises securities and records ownership electronically, allowing transfers and settlement by book entry. It does not underwrite issues, give investment advice or conduct monetary policy.

Question 9Securities markets, market participants and regulatory framework

An issuer wishes to conduct a rights issue and needs to know how the offer is allocated. Which statement is correct?

  1. The offer must be priced at the previous day's closing price
  2. New securities are allocated by lottery among all applicants
  3. Only institutional investors may subscribe to the offer
  4. Existing shareholders are offered the new securities in proportion to their holdings Correct answer.

Explanation

A rights issue gives existing holders a pre-emptive allocation in proportion to their existing holdings, usually at a discount, and the rights may be renounced or traded. It is not a lottery, is not restricted to institutions, and the price is set by the issuer.

Question 10Securities markets, market participants and regulatory framework

A licensed fund manager receives a gift of significant value from a broker whose services it uses for client trades. Under the applicable conduct rules, what is the manager's primary obligation?

  1. Retain the gift because it is unrelated to client assets
  2. Disclose and manage the conflict, or decline the gift Correct answer.
  3. Pass the gift to clients in cash immediately
  4. Record the gift only if it exceeds the manager's annual fee

Explanation

Conflicts of interest must be identified and either avoided or managed and disclosed so that clients' interests are not compromised. The threshold for recording or escalating benefits is set by the firm's policies and the regulator's conflict rules, not by a comparison with fees.

Question 11Securities markets, market participants and regulatory framework

Which best explains why exchanges impose circuit breakers or trading halts?

  1. To allow a cooling-off period during extreme price movements Correct answer.
  2. To increase the exchange's trading revenue
  3. To prevent short selling permanently
  4. To fix the price of the security at its last traded level

Explanation

Circuit breakers and halts pause trading when prices move beyond defined thresholds, giving participants time to absorb information and reducing disorderly volatility. They are temporary controls, not revenue measures or permanent bans.

Question 12Securities markets, market participants and regulatory framework

An individual is offered a role as a nominated adviser to a company seeking admission to a sponsor-supervised market. What is the adviser's core responsibility?

  1. Acting as the company's legal counsel in litigation
  2. Assessing suitability for listing and guiding compliance obligations Correct answer.
  3. Providing liquidity in the company's shares after listing
  4. Guaranteeing the company's future profits

Explanation

A sponsor or nominated adviser assesses whether the applicant is suitable for listing and supports it in meeting continuing obligations after admission. It does not guarantee performance, act as litigator, or take on a market-making function.

Question 13Securities markets, market participants and regulatory framework

Which of the following best describes the fiduciary duty of a discretionary portfolio manager?

  1. A duty to guarantee a minimum annual return
  2. A duty to follow the client's instructions on every trade
  3. A duty to act in the client's best interests and avoid conflicts Correct answer.
  4. A duty to hold client assets on the manager's own balance sheet

Explanation

A fiduciary must act loyally and in the client's best interests, managing conflicts and exercising care and skill. Discretionary management means the manager decides trades without seeking instructions for each one, and returns cannot be guaranteed.

Question 14Securities markets, market participants and regulatory framework

A retail investor buys units of an authorised unit trust. Which entity is responsible for safeguarding the scheme's assets and overseeing the manager?

  1. The exchange on which the units are listed
  2. The trustee or custodian of the scheme Correct answer.
  3. The scheme's investment adviser
  4. The distributing bank's relationship manager

Explanation

The trustee or custodian holds the scheme's assets separately and monitors the manager's compliance with the constitutive documents and applicable rules. Distributors, exchanges and advisers perform different roles.

Question 15Securities markets, market participants and regulatory framework

Which of the following is the clearest example of market manipulation?

  1. Hedging a position with a derivative
  2. Placing orders with no intention to execute in order to move the price Correct answer.
  3. Buying shares based on published research
  4. Selling shares to rebalance a portfolio

Explanation

Entering orders that the trader does not intend to execute, in order to create a false impression of demand or supply, is a form of manipulative conduct. Legitimate trading driven by research, rebalancing or hedging lacks the deceptive intent.

Question 16Securities markets, market participants and regulatory framework

A firm holds client money in a trust account. Which practice is consistent with client money rules?

  1. Pooling client money with the firm's own funds in one account
  2. Applying client money to settle the firm's own trading losses
  3. Depositing client money in a segregated account with daily reconciliation Correct answer.
  4. Using client money temporarily to fund the firm's working capital

Explanation

Client money must be segregated from the firm's own assets and reconciled regularly so that it is readily identifiable and returnable to clients. Using it for the firm's working capital, losses or commingling breaches those protections.

