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Bulgarian Financial Instruments Broker Exam study materials
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Bulgarian Financial Instruments Broker Exam practice questions

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Question 1Regulatory Framework and Market Supervision

Which Bulgarian institution is the single supervisory authority responsible for licensing and supervising investment firms, trading venues and central counterparties under the Markets in Financial Instruments Act?

  1. The Bulgarian Stock Exchange
  2. The Financial Supervision Commission Correct answer.
  3. The Ministry of Finance
  4. The Bulgarian National Bank

Explanation

The Financial Supervision Commission is the integrated regulator for the non-banking financial sector, including investment firms, regulated markets and CCPs. The central bank handles monetary policy and banking supervision, while the exchange is a private operator.

Question 2Regulatory Framework and Market Supervision

Under the Markets in Financial Instruments Act, which body hears appeals against individual administrative acts issued by the Financial Supervision Commission?

  1. The Constitutional Court
  2. The Supreme Administrative Court Correct answer.
  3. The Supreme Court of Cassation
  4. The Sofia City Court

Explanation

Individual administrative acts of the Financial Supervision Commission are challenged before the Supreme Administrative Court under the general administrative procedure rules. Ordinary civil courts and the constitutional court have no jurisdiction over such appeals.

Question 3Regulatory Framework and Market Supervision

An investment firm wishes to provide investment advice to retail clients in Bulgaria. Which precondition applies under the licensing regime?

  1. It must register with the Ministry of Finance as a financial intermediary
  2. It must obtain a banking licence from the Bulgarian National Bank
  3. It must join the Bulgarian Stock Exchange as a member first
  4. It must obtain authorisation from the Financial Supervision Commission covering that service Correct answer.

Explanation

Providing investment services and activities requires prior authorisation from the Financial Supervision Commission, with the specific services listed in the licence. Exchange membership and banking authorisation are separate matters that do not substitute for this licence.

Question 4Regulatory Framework and Market Supervision

Which document must an investment firm provide to a retail client before concluding an investment service agreement, describing the firm, its services, financial instruments and conflicts of interest?

  1. The internal compliance manual
  2. The general terms and conditions with a client information pack Correct answer.
  3. The prospectus of the client's chosen instrument
  4. The annual financial statements

Explanation

Firms must give clients a general terms and conditions document together with prescribed information on the firm, services, instruments and conflict-of-interest policy. Financial statements, issuer prospectuses and internal manuals are not client-facing pre-contractual disclosures.

Question 5Regulatory Framework and Market Supervision

What is the standard initial capital requirement for an investment firm that operates a multilateral trading facility and deals on own account?

  1. EUR 125,000
  2. EUR 5,000,000
  3. EUR 750,000 Correct answer.
  4. EUR 50,000

Explanation

Firms that operate an MTF or OTF, or that deal on own account, are subject to the highest initial capital tier of EUR 750,000. The lower tiers apply to advisory and order-execution-only firms.

Question 6Regulatory Framework and Market Supervision

An investment firm's own funds fall below the required level. What is the firm's primary obligation toward the regulator?

  1. Suspend all client activity only after the regulator issues an order
  2. Wait until the next quarterly reporting deadline to disclose the shortfall
  3. Increase client fees to rebuild capital before informing the regulator
  4. Notify the Financial Supervision Commission without delay and submit a plan to restore compliance Correct answer.

Explanation

Firms must promptly inform the supervisor of any breach of capital requirements and present a restoration plan. Delaying disclosure or adjusting pricing does not cure the regulatory breach.

Question 7Regulatory Framework and Market Supervision

Which best describes the role of the Bulgarian Stock Exchange in the regulatory framework?

  1. It licenses investment intermediaries independently of the regulator
  2. It acts as the compensation scheme for investor claims
  3. It issues binding rules that override Financial Supervision Commission regulations
  4. It operates a regulated market and is itself subject to supervision by the Financial Supervision Commission Correct answer.

Explanation

The exchange is a market operator authorised and supervised by the Financial Supervision Commission, and its rulebook must be approved by the regulator. It does not license firms or override supervisory rules.

