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CISI CMP Securities study materials
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CISI CMP Securities practice questions

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Question 1Securities markets and market participants

In the UK, which body is the statutory regulator responsible for the conduct of firms and individuals authorised to carry on investment business?

  1. The Financial Conduct Authority Correct answer.
  2. The Bank of England's Monetary Policy Committee
  3. The London Stock Exchange's Listing Authority
  4. The Prudential Regulation Authority

Explanation

The Financial Conduct Authority is the statutory conduct regulator for investment business in the UK, with objectives including consumer protection and market integrity. The PRA focuses on prudential soundness of banks and insurers, while the MPC sets monetary policy and the exchange's listing function relates to admission of securities.

Question 2Securities markets and market participants

A company wishes to raise new capital by selling shares to the public for the first time on a regulated market. Which description best fits this transaction?

  1. A private placement to a single existing shareholder
  2. A secondary market block trade
  3. A repurchase of its own shares in the market
  4. A primary market initial public offering Correct answer.

Explanation

An initial public offering is the first sale of new shares by a company to public investors, which is a primary market activity because new capital flows to the issuer. Subsequent trading of those shares between investors takes place in the secondary market.

Question 3Securities markets and market participants

Which market participant acts as principal, quoting two-way prices and holding inventory of securities in order to facilitate client and market trades?

  1. A market maker Correct answer.
  2. A custodian
  3. A transfer agent
  4. A registrar

Explanation

A market maker stands ready to buy and sell a security at quoted bid and offer prices, dealing as principal and carrying inventory to provide liquidity. Custodians safekeep assets, while registrars and transfer agents maintain shareholder records.

Question 4Securities markets and market participants

An investor buys shares through a stockbroker and the trade is executed on a recognised exchange. In the settlement cycle, what does the abbreviation T+2 mean?

  1. Settlement is due two calendar months after the trade date
  2. The trade must be cancelled within two hours of execution
  3. The investor has two days to decide whether to accept the price
  4. Settlement is due two business days after the trade date Correct answer.

Explanation

T+2 denotes the standard settlement cycle in many developed markets, meaning the exchange of cash and securities occurs two business days after the trade date. It refers to settlement timing, not to a cancellation window or a price acceptance period.

Question 5Securities markets and market participants

Which type of fund issues a fixed number of shares that are bought and sold on an exchange rather than continuously created and redeemed at net asset value?

  1. A money market fund
  2. A unit trust
  3. A closed-ended investment company Correct answer.
  4. An open-ended investment company

Explanation

A closed-ended investment company has a fixed share capital, and investors trade those shares on an exchange at prices driven by supply and demand. Open-ended vehicles such as OEICs and unit trusts expand and contract by issuing or redeeming units at net asset value.

Question 6Securities markets and market participants

A dealer quotes a bond as '99.50 to 99.60'. What do these two figures represent?

  1. The opening price and the closing price
  2. The clean price and the accrued interest
  3. The bid price and the offer price Correct answer.
  4. The offer price and the bid price

Explanation

In a two-way price the lower figure is the bid, at which the dealer will buy, and the higher figure is the offer, at which the dealer will sell. The gap between them is the bid-offer spread, which compensates the dealer for providing liquidity.

Question 7Securities markets and market participants

Which of the following best describes the role of a central counterparty (CCP) in securities and derivatives markets?

  1. It interposes itself between buyer and seller, becoming counterparty to both sides Correct answer.
  2. It sets the official closing price for each listed security
  3. It insures investors against fraud by their brokers
  4. It lends securities to short sellers to cover failed deliveries

Explanation

A CCP novates trades so that it becomes the buyer to every seller and the seller to every buyer, thereby mutualising counterparty credit risk and managing margin. Securities lending, price setting and investor compensation are performed by other entities.