Question 17Securities markets, market participants and regulatory framework

Which statement about short selling regulation is most accurate?

  1. All short selling is prohibited in every regulated market
  2. Short selling is permitted only for government bonds
  3. Short selling never requires the seller to arrange a borrow
  4. Short selling may be permitted subject to disclosure, borrowing and settlement controls Correct answer.

Explanation

Regulators typically permit short selling but impose controls such as disclosure of significant short positions, rules on locating or borrowing securities, and settlement discipline. Blanket prohibition and bond-only permission are not the norm.

Question 18Securities markets, market participants and regulatory framework

What is the main function of an index provider in the securities markets?

  1. Executing client orders on the exchange floor
  2. Guaranteeing settlement of trades
  3. Acting as trustee for unit trusts
  4. Constructing and maintaining benchmarks used by funds and derivatives Correct answer.

Explanation

Index providers design methodologies, select constituents and publish benchmarks that underpin index funds, exchange-traded funds and index derivatives. They do not execute orders, act as trustee, or guarantee settlement.

Question 19Securities markets, market participants and regulatory framework

An issuer's shares are subject to a trading halt pending an announcement. Which statement best reflects the purpose of such a halt?

  1. To allow the issuer time to correct an information asymmetry Correct answer.
  2. To allow the exchange to buy the issuer's shares cheaply
  3. To punish the issuer for a disclosure breach
  4. To permanently remove the securities from trading

Explanation

A halt prevents trading while material information is unavailable to the whole market, protecting investors from trading on an uneven information footing. It is not punitive, does not involve the exchange trading for its own account, and is normally temporary.

Question 20Securities markets, market participants and regulatory framework

Which of the following is a key difference between a unit trust and a closed-end fund?

  1. A closed-end fund cannot be listed on an exchange
  2. A closed-end fund must redeem units daily at net asset value
  3. A unit trust has a fixed number of units that trade at a premium or discount
  4. A unit trust generally issues and redeems units at net asset value on request Correct answer.

Explanation

An open-ended unit trust creates and cancels units in response to investor demand at net asset value, whereas a closed-end fund has a fixed capital base whose shares trade on an exchange and may diverge from net asset value.

Question 21Securities markets, market participants and regulatory framework

Under a disclosure-based listing regime, which document typically contains the detailed risk factors and financial information for a new issue?

  1. The underwriter's engagement letter
  2. The issuer's internal board minutes
  3. The exchange's trading rules
  4. The prospectus or offering document Correct answer.

Explanation

The prospectus or offering document is the disclosure vehicle through which investors receive financial, business and risk information about the offer. Board minutes, exchange rules and engagement letters are not investor-facing disclosure documents.

Question 22Securities markets, market participants and regulatory framework

A broker executes a client order but allocates a favourable price to the firm's proprietary account and a worse price to the client. Which breach does this most directly represent?

  1. Front running of client orders
  2. Client order priority and best execution failure Correct answer.
  3. Insider dealing in listed securities
  4. Unauthorised short selling

Explanation

Where client orders are disadvantaged relative to the firm's own trading, the firm has failed to give client orders due priority and to act in the client's best interests. Front running is the separate practice of trading ahead of an unexecuted client order.

Question 23Securities markets, market participants and regulatory framework

An investor holds a convertible bond. Which statement best captures the instrument's dual nature?

  1. It is a deposit insured by the central bank
  2. It is an equity instrument that may convert into a loan
  3. It is a debt instrument that may convert into a specified number of shares Correct answer.
  4. It is a derivative whose value is unrelated to the issuer's shares

Explanation

A convertible bond pays coupon interest as debt but carries an option to convert into shares at a set ratio, so its value reflects both credit and equity considerations. It is not a deposit and its value is linked to the issuer's share price.

Question 24Securities markets, market participants and regulatory framework

A fund manager directs trades to a broker in exchange for that broker providing research and execution services to the manager. Which statement best describes the regulatory concern with this arrangement?

  1. It raises conflict and inducement concerns that must be managed and disclosed Correct answer.
  2. It is prohibited because research may never be obtained from brokers
  3. It is permitted only where the broker waives all commissions
  4. It is permitted only if the research is shared with retail clients

Explanation

Bundled arrangements can create conflicts and inducements, so firms must ensure the services benefit clients, are properly disclosed and are managed under the applicable conduct rules. Absolute prohibition, mandatory client sharing, or commission waiver are not the governing principles.

Question 25Securities markets, market participants and regulatory framework

Which sequence correctly reflects the typical lifecycle of an exchange-traded equity trade?

