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Bulgarian Investment Consultant Exam study materials
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Bulgarian Investment Consultant Exam practice questions

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Question 1Regulatory Framework and Market Supervision

Which Bulgarian institution is the primary regulator responsible for licensing and supervising investment firms and collective investment schemes?

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

Explanation

The Financial Supervision Commission is the integrated non-banking financial regulator in Bulgaria, empowered to license and supervise investment intermediaries, management companies, and other capital market participants. The central bank handles monetary policy and banking supervision, not investment firm licensing.

Question 2Regulatory Framework and Market Supervision

Under the Bulgarian capital markets framework, an investment intermediary must generally hold minimum initial capital that is calibrated to which factor?

  1. The number of shareholders in the company
  2. The scope of investment services and whether client money is held Correct answer.
  3. The market capitalisation of the exchange
  4. The number of years the firm has operated

Explanation

Capital requirements are risk- and activity-based: firms that hold client assets or deal on own account face higher thresholds than firms providing only advisory or order-transmission services. The requirement is not linked to ownership structure or operating history.

Question 3Regulatory Framework and Market Supervision

Which directive established the core EU passporting framework allowing investment firms authorised in one member state to serve clients across the EU?

  1. MiFID II Correct answer.
  2. The Payment Services Directive
  3. The Solvency II Directive
  4. The Prospectus Regulation

Explanation

MiFID II provides the single-market authorisation and passporting regime for investment services, letting a firm authorised in its home state operate in other member states via branches or cross-border services. The other instruments govern insurance capital, payments, and securities offering documentation respectively.

Question 4Regulatory Framework and Market Supervision

A Bulgarian investment firm wants to provide cross-border services into another EU member state without opening a branch. What is the standard supervisory route?

  1. Register with the host state's stock exchange
  2. Notify its home regulator, which transmits the information to the host regulator Correct answer.
  3. Apply directly to the host state regulator for a separate licence
  4. Obtain prior approval from the European Securities and Markets Authority

Explanation

Under the passporting regime the firm notifies its home competent authority, which forwards the notification to the host authority; no separate host-state licence is needed. ESMA coordinates but does not grant individual firm passports.

Question 5Regulatory Framework and Market Supervision

Which piece of Bulgarian legislation is the principal national statute transposing the MiFID framework into domestic law?

  1. The Insurance Code
  2. The Credit Institutions Act
  3. The Consumer Protection Act
  4. The Markets in Financial Instruments Act Correct answer.

Explanation

The Markets in Financial Instruments Act is the core national law governing investment services, regulated markets, and intermediary conduct in Bulgaria. The Credit Institutions Act and Insurance Code regulate banking and insurance respectively.

Question 6Regulatory Framework and Market Supervision

Which of the following best describes the role of the Bulgarian National Bank in relation to the country's participation in the euro area?

  1. It continues to set independent interest rates after euro adoption
  2. It transfers investment firm supervision to the European Central Bank
  3. It loses all supervisory functions upon euro adoption
  4. It participates in the Eurosystem and applies the common monetary policy once Bulgaria adopts the euro Correct answer.

Explanation

Upon adopting the euro, the national central bank becomes part of the Eurosystem and implements the single monetary policy decided by the ECB Governing Council. It retains national supervisory responsibilities within the banking union framework rather than losing them.

Question 7Regulatory Framework and Market Supervision

Which body is responsible for the prudential supervision of credit institutions in Bulgaria within the single supervisory mechanism?

  1. The Bulgarian National Bank acting with the ECB Correct answer.
  2. The Financial Supervision Commission
  3. The Commission for Protection of Competition
  4. The Ministry of Finance

Explanation

Banking supervision in Bulgaria operates through the single supervisory mechanism, with the national central bank working alongside the European Central Bank. The Financial Supervision Commission covers non-banking financial sectors.

Question 8Regulatory Framework and Market Supervision

What is the primary purpose of the investor compensation scheme in the Bulgarian capital market?