Question 8Regulatory Framework and Market Supervision

Which securities market in Bulgaria is designated as a regulated market under the Markets in Financial Instruments Act?

  1. The Sofia Commodity Exchange
  2. The Bulgarian Energy Exchange
  3. The market operated by Bulgarian Stock Exchange AD Correct answer.
  4. The interbank money market

Explanation

The regulated market for financial instruments is the one operated by Bulgarian Stock Exchange AD. Energy and commodity exchanges and the interbank market are not regulated markets for financial instruments under this Act.

Question 9Regulatory Framework and Market Supervision

Which activity requires authorisation as an investment service rather than being a mere ancillary activity?

  1. Publishing share price data on a website
  2. Portfolio management on a discretionary basis for clients Correct answer.
  3. Issuing shares to the public
  4. Providing general market commentary in a newspaper

Explanation

Discretionary portfolio management is a core investment service requiring authorisation. Journalism, capital raising by an issuer and data publication fall outside the list of investment services.

Question 10Regulatory Framework and Market Supervision

Under the client categorisation rules, a local public authority is presumed to be which type of client?

  1. An elective professional client on request
  2. A retail client by default
  3. A professional client by default Correct answer.
  4. An eligible counterparty by default

Explanation

Municipalities and local public authorities are treated as professional clients per se under the categorisation rules. They are not eligible counterparties and do not need to opt in to professional status.

Question 11Regulatory Framework and Market Supervision

A retail client asks to be treated as a professional client. What must the firm do before granting the request?

  1. Automatically grant the request if the client signs a waiver
  2. Assess the client's expertise, experience and knowledge and document the assessment Correct answer.
  3. Require the client to deposit a minimum of EUR 500,000
  4. Obtain prior consent from the Financial Supervision Commission for each client

Explanation

Upgrading a retail client requires a documented assessment of the client's experience, knowledge and expertise, plus a written warning about lost protections. The regulator does not approve individual upgrades and no fixed deposit threshold exists for this purpose.

Question 12Regulatory Framework and Market Supervision

Which statement correctly describes the appropriateness assessment when advising on a complex product?

  1. The firm must refer every complex product sale to the regulator for approval
  2. The firm may rely solely on the client's self-declaration without any warning
  3. The firm must obtain information on the client's knowledge, experience and objectives and warn if the product is unsuitable Correct answer.
  4. The firm must always execute the order regardless of the assessment outcome

Explanation

For advisory and discretionary services, firms must assess appropriateness using information on knowledge, experience, financial situation and objectives, and warn the client where the product appears unsuitable. Client self-declaration alone and automatic execution do not satisfy the duty.

Question 13Regulatory Framework and Market Supervision

What is the minimum record-retention period for client orders and transaction records that investment firms must keep under Bulgarian implementation of MiFID II?

  1. Five years Correct answer.
  2. Two years
  3. Ten years
  4. One year

Explanation

Firms must retain records of client orders and transactions for at least five years. Shorter periods are insufficient, and ten years exceeds the general minimum, though longer retention may apply on supervisory request.

Question 14Regulatory Framework and Market Supervision

Which body administers the Investor Compensation Fund in Bulgaria?

  1. The Ministry of Finance directly
  2. A fund managed under the supervision of the Financial Supervision Commission Correct answer.
  3. The Bulgarian National Bank
  4. The Bulgarian Stock Exchange

Explanation

The Investor Compensation Fund is a separate legal entity supervised by the Financial Supervision Commission, funded by contributions from investment firms. The central bank, exchange and ministry do not administer it.

Question 15Regulatory Framework and Market Supervision

What is the maximum compensation level per investor under the Bulgarian investor compensation scheme?

  1. Unlimited
  2. EUR 50,000
  3. EUR 20,000 Correct answer.
  4. EUR 100,000

Explanation

The Bulgarian scheme covers claims up to EUR 20,000 per investor, which is the harmonised minimum level under the EU directive. The EUR 100,000 figure relates to deposit guarantees, not investments.

Question 16Regulatory Framework and Market Supervision

Which conduct rule applies when an investment firm executes a client order alongside its own proprietary order for the same instrument?

