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KASNEB CIFA Intermediate study materials
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KASNEB CIFA Intermediate practice questions

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Question 1Financial Markets and Instruments

A Treasury bill is best described as:

  1. An equity security issued by the central bank
  2. A long-term bond that pays a fixed coupon each year
  3. A short-term discount security issued by government Correct answer.
  4. Corporate debt that carries a government guarantee

Explanation

Treasury bills are money market instruments issued by the government with maturities of one year or less. They carry no coupon; instead they are sold below face value and redeemed at face value, so the investor's return is the difference between the purchase price and the redemption value.

Question 2Financial Markets and Instruments

The primary market is the market in which:

  1. Securities already issued are traded between investors
  2. New securities are sold to raise fresh capital for the issuer Correct answer.
  3. Only short-term government paper is bought and sold
  4. Investors exchange existing shares without new funds to issuers

Explanation

The primary market is where a security is offered for the first time, so the proceeds flow to the issuer and represent new capital formation. Trading of already-issued securities after that point takes place in the secondary market.

Question 3Financial Markets and Instruments

Which of the following is a feature of ordinary shares?

  1. They carry a fixed rate of dividend paid before other distributions
  2. They rank ahead of creditors when the company is liquidated
  3. They carry a residual claim on assets after other claims are met Correct answer.
  4. They must be repaid their capital at a fixed maturity date

Explanation

Ordinary shareholders are the residual owners of a company: they receive whatever remains after all expenses, creditors and prior-ranking claims have been settled. Because their claim is last, their dividend and capital return are variable rather than contractual.

Question 4Financial Markets and Instruments

The buyer of a call option acquires the right to:

  1. sell an asset at a fixed price on or before expiry
  2. buy an asset at a set price on or before expiry Correct answer.
  3. receive dividends declared by the underlying company
  4. obtain a loan at a predetermined interest rate

Explanation

A call option confers on the holder the right, but not the obligation, to purchase the underlying asset at the strike price within the stated period. The holder exercises only when it is favourable, and the maximum loss is the premium paid.

Question 5Financial Markets and Instruments

Which of the following best describes the role of a stock exchange?

  1. It sets the dividend policy of listed companies
  2. It guarantees investors against capital losses
  3. It provides a regulated platform for trading existing securities Correct answer.
  4. It lends money to listed firms at concessional rates

Explanation

A stock exchange brings buyers and sellers of already-issued securities together under published rules, which gives investors liquidity and price discovery. It does not manage the companies listed on it or underwrite investor losses.

Question 6Financial Markets and Instruments

Preference shareholders typically:

  1. have voting rights that exceed those of ordinary shareholders
  2. receive a fixed dividend that ranks ahead of ordinary dividends Correct answer.
  3. can be repaid their capital at any time on demand
  4. rank after ordinary shareholders for dividend payments

Explanation

Preference shares carry a stated dividend rate that must be paid before any dividend is paid on ordinary shares, which is the source of the word preference. In exchange for that priority, preference shareholders normally have restricted voting rights.

Question 7Financial Markets and Instruments

In Kenya, the primary regulator of capital markets and securities is:

  1. the Central Bank of Kenya
  2. the Insurance Regulatory Authority
  3. the Capital Markets Authority Correct answer.
  4. the Nairobi Securities Exchange

Explanation

The Capital Markets Authority is the statutory body charged with licensing market intermediaries and regulating the issuance and trading of securities. The Central Bank regulates banks and monetary policy, while the exchange is a self-regulating market operator.

Question 8Financial Markets and Instruments

A unit trust is best described as:

  1. a government scheme that guarantees minimum returns to savers
  2. a pooled fund managed professionally for many investors Correct answer.
  3. a company that manufactures and sells goods using public funds
  4. a bank account that pays interest at the central bank rate

Explanation

A unit trust is a collective investment scheme that pools subscriptions from many investors and invests them in a diversified portfolio under professional management. Each investor holds units whose value reflects the underlying net asset value of the fund.