  1. To guarantee investment returns against market losses
  2. To insure issuers against failed securities offerings
  3. To cover losses caused by the client's own trading decisions
  4. To reimburse eligible clients when an investment firm cannot meet claims arising from its failure Correct answer.

Explanation

Investor compensation schemes protect clients when an authorised firm becomes insolvent and cannot return assets or settle claims, up to defined limits. They do not protect against market risk or poor investment choices.

Question 9Regulatory Framework and Market Supervision

An investment intermediary wishes to hold client financial instruments. Which supervisory expectation applies?

  1. Segregation of client assets from the firm's own assets with appropriate records and reconciliations Correct answer.
  2. Depositing client securities with an unregulated third party
  3. Transfer of custody to the firm's majority shareholder
  4. Commingling of client and firm assets to improve efficiency

Explanation

Safeguarding rules require client instruments to be segregated and reconciled so they can be identified and returned if the firm fails. Commingling or placing client assets with unregulated parties undermines that protection.

Question 10Regulatory Framework and Market Supervision

Which statement correctly describes the Bulgarian Financial Supervision Commission's governance structure?

  1. It is chaired by the Minister of Finance
  2. It is a department within the Bulgarian National Bank
  3. It is a private self-regulatory body funded by members
  4. It is headed by a chair and deputy chairs appointed by the National Assembly Correct answer.

Explanation

The Commission is an independent state body led by a chair and deputy chairs appointed by parliament, which gives it operational independence from the government. It is not a central bank department or a private body.

Question 11Regulatory Framework and Market Supervision

Under EU rules, which document must a firm provide to a retail client before or at the time of concluding an investment services agreement, summarising the firm and its services?

  1. The terms of business and client information document Correct answer.
  2. The annual financial statements
  3. The firm's internal audit charter
  4. The prospectus of the firm's shares

Explanation

Conduct-of-business rules require firms to give retail clients clear pre-contractual information about the firm, its services, and the basis of the relationship. Financial statements and internal charters are not client-facing disclosure documents.

Question 12Regulatory Framework and Market Supervision

A retail client complains about an investment firm's execution of an order. What is the firm's first regulatory obligation?

  1. Refuse to engage until the client hires a lawyer
  2. Handle the complaint under a documented complaints procedure and respond within set timeframes Correct answer.
  3. Publish the complaint on the firm's website
  4. Immediately refer the matter to the public prosecutor

Explanation

Firms must maintain effective complaints-handling procedures, log complaints, and respond within prescribed deadlines while informing clients of escalation options. Criminal referral or public disclosure is not the standard first step.

Question 13Regulatory Framework and Market Supervision

Which requirement applies to an investment firm's marketing communications addressed to retail clients?

  1. They must be fair, clear, and not misleading, and identifiable as marketing Correct answer.
  2. They may promise guaranteed returns if approved internally
  3. They may omit risk warnings if the product is popular
  4. They are exempt from supervision if posted on social media

Explanation

Marketing must be fair, clear, and not misleading, must be identifiable as such, and must not disguise the risks of a product. Promising guaranteed returns on variable products would itself be misleading.

Question 14Regulatory Framework and Market Supervision

Which best characterises the legal status of the Bulgarian Stock Exchange?

  1. A government department of the Financial Supervision Commission
  2. A self-regulatory association of brokers with no statutory basis
  3. A regulated market operated by a licensed market operator under supervisory oversight Correct answer.
  4. A central bank facility for government bond auctions

Explanation

The exchange is a regulated market run by a licensed operator subject to supervision, not a public authority. Its rules and operations must comply with capital markets legislation.

Question 15Regulatory Framework and Market Supervision

Under the market abuse regime, which conduct is prohibited for persons discharging managerial responsibilities in a listed issuer?

  1. Attending shareholder meetings
  2. Dealing in the issuer's securities during a closed period before results are published Correct answer.
  3. Disclosing holdings in the annual report
  4. Consulting the firm's compliance officer

Explanation

Closed periods bar managers from trading in the issuer's securities ahead of periodic results to prevent misuse of inside information. Routine disclosure and governance activities are not prohibited.