  1. The firm may prioritise its own order because it bears the market risk
  2. The firm must act in the client's best interest and manage the conflict to prevent detriment to the client Correct answer.
  3. The firm must always route the client order to another venue
  4. The firm may combine orders only with prior regulatory approval for each trade

Explanation

Conflicts of interest must be managed so that client interests are not harmed, and best execution obligations apply to client orders. Prioritising proprietary orders or requiring per-trade approval are not compliant approaches.

Question 17Regulatory Framework and Market Supervision

Which of the following constitutes market abuse under Bulgarian law implementing the MAR regime?

  1. Executing trades based on inside information about an unannounced takeover Correct answer.
  2. Hedging a portfolio using index futures
  3. Publishing an independent research report on a listed company
  4. Placing a limit order that is later cancelled before execution

Explanation

Trading on inside information is insider dealing, a core form of market abuse. Legitimate research, hedging and ordinary order cancellation are not abusive unless they form part of a manipulative scheme.

Question 18Regulatory Framework and Market Supervision

A trader places large buy orders with no intention to execute them, aiming to push the price up before selling. This behaviour is best characterised as:

  1. Spoofing, a form of market manipulation Correct answer.
  2. Insider dealing
  3. Best execution failure
  4. Legitimate liquidity provision

Explanation

Entering orders without intent to execute to move prices is spoofing, expressly prohibited as market manipulation. It does not involve inside information, and it is not a legitimate liquidity strategy or an execution-quality issue.

Question 19Regulatory Framework and Market Supervision

Which regulator is competent to investigate and sanction market abuse on Bulgarian regulated markets?

  1. The Supreme Administrative Court
  2. The Bulgarian National Bank
  3. The Commission for Protection of Competition
  4. The Financial Supervision Commission Correct answer.

Explanation

The Financial Supervision Commission is the competent authority for market abuse investigations and sanctions. Competition, banking and judicial bodies have different mandates.

Question 20Regulatory Framework and Market Supervision

An investment firm intends to outsource a critical operational function to a third-party IT provider. Which requirement applies?

  1. Responsibility for compliance transfers to the service provider
  2. The provider must obtain an investment firm licence
  3. The firm remains fully responsible for compliance and must notify the regulator of the outsourcing Correct answer.
  4. Outsourcing critical functions is prohibited for investment firms

Explanation

Outsourcing does not transfer regulatory responsibility; the firm remains accountable and must notify the supervisor of material outsourcing arrangements. Prohibition, transfer of responsibility and provider licensing are not the rules.

Question 21Regulatory Framework and Market Supervision

Which best describes the principle of best execution for retail client orders?

  1. The firm must execute every order on the regulated market
  2. The firm must guarantee the best price available in the market
  3. The firm must always choose the venue with the lowest commission
  4. The firm must take all sufficient steps to obtain the best possible result considering price, cost, speed and likelihood of execution Correct answer.

Explanation

Best execution is a process obligation weighing price, costs, speed and execution likelihood, and it cannot be reduced to venue selection or a price guarantee. Execution is not confined to regulated markets.

Question 22Regulatory Framework and Market Supervision

What is the maximum administrative penalty the Financial Supervision Commission may impose on an investment firm for serious breaches of the Markets in Financial Instruments Act?

  1. Up to ten percent of annual turnover, capped at EUR 1,000,000
  2. Up to EUR 100,000
  3. Up to EUR 500,000
  4. Up to EUR 5,000,000 or twice the profit gained or loss avoided, whichever is higher Correct answer.

Explanation

For serious breaches, the statutory maximum aligns with the MiFID II administrative sanction level of EUR 5,000,000 or twice the profit gained or loss avoided. The lower figures do not reflect the maximum available.

Question 23Regulatory Framework and Market Supervision

Which statement about the prohibition of accepting third-party inducements for investment advice is correct?

  1. Inducements are prohibited in all circumstances without exception
  2. Inducements are permitted only if they enhance the service to the client and are clearly disclosed Correct answer.
  3. All inducements are permitted provided they are disclosed in the annual report
  4. Inducements are permitted only if approved by the Bulgarian Stock Exchange

Explanation

Inducements are allowed only where they are designed to enhance service quality and are disclosed to the client in a clear and comprehensive manner. Blanket prohibition, mere annual reporting and exchange approval are incorrect.