Question 9Financial Markets and Instruments

A 91-day Treasury bill with a face value of Ksh 1,000,000 is quoted at a discount rate of 10% per annum. Using a 365-day year, the price an investor pays is approximately:

  1. Ksh 900,000
  2. Ksh 990,000
  3. Ksh 975,068 Correct answer.
  4. Ksh 1,024,932

Explanation

Bills are quoted on a bank discount basis, so the discount is face value multiplied by the rate and the fraction of the year, then deducted from face value. Here the discount is 1,000,000 × 0.10 × 91/365 ≈ 24,932, giving a price of about Ksh 975,068.

Question 10Financial Markets and Instruments

A share has a market price of Ksh 40 and paid a dividend of Ksh 2.50 per share over the last year. The dividend yield is:

  1. 12.50%
  2. 16.00%
  3. 6.25% Correct answer.
  4. 2.50%

Explanation

Dividend yield expresses the cash dividend as a percentage of the current market price: dividend per share divided by price per share. Dividing 2.50 by 40 gives 0.0625, or 6.25%.

Question 11Financial Markets and Instruments

A company's shares trade at Ksh 60 and its earnings per share is Ksh 4. A price-earnings ratio of 15 indicates that:

  1. the company's earnings grew by 15% over the last year
  2. the company pays out 15% of its earnings as dividends
  3. the share price is expected to fall by 15% next year
  4. the market values each Ksh 1 of earnings at Ksh 15 Correct answer.

Explanation

The price-earnings ratio is the market price divided by earnings per share, and it shows how much investors are prepared to pay for each shilling of current earnings. A ratio of 15 therefore means Ksh 15 of price is paid per Ksh 1 of earnings.

Question 12Financial Markets and Instruments

In a rights issue, existing shareholders are:

  1. obliged to buy extra shares at the ruling market price
  2. offered a bonus issue in proportion to their holdings
  3. offered new shares pro rata to their holdings, usually at a discount Correct answer.
  4. invited to sell their shares back to the company

Explanation

A rights issue raises new capital by offering existing shareholders the chance to buy additional shares in proportion to their current holdings. The subscription price is normally set below the market price to encourage take-up, and the right may be exercised, sold or allowed to lapse.

Question 13Financial Markets and Instruments

A bonus issue (scrip issue) has which effect on the issuing company?

  1. Reserves are capitalised and the number of shares rises Correct answer.
  2. New cash is raised for expansion of the business
  3. The total market value of the company rises immediately
  4. The company's debt is converted into equity

Explanation

In a bonus issue, the company transfers part of its reserves to share capital and issues extra shares to existing holders in proportion to their holdings. No cash changes hands, so the company's assets and total market value are unchanged; only the number of shares and the price per share change.

Question 14Financial Markets and Instruments

A distinguishing feature of exchange-traded futures compared with forward contracts is that futures:

  1. are standardised contracts that are marked to market daily Correct answer.
  2. are private agreements with no margin requirements
  3. expose each party to the other's credit risk
  4. can only be settled at the maturity date

Explanation

Futures are standardised contracts traded on an organised exchange and cleared through a clearing house, with positions marked to market and margins called daily. Forwards are bespoke bilateral agreements held to maturity, so they carry counterparty credit risk.

Question 15Financial Markets and Instruments

A repurchase agreement (repo) is best described as:

  1. a sale of shares with an option to buy them back at a lower price
  2. an agreement to buy securities only after the counterparty defaults
  3. borrowing cash by selling securities and agreeing to buy them back Correct answer.
  4. a permanent transfer of ownership of securities between commercial banks

Explanation

In a repo the borrower sells securities today and contracts to repurchase them at a slightly higher price on a specified future date, so the transaction is economically a secured short-term loan. The difference between the sale and repurchase prices is the interest cost of the borrowing.

Question 16Financial Markets and Instruments

When market interest rates rise, the price of an existing fixed-coupon bond:

  1. stays unchanged because the coupon is fixed
  2. falls, as the fixed coupon is less attractive than new issues Correct answer.
  3. rises, because the coupon becomes more valuable
  4. rises only if the bond is held to maturity

Explanation

A bond's coupon is fixed in money terms, so its market price must adjust to bring the yield in line with prevailing rates. When rates rise, newly issued bonds offer higher coupons and the old bond can only be sold at a lower price, which produces the inverse price-yield relationship.