Question 16Regulatory Framework and Market Supervision

What is the key obligation of an issuer regarding inside information under the market abuse framework?

  1. Keep it confidential indefinitely
  2. Disclose it exclusively to analysts before publication
  3. Share it only with major shareholders
  4. Disclose it to the public as soon as possible, subject to limited delayed-disclosure conditions Correct answer.

Explanation

Issuers must inform the public as soon as possible of inside information directly concerning them, with narrow exceptions allowing delayed disclosure where conditions are met. Selective disclosure to shareholders or analysts is prohibited.

Question 17Regulatory Framework and Market Supervision

Which supervisory measure can the Financial Supervision Commission impose on an investment firm that breaches capital requirements?

  1. Transfer the firm's clients to a state-owned bank
  2. Withdraw or restrict its authorisation and require remedial action Correct answer.
  3. Impose criminal imprisonment directly on the firm
  4. Order the firm to merge with a competitor

Explanation

The regulator's toolkit includes supervisory measures such as requiring remediation, restricting business, and ultimately withdrawing authorisation. Criminal sanctions are imposed by courts, and the regulator does not order commercial mergers.

Question 18Regulatory Framework and Market Supervision

Which principle governs the allocation of supervisory responsibilities between home and host state authorities for a passported investment firm?

  1. ESMA supervises the firm directly
  2. The firm chooses which authority supervises it
  3. The home authority supervises the firm's overall prudential soundness while the host oversees conduct in its territory Correct answer.
  4. The host authority supervises all aspects including capital

Explanation

Home-state supervision covers authorisation and prudential matters such as capital, while host authorities are responsible for conduct rules relating to local branches and local market activity. This division is central to the passporting system.

Question 19Regulatory Framework and Market Supervision

Which of the following is a core element of the suitability assessment when advising a retail client?

  1. The client's knowledge, experience, financial situation, and investment objectives Correct answer.
  2. The client's political affiliations
  3. The client's employer's share price
  4. The client's preferred bank branch

Explanation

Suitability requires gathering information on the client's knowledge and experience, financial situation, and investment objectives to recommend appropriate products. Personal attributes unrelated to financial circumstances are not part of the test.

Question 20Regulatory Framework and Market Supervision

A firm provides execution-only services for a non-complex product. Which obligation applies regarding appropriateness?

  1. Require the client to pledge collateral
  2. Assess whether the client has the knowledge and experience to understand the risks Correct answer.
  3. Verify the client's credit score before each trade
  4. Obtain a full suitability report for every transaction

Explanation

For execution-only services the firm must perform an appropriateness test to confirm the client can understand the product's risks, unless the service qualifies for an exemption. A full suitability assessment applies to advisory and portfolio management services.

Question 21Regulatory Framework and Market Supervision

Which body issues technical standards and guidelines that national supervisors apply to EU capital market rules?

  1. The European Court of Auditors
  2. The European Securities and Markets Authority Correct answer.
  3. The Council of the European Union
  4. The European Investment Bank

Explanation

ESMA is the EU securities regulator that drafts technical standards and issues guidelines to promote consistent application of capital markets rules. The other bodies perform audit, legislative, or lending functions.

Question 22Regulatory Framework and Market Supervision

Which requirement applies to an investment firm's record-keeping of client orders and transactions?

  1. Retain records only until the client relationship ends
  2. Store records exclusively on the client's premises
  3. Delete records after one month to protect privacy
  4. Retain records for the prescribed period and make them available to the regulator on request Correct answer.

Explanation

Firms must keep complete records of orders and transactions for the minimum retention period and produce them to supervisors on demand. Short retention or client-controlled storage would prevent effective supervision.

Question 23Regulatory Framework and Market Supervision

Which best describes the regulatory treatment of conflicts of interest at an investment firm?

  1. Identify conflicts and manage them through organisational and disclosure measures Correct answer.
  2. Resolve conflicts only by paying a fine after the event
  3. Ignore conflicts if the client is wealthy
  4. Rely solely on the client to detect conflicts

Explanation

Firms must identify conflicts that may harm clients and manage them through measures such as information barriers, remuneration controls, and, as a last resort, disclosure. Passive reliance on clients or ex-post penalties does not satisfy the obligation.