  1. Execution, clearing, settlement, custody Correct answer.
  2. Custody, clearing, execution, settlement
  3. Clearing, settlement, execution, custody
  4. Settlement, execution, custody, clearing

Explanation

A trade is first executed on the venue, then cleared through a central counterparty that novates and nets obligations, then settled by delivery versus payment, after which the securities are held in custody. The other sequences invert these dependent steps.

Question 26Securities markets, market participants and regulatory framework

Which body is typically responsible for authorising a collective investment scheme before it can be marketed to retail investors in a regulated jurisdiction?

  1. The securities regulator Correct answer.
  2. The sponsoring stock exchange
  3. The scheme's trustee or depositary
  4. The scheme's investment manager

Explanation

Authorisation of retail collective investment schemes is a public regulatory function, exercised by the securities regulator or an equivalent competent authority. The manager, trustee and exchange are private or market parties that may apply for or support authorisation but cannot grant it themselves.

Question 27Securities markets, market participants and regulatory framework

In a securities market, which party acts as an intermediary that matches buy and sell orders on an exchange on behalf of clients?

  1. A broker Correct answer.
  2. A credit rating agency
  3. A registrar
  4. A custodian bank

Explanation

A broker executes client orders and, where it is an exchange member, routes them to the trading venue for matching. Custodians safekeep assets, rating agencies assess creditworthiness, and registrars maintain shareholder records; none of these executes trades.

Question 28Securities markets, market participants and regulatory framework

A start-up wishes to raise capital by selling shares to a small number of experienced investors without a public offer or listing. Which description best fits this activity?

  1. A private placement of equity Correct answer.
  2. An initial public offering on a regulated market
  3. A rights issue to existing shareholders
  4. A secondary market trade

Explanation

A private placement involves offering securities to a limited group of investors, often institutions or high-net-worth individuals, without a public offer document or listing. An IPO and a rights issue both involve public or existing-shareholder distribution, and a secondary trade transfers already-issued shares rather than raising new capital.

Question 29Securities markets, market participants and regulatory framework

An investor buys shares through a broker and the trade settles two business days after execution. Which statement about the settlement process is most accurate?

  1. The buyer must pay the full price on the trade date regardless of settlement
  2. The broker takes ownership of the shares and later resells them to the client
  3. Settlement risk is eliminated because the exchange guarantees every trade
  4. Legal title passes only when the central securities depository completes book-entry transfer against payment Correct answer.

Explanation

In a delivery-versus-payment system, ownership transfers when the central securities depository moves securities and cash simultaneously in its books. Payment falls due on the settlement date, not the trade date, and the broker acts as agent rather than principal owner.

Question 30Securities markets, market participants and regulatory framework

A regulator wishes to address a conflict of interest arising from the way firms structure their order-handling arrangements. Which regulatory approach most directly targets this conflict?

  1. Setting a maximum permitted level of brokerage commission
  2. Requiring firms to publish their best-execution and order-handling policies Correct answer.
  3. Restricting share ownership by retail investors
  4. Requiring issuers to publish quarterly earnings guidance

Explanation

Order-handling and best-execution rules require firms to disclose how client orders are routed and executed, making conflicts visible and enforceable. Commission caps, earnings guidance and ownership restrictions address different objectives and do not directly govern order routing.

Question 31Equities and equity-linked products

A company has 20 million shares outstanding and announces a 4-for-1 share split. What is the number of shares outstanding immediately after the split?

  1. 20 million
  2. 80 million Correct answer.
  3. 5 million
  4. 24 million

Explanation

A 4-for-1 split multiplies the share count by four while reducing the price per share to one quarter. Multiplying 20 million by 4 gives 80 million shares. Total market value is unchanged by the split.

Question 32Equities and equity-linked products

Which right is most characteristic of a holder of a company's ordinary (common) shares?

  1. A contractual right to redeem the shares at par on a set date
  2. Priority repayment of principal ahead of bondholders
  3. A claim on residual profits and assets after all senior claims Correct answer.
  4. A fixed dividend payable before any other distribution

Explanation

Ordinary shareholders are residual owners: they rank last for dividends and for assets in liquidation. Their return is not fixed and depends on what remains after creditors and preferred holders are paid. This residual position is the defining legal feature of common equity.

Question 33Equities and equity-linked products

An investor buys shares at $40 and sells them one year later at $46, receiving $2 per share in dividends during the year. What is the total return?

  1. 20% Correct answer.
  2. 10%
  3. 15%
  4. 5%

Explanation

Total return combines the capital gain of $6 with dividends of $2, giving $8 on a $40 cost base. Dividing 8 by 40 gives 20%. Ignoring dividends would understate the return.

