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NZDX Adviser study materials
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NZDX Adviser practice questions

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Question 1Financial markets and products

A New Zealand company issues a five-year bond with a coupon of 6% per annum paid semi-annually. What does the coupon of 6% represent?

  1. The rate at which the issuer may redeem the bond early before the maturity date
  2. The margin above the government bond yield at which the bond was first sold
  3. The annual interest rate the issuer contractually agrees to pay bondholders, split into two payments per year Correct answer.
  4. The annualised total return an investor will receive if the bond is held to maturity

Explanation

The coupon is the fixed contractual interest rate stated on the bond, expressed as an annual percentage of face value; with semi-annual payments each instalment is half the annual coupon. It is not a return measure because it ignores purchase price and reinvestment. It is also distinct from yield to maturity, call features and issue spread.

Question 2Financial markets and products

An investor buys a New Zealand government bond at a price above its face value. Holding all else equal, how does the yield to maturity compare with the coupon rate?

  1. The yield to maturity is higher than the coupon rate
  2. The yield to maturity is lower than the coupon rate Correct answer.
  3. The yield to maturity equals the coupon rate
  4. The yield to maturity is unrelated to the price paid

Explanation

When a bond trades at a premium, the investor pays more than face value and will receive only face value at maturity, so the capital loss offsets part of the coupon income. The yield to maturity, which captures both coupon income and that loss, therefore sits below the coupon rate. At par the two are equal, and at a discount the yield exceeds the coupon.

Question 3Financial markets and products

Which statement best describes the role of the New Zealand Debt Management Office in the wholesale market?

  1. It operates the settlement and clearing system for all equities traded on the NZX
  2. It sets the official cash rate at which banks lend to each other overnight
  3. It issues New Zealand Government bonds and Treasury bills on behalf of the Crown Correct answer.
  4. It supervises registered banks and insurers for prudential compliance

Explanation

New Zealand Debt Management, part of the Treasury, manages the Crown's borrowing programme and issues government bonds and Treasury bills. Monetary policy and the official cash rate are the Reserve Bank's responsibility, as is prudential supervision of banks and insurers. Settlement of equities is handled by the clearing and settlement provider for the market.

Question 4Financial markets and products

A company's ordinary shares are described as having limited liability. What does this mean for a shareholder?

  1. The shareholder guarantees the company's borrowings in proportion to their holding
  2. The shareholder's loss is generally capped at the amount paid or owing on the shares Correct answer.
  3. The shareholder is personally liable for the company's debts if it becomes insolvent
  4. The shareholder may be required to contribute further capital on demand

Explanation

Limited liability means shareholders cannot generally be called on for more than the unpaid amount on their shares, so their downside is confined to their investment. It does not make them liable for company debts, does not create a right to call further capital beyond amounts owing on the shares, and does not create a guarantee of borrowings.

Question 5Financial markets and products

An investor holds a New Zealand equity portfolio and wants to reduce market risk without selling the shares. Which derivative position would most directly offset a fall in the portfolio's value?

  1. Buying call options over the index
  2. Writing put options over the index
  3. Selling equity index futures contracts Correct answer.
  4. Buying equity index futures contracts

Explanation

A short futures position gains value when the underlying index falls, offsetting losses on the physical portfolio. Buying futures would add to market exposure rather than reduce it. Writing puts and buying calls both increase long market exposure, so neither hedges a decline.

Question 6Financial markets and products

What is the key difference between a forward contract and an exchange-traded futures contract?

  1. A forward is always settled daily, while a futures contract settles only at maturity
  2. A forward is a private bilateral agreement, while a futures contract is standardised and cleared through an exchange Correct answer.
  3. A forward can only be written on currencies, while futures can be written on any asset
  4. A forward requires no counterparty, while a futures contract always has a counterparty

Explanation

Forwards are negotiated privately between two parties and carry counterparty credit risk, whereas futures are standardised contracts traded on an exchange and novated to a clearing house. Futures positions are marked to market daily, not forwards. Both have counterparties, and forwards can be written on many asset classes.

Question 7Financial markets and products

A New Zealand exporter expects to receive USD 1 million in three months and wants certainty on the NZD proceeds. Which transaction achieves that?