Question 8Securities markets and market participants

A pension fund places an order with a broker to buy 500,000 shares over the course of a day, instructing the broker to work the order patiently and use judgement on timing. This instruction is best described as:

  1. A discretionary or 'care' order Correct answer.
  2. A limit order
  3. A stop order
  4. A market order

Explanation

When a client gives the broker discretion over price and timing, the instruction is a discretionary or care order, and the broker must act in the client's best interests. A limit order fixes a maximum or minimum price, a market order seeks immediate execution and a stop order is triggered at a specified level.

Question 9Securities markets and market participants

Which of the following securities gives the holder a claim on the issuer's assets that ranks ahead of ordinary shareholders in a liquidation?

  1. A corporate bond Correct answer.
  2. An ordinary share
  3. A convertible preference share
  4. A warrant

Explanation

Bondholders are creditors of the issuer and are paid before shareholders in a liquidation. Ordinary and preference shareholders rank behind creditors, with preference holders typically ahead of ordinary holders but still subordinated to debt.

Question 10Securities markets and market participants

An investor buys a share at 250p and sells it a year later at 280p, receiving no dividends. What is the capital return over the holding period?

  1. 12% Correct answer.
  2. 10.7%
  3. 3%
  4. 30%

Explanation

Capital return is the change in price divided by the purchase price: (280 − 250) ÷ 250 = 0.12, or 12%. Dividends would add to total return but none were received here.

Question 11Securities markets and market participants

Which statement about a gilt-edged security issued by the UK government is correct?

  1. It gives the holder voting rights at the issuer's annual general meeting
  2. It is a debt obligation of the government and carries the risk of default by the sovereign issuer Correct answer.
  3. It is only available to overseas institutional investors
  4. It represents an equity stake in the Bank of England

Explanation

Gilts are sovereign debt instruments, so the holder is a creditor of the government and is exposed to sovereign credit risk, however low that risk is perceived to be. They carry no voting rights and are freely available to domestic and overseas investors.

Question 12Securities markets and market participants

Which of the following is the principal function of a stock exchange's trading system in a quote-driven market?

  1. Guaranteeing a profit for every investor who trades
  2. Setting the dividend policy of listed companies
  3. Auditing the financial statements of member firms
  4. Displaying competing dealer quotes so that orders can be executed against them Correct answer.

Explanation

In a quote-driven market, dealers publish bid and offer prices and the trading system disseminates them so that orders can be matched against those quotes. Exchanges do not guarantee profits, set dividends or audit member firms.

Question 13Securities markets and market participants

An investor wishes to hedge against a fall in the value of a share portfolio without selling the shares. Which derivative position would most directly achieve this?

  1. Buying call options on the underlying shares
  2. Buying put options on the underlying shares Correct answer.
  3. Buying a convertible bond issued by the company
  4. Writing put options on the underlying shares

Explanation

A put option gives the right to sell at a set strike, so its value rises as the share price falls, offsetting losses on the portfolio. Buying calls or writing puts both benefit from rising prices, and a convertible bond does not hedge downside in the same direct way.

Question 14Securities markets and market participants

Which best describes the function of a prime broker to a hedge fund?

  1. Acting as the fund's independent auditor
  2. Providing financing, securities lending and settlement services alongside execution Correct answer.
  3. Setting the fund's investment mandate and risk limits
  4. Underwriting the fund's initial public offering

Explanation

Prime brokers offer an integrated package of services including margin financing, stock borrowing, custody and trade settlement. They do not audit the fund or set its investment policy, which is the responsibility of the fund's manager and governing documents.

Question 15Securities markets and market participants

A company announces a 3-for-1 share split. What is the most likely immediate effect on the share price and the number of shares held by an existing investor?

  1. The price falls to roughly one third and the holding triples Correct answer.
  2. Both the price and the holding remain unchanged
  3. The price triples and the holding falls to one third
  4. The price is unchanged but the holding triples

Explanation

In a share split the number of shares in issue is multiplied while the company's market capitalisation is unchanged, so the theoretical price per share divides by the same factor. An existing holder's proportionate ownership is unchanged because their share count rises in proportion.