Question 24Regulatory Framework and Market Supervision

A firm's compliance officer reports directly to the board and is independent of revenue functions. Which supervisory principle does this reflect?

  1. The requirement that compliance staff hold a banking licence
  2. The requirement that compliance be outsourced to an external auditor
  3. The requirement for an independent compliance function with adequate resources and authority Correct answer.
  4. The requirement that compliance report only to the regulator

Explanation

Firms must maintain an independent compliance function with sufficient authority and resources to identify and manage compliance risk. Reporting to the board supports independence; no banking licence, audit outsourcing or direct regulator reporting is required.

Question 25Regulatory Framework and Market Supervision

Which of the following is required before an investment firm may market a UCITS fund to retail investors in Bulgaria?

  1. The fund must be listed on the Bulgarian Stock Exchange
  2. The fund must be managed by a Bulgarian management company
  3. The fund must be notified for cross-border marketing and the firm must hold the relevant licence Correct answer.
  4. The firm must obtain prior approval from the Ministry of Finance

Explanation

Cross-border marketing of a UCITS requires notification under the passporting procedure, and the distributing firm must be authorised to provide the service. Listing, local management and ministry approval are not prerequisites.

Question 26Regulatory Framework and Market Supervision

Which authority is responsible for the prudential supervision of investment firms authorised in Bulgaria?

  1. The Bulgarian Stock Exchange
  2. The Bulgarian National Bank
  3. The Ministry of Finance
  4. The Financial Supervision Commission Correct answer.

Explanation

Under the Markets in Financial Instruments Act, the Financial Supervision Commission is the competent authority for authorising and prudentially supervising investment firms in Bulgaria. The Bulgarian National Bank supervises banks and payment institutions, while the Stock Exchange operates the market rather than supervising its members.

Question 27Regulatory Framework and Market Supervision

Which piece of Bulgarian legislation transposes the Markets in Financial Instruments Directive and governs the authorisation and conduct of investment firms?

  1. The Insurance Code
  2. The Markets in Financial Instruments Act Correct answer.
  3. The Public Offering of Securities Act
  4. The Credit Institutions Act

Explanation

The Markets in Financial Instruments Act is the framework law that implements MiFID requirements in Bulgaria, covering authorisation, conduct of business and market organisation. The Public Offering of Securities Act deals mainly with prospectuses and collective investment schemes, while the other acts cover banking and insurance.

Question 28Regulatory Framework and Market Supervision

An investment firm authorised in another EU member state wishes to provide services to clients in Bulgaria without establishing a branch. What is the correct procedure?

  1. Notify its home-state regulator, which then informs the Financial Supervision Commission Correct answer.
  2. Apply directly to the Financial Supervision Commission for a Bulgarian licence
  3. Obtain prior consent from the Bulgarian Stock Exchange
  4. Open a representative office in Bulgaria before providing any service

Explanation

Under the passporting regime, a firm wishing to provide cross-border services notifies its home competent authority, which transmits the information to the host authority. The firm does not need a separate Bulgarian licence or a local establishment for such freedom of services.

Question 29Regulatory Framework and Market Supervision

A Bulgarian investment firm plans to acquire a qualifying holding in another investment firm. Which step must it take under the supervisory framework?

  1. Complete the acquisition and report it in the next annual financial statements
  2. Seek approval only from the target firm's general meeting of shareholders
  3. Inform the Bulgarian Stock Exchange before settlement of the share transfer
  4. Notify the Financial Supervision Commission in advance and await its assessment of the acquisition Correct answer.

Explanation

The acquisition of a qualifying holding in an investment firm is subject to prior notification and supervisory assessment of the acquirer's suitability and financial soundness. The regulator may object to the acquisition within the prescribed assessment period, so completing it first is not permitted.

Question 30Regulatory Framework and Market Supervision

A supervised investment firm repeatedly breaches conduct-of-business rules despite earlier warnings. Which combination best reflects how the Financial Supervision Commission's enforcement powers are typically structured?