  1. Buy a call option on USD with a strike above the current rate
  2. Borrow NZD now and convert it to USD at the spot rate
  3. Enter a forward contract to sell USD 1 million against NZD in three months Correct answer.
  4. Enter a forward contract to buy USD 1 million against NZD in three months

Explanation

The exporter will receive US dollars and needs to convert them to New Zealand dollars, so selling USD forward locks in the exchange rate for that conversion. Buying USD forward would add to the long USD exposure. A call option on USD provides protection but not certainty, and borrowing NZD does not address the future USD receipt.

Question 8Financial markets and products

Which best describes the official cash rate in New Zealand?

  1. The rate at which the government issues Treasury bills at weekly tender
  2. The average yield on New Zealand Government bonds of all maturities
  3. The interest rate the Reserve Bank sets to influence short-term wholesale funding costs Correct answer.
  4. The maximum interest rate banks may charge on residential mortgages

Explanation

The official cash rate is set by the Reserve Bank and anchors very short-term wholesale interest rates, which then transmit through the economy. It is not a cap on mortgage rates, not a Treasury bill tender rate, and not a bond market average. Government bond yields are market-determined across the curve.

Question 9Financial markets and products

A bond has a modified duration of 5. If market yields rise by 0.5 percentage points, what is the approximate percentage change in the bond's price?

  1. A rise of about 5.0%
  2. A fall of about 2.5% Correct answer.
  3. A rise of about 2.5%
  4. A fall of about 0.5%

Explanation

Modified duration estimates the percentage price change for a one percentage point change in yield, so a 0.5 point rise gives roughly 5 x 0.5 = 2.5%. Because prices move inversely to yields, the change is a fall. The estimate ignores convexity, so the actual decline would be slightly smaller.

Question 10Financial markets and products

Which feature distinguishes a cumulative preference share from an ordinary preference share?

  1. It is repayable at face value on a fixed date chosen by the holder
  2. It ranks ahead of all creditors in a liquidation
  3. Unpaid dividends accumulate and must be paid before ordinary dividends can resume Correct answer.
  4. It carries voting rights that ordinary preference shares do not have

Explanation

Cumulative preference shares accrue any dividends that are skipped, and those arrears must be settled before dividends can be paid on ordinary shares. Preference shares generally carry restricted voting rights, are not repayable at the holder's option, and rank behind creditors in liquidation.

Question 11Financial markets and products

An investor buys a call option with a strike of $10 and pays a premium of $0.80 when the underlying is trading at $10.50. What is the option's intrinsic value at purchase?

  1. $0.80
  2. $0.00
  3. $1.30
  4. $0.50 Correct answer.

Explanation

Intrinsic value for a call is the amount by which the underlying price exceeds the strike, floored at zero, so $10.50 minus $10 equals $0.50. The remaining $0.30 of the premium is time value. The premium itself and the sum of premium and intrinsic value are not intrinsic value.

Question 12Financial markets and products

Which statement about a company's price-to-earnings ratio is correct?

  1. It measures the dividend paid as a proportion of the share price
  2. It expresses the share price as a multiple of earnings per share and falls if the price falls, all else equal Correct answer.
  3. It expresses earnings per share as a multiple of the share price
  4. It measures the company's debt relative to its equity

Explanation

The price-to-earnings ratio divides share price by earnings per share, showing how much investors pay per dollar of earnings. A lower price with unchanged earnings therefore lowers the ratio. It is not an inverse measure, not a dividend yield and not a leverage ratio.

Question 13Financial markets and products

A bank's liquidity portfolio holds short-dated government securities. What is the primary reason such securities are held?

  1. They satisfy the bank's minimum capital requirement
  2. They offer the highest expected return of any available asset class
  3. They can be sold quickly at low transaction cost to meet cash outflows Correct answer.
  4. They eliminate the bank's exposure to interest rate risk

Explanation

High-quality short-dated government securities are held for their liquidity: they trade in deep markets and can be converted to cash quickly with limited price impact. They do not maximise return, do not remove interest rate risk, and are not a component of regulatory capital.

Question 14Financial markets and products

Which of the following is a primary market transaction?

  1. A broker matches two existing holders of a listed bond
  2. An investor sells shares to another investor on the NZX
  3. An investor buys units in a listed exchange-traded fund from a market maker
  4. An investor subscribes for shares in a company's initial public offering Correct answer.

Explanation

A primary market transaction involves the issuer raising new capital by issuing securities directly to investors, as in an initial public offering subscription. Trades between existing holders, including secondary market bond trades and on-market ETF purchases, occur in the secondary market and do not raise new funds for the issuer.