Question 24Regulatory Framework and Market Supervision

What is the function of the prospectus approved by the Financial Supervision Commission for a public offer of securities?

  1. To guarantee that the offering will succeed
  2. To give investors the information needed to make an informed assessment of the offer and the issuer Correct answer.
  3. To exempt the issuer from ongoing disclosure duties
  4. To set the final market price of the securities

Explanation

A prospectus is a disclosure document providing standardized information on the issuer, the securities, and the offer so investors can assess them. It does not guarantee success, fix prices, or remove continuing obligations.

Question 25Regulatory Framework and Market Supervision

Which of the following is an example of a regulated market safeguard concerning order execution transparency?

  1. Allowing insiders to trade ahead of announcements
  2. Concealment of all trade data from the public
  3. Execution of orders without any audit trail
  4. Publication of pre-trade and post-trade information about transactions Correct answer.

Explanation

Transparency requirements oblige trading venues and firms to publish pre-trade and post-trade data, subject to defined waivers, so that price formation is fair and auditable. Concealment or insider trading would breach market integrity rules.

Question 26Regulatory Framework and Market Supervision

Which authority is responsible for licensing and supervising investment intermediaries in Bulgaria?

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

Explanation

The Financial Supervision Commission is the integrated regulator for non-banking financial sectors, including investment firms. It grants licenses, conducts ongoing supervision, and enforces compliance with capital market rules. The Bulgarian National Bank focuses on banking supervision and monetary policy.

Question 27Regulatory Framework and Market Supervision

Under the EU Market Abuse Regulation, which of the following is a market soundings procedure?

  1. A firm assesses whether disclosing inside information to a potential investor would constitute unlawful disclosure. Correct answer.
  2. A firm records a client order and sends a confirmation to the client.
  3. A firm reports a suspicious transaction to the Financial Supervision Commission.
  4. A firm discloses inside information to the public via a regulatory announcement.

Explanation

Market soundings involve communicating inside information to potential investors to gauge interest in a transaction, and the discloser must assess whether the disclosure would breach the prohibition on unlawful disclosure. The procedure requires the recipient to be bound by confidentiality and the discloser to keep records. It is distinct from public disclosure or transaction reporting.

Question 28Regulatory Framework and Market Supervision

Which document must be published when a company makes a public offer of securities in Bulgaria?

  1. An annual financial report
  2. A key information document
  3. A sustainability report
  4. A prospectus approved by the Financial Supervision Commission Correct answer.

Explanation

A public offer of securities requires a prospectus approved by the Financial Supervision Commission, which ensures investors receive standardized information. The prospectus must be published before the offer opens. Other documents serve different purposes and do not replace the prospectus requirement.

Question 29Regulatory Framework and Market Supervision

An investment firm receives a complaint from a retail client about the execution of an order. What is the firm's first regulatory obligation?

  1. To resolve the complaint within three business days
  2. To publish the complaint in the firm's annual report
  3. To forward the complaint to the Financial Supervision Commission
  4. To acknowledge receipt of the complaint promptly Correct answer.

Explanation

Firms must have a complaints-handling policy that includes acknowledging receipt of a complaint promptly. This ensures the client knows the complaint is being addressed and sets the tone for a fair process. Resolution timelines and reporting to authorities follow after acknowledgment.

Question 30Regulatory Framework and Market Supervision

Which principle determines whether a Bulgarian investment firm must seek additional authorisation from a host-state regulator when providing cross-border services into another EU member state?

  1. The host-state authorization principle
  2. The territoriality principle
  3. The single passport principle Correct answer.
  4. The reciprocity principle

Explanation

The single passport principle allows a firm authorised in its home member state to provide services in other member states without seeking separate authorisation from each host regulator. The home state remains responsible for prudential supervision, while host states may enforce certain conduct rules. This principle underpins the EU internal market for financial services.

Question 31Financial Instruments and Markets

Which characteristic distinguishes an ordinary share from a corporate bond issued by the same company?