Question 17Financial Markets and Instruments

The yield to maturity of a bond is:

  1. the difference between the issue price and the face value
  2. the discount rate equating the present value of cash flows to price Correct answer.
  3. the interest income received in the next twelve months
  4. the coupon rate stated on the face of the bond

Explanation

Yield to maturity is the internal rate of return on a bond held to redemption, so it is the single discount rate at which the present value of all coupons and the redemption payment equals the current market price. It therefore reflects both coupon income and any gain or loss from buying away from par.

Question 18Financial Markets and Instruments

An underwriter in a new issue of shares:

  1. trades the shares on the secondary market after listing
  2. advises the issuer on its dividend policy
  3. agrees to subscribe to any shares not taken up by the public Correct answer.
  4. guarantees the issuer a minimum share price for five years

Explanation

Underwriting is an insurance service on a new issue: for a fee the underwriter commits to take up any portion of the offer left with the issuing house after the subscription period. This guarantees the issuer that the planned amount of capital will be raised.

Question 19Financial Markets and Instruments

A 2-for-1 stock split:

  1. reduces the number of shares in issue and raises the share price
  2. doubles the number of shares while halving the par value per share Correct answer.
  3. increases the total market capitalisation of the company
  4. raises new capital for the company

Explanation

A stock split divides each existing share into several shares and reduces the nominal or par value in the same proportion. The total shareholders' equity and market capitalisation are unchanged; only the number of shares and the price per share are altered.

Question 20Financial Markets and Instruments

Commercial paper is:

  1. a government security issued to control money supply
  2. an equity instrument carrying a fixed rate of dividend
  3. an unsecured short-term promissory note issued by large companies Correct answer.
  4. a long-term secured bond issued by large companies

Explanation

Commercial paper is a short-term unsecured promissory note sold at a discount by large, creditworthy companies to meet working capital needs. Because it is unsecured, it is normally issued only by firms with strong credit standing and is often backed by a committed bank line.

Question 21Financial Markets and Instruments

A 182-day Treasury bill is issued at a discount rate of 12% per annum on a 365-day year. The effective annual yield to the investor, compounded, is closest to:

  1. 12.0%
  2. 11.0%
  3. 13.2% Correct answer.
  4. 14.5%

Explanation

The discount is 100 × 0.12 × 182/365 ≈ 5.98, so the investor pays about 94.02 and gains 5.98 over 182 days, a holding-period return of about 6.36%. Compounding that return over 365/182 periods gives (1.0636)^2.005 − 1 ≈ 13.2%, which exceeds the quoted discount rate because the gain is earned on a smaller outlay over less than a year.

Question 22Financial Markets and Instruments

An investor buys a call option with a strike price of Ksh 50 for a premium of Ksh 3. At expiry the underlying share trades at Ksh 56. The investor's net profit per share is:

  1. Ksh 3 Correct answer.
  2. Ksh 6
  3. Ksh 0
  4. Ksh 9

Explanation

The option finishes in the money by the excess of the share price over the strike, that is Ksh 6 of intrinsic value. Net profit deducts the premium already paid, so the investor clears 6 − 3 = Ksh 3 per share.

Question 23Financial Markets and Instruments

A bond has a duration of 5 years and a yield to maturity of 10%. If the yield falls by 0.5 percentage points, the bond's price will approximately:

  1. fall by about 2.3%
  2. rise by about 0.5%
  3. rise by about 2.3% Correct answer.
  4. fall by about 5.0%

Explanation

The duration-based approximation of a price change is minus duration multiplied by the change in yield divided by one plus the yield. Here −5 × (−0.005)/1.10 = +0.0227, so the price rises by roughly 2.3% when yields fall.

Question 24Financial Markets and Instruments

In a plain vanilla interest rate swap, two parties agree to:

  1. transfer the credit risk of a loan to a third party
  2. exchange fixed for floating interest payments on a notional principal Correct answer.
  3. exchange the principal amounts of two different currencies at maturity
  4. fix the price at which a commodity will be bought in future

Explanation

An interest rate swap involves swapping only interest obligations, typically a fixed rate against a floating reference rate, calculated on a notional principal that is never itself exchanged. The purpose is usually to align the interest profile of assets or liabilities with the party's expectations or risk appetite.