Question 16Securities markets and market participants

Which statement correctly distinguishes a futures contract from an option?

  1. A futures contract can only be settled by physical delivery, while an option is always cash settled
  2. Both instruments oblige the buyer to transact, differing only in the exchange on which they trade
  3. A futures contract obliges both parties to transact at expiry, whereas an option buyer has a right but not an obligation Correct answer.
  4. A futures contract gives the buyer a right but not an obligation, whereas an option obliges both parties

Explanation

Futures are binding agreements on both sides, with daily mark-to-market variation margin; options confer a right on the buyer, who pays a premium, while the writer assumes the obligation. Settlement method varies for both instruments and is not the defining distinction.

Question 17Securities markets and market participants

A bond with a nominal value of £100 pays a coupon of 4% and is trading at £80. What is the current running yield?

  1. 5% Correct answer.
  2. 20%
  3. 3.2%
  4. 4%

Explanation

The running or flat yield is the annual coupon divided by the market price: £4 ÷ £80 = 5%. The coupon rate alone is 4%, but buying below par raises the income return on the price paid.

Question 18Securities markets and market participants

Which of the following best explains why an investor might prefer an exchange-traded fund (ETF) over a traditional open-ended fund?

  1. ETFs never charge any management fee
  2. ETFs are guaranteed to outperform open-ended funds
  3. ETFs are exempt from all regulatory disclosure requirements
  4. ETF shares can be bought and sold intraday on an exchange at market prices Correct answer.

Explanation

Because ETF shares are listed, investors can trade them throughout the day at prevailing market prices, unlike open-ended funds which are typically dealt at a single valuation point. ETFs still charge fees and remain subject to regulation and disclosure.

Question 19Securities markets and market participants

In the context of market abuse, which term describes dealing on the basis of information that is not generally available and which, if made public, would likely affect the price of the security?

  1. Arbitrage
  2. Insider dealing Correct answer.
  3. Market making
  4. Front running a client order

Explanation

Insider dealing is trading while in possession of inside information, that is, precise non-public information likely to have a significant effect on price. Market making and arbitrage are legitimate activities, and front running is a separate abuse involving misuse of client order information.

Question 20Securities markets and market participants

A broker executes a client's buy order for 10,000 shares but the trade fails to settle on the due date because the seller has not delivered the stock. Which party bears the immediate delivery obligation that has been breached?

  1. The issuer of the shares
  2. The selling party's clearing member Correct answer.
  3. The buying client
  4. The stock exchange's listing department

Explanation

Delivery obligations in a cleared market are owed through the clearing members, so a failure to deliver is addressed with the selling clearing member, who must resolve the shortfall. The buying client, the listing department and the issuer are not responsible for the seller's delivery.

Question 21Securities markets and market participants

Which statement about the relationship between risk and return in securities markets is most accurate?

  1. Higher expected returns are always achieved with lower risk
  2. Investors generally require a higher expected return to accept greater uncertainty of returns Correct answer.
  3. Diversification increases the unsystematic risk of a portfolio
  4. Government bonds always produce higher returns than equities over any period

Explanation

The risk-return trade-off holds that investors demand compensation for bearing risk, so higher expected returns generally come with greater volatility or uncertainty. This is an expectation, not a guarantee, and diversification reduces rather than increases firm-specific risk.

Question 22Securities markets and market participants

Which of the following is the main purpose of a prospectus published in connection with an offer of securities to the public?

  1. To replace the need for audited financial statements
  2. To guarantee that the securities will rise in value after listing
  3. To set the interest rate that will apply to all future borrowings of the issuer
  4. To provide investors with the information needed to make an informed assessment of the issuer and the securities Correct answer.

Explanation

A prospectus is a disclosure document giving details of the issuer, the securities and the risks, enabling investors to make an informed investment decision. It does not guarantee performance, fix future borrowing costs or substitute for audited accounts, which are normally included within it.

Question 23Securities markets and market participants

An investor holds a convertible bond with a conversion price of 500p when the underlying share trades at 400p. Which statement best describes the position?