Question 34Equities and equity-linked products

What does a price-to-earnings (P/E) ratio of 15 indicate about a share priced at $30?

  1. The company earned $2 per share in the relevant period Correct answer.
  2. The company paid a dividend of $2 per share
  3. The share trades at $15 below its book value
  4. The company's earnings grew by 15% in the period

Explanation

The P/E ratio equals price divided by earnings per share, so earnings per share equals price divided by the ratio. Dividing $30 by 15 gives $2. The ratio says nothing about dividends, book value, or growth on its own.

Question 35Equities and equity-linked products

Which statement best describes a depositary receipt such as an ADR?

  1. It is a negotiable certificate representing shares in a foreign company, traded on a domestic exchange Correct answer.
  2. It is a derivative that obliges the holder to buy the underlying shares at a set price
  3. It is a bond issued by a foreign government and settled locally
  4. It is a share issued directly by the foreign company in its home market

Explanation

A depositary receipt is issued by a depositary bank against shares held in custody and represents an ownership interest in a foreign company. It trades in the investor's home market and currency, easing cross-border investment. The underlying shares remain held by the custodian.

Question 36Equities and equity-linked products

A company declares a cash dividend with an ex-dividend date of Thursday. An investor buys the shares on Wednesday, before the ex-date. What is the usual outcome?

  1. The investor receives only half the dividend
  2. The investor forfeits the dividend because settlement is delayed
  3. The investor receives the dividend Correct answer.
  4. The seller retains the dividend regardless of the trade date

Explanation

Buyers who purchase before the ex-dividend date are entitled to the declared dividend; buyers on or after the ex-date are not. The ex-date reflects when the shares begin trading without the dividend attached. Settlement timing does not remove the entitlement once the trade is done in time.

Question 37Equities and equity-linked products

Which feature distinguishes preference (preferred) shares from ordinary shares?

  1. A guaranteed capital gain on redemption
  2. Voting rights that always exceed those of ordinary shares
  3. A dividend that is usually fixed and ranks ahead of ordinary dividends Correct answer.
  4. Exemption from all issuer-level taxation

Explanation

Preference shares typically carry a stated dividend rate that must be paid before ordinary dividends and ranks ahead in liquidation. In exchange, holders usually give up much of the voting power and upside participation of ordinary shares. The preference is a priority of claim, not a guarantee of gains.

Question 38Equities and equity-linked products

A stock index is market-capitalisation weighted. One constituent's price rises sharply while all other prices and share counts are unchanged. What happens to that constituent's weight?

  1. It rises because its market value now represents a larger share of the index Correct answer.
  2. It becomes equal to the average weight of the other constituents
  3. It falls because the divisor increases
  4. It stays the same because weights are fixed at each rebalance

Explanation

In a market-cap weighted index, each stock's weight equals its market capitalisation divided by total index capitalisation. A price rise raises that stock's market value, so its share of the total increases. No rebalancing is needed for the weight to drift upward.

Question 39Equities and equity-linked products

An investor holds a convertible bond with a conversion price of $25 when the share price is $30. What is the approximate conversion value per $1,000 face value?

  1. $1,200 Correct answer.
  2. $1,000
  3. $750
  4. $1,250

Explanation

Conversion value equals the number of shares received multiplied by the current share price. At a $25 conversion price, $1,000 converts into 40 shares, which at $30 are worth $1,200. The bond therefore trades at least near this value if conversion is attractive.

Question 40Equities and equity-linked products

A company's shares trade at $50 and it reports earnings per share of $2.50. What is the earnings yield?

  1. 2%
  2. 20%
  3. 5% Correct answer.
  4. 50%

Explanation

Earnings yield is earnings per share divided by price, the inverse of the P/E ratio. Dividing $2.50 by $50 gives 5%. The P/E here is 20, and its reciprocal is 0.05.

Question 41Equities and equity-linked products

Which statement about a company's dividend payout ratio is accurate?

  1. It measures the dividend as a percentage of share price
  2. It must exceed 100% for a sustainable dividend policy
  3. It equals dividends per share divided by earnings per share Correct answer.
  4. It equals the share price divided by dividends per share

Explanation

The payout ratio expresses the proportion of earnings distributed as dividends, calculated as dividends per share over earnings per share. A high ratio leaves less retained earnings for reinvestment. A ratio above 100% means the company is paying out more than it earns.

Question 42Equities and equity-linked products

A rights issue is made on a 1-for-4 basis at a subscription price of $8, when the shares trade at $12. What is the theoretical ex-rights price?