Question 25Financial Markets and Instruments

An investor earns a nominal return of 12% in a year when inflation is 5%. Using the exact Fisher relationship, the real return is approximately:

  1. 12.0%
  2. 17.0%
  3. 5.0%
  4. 6.7% Correct answer.

Explanation

The exact Fisher equation divides one plus the nominal return by one plus the inflation rate to remove the erosion of purchasing power. Computing 1.12/1.05 gives 1.0667, so the real return is about 6.7%, slightly below the simple 12% − 5% difference.

Question 26Financial Markets and Instruments

A company sells newly issued ordinary shares directly to institutional investors and receives the cash proceeds. This transaction takes place in the:

  1. money market
  2. derivatives market
  3. primary market Correct answer.
  4. secondary market

Explanation

A primary market is where a security is sold for the first time, so the issuing company receives the funds raised. The secondary market involves trading of securities that are already in issue between investors.

Question 27Financial Markets and Instruments

On liquidation, the claim of ordinary shareholders on a company's assets ranks:

  1. equally with secured creditors
  2. ahead of preference shareholders but after creditors
  3. ahead of secured creditors
  4. after all creditors and preference shareholders Correct answer.

Explanation

Ordinary shareholders are the residual owners of a company. On liquidation they rank after secured and unsecured creditors and after preference shareholders, so they are paid last.

Question 28Financial Markets and Instruments

The main economic function of a stock exchange is to:

  1. set the dividends that listed companies must pay
  2. provide a market where existing securities can be traded Correct answer.
  3. guarantee investors a positive return
  4. lend money to listed companies

Explanation

A stock exchange provides a regulated secondary market where investors can buy and sell existing securities, which gives them liquidity. It does not guarantee returns, determine dividend payments, or lend funds to issuers.

Question 29Financial Markets and Instruments

When a central bank buys government securities from commercial banks in the open market, the immediate effect is to:

  1. raise the Treasury bill discount rate
  2. reduce bank reserves and tighten credit
  3. increase government tax revenue
  4. increase bank reserves and expand credit Correct answer.

Explanation

When the central bank buys securities, it pays the sellers, which adds reserves to the banking system. Higher reserves support more lending and therefore expand credit.

Question 30Financial Markets and Instruments

A debenture is best described as:

  1. an equity instrument that carries voting rights at general meetings
  2. a derivative whose value depends on the price of a share
  3. a short-term government security sold at a discount to face value
  4. a long-term debt instrument often secured by a charge on company assets Correct answer.

Explanation

A debenture is a long-term debt instrument issued by a company, usually secured by a fixed or floating charge over its assets. Holders are creditors who receive interest and do not own the company.

Question 31Financial Markets and Instruments

An investor buys shares on the ex-dividend date. The investor will:

  1. receive the dividend only if the shares are held for 30 days
  2. receive a bonus issue in place of the dividend
  3. not receive the declared dividend Correct answer.
  4. receive the dividend because settlement is immediate

Explanation

Shares bought on or after the ex-dividend date do not carry the right to the declared dividend; that right remains with the seller. The ex-dividend date is set before the record date to allow settlement.

Question 32Financial Markets and Instruments

A market maker quotes a bid price of Ksh 18.00 and an ask price of Ksh 18.50. An investor who buys from the market maker and immediately sells back will:

  1. receive Ksh 18.25 per share
  2. break even after transaction costs
  3. lose Ksh 0.50 per share Correct answer.
  4. gain Ksh 0.50 per share

Explanation

The investor buys at the ask price of Ksh 18.50 and can sell back only at the bid price of Ksh 18.00. The Ksh 0.50 difference is the dealer's spread and represents an immediate loss.

Question 33Financial Markets and Instruments

The par value of a share is:

  1. the price at which it currently trades on the exchange
  2. a nominal value stated in the company's constitution Correct answer.
  3. the amount paid by a buyer in a rights issue
  4. the highest price it has ever reached in the market

Explanation

Par value is a nominal amount fixed in the company's constitution and used for accounting and legal purposes. It is not the market price and does not change as the share trades.