  1. The ordinary share gives a contractual right to a stated interest payment.
  2. The ordinary share carries a fixed redemption date set at issuance.
  3. The ordinary share ranks ahead of all creditors in a liquidation.
  4. The ordinary share represents residual ownership and its dividend depends on distributable profit. Correct answer.

Explanation

Ordinary shares are equity instruments: holders own a residual claim on profits and assets after all obligations are met, and dividends are declared at the company's discretion from distributable reserves. Bonds are debt, carrying contractual interest and a repayment schedule. Equity ranks last in liquidation, not first.

Question 32Financial Instruments and Markets

An investor buys a bond with a nominal value of BGN 1,000, a 5% annual coupon and exactly three years to maturity. If the required yield is 5%, what is the bond's price?

  1. BGN 1,136.16
  2. BGN 1,050.00
  3. BGN 950.00
  4. BGN 1,000.00 Correct answer.

Explanation

When the coupon rate equals the yield to maturity, a bond trades at par, because the discounted value of the coupon stream plus the redemption payment exactly equals the nominal amount. Here both rates are 5%, so the price is the nominal value of BGN 1,000. Any premium or discount would require the coupon and the market yield to differ.

Question 33Financial Instruments and Markets

What does a share's price-to-earnings (P/E) ratio express?

  1. The market price per share divided by earnings per share Correct answer.
  2. The market price per share divided by book value per share
  3. The annual trading volume divided by shares outstanding
  4. The annual dividend per share divided by the market price

Explanation

The P/E ratio divides the current market price of a share by its earnings per share, showing how much investors pay for each unit of accounting profit. It is a valuation multiple used to compare companies or to judge whether a price embeds high growth expectations. It is not a dividend or book-value measure.

Question 34Financial Instruments and Markets

Which body is responsible for authorising investment firms and supervising their ongoing compliance with capital and conduct rules in Bulgaria?

  1. The Bulgarian Stock Exchange admissions committee
  2. The Bulgarian National Bank's payment systems directorate
  3. The Financial Supervision Commission Correct answer.
  4. The Ministry of Finance's public debt department

Explanation

The Financial Supervision Commission is the integrated regulator for capital markets, investment firms, insurers and pension funds in Bulgaria, and it grants and withdraws licences for investment intermediaries. The central bank is responsible for monetary policy and banking supervision, while exchanges and ministries perform different functions.

Question 35Financial Instruments and Markets

Which of the following best describes the primary market?

  1. The market in which existing securities are traded between investors
  2. The market in which newly issued securities are sold by the issuer to raise capital Correct answer.
  3. The market for derivative contracts settled in the future
  4. The market for repurchase agreements between banks

Explanation

In the primary market the issuer itself sells new securities, whether through a public offering or a private placement, and the proceeds go to the issuer. Subsequent trading among investors takes place in the secondary market. Repos and derivatives are separate instrument categories rather than primary issuance.

Question 36Financial Instruments and Markets

A Bulgarian investor holds a euro-denominated bond while the lev is pegged to the euro under the currency board. What exchange-rate risk does the investor primarily face on that position?

  1. Full exposure to daily lev-euro fluctuations
  2. Guaranteed loss if the euro weakens against the US dollar
  3. No currency risk of any kind under any circumstances
  4. Minimal risk against the lev, but exposure if the investor's liabilities are in a currency other than the euro Correct answer.

Explanation

Under the currency board the lev is fixed to the euro at a statutory rate, so a lev-based investor's euro exposure is largely neutralised. Risk reappears if the investor measures performance in another currency or holds liabilities in a currency that moves against the euro. The peg does not eliminate cross-currency risk against third currencies.

Question 37Financial Instruments and Markets

Which settlement convention applies to standard spot transactions in Bulgarian government securities on the local market?