  1. Conversion is immediately profitable because the bond converts at a discount to market
  2. The conversion price falls automatically as the share price falls
  3. The bond must be converted at maturity regardless of the share price
  4. Conversion would be uneconomic now because the shares cost less in the market than through conversion Correct answer.

Explanation

Conversion is worthwhile only when the market price of the shares exceeds the conversion price, since converting at 500p when shares trade at 400p destroys value. The investor can instead hold the bond for its coupon and redemption, and conversion is a right, not an obligation.

Question 24Securities markets and market participants

A market has a continuous auction order book. A large buy order arrives and sweeps several price levels, moving the price sharply higher. Which term best describes the price impact experienced by the buyer?

  1. Accrued interest
  2. Novation
  3. Contango
  4. Slippage Correct answer.

Explanation

Slippage is the difference between the expected price of a trade and the price actually achieved, often caused by insufficient depth at the best quotes. Accrued interest, contango and novation relate to bond pricing, futures curves and clearing respectively.

Question 25Securities markets and market participants

Which statement about the role of credit rating agencies in the securities markets is correct?

  1. They assign opinions on the creditworthiness of issuers and issues, which investors use alongside their own analysis Correct answer.
  2. They guarantee that a rated bond will be repaid in full at maturity
  3. They set the coupon that an issuer must pay on a new bond
  4. They act as underwriters for the bonds they rate

Explanation

Rating agencies express forward-looking opinions about an issuer's ability and willingness to meet obligations; the rating is an input to, not a substitute for, investors' own credit analysis. Ratings are not guarantees, do not fix coupons and are produced independently of underwriting.

Question 26Securities markets and market participants

A company wishes to raise new equity capital from institutional and retail investors simultaneously through a public offer. Which market is the company accessing when it first lists its shares on a recognised exchange?

  1. The secondary market
  2. The interbank market
  3. The money market
  4. The primary market Correct answer.

Explanation

The primary market is where new securities are issued and the issuer receives the proceeds of sale. Once the shares are listed and traded between investors, dealings occur in the secondary market. Money and interbank markets deal in short-term debt and deposits rather than new equity issuance.

Question 27Securities markets and market participants

An investor places an order to buy shares and the broker executes it immediately at the best price currently available on the order book. Which order type has the investor used?

  1. A stop order
  2. An iceberg order
  3. A market order Correct answer.
  4. A limit order

Explanation

A market order instructs the broker to trade immediately at whatever price the market offers, prioritising execution over price certainty. A limit order instead sets a maximum purchase price and may remain unfilled. Stop and iceberg orders serve different purposes of triggering and concealing size.

Question 28Securities markets and market participants

Which market participant typically acts as principal, buying securities into its own inventory and quoting two-way prices to clients?

  1. A dealer Correct answer.
  2. An investment consultant
  3. A broker
  4. A registrar

Explanation

A dealer trades as principal on its own account, holding inventory and quoting bid and offer prices at which it will buy or sell. A broker acts as agent for clients rather than taking the other side of the trade. Consultants advise and registrars maintain shareholder records.

Question 29Securities markets and market participants

Which type of fund issues a fixed number of shares that are then bought and sold between investors on an exchange, rather than being created and redeemed on demand?

  1. A money market fund
  2. A closed-ended investment company Correct answer.
  3. A unit trust
  4. An open-ended investment company

Explanation

A closed-ended investment company has a fixed share capital, and investors trade those shares on an exchange at prices set by supply and demand. Open-ended vehicles such as OEICs and unit trusts create and cancel units in response to investor flows. Money market funds are defined by their short-term debt holdings, not by a closed capital structure.

Question 30Securities markets and market participants

Which of the following best describes the role of a custodian in the securities markets?