Question 34Financial Markets and Instruments

A sukuk is best described as:

  1. a short-term discount security issued by a central bank
  2. a conventional bond that pays a fixed rate of interest
  3. an equity share that carries a guaranteed dividend
  4. an Islamic certificate representing ownership in an underlying asset Correct answer.

Explanation

Sukuk are Islamic investment certificates that represent ownership in a tangible asset or project, and returns come from the asset's income rather than interest. This structure avoids riba, which is prohibited under Islamic finance principles.

Question 35Financial Markets and Instruments

A convertible bond gives its holder the right to:

  1. exchange the bond for a specified number of ordinary shares Correct answer.
  2. receive dividends instead of interest
  3. sell the bond back to the issuer at a premium
  4. demand early repayment at par at any time

Explanation

A convertible bond combines a bond with an embedded option to convert into ordinary shares at a pre-set conversion ratio. Because of this option, it usually offers a lower coupon than a straight bond.

Question 36Financial Markets and Instruments

A corporate bond is downgraded from BBB to BB. All else equal, the bond's:

  1. market price rises because risk is now higher
  2. market price falls and required yield rises Correct answer.
  3. maturity is extended
  4. coupon rate automatically increases

Explanation

A downgrade signals greater default risk, so investors demand a higher yield to hold the bond. Because the coupon is fixed, the market price must fall for the yield to rise.

Question 37Financial Markets and Instruments

An exchange-traded fund (ETF) is a fund that:

  1. is restricted to holding government bonds
  2. trades on an exchange like an ordinary share Correct answer.
  3. can be bought or sold only at the end of each trading day
  4. guarantees a return equal to the risk-free rate

Explanation

An ETF holds a portfolio of securities, but its units are listed and trade on an exchange throughout the day like shares. Its market price is set by supply and demand rather than only at an end-of-day net asset value.

Question 38Financial Markets and Instruments

An inverted yield curve occurs when:

  1. long-term interest rates are higher than short-term interest rates
  2. bond prices are rising while yields are also rising
  3. short-term interest rates are higher than long-term interest rates Correct answer.
  4. the yield on all maturities is equal

Explanation

Normally longer maturities carry higher yields to compensate for time and uncertainty. An inversion, with short-term rates above long-term rates, often reflects tight monetary policy and expectations of weaker growth or lower future rates.

Question 39Financial Markets and Instruments

Systematic risk is best described as risk that:

  1. affects only companies in a single industry
  2. arises from economy-wide factors and cannot be diversified away Correct answer.
  3. is measured by a company's debt-to-equity ratio
  4. can be eliminated by holding a diversified portfolio

Explanation

Systematic risk stems from economy-wide factors such as inflation, interest rates and recessions, and it affects all securities. Diversification cannot remove it, and beta is used to measure it.

Question 40Financial Markets and Instruments

An investor buys shares worth Ksh 100,000 using Ksh 40,000 of own funds and a Ksh 60,000 margin loan. If the share value falls to Ksh 70,000, the investor's equity is:

  1. Ksh 30,000
  2. Ksh 70,000
  3. Ksh 40,000
  4. Ksh 10,000 Correct answer.

Explanation

Equity equals the market value of the shares minus the margin loan: Ksh 70,000 minus Ksh 60,000 equals Ksh 10,000. Leverage magnifies losses as well as gains.

Question 41Financial Statement and Security Analysis

Which ratio is calculated by dividing current assets by current liabilities?

  1. Debt ratio
  2. Current ratio Correct answer.
  3. Quick ratio
  4. Inventory turnover

Explanation

The current ratio compares total current assets with current liabilities and is the standard broad measure of short-term solvency. The quick ratio removes inventory and other less liquid items from the numerator, while the debt ratio and inventory turnover measure leverage and activity respectively.

Question 42Financial Statement and Security Analysis

In the computation of earnings per share for ordinary shareholders, the earnings figure used in the numerator is:

  1. Operating profit less finance costs only
  2. Profit after tax plus preference dividends
  3. Profit before tax
  4. Profit after tax less preference dividends Correct answer.