  1. T+0, with same-day final transfer of securities
  2. T+30, at the end of the following month
  3. T+2, consistent with the settlement cycle used by the central securities depository Correct answer.
  4. T+1 only for retail investors and T+5 for institutions

Explanation

Spot trades in Bulgarian government securities settle on a T+2 basis, aligning with the standard cycle operated through the central securities depository and the linked international settlement infrastructure. Settlement is not same-day by default, and no month-end cycle applies to spot trades. Retail and institutional investors settle under the same market convention.

Question 38Financial Instruments and Markets

What is the main purpose of a prospectus when securities are offered to the public?

  1. To give investors the information needed to make an informed assessment of the issuer and the securities Correct answer.
  2. To register the securities automatically for trading on every exchange
  3. To set the maximum price at which the securities may later trade
  4. To guarantee that the issuer will repay the invested capital

Explanation

A prospectus is a prescribed disclosure document containing details on the issuer, its business, the securities and the risks, enabling investors to assess the offer. It is not a guarantee of repayment and does not cap secondary market prices. Admission to trading on a specific venue requires a separate application.

Question 39Financial Instruments and Markets

A portfolio has 60% invested in an asset with an expected return of 8% and 40% in an asset with an expected return of 3%. What is the portfolio's expected return?

  1. 7.0%
  2. 4.8%
  3. 6.0% Correct answer.
  4. 5.5%

Explanation

The expected portfolio return is the weighted average of the component expected returns: 0.60 times 8% plus 0.40 times 3% equals 4.8% plus 1.2%, which is 6.0%. Weights must sum to one, and the calculation ignores diversification effects because expected returns combine linearly. Risk, unlike return, depends on correlation.

Question 40Financial Instruments and Markets

Which measure quantifies the sensitivity of a bond's price to a small parallel change in yield?

  1. Yield to call
  2. Modified duration Correct answer.
  3. Credit spread
  4. Convexity

Explanation

Modified duration estimates the percentage change in a bond's price for a one percentage point change in yield, so it is the standard first-order interest-rate sensitivity measure. Convexity is the second-order correction, while credit spread and yield to call describe other features. Duration rises with maturity and falls with coupon.

Question 41Financial Instruments and Markets

An investor expects interest rates to fall sharply over the next year. Which bond position is most consistent with that view?

  1. Buying long-duration bonds to capture larger price appreciation Correct answer.
  2. Selling all bonds and holding cash until rates rise
  3. Buying short-duration bonds to minimise price changes
  4. Buying floating-rate notes that reset with market rates

Explanation

Bond prices move inversely to yields, and the price gain for a given yield decline is larger for higher-duration bonds. An investor expecting falling rates therefore maximises capital appreciation with long duration. Short-duration and floating-rate instruments reset or mature quickly and capture little of the gain.

Question 42Financial Instruments and Markets

A company issues new shares in a rights offering at a discount to the market price. What is the direct effect on an existing shareholder who does not subscribe?

  1. Their holding is automatically increased at no cost
  2. Their percentage ownership is diluted and the value of their holding may fall Correct answer.
  3. Their dividend entitlement is fixed in perpetuity
  4. Their shares are converted into bonds

Explanation

A rights issue increases the number of shares outstanding, so a shareholder who declines to exercise rights sees their proportional stake reduced. Because the new shares are issued at a discount, the theoretical ex-rights price falls, which can reduce the value of the unexercised position. Rights themselves have value and can usually be sold.

Question 43Financial Instruments and Markets

What does a beta coefficient of 1.4 for a share indicate in a single-factor market model?

  1. The share will return 1.4% more than the market in every period
  2. The share's total risk is 1.4 times the market's total risk
  3. The share has tended to move 1.4% for each 1% move in the market, indicating above-average systematic risk Correct answer.
  4. The share has no diversifiable risk

Explanation

Beta measures sensitivity to movements in the market portfolio, so a beta of 1.4 implies that historically the share amplified market moves by a factor of 1.4. It reflects systematic risk only, not total risk, and it is an average relationship rather than a guaranteed periodic outperformance. Firm-specific risk is unaffected by beta.

Question 44Financial Instruments and Markets

Which statement correctly describes the relationship between price and yield for a fixed-coupon bond?