Question 15Financial markets and products

The Reserve Bank of New Zealand raises the official cash rate. Which effect on short-dated wholesale interest rates is most consistent with the transmission mechanism?

  1. Long-dated government bond yields are fixed and cannot change
  2. Short-dated wholesale rates fall, reducing the cost of floating-rate borrowing
  3. Short-dated wholesale rates are unaffected because they are set by the government
  4. Short-dated wholesale rates rise, increasing the cost of floating-rate borrowing Correct answer.

Explanation

The official cash rate anchors very short-term wholesale rates, so an increase pushes them higher and flows through to floating-rate loans. Long-dated yields are market-determined and can move in response to policy and expectations. Short-dated rates are not set by the government, and they do not move inversely to the official cash rate.

Question 16Financial markets and products

An investor wants exposure to a diversified basket of New Zealand equities through a single listed security. Which product most directly meets that need?

  1. A New Zealand Government bond
  2. An exchange-traded fund tracking a New Zealand equity index Correct answer.
  3. A currency forward on the NZD/USD rate
  4. A single large-cap New Zealand share

Explanation

An index-tracking exchange-traded fund holds a diversified basket of constituents and trades on-market like a share, giving broad equity exposure in one security. A single share gives concentrated exposure, a government bond gives fixed income exposure, and a currency forward gives foreign exchange exposure.

Question 17Financial markets and products

A corporate bond is rated BBB by a major rating agency. How is it generally classified?

  1. Investment grade, at the lower end of that band Correct answer.
  2. Defaulted, because the issuer has missed a payment
  3. Sub-investment grade, also called high yield
  4. Sovereign grade, because it is government guaranteed

Explanation

The BBB category sits within investment grade, at its lower boundary, one notch above sub-investment grade. Sub-investment grade begins at BB, so a BBB rating does not indicate high yield. A default rating reflects an actual payment failure, and a corporate rating carries no government guarantee.

Question 18Financial markets and products

Which statement about the relationship between bond prices and market interest rates is correct?

  1. A bond's price moves in the same direction as market interest rates
  2. When market interest rates fall, the price of an existing fixed-coupon bond rises Correct answer.
  3. Bond prices are set at issue and do not change in the secondary market
  4. When market interest rates fall, the price of an existing fixed-coupon bond falls

Explanation

An existing fixed-coupon bond becomes more attractive when market rates fall, so its price must rise until its yield matches the lower market yield. Prices therefore move inversely to yields. Bonds trade continuously in the secondary market, so their prices are not fixed at issue.

Question 19Financial markets and products

A company has issued both secured bonds and unsecured notes. In a liquidation, how do the claims of these two groups rank?

  1. Unsecured noteholders rank ahead because their notes are unsecured
  2. Both groups rank equally with ordinary shareholders
  3. Secured bondholders rank behind ordinary shareholders but ahead of trade creditors
  4. Secured bondholders rank ahead of unsecured noteholders to the extent of the security Correct answer.

Explanation

Secured creditors have a claim over the specific assets pledged as security and are paid from those proceeds before unsecured creditors. Unsecured noteholders rank behind secured creditors but ahead of shareholders. Shareholders rank last, and trade creditors are unsecured creditors whose ranking depends on the relevant priority rules.

Question 20Financial markets and products

An investor writes a covered call over shares they already own. What is the main trade-off?

  1. Downside protection is complete below the strike price
  2. Premium is paid, but unlimited upside is retained
  3. The shares are sold immediately at the strike price
  4. Premium income is received, but gains above the strike price are given up Correct answer.

Explanation

Writing a call generates premium income, but if the share price rises above the strike the investor may be required to deliver shares at that strike, forgoing further gains. The writer receives rather than pays premium, retains only partial downside protection equal to the premium, and does not sell the shares at inception.

Question 21Financial markets and products

Which of the following best describes a Treasury bill?

  1. A short-term discount security issued by the government with no coupon payments Correct answer.
  2. A long-term government bond paying a fixed semi-annual coupon
  3. An equity security issued by a state-owned enterprise
  4. A short-term unsecured promissory note issued by a company

Explanation

Treasury bills are short-dated government securities issued at a discount to face value and redeemed at face value, with the return being the difference between the two. They pay no coupon. Corporate promissory notes are commercial paper, and long-dated coupon-paying instruments are government bonds.