  1. Safekeeping client assets and processing settlement and corporate actions Correct answer.
  2. Underwriting new issues and placing them with investors
  3. Setting the official closing price for listed securities
  4. Guaranteeing the performance of every trade executed on an exchange

Explanation

A custodian holds securities and cash on behalf of clients, administers settlement, collects dividends and handles corporate actions such as rights issues. Guaranteeing trade performance is the function of a central counterparty, and price setting is performed by the exchange. Underwriting is carried out by investment banks or issuing houses.

Question 31Securities markets and market participants

A UK-listed company pays a dividend to shareholders. Which date determines the shareholders who are entitled to receive that dividend?

  1. The announcement date
  2. The payment date
  3. The record date Correct answer.
  4. The ex-dividend date

Explanation

The record date is the date on which the company reviews its register of members to establish who is entitled to the dividend. The ex-dividend date is when the shares begin trading without the right to the dividend, and the payment date is when cash is actually distributed. The announcement date merely communicates the intended dividend.

Question 32Securities markets and market participants

Which of the following best describes a money market instrument?

  1. A derivative contract settled against an equity index
  2. A short-term debt security with high liquidity and low credit risk Correct answer.
  3. An equity security listed on a recognised exchange
  4. A long-dated government bond with a fixed coupon

Explanation

Money market instruments are short-term debt securities, typically maturing within a year, issued by governments, banks and large corporates. They are characterised by high liquidity and relatively low credit risk. Long-dated bonds, equities and derivatives belong to other market segments.

Question 33Securities markets and market participants

Which body is typically responsible for regulating the conduct of investment firms and protecting consumers in the UK securities market?

  1. The Prudential Regulation Authority
  2. The Financial Conduct Authority Correct answer.
  3. The Payment Systems Regulator
  4. The Bank of England's Monetary Policy Committee

Explanation

The Financial Conduct Authority regulates the conduct of financial firms and is responsible for consumer protection and market integrity in the UK. The Prudential Regulation Authority focuses on the safety and soundness of banks and insurers, while the Monetary Policy Committee sets interest rates. The Payment Systems Regulator oversees payment systems rather than securities conduct.

Question 34Securities markets and market participants

A corporate bond is quoted with a bid price of 98.00 and an offer price of 98.50. An investor wishes to sell £100,000 nominal to the dealer. What price will the investor receive, ignoring accrued interest and fees?

  1. 98.50
  2. 98.25
  3. 98.00 Correct answer.
  4. 99.00

Explanation

A client selling to a dealer receives the bid price, which is the price at which the dealer is willing to buy. The offer price applies to clients buying from the dealer. The mid-price is used for valuation, not for executing a sale.

Question 35Securities markets and market participants

An investor buys 1,000 shares at 150p each and the broker charges a commission of 0.5% of the consideration. What is the total cash cost of the purchase, ignoring taxes and levies?

  1. £1,575.00
  2. £1,500.00
  3. £1,492.50
  4. £1,507.50 Correct answer.

Explanation

The consideration is 1,000 shares multiplied by 150p, which equals £1,500. Commission of 0.5% adds £7.50, giving a total cash cost of £1,507.50. The commission is added to, not deducted from, the purchase cost.

Question 36Securities markets and market participants

A company has 400 million shares in issue and announces a 1-for-4 rights issue at a subscription price of 200p, when the current market price is 260p. What is the theoretical ex-rights price per share?

  1. 260p
  2. 200p
  3. 248p Correct answer.
  4. 230p

Explanation

Four existing shares at 260p cost 1,040p and one new share at 200p costs 200p, giving a total of 1,240p for five shares. Dividing by five produces a theoretical ex-rights price of 248p. The new subscription price alone understates the blended value of the enlarged holding.

Question 37Securities markets and market participants

An investor expects the price of a share to fall and wishes to profit from that view while limiting potential loss to the premium paid. Which strategy best matches this objective?

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

Explanation

A purchased put option gains value as the underlying share price falls, and the maximum loss is limited to the premium paid. Writing a call also profits from a fall but exposes the writer to potentially unlimited loss. Buying a call or the share profits from a rise.