  1. Price is independent of yield once the bond is issued
  2. Price and yield move inversely, and the curve is a straight line
  3. Price and yield move directly, and the curve is linear
  4. Price and yield move inversely, and the price-yield curve is convex Correct answer.

Explanation

Because a bond's cash flows are fixed, a higher discount rate reduces their present value, so prices fall when yields rise. The relationship is curved rather than linear, with convexity meaning price gains from yield falls exceed price losses from equal yield rises. This asymmetry is a fundamental property of fixed-income pricing.

Question 45Financial Instruments and Markets

An investor wants exposure to a broad equity index but has limited capital and wants intraday liquidity on an exchange. Which instrument is most suitable?

  1. An exchange-traded fund tracking the index Correct answer.
  2. A single large-cap share chosen for its dividend
  3. A five-year structured note linked to the index
  4. A money-market fund holding treasury bills

Explanation

An index-tracking ETF provides diversified exposure to the whole index in a single listed security that trades continuously on an exchange. A single share gives concentrated rather than broad exposure, and a structured note adds issuer credit risk and limited liquidity. A money-market fund holds short-term debt and offers no equity exposure.

Question 46Financial Instruments and Markets

Which risk is most reduced by holding a portfolio of many imperfectly correlated shares?

  1. Interest-rate risk on government bonds
  2. Systematic market risk
  3. Inflation risk affecting all assets
  4. Unsystematic or company-specific risk Correct answer.

Explanation

Diversification offsets company-specific events because their effects are imperfectly correlated across holdings, so unsystematic risk declines as the number of holdings grows. Market-wide systematic risk remains because all shares are exposed to common factors. Inflation and interest-rate risk are macroeconomic exposures not removed by adding equities.

Question 47Financial Instruments and Markets

A stock currently trades at BGN 50 and pays an annual dividend of BGN 2.50 per share. What is the dividend yield?

  1. 5.0% Correct answer.
  2. 20.0%
  3. 12.5%
  4. 2.5%

Explanation

Dividend yield equals the annual dividend per share divided by the current market price, so BGN 2.50 divided by BGN 50 gives 5%. The measure expresses income return relative to the price paid and ignores capital gains. Inverting the ratio would give the price-to-dividend multiple rather than a yield.

Question 48Financial Instruments and Markets

Which feature distinguishes a preference share from an ordinary share?

  1. Preference shares are traded only on the primary market
  2. Preference shares are debt instruments with a fixed maturity date
  3. Preference shares always carry voting rights superior to those of ordinary shares
  4. Preference shares normally receive a fixed dividend and rank ahead of ordinary shares for dividends and liquidation proceeds Correct answer.

Explanation

Preference shares typically carry a stated dividend rate and priority over ordinary shares in the payment of dividends and in liquidation, in exchange for limited or no voting rights. They remain equity instruments without a mandatory maturity. They trade on the secondary market like other listed securities.

Question 49Financial Instruments and Markets

An investment consultant compares two bonds with the same maturity and coupon but different credit ratings. What does the lower-rated bond's higher yield principally reflect?

  1. A tax adjustment for the investor's residence
  2. A credit spread compensating for greater default risk Correct answer.
  3. A liquidity premium for a larger issue size
  4. An inflation forecast specific to the issuer

Explanation

Investors demand extra yield over a benchmark to hold debt with a greater probability of default or loss given default, and that extra compensation is the credit spread. Ratings summarise creditworthiness rather than tax or inflation characteristics. Liquidity effects exist but are separate from the rating difference described.

Question 50Financial Instruments and Markets

Which statement best describes the function of a central counterparty (CCP) in securities clearing?

  1. It guarantees investors a minimum return on their portfolios
  2. It sets the official closing price of each listed security
  3. It interposes itself between buyer and seller, becoming counterparty to each side and managing counterparty credit risk through margin Correct answer.
  4. It issues the securities that are subsequently traded

Explanation

A CCP novates trades so that it becomes the buyer to every seller and the seller to every buyer, mutualising counterparty risk. It collects margin and operates a default fund to cover a participant's failure. It does not set prices, issue securities or guarantee investment returns.