  1. Administrative measures such as remedial orders, followed where necessary by pecuniary penalties and public disclosure Correct answer.
  2. Referral to the Bulgarian National Bank, which alone may sanction investment firms
  3. Criminal prosecution only, since conduct breaches are not administrative offences
  4. Automatic withdrawal of authorisation for any breach, with no intermediate measures available

Explanation

Supervisory enforcement normally escalates: the regulator may first impose remedial measures and deadlines, then apply pecuniary penalties and publish its decisions where the law allows. Withdrawal of authorisation is an exceptional measure reserved for serious or persistent failures, not an automatic consequence of every breach.

Question 31Financial Instruments: Types, Characteristics and Valuation

Which feature most accurately distinguishes an ordinary share from a corporate bond issued by the same company?

  1. The share is a short-term money market instrument, while the bond is always long-term.
  2. The share always pays a fixed coupon, while the bond pays a variable dividend.
  3. The share represents an ownership claim with residual rights to profits and assets, while the bond represents a contractual debt claim with priority over shareholders. Correct answer.
  4. The share has a fixed maturity date, while the bond has no maturity.

Explanation

Ordinary shares confer equity ownership: holders receive dividends only after obligations are met and rank last on liquidation. Bonds are debt contracts giving the holder a prior claim on interest and principal. This priority ranking, not the payment form or maturity alone, is the core distinction.

Question 32Financial Instruments: Types, Characteristics and Valuation

An investor buys a zero-coupon bond with a face value of BGN 1,000 maturing in exactly 3 years. If the required annual yield is 5% compounded annually, what is the fair price today?

  1. BGN 863.84 Correct answer.
  2. BGN 950.00
  3. BGN 1,157.63
  4. BGN 1,000.00

Explanation

A zero-coupon bond pays only face value at maturity, so its price is the face value discounted at the required yield: 1000 divided by 1.05 raised to the third power. This equals 1000 divided by 1.157625, approximately 863.84. The absence of coupons means no interim cash flows are added.

Question 33Financial Instruments: Types, Characteristics and Valuation

Which statement best describes the payoff profile of a European call option held by the buyer?

  1. The buyer profits when the underlying falls below the strike price.
  2. The buyer receives a fixed coupon for as long as the option remains open.
  3. The buyer has a right, not an obligation, to buy the underlying at the strike price on expiry and profits when the underlying exceeds the strike plus premium. Correct answer.
  4. The buyer is obliged to buy the underlying at the strike price whenever the seller demands delivery.

Explanation

A call option gives the holder the right to buy at the strike price on the expiry date, with no obligation to exercise. The holder's gain equals the underlying price minus the strike minus the premium paid, so profit begins above strike plus premium. Maximum loss is limited to the premium.

Question 34Financial Instruments: Types, Characteristics and Valuation

A Bulgarian company issues shares with a nominal value of BGN 1 each and sells them to investors at BGN 2.50 per share. What is the BGN 1.50 excess per share called?

  1. Share premium Correct answer.
  2. Dividend reserve
  3. Retained earnings
  4. Accrued interest

Explanation

The amount received above the nominal value of newly issued shares is the share premium, recorded in a separate equity reserve. Nominal value is the accounting capital, while the premium reflects the price investors are willing to pay above it. Dividends and retained earnings arise from profits, not from issuance.

Question 35Financial Instruments: Types, Characteristics and Valuation

Which of the following is a money market instrument rather than a capital market instrument?

  1. A 91-day treasury bill Correct answer.
  2. A 7-year corporate bond
  3. A 10-year government bond
  4. A listed ordinary share

Explanation

Money market instruments have original maturities of one year or less, and a 91-day treasury bill fits that definition. Government bonds, corporate bonds, and shares with long or indefinite lives belong to the capital market. The dividing line is the short original maturity.

Question 36Financial Instruments: Types, Characteristics and Valuation

A bond has a face value of BGN 1,000 and a fixed annual coupon rate of 4%. What cash amount does the holder receive each year from the coupon?