Question 38Securities markets and market participants

A hedge fund borrows shares from a custodian bank and sells them in the market, intending to buy them back later at a lower price. Which activity is being described?

  1. Arbitrage
  2. Hedging
  3. Short selling Correct answer.
  4. Going long

Explanation

Short selling involves borrowing securities, selling them, and later repurchasing them to return to the lender, profiting if the price falls. Going long means buying and holding an asset. Arbitrage exploits price differences, and hedging offsets existing risk rather than creating a directional short position.

Question 39Securities markets and market participants

A settlement system operates on a delivery-versus-payment basis. What does this mean for the parties to a trade?

  1. Securities are transferred only when the corresponding cash payment is made Correct answer.
  2. Settlement is guaranteed by the exchange regardless of the counterparties
  3. Cash is paid in advance of any transfer of securities
  4. Securities are transferred on one date and cash settles several days later

Explanation

Delivery versus payment links the transfer of securities to the transfer of cash so that neither leg occurs without the other. This removes principal risk, whereby one party delivers and the other fails to pay. Separate settlement dates, prepayment or exchange guarantees describe other arrangements.

Question 40Securities markets and market participants

An investor holds a portfolio of UK equities and expects a temporary market fall but does not wish to sell the holdings and trigger capital gains tax. Which action best achieves the objective?

  1. Purchase a corporate bond fund
  2. Buy additional equities on margin
  3. Sell a stock index futures contract Correct answer.
  4. Buy a call option on the index

Explanation

Selling index futures creates a short position that offsets losses on the physical portfolio while leaving the shares unsold. The investor retains ownership and avoids a taxable disposal. Buying equities or calls adds upside exposure, and a bond fund does not hedge equity risk directly.

Question 41Securities markets and market participants

A bond has a nominal value of £1,000 and pays an annual coupon of 5%. It is currently priced at £1,250. What is the current running yield?

  1. 6.25%
  2. 4.0% Correct answer.
  3. 5.0%
  4. 3.2%

Explanation

The annual coupon is 5% of £1,000, which equals £50. Dividing the £50 coupon by the £1,250 market price gives a running yield of 4.0%. The running yield falls below the coupon rate whenever the bond trades at a premium to par.

Question 42Securities markets and market participants

Which statement best explains why a company might choose to issue preference shares rather than additional ordinary shares?

  1. Preference shares rank ahead of ordinary shares for dividends and repayment but usually carry no voting rights Correct answer.
  2. Preference dividends are legally guaranteed and must be paid even when no profits exist
  3. Preference shares rank behind ordinary shares on a winding up
  4. Preference shares always carry voting rights that ordinary shares do not

Explanation

Preference shares typically carry a fixed dividend and rank ahead of ordinary shares for income and capital repayment, but they usually lack voting rights. This allows a company to raise capital without diluting control. Preference dividends remain discretionary and the shares rank ahead of, not behind, ordinary shares.

Question 43Securities markets and market participants

A company announces a profit warning outside trading hours. When the market opens, the share price falls sharply on heavy volume. Which market function is most clearly demonstrated?

  1. Liquidity provision by a central bank
  2. Price discovery in response to new information Correct answer.
  3. Settlement of outstanding trades
  4. Underwriting of a new issue

Explanation

Price discovery is the process by which new information is absorbed into market prices through trading. The sharp fall on heavy volume shows investors reassessing value in response to the warning. Central bank liquidity, settlement and underwriting are distinct functions unrelated to this reaction.

Question 44Securities markets and market participants

An investor buys a bond at a premium to its nominal value and holds it to maturity. Assuming the issuer does not default, what is the most likely relationship between the yield to maturity and the current running yield?

  1. The yield to maturity is unaffected by the purchase price
  2. The yield to maturity is higher than the current running yield
  3. The yield to maturity is lower than the current running yield Correct answer.
  4. The two measures are always equal for premium bonds

Explanation

A bond bought at a premium will be redeemed at par, producing a capital loss over its life. The yield to maturity accounts for this loss, so it is lower than the running yield, which ignores capital movements. The gap widens with the size of the premium and the time to maturity.