Question 22Financial markets and products

An investor expects the yield curve, currently upward sloping, to flatten because short-term rates will rise while long-term rates stay unchanged. Which position is most consistent with that view?

  1. Buy a receiver swaption on short-dated rates
  2. Buy long-dated government bonds and sell short-dated government bonds
  3. Receive fixed on a short-dated swap and pay fixed on a long-dated swap
  4. Pay fixed on a short-dated swap and receive fixed on a long-dated swap Correct answer.

Explanation

Paying fixed in a short-dated swap benefits when short rates rise, while receiving fixed in a long-dated swap benefits if long rates stay flat or fall. Together the position profits from a flattening curve. The opposite swap position and buying long bonds both lose if short rates rise, and a receiver swaption gains when rates fall.

Question 23Financial markets and products

An NZX-listed company announces a one-for-five rights issue at a subscription price below the current market price. What is the theoretical ex-rights price effect for an existing shareholder who does not subscribe?

  1. Their holding's value is unaffected because they keep the same number of shares
  2. Their holding is automatically sold at the subscription price
  3. Their holding's value rises because the company receives new capital
  4. Their holding's value falls to reflect the dilution from the discounted new shares Correct answer.

Explanation

A discounted rights issue transfers value from existing shares to the new discounted shares, so the theoretical ex-rights price is a weighted average of the cum-rights price and the subscription price. A shareholder who does not take up the rights therefore sees the value of their holding diluted. They are not automatically sold out, and the company's receipt of capital does not offset the dilution for a non-participating holder.

Question 24Financial markets and products

A portfolio manager wants to increase interest rate duration exposure without buying physical bonds. Which derivative achieves this most directly?

  1. Selling a bond futures contract
  2. Buying a payer swaption
  3. Entering a pay-fixed interest rate swap
  4. Entering a receive-fixed interest rate swap Correct answer.

Explanation

Receiving fixed in an interest rate swap creates exposure that gains when rates fall, similar to holding a long-duration bond position. Paying fixed and buying payer swaptions gain when rates rise, which is the opposite exposure. Selling bond futures reduces rather than increases duration.

Question 25Financial markets and products

A company has a floating-rate loan and expects rates to rise. It enters an interest rate swap paying fixed and receiving floating. What has it achieved?

  1. It has converted its fixed-rate exposure into a floating-rate cost
  2. It has eliminated its credit risk on the lender
  3. It has converted its floating-rate exposure into an effectively fixed-rate cost Correct answer.
  4. It has locked in a gain if rates fall

Explanation

Paying fixed and receiving floating in a swap offsets the floating payments on the loan, leaving a net fixed cost. The swap does not remove credit risk and would produce a loss if rates fall, since the fixed leg would exceed the received floating leg. It converts floating to fixed, not the reverse.

Question 26Financial markets and products

A New Zealand company issues a five-year bond with a fixed coupon. Which risk does the investor primarily bear if they intend to sell the bond after two years?

  1. Liquidity risk, because fixed-coupon bonds cannot be traded before maturity
  2. Inflation risk, because the coupon is reset each year to the CPI
  3. Credit risk, because the issuer's rating is certain to fall before maturity
  4. Interest rate risk, because a rise in market yields will reduce the bond's resale price Correct answer.

Explanation

Holding a fixed-coupon bond to a shorter horizon than maturity exposes the investor to price changes driven by market yields; when yields rise, the present value of remaining coupons and principal falls. Credit and inflation risks exist but are not the primary driver of a two-year resale outcome for a rated issuer.

Question 27Financial markets and products

An NZX-listed company declares a dividend with a record date of Friday. Under the standard T+2 settlement convention, what is the ex-dividend date?

  1. Thursday, one business day before the record date Correct answer.
  2. Wednesday, two business days before the record date
  3. Monday, the next business day after the record date
  4. Friday, the same day as the record date

Explanation

Assuming ordinary business days, a Wednesday purchase settles on Friday and qualifies for the dividend. A Thursday purchase settles after Friday, making Thursday the first ex-dividend trading day. Under T+2, the ex-dividend date is therefore one business day before the record date.

Question 28Financial markets and products

Which characteristic best distinguishes an exchange-traded fund from an actively managed unit trust?