Explanation

Earnings attributable to ordinary shareholders are profit after tax less any preference dividend, because preference shareholders have a prior claim on distributable profit. This residual figure is then divided by the weighted average number of ordinary shares in issue.

Question 43Financial Statement and Security Analysis

Dividend yield is computed as dividend per share divided by:

  1. Earnings per share
  2. Par value per share
  3. Market price per share Correct answer.
  4. Net asset value per share

Explanation

Dividend yield expresses the cash return an investor receives relative to the price actually paid for the share, so the market price is the denominator. Dividing by earnings gives the payout ratio, and dividing by net assets gives a book-value relationship.

Question 44Financial Statement and Security Analysis

A price-earnings ratio of 12 times most directly indicates that:

  1. Twelve per cent of profits are paid out as dividends
  2. The share price is twelve times the dividend per share
  3. Each shilling of market price generates twelve shillings of earnings
  4. The market price equals twelve years of the company's current earnings Correct answer.

Explanation

The price-earnings ratio is the market price divided by earnings per share, so it measures how many years of current earnings the market is prepared to pay for the share. A high multiple signals expected earnings growth or lower perceived risk.

Question 45Financial Statement and Security Analysis

A company reports sales of Sh.800,000 and cost of sales of Sh.600,000. Its gross profit margin is:

  1. 75.0%
  2. 33.3%
  3. 25.0% Correct answer.
  4. 20.0%

Explanation

Gross profit is sales less cost of sales, that is Sh.200,000, and the margin is gross profit divided by sales. Sh.200,000 divided by Sh.800,000 gives 25%.

Question 46Financial Statement and Security Analysis

A company has net assets of Sh.5,000,000, including Sh.1,000,000 of preference share capital. There are 1,000,000 ordinary shares in issue. Book value per ordinary share is:

  1. Sh.5.00
  2. Sh.1.00
  3. Sh.4.00 Correct answer.
  4. Sh.3.00

Explanation

Net assets attributable to ordinary shareholders exclude preference capital because preference shareholders rank ahead on a winding up. Sh.4,000,000 divided by 1,000,000 shares gives Sh.4.00 per share.

Question 47Financial Statement and Security Analysis

Working capital is best defined as:

  1. Current assets less inventory
  2. Total assets less total liabilities
  3. Current assets less current liabilities Correct answer.
  4. Current liabilities less current assets

Explanation

Working capital, or net current assets, measures the excess of current assets over current liabilities and indicates the buffer available to meet short-term obligations. Total assets less total liabilities is shareholders' funds, not working capital.

Question 48Financial Statement and Security Analysis

A bond with a par value of Sh.1,000 carries a coupon rate of 10%. The annual interest paid to the holder is:

  1. Sh.909.09
  2. Sh.100.00 Correct answer.
  3. Sh.10.00
  4. Sh.1,100.00

Explanation

Coupon interest is calculated by applying the coupon rate to the nominal or par value of the bond, not to its market price. Ten per cent of Sh.1,000 is Sh.100 per year.

Question 49Financial Statement and Security Analysis

A firm has current assets of Sh.900,000, comprising inventory of Sh.300,000 and prepayments of Sh.50,000, and current liabilities of Sh.400,000. Its quick ratio is approximately:

  1. 2.25
  2. 0.75
  3. 1.50
  4. 1.38 Correct answer.

Explanation

The quick ratio uses only liquid current assets, so inventory and prepayments are excluded, leaving Sh.550,000. Dividing by current liabilities of Sh.400,000 gives approximately 1.38.

Question 50Financial Statement and Security Analysis

A company earns profit after tax of Sh.900,000 and pays preference dividends of Sh.100,000. It has 400,000 ordinary shares in issue. Earnings per share is:

  1. Sh.2.00 Correct answer.
  2. Sh.1.75
  3. Sh.2.25
  4. Sh.2.50

Explanation

Earnings attributable to ordinary shareholders are profit after tax less the preference dividend, giving Sh.800,000. Dividing by 400,000 shares gives Sh.2.00 per share.