  1. BGN 40.00 Correct answer.
  2. BGN 4.00
  3. BGN 25.00
  4. BGN 400.00

Explanation

The annual coupon equals the coupon rate multiplied by the face value: 4% of 1,000 equals 40. The coupon rate is applied to nominal value, not to the current market price. This gives the fixed cash flow the holder receives each year.

Question 37Financial Instruments: Types, Characteristics and Valuation

What does the term structure of interest rates, often shown as a yield curve, represent?

  1. The difference between a share's market price and its nominal value
  2. The total volume of bonds issued in a given year
  3. The relationship between yield to maturity and time to maturity for bonds of comparable credit quality Correct answer.
  4. The relationship between a bond's price and its credit rating

Explanation

The yield curve plots yields of bonds with the same credit quality against their remaining maturities. Its shape reflects expectations about future rates, inflation, and term premiums. It is not a measure of issuance volume or equity pricing.

Question 38Financial Instruments: Types, Characteristics and Valuation

Which characteristic is typical of a preference (preferred) share compared with an ordinary share?

  1. Priority in receiving dividends up to a stated amount and priority in liquidation, usually with limited voting rights Correct answer.
  2. Guaranteed repayment of principal on a fixed maturity date
  3. Automatic conversion into a bond at the issuer's discretion
  4. A claim ranking ahead of all secured creditors in liquidation

Explanation

Preference shares typically carry a stated dividend that ranks ahead of ordinary dividends and a prior claim on assets in liquidation. In exchange, they often have restricted or no voting rights. They remain equity and do not guarantee repayment of principal.

Question 39Financial Instruments: Types, Characteristics and Valuation

A bond with a face value of BGN 1,000 pays an annual coupon of BGN 60 and currently trades at BGN 1,200. What is its current yield?

  1. 4.00%
  2. 5.00% Correct answer.
  3. 6.00%
  4. 16.67%

Explanation

Current yield equals the annual coupon divided by the current market price: 60 divided by 1,200 equals 5%. It measures the income return on the price actually paid. It is not the same as yield to maturity because it ignores capital gain or loss at redemption.

Question 40Financial Instruments: Types, Characteristics and Valuation

If market interest rates rise sharply after a fixed-coupon bond has been issued, what typically happens to the bond's price?

  1. It stays unchanged, because the coupon is fixed by contract
  2. It moves to par value regardless of the rate change
  3. It rises, because higher rates increase the coupon paid on the existing bond
  4. It falls, because the fixed coupon becomes less attractive relative to newly issued bonds Correct answer.

Explanation

Bond prices and market yields move inversely. When rates rise, new bonds offer higher coupons, so the existing fixed coupon must be compensated by a lower price to deliver a competitive yield. The contractual coupon itself does not change.

Question 41Financial Instruments: Types, Characteristics and Valuation

A company has issued 1,000 bonds with a face value of BGN 1,000 each. What is the total principal amount the company must repay at maturity, ignoring any premium?

  1. BGN 10,000,000
  2. BGN 1,000
  3. BGN 100,000
  4. BGN 1,000,000 Correct answer.

Explanation

Total principal equals the number of bonds multiplied by the face value per bond: 1,000 times 1,000 equals 1,000,000. This is the aggregate redemption obligation before any premium or fees. Coupons are separate periodic payments.

Question 42Financial Instruments: Types, Characteristics and Valuation

Which statement correctly describes the difference between a forward contract and a futures contract?

  1. Forwards are always settled through a central clearing house, while futures are never cleared
  2. Futures require no margin, while forwards require daily cash settlement
  3. Forwards are exchange-traded, while futures are negotiated privately
  4. Futures are standardised and traded on exchanges with daily margining, while forwards are customised over-the-counter agreements Correct answer.

Explanation

Futures contracts are standardised, exchange-traded, and marked to market daily through margin accounts. Forwards are privately negotiated, customised, and carry counterparty credit risk because they are not exchange-cleared. The distinction rests on standardisation, trading venue, and margining.

Question 43Financial Instruments: Types, Characteristics and Valuation

An investor holds a bond with a modified duration of 6. If yields fall by 0.50 percentage points, what is the approximate percentage change in the bond's price?