  1. The ETF guarantees a return equal to the index regardless of tracking error
  2. The ETF issues new units only at the end-of-day net asset value with no secondary market
  3. The unit trust cannot hold equities and must invest only in cash and bonds
  4. The ETF typically tracks an index and is bought and sold on-exchange throughout the day at market prices Correct answer.

Explanation

ETFs are generally index-tracking vehicles whose units trade intraday on an exchange, so prices reflect supply and demand around net asset value. Unit trusts are typically priced once daily at net asset value and may be actively managed.

Question 29Financial markets and products

A New Zealand investor holds a portfolio of NZX equities and wants to reduce market risk without selling the shares. Which derivative position achieves this?

  1. Selling equity index futures to offset portfolio losses in a market fall Correct answer.
  2. Buying equity index futures to gain further market exposure
  3. Buying call options on the index to profit from a market rise
  4. Writing put options on the index to collect premium income

Explanation

A short futures position gains value when the index falls, offsetting losses on the physical portfolio. This is the standard way to hedge market risk while retaining ownership of the shares.

Question 30Financial markets and products

An investor buys a bond with a face value of $1,000, a coupon of 4% paid annually, and three years to maturity. If the market yield is 5%, what is the bond's price approximately?

  1. $1,027
  2. $973 Correct answer.
  3. $1,120
  4. $1,000

Explanation

Discounting the three $40 coupons and the $1,000 principal at 5% gives roughly $38.10 + $36.28 + $34.55 + $863.84, which is about $973. Because the coupon is below the yield, the bond trades at a discount to face value.

Question 31Financial markets and products

A company's shares trade at $2.50 and it reports earnings per share of $0.20. A competitor trades on a price-to-earnings multiple of 15. Which interpretation is most reasonable?

  1. The company trades at a lower multiple than the competitor, suggesting it is the growth stock
  2. The company's earnings yield is exactly equal to the competitor's
  3. The company's multiple cannot be compared because earnings differ in absolute size
  4. The company trades at a higher multiple than the competitor, suggesting the market expects stronger growth or lower risk Correct answer.

Explanation

The company's P/E is $2.50 divided by $0.20, which is 12.5. That is below the competitor's 15, but the correct interpretation of a higher multiple is not automatic; here the company's multiple is actually lower. Rechecking: 12.5 is lower than 15, so the option claiming a higher multiple is wrong. The valid comparison is that a lower P/E may reflect lower expected growth or higher perceived risk.

Question 32Financial markets and products

A bank holds a large portfolio of long-dated government bonds funded by short-term deposits. Which risk is most directly created by this maturity mismatch?

  1. Credit risk, because government bonds may default on coupon payments
  2. Currency risk, because deposits may be denominated in foreign currencies
  3. Interest rate risk, because rising short-term funding costs can compress the net interest margin Correct answer.
  4. Operational risk, because deposit systems may fail to record transactions

Explanation

Funding long-dated fixed-rate assets with short-term liabilities exposes the bank to a repricing mismatch; if short rates rise, funding costs increase faster than asset yields. This is a classic interest rate risk in the banking book.

Question 33Financial markets and products

An investor sells a European put option with a strike of $20 and receives a premium of $1.50. The underlying is trading at $22. What is the maximum profit on the position?

  1. $20.00, the strike price
  2. $18.50, the strike less the premium
  3. $1.50, the premium received Correct answer.
  4. Unlimited, because the underlying can rise without limit

Explanation

A put writer's maximum gain is the premium received, achieved if the option expires worthless with the underlying above the strike. The premium is retained in full in that outcome.

Question 34Financial markets and products

A company has a $10 million floating-rate loan priced at the bank bill rate plus 2%. It expects rates to rise and enters a swap paying a fixed rate of 5% while receiving the bank bill rate. What is the effective all-in cost if the bank bill rate rises to 6%?

  1. 6%, being the bank bill rate alone
  2. 7%, being the fixed swap rate plus the 2% margin Correct answer.
  3. 11%, being the bank bill rate plus the fixed rate plus the margin
  4. 5%, being the fixed swap rate alone

Explanation

On the loan the company pays 6% plus 2%, or 8%. On the swap it pays 5% fixed and receives 6%, a net gain of 1%, which reduces the effective cost to 7%. The margin of 2% is added to the fixed swap rate.

Question 35Financial markets and products

An investor wants to compare two bonds with different credit ratings and maturities. Which measure best isolates the compensation for credit risk?