  1. $10.00
  2. $9.60
  3. $11.20 Correct answer.
  4. $8.00

Explanation

The theoretical ex-rights price is the weighted average of the existing shares at market price and the new shares at the subscription price. Four shares at $12 plus one at $8 totals $56 across five shares, giving $11.20. The value of the right is the difference between this and the subscription price.

Question 43Equities and equity-linked products

What is the main purpose of a scrip (bonus) issue?

  1. To buy back shares and cancel them
  2. To raise new cash from existing shareholders
  3. To issue additional shares to existing holders from reserves without raising cash Correct answer.
  4. To convert debt into equity

Explanation

A scrip or bonus issue capitalises reserves by giving existing shareholders extra shares pro rata, with no new money raised. The number of shares rises while the company's assets are unchanged, so the price per share adjusts downward. It is effectively a share split delivered as a dividend of shares.

Question 44Equities and equity-linked products

An index uses a price-weighted method. A $100 stock and a $20 stock are the only constituents. What weight does the $20 stock carry?

  1. 50%
  2. About 83.3%
  3. About 16.7% Correct answer.
  4. 20%

Explanation

In a price-weighted index, weights are proportional to share prices rather than market values. The $20 stock accounts for 20 out of 120 total price points, about 16.7%. The higher-priced stock therefore dominates the index's movement.

Question 45Equities and equity-linked products

A stock has a beta of 1.4. If the market rises 10% and the risk-free rate is unchanged, what does the capital asset pricing model predict for the stock's expected return from market movement alone?

  1. 1.4%
  2. 10%
  3. 14% Correct answer.
  4. 4%

Explanation

Beta measures sensitivity to market movements, so a beta of 1.4 implies the stock moves 1.4 times the market. A 10% market rise therefore implies a 14% contribution from market movement. The actual expected return also includes the risk-free rate and any alpha.

Question 46Equities and equity-linked products

Which characteristic is typical of a growth company's shares?

  1. Heavy reliance on fixed-interest debt for distributions
  2. Low price-to-earnings ratio relative to the market
  3. High dividend payout and low reinvestment
  4. Earnings reinvested for expansion with little or no dividend Correct answer.

Explanation

Growth companies typically retain earnings to fund expansion, so dividends are low or absent and the P/E ratio is often high. Investors accept low current income in expectation of future capital gains. Value companies, by contrast, tend to show higher payouts and lower multiples.

Question 47Equities and equity-linked products

An investor sells shares short at $60 and later buys them back at $45. Ignoring costs, what is the profit per share?

  1. $45
  2. $15 Correct answer.
  3. $60
  4. $105

Explanation

A short seller profits when the repurchase price is below the original sale price. The gain is $60 minus $45, or $15 per share. The maximum gain is limited to the sale price, while losses can exceed it if the price rises.

Question 48Equities and equity-linked products

A company announces a 1-for-10 share consolidation (reverse split). An investor holds 1,000 shares trading at $0.50. What is the position immediately after, ignoring other effects?

  1. 1,000 shares at about $0.50
  2. 10,000 shares at about $0.05
  3. 100 shares at about $5.00 Correct answer.
  4. 100 shares at about $0.50

Explanation

A 1-for-10 consolidation reduces the share count by a factor of ten and raises the price proportionally. The investor holds 100 shares, and the price adjusts to about $5.00 so that total value is unchanged. Consolidations are often used to lift a low share price above exchange minimums.

Question 49Equities and equity-linked products

Which statement best explains why a convertible bond typically offers a lower coupon than a straight bond from the same issuer?

  1. Convertible holders rank ahead of secured creditors
  2. The conversion option has value to the investor, so investors accept a lower yield Correct answer.
  3. Convertibles have shorter legal maturities by definition
  4. Convertibles are always secured by government guarantees

Explanation

The embedded option to convert into shares gives the investor upside participation, and that value is paid for through a lower coupon. The issuer benefits from cheaper debt in exchange for potential dilution. A straight bond without the option must offer a higher yield to attract investors.

Question 50Equities and equity-linked products

An investor wants to hedge a long equity portfolio against a broad market decline without selling the shares. Which action is most consistent with that objective?

  1. Writing put options on the index
  2. Buying put options on a broad market index Correct answer.
  3. Selling call options on the same shares
  4. Buying additional shares on margin

Explanation

A long put on a market index gains value when the market falls, offsetting losses in the portfolio while the shares are retained. Selling calls or writing puts would add to downside exposure rather than hedge it. Buying on margin increases both risk and leverage.