  1. An increase of about 6.0%
  2. An increase of about 0.3%
  3. A decrease of about 3.0%
  4. An increase of about 3.0% Correct answer.

Explanation

The approximate price change equals modified duration multiplied by the change in yield, with a negative sign: -6 times -0.005 equals +0.03, or about 3%. A fall in yields raises the price. Duration therefore estimates the sensitivity for small yield moves.

Question 44Financial Instruments: Types, Characteristics and Valuation

What is the primary role of a custodian bank in securities markets?

  1. Guaranteeing the issuer's coupon payments to bondholders
  2. Providing investment advice and discretionary portfolio management
  3. Underwriting new share issues and setting the offer price
  4. Safekeeping client securities and settling trades, including processing income and corporate actions Correct answer.

Explanation

A custodian holds securities in safekeeping, settles transactions, and administers income payments and corporate actions on behalf of clients. It does not take on the issuer's credit risk or set issuance prices. Investment advice is a separate portfolio management function.

Question 45Financial Instruments: Types, Characteristics and Valuation

A bond is issued at a price below its face value and redeemed at face value. What is this arrangement called?

  1. An issue at a premium
  2. An issue at a discount Correct answer.
  3. A floating-rate issue
  4. A convertible issue

Explanation

When the issue price is below face value, the bond is issued at a discount, and the investor gains the difference at redemption. The opposite, issuing above face value, is a premium. Convertibility and floating rates describe other features entirely.

Question 46Financial Instruments: Types, Characteristics and Valuation

Which factor most directly increases the credit risk premium demanded by investors in a corporate bond?

  1. A deterioration in the issuer's ability to meet interest and principal payments Correct answer.
  2. An increase in the bond's remaining maturity alone
  3. A rise in the bond's trading volume on the exchange
  4. A reduction in the bond's face value

Explanation

The credit spread compensates investors for the risk that the issuer fails to pay. Weaker financial capacity raises default probability and therefore the required spread. Trading volume and face value do not by themselves change default risk.

Question 47Financial Instruments: Types, Characteristics and Valuation

An investor expects a share's price to fall and wishes to profit from that view using options. Which position best matches the expectation?

  1. Buying a call option
  2. Buying the underlying share
  3. Buying a put option Correct answer.
  4. Writing a put option

Explanation

A put option gains value when the underlying price falls below the strike, allowing the holder to sell at the strike. Buying a call or buying the share profits when prices rise. Writing a put obliges the writer to buy and profits only if the price stays above the strike.

Question 48Financial Instruments: Types, Characteristics and Valuation

What distinguishes a convertible bond from a plain vanilla bond?

  1. It always carries a higher coupon than any other bond
  2. It is issued only by governments
  3. It has no maturity date and never repays principal
  4. It can be converted into a specified number of the issuer's shares at the holder's option Correct answer.

Explanation

A convertible bond embeds an equity option allowing the holder to exchange the bond for shares at a set conversion ratio. This equity component typically lowers the coupon relative to a comparable straight bond. It still has a maturity and principal repayment unless converted.

Question 49Financial Instruments: Types, Characteristics and Valuation

A portfolio holds two assets of equal weight. Asset A has an expected return of 6% and asset B of 10%. If the correlation between them is zero, what is the portfolio's expected return?

  1. 10.0%
  2. 8.0% Correct answer.
  3. 6.0%
  4. 16.0%

Explanation

Expected portfolio return is the weighted average of asset returns, regardless of correlation: 0.5 times 6% plus 0.5 times 10% equals 8%. Correlation affects portfolio risk, not the expected return. Averaging the two returns gives the correct figure.

Question 50Financial Instruments: Types, Characteristics and Valuation

Which of the following best describes the role of a market maker in a securities market?

  1. Guaranteeing investors against losses on their holdings
  2. Issuing new shares on behalf of listed companies
  3. Setting the official closing price of every listed security by regulation
  4. Continuously quoting bid and ask prices to provide liquidity and earning the spread Correct answer.

Explanation

A market maker stands ready to buy and sell at quoted bid and ask prices, supplying liquidity and earning the difference between them. It bears inventory risk while doing so. It does not guarantee investor returns or issue securities.