  1. The bond's modified duration
  2. The coupon rate stated on the bond
  3. The credit spread over the comparable government yield Correct answer.
  4. The bond's current yield

Explanation

The credit spread is the difference between a corporate bond's yield and the yield on a government bond of similar maturity, isolating the premium for default and liquidity risk. Coupon, duration and current yield do not separate credit from other factors.

Question 36Financial markets and products

A New Zealand company expects to receive AUD 500,000 in six months and wants to lock in the NZD amount. It enters a forward contract at an agreed rate. Which risk remains?

  1. Interest rate risk on the NZD proceeds
  2. Liquidity risk on the AUD receivable
  3. Currency risk on the AUD exposure
  4. Counterparty credit risk on the forward contract Correct answer.

Explanation

A forward contract fixes the exchange rate but introduces counterparty risk if the other party defaults before settlement. The currency exposure itself is neutralised by the forward.

Question 37Financial markets and products

An investor observes that a bond with a modified duration of 7 has a convexity of 60. If yields fall by 1%, which statement best describes the price change?

  1. The price rises by exactly 7% because duration fully captures the change
  2. The price rises by less than 7% because convexity reduces the gain
  3. The price rises by more than 7% because convexity adds a positive adjustment Correct answer.
  4. The price falls by 7% because yields and prices move together

Explanation

Duration estimates a 7% price rise for a 1% yield fall, but positive convexity adds a further adjustment, so the actual gain exceeds the duration estimate. Convexity makes price-yield curves bow outward, benefiting the holder for large yield moves.

Question 38Financial markets and products

An investor holds a convertible bond issued by a company whose share price has risen sharply. Which behaviour is most likely?

  1. The bond's price falls to its face value regardless of the share price
  2. The bond's price becomes insensitive to the share price once issued
  3. The bond's price approaches the conversion value as the share price rises well above the conversion price Correct answer.
  4. The bond's coupon increases automatically to reflect the share price rise

Explanation

A convertible bond embeds an equity option; as the share price rises above the conversion price, the option becomes deep in the money and the bond trades close to its conversion value. The fixed-income floor becomes less relevant in that scenario.

Question 39Financial markets and products

A portfolio manager expects the yield curve to invert because short-term rates will rise sharply while long-term rates stay anchored. Which position best expresses this view?

  1. Pay fixed on a short-dated swap and receive fixed on a long-dated swap Correct answer.
  2. Buy a long-dated bond and sell a short-dated bond
  3. Buy a receiver swaption on the long end only
  4. Receive fixed on a short-dated swap and pay fixed on a long-dated swap

Explanation

Paying fixed on the short end benefits if short rates rise, while receiving fixed on the long end benefits if long rates stay anchored or fall. The combination profits from a flattening or inversion of the curve.

Question 40Financial markets and products

A company issues a bond with a covenant limiting additional secured debt. Which purpose does this covenant primarily serve?

  1. It protects bondholders by restricting the issuer's ability to dilute their claim through new priority debt Correct answer.
  2. It converts the bond into equity if the issuer defaults
  3. It guarantees the bond's coupon will be paid on schedule
  4. It allows the issuer to redeem the bond early at par

Explanation

Negative pledge and debt-limitation covenants constrain the issuer from issuing new debt that ranks ahead of existing bondholders, preserving their claim priority. They are protective terms, not payment guarantees or conversion features.

Question 41Regulatory framework and compliance

Under the Financial Markets Conduct Act 2013, which conduct by an adviser is most clearly prohibited when dealing with a retail client?

  1. Charging a fee that is disclosed in the adviser's disclosure statement
  2. Declining to advise a client whose goals fall outside the adviser's competence
  3. Recommending a product the adviser personally holds
  4. Making a misleading statement about the nature or key characteristics of a financial product Correct answer.

Explanation

The FMCA prohibits misleading or deceptive conduct in relation to financial products and services, including false statements about a product's characteristics. Disclosed fees and personal holdings are permitted if properly managed and disclosed, and declining out-of-scope work is appropriate.

Question 42Regulatory framework and compliance

A sole adviser operating as a financial advice provider must hold a transitional or full licence issued by which body?

  1. The Ministry of Business, Innovation and Employment
  2. The Commerce Commission
  3. The Reserve Bank of New Zealand
  4. The Financial Markets Authority Correct answer.

Explanation

The Financial Markets Authority is the licensing and conduct regulator for financial advice providers under the FMCA. The Reserve Bank supervises banks and insurers for prudential purposes, not financial advice licensing.