Question 45Securities markets and market participants

A market maker holds a large inventory of a thinly traded corporate bond and faces few competing quotes. Which risk is most directly increased for the market maker?

  1. Inventory risk arising from adverse price moves before the position can be unwound Correct answer.
  2. Settlement risk arising from a failure of the central counterparty
  3. Currency risk arising from translation of overseas earnings
  4. Operational risk arising from a failure of the order management system

Explanation

Inventory risk is the danger that a dealer holding a position suffers losses before it can be sold on. Thin trading and limited competition make it harder to unwind a large holding quickly, magnifying this exposure. Settlement, currency and operational risks arise from different sources and are not the primary consequence described.

Question 46Securities markets and market participants

An index provider announces that a widely tracked equity index will rebalance, increasing the weight of a particular share. Which effect is most likely in the period before the rebalance takes effect?

  1. The issuer must buy back its own shares to support the price
  2. The share is suspended from trading pending the rebalance
  3. Index-tracking funds buy the share, pushing its price up ahead of the change Correct answer.
  4. Index-tracking funds sell the share to reduce their exposure

Explanation

Funds tracking an index must adjust their holdings to mirror its composition, so an increased weight creates predictable demand for the share. This buying pressure can move the price before the effective date. Tracking funds would not sell, and the issuer has no obligation to buy back shares.

Question 47Securities markets and market participants

A broker receives a client order to buy a large block of shares with instructions to work the order gradually and avoid moving the price. Which risk is the broker primarily seeking to manage?

  1. Regulatory risk from failing to report the trade
  2. Custody risk from holding the shares after settlement
  3. Credit risk from the client failing to pay for the shares
  4. Market impact risk from the order itself moving prices against the client Correct answer.

Explanation

Large orders can move prices against the buyer if executed too quickly, so brokers often work orders gradually to limit market impact. Credit, custody and reporting risks are separate concerns managed through other controls. The instruction to avoid moving the price points directly to market impact.

Question 48Securities markets and market participants

Two bonds have the same maturity and credit rating, but one pays a fixed coupon and the other pays a floating coupon linked to a reference rate. Which statement best explains the different interest rate exposure of the two bonds?

  1. The fixed-coupon bond is unaffected by changes in market yields
  2. The fixed-coupon bond has greater price sensitivity to changes in market yields than the floating-rate bond Correct answer.
  3. Both bonds have identical price sensitivity because they share the same maturity
  4. The floating-rate bond has greater price sensitivity because its coupon changes over time

Explanation

A fixed-coupon bond's price moves inversely with market yields because its future cash flows are fixed. A floating-rate bond resets its coupon to prevailing rates, so its price stays close to par and its sensitivity to yield changes is much lower. Maturity alone does not determine interest rate sensitivity.

Question 49Securities markets and market participants

An issuer is planning a placing of shares to institutional investors. Which document is typically required to provide detailed disclosure about the issuer and the securities being offered?

  1. A shareholder circular
  2. A prospectus Correct answer.
  3. A trade confirmation
  4. A key information document

Explanation

A prospectus sets out the information investors need to make an informed assessment of an offer of securities, including the issuer's business, financial position and the terms of the offer. Shareholder circulars address meetings and resolutions, trade confirmations record executed deals, and key information documents summarise packaged retail products.

Question 50Securities markets and market participants

A fund manager wishes to gain exposure to a broad equity index with intraday trading and low ongoing costs. Which vehicle most closely matches this requirement?

  1. An exchange-traded fund tracking the index Correct answer.
  2. A actively managed unit trust with a performance fee
  3. A closed-ended private equity fund
  4. A direct holding of a single large-cap share

Explanation

An exchange-traded fund tracking an index offers diversified exposure, trades on an exchange throughout the day and typically carries low charges. An actively managed unit trust charges more and does not track the index, while a private equity fund and a single share do not provide broad index exposure.