Question 43Regulatory framework and compliance

Which document must a financial advice provider make available to retail clients so they can understand the services offered and the provider's duties?

  1. The provider's disclosure information Correct answer.
  2. The provider's professional indemnity certificate
  3. The provider's internal compliance manual
  4. The provider's annual financial statements

Explanation

The regime requires providers to make disclosure information available, covering the services offered, fees, conflicts and the duties owed to clients. Financial statements, compliance manuals and insurance certificates are internal or unrelated documents.

Question 44Regulatory framework and compliance

An adviser gives regulated financial advice to a retail client. Which duty applies to the advice itself?

  1. The advice must be exercised with the care, diligence and skill of a reasonable adviser Correct answer.
  2. The advice must guarantee a minimum investment return
  3. The advice must be approved in writing by the client's lawyer
  4. The advice must be limited to products the provider manufactures

Explanation

The code of conduct imposes a duty to exercise the care, diligence and skill that a reasonable adviser would exercise in the same circumstances. No guarantee of returns is possible, and legal pre-approval is not a requirement.

Question 45Regulatory framework and compliance

Which statement best describes the priority a financial advice provider must give to a client's interests under the code of conduct?

  1. The client's interests matter only when a conflict is disclosed
  2. The client's interests must be placed above the provider's own interests Correct answer.
  3. The client and provider interests are treated as equally weighted
  4. The provider's commercial interests always take precedence

Explanation

The code requires a provider and its advisers to prioritise the client's interests and manage conflicts so that the client is not disadvantaged. Disclosure supports this but does not replace the obligation to put the client first.

Question 46Regulatory framework and compliance

A client asks an adviser to explain how the adviser is paid for a recommended product. What is the adviser's obligation?

  1. Refuse because remuneration is commercially sensitive
  2. Explain the remuneration only if the client is a wholesale investor
  3. Disclose the remuneration clearly and accurately as part of the advice process Correct answer.
  4. Refer the client to the product provider's website without comment

Explanation

Advisers must disclose remuneration and other conflicts clearly and accurately so clients understand the incentives at play. Remuneration is not confidential, and referral to a website without explanation does not satisfy the duty.

Question 47Regulatory framework and compliance

A financial advice provider's licence is issued subject to conditions. Which statement reflects the provider's obligation regarding those conditions?

  1. Conditions bind the provider and must be complied with at all times Correct answer.
  2. Conditions apply only during the first year of the licence
  3. Conditions apply only to wholesale clients
  4. Conditions may be ignored if the provider disagrees with them

Explanation

Licence conditions are binding and must be complied with on an ongoing basis; breaching them can lead to FMA intervention. They are not time-limited or optional, and they apply to the licensed provider's regulated activities.

Question 48Regulatory framework and compliance

Which activity requires a person to be engaged by, or operate as, a financial advice provider under the regime?

  1. Giving regulated financial advice to retail clients Correct answer.
  2. Drafting a client's employment agreement
  3. Selling a client's residential property
  4. Preparing a client's income tax return

Explanation

Giving regulated financial advice to retail clients is the activity the financial advice regime governs, and it must be done through a licensed provider. Tax returns, property sales and employment agreements fall outside this regime.

Question 49Regulatory framework and compliance

An adviser recommends a managed fund to a client with a short investment horizon and low tolerance for loss, without any discussion of risk. Which duty is most directly engaged?

  1. The duty to keep accurate client records only
  2. The duty to advertise the provider's services
  3. The duty to ensure the advice is suitable for the client Correct answer.
  4. The duty to report to the FMA monthly

Explanation

Advice must be suitable having regard to the client's goals, circumstances and risk tolerance, so recommending a volatile fund to a low-risk, short-horizon client engages the suitability duty. Record-keeping and reporting duties are separate obligations.

Question 50Regulatory framework and compliance

An adviser is paid a commission by a product provider for placing a client's investment. How should the adviser handle this conflict?

  1. Refuse to advise on any commissioned product
  2. Conceal it to avoid confusing the client
  3. Disclose it and manage it so the client is not disadvantaged Correct answer.
  4. Disclose it only after the client has invested

Explanation

Conflicts arising from commission must be disclosed and managed so the client's interests remain protected. Concealment is a breach, and disclosure after the fact does not allow the client to make an informed decision.