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IFMP Fundamentals of Capital Markets Certification (FCM), Pakistan study materials
IFMP Fundamentals of Capital Markets Certification (FCM), Pakistan study resources

IFMP Fundamentals of Capital Markets Certification (FCM), Pakistan practice questions

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Question 1Capital Markets Fundamentals

In Pakistan's capital market, which regulator is primarily responsible for licensing and supervising brokers and stock exchanges?

  1. Pakistan Stock Exchange (PSX)
  2. Securities and Exchange Commission of Pakistan (SECP) Correct answer.
  3. State Bank of Pakistan (SBP)
  4. Central Depository Company (CDC)

Explanation

The SECP is the apex regulator of Pakistan's securities market, responsible for licensing intermediaries, approving exchange rules, and enforcing securities law. The SBP regulates banking and monetary policy, while PSX and CDC are market infrastructure institutions operating under SECP oversight.

Question 2Capital Markets Fundamentals

A company issues new shares to the public for the first time and lists them on the Pakistan Stock Exchange. This transaction is best described as:

  1. A rights issue in the secondary market
  2. An initial public offering in the primary market Correct answer.
  3. A repurchase of shares by the issuer
  4. A secondary market trade

Explanation

New securities sold by the issuer to raise capital occur in the primary market; the first such public sale with listing is an IPO. The secondary market only involves trading of already-issued securities between investors.

Question 3Capital Markets Fundamentals

Which instrument represents an ownership stake in a company and typically carries voting rights at the general meeting?

  1. Ordinary share Correct answer.
  2. Treasury bill
  3. Corporate bond
  4. Commercial paper

Explanation

An ordinary share is an equity claim on the residual earnings and assets of a company and normally confers voting rights. Bonds, bills, and commercial paper are debt instruments that pay fixed or discounted returns without ownership rights.

Question 4Capital Markets Fundamentals

A debt security's coupon rate is stated as a percentage of which value?

  1. Its face or par value Correct answer.
  2. The prevailing inflation rate
  3. The issuer's total equity
  4. Its current market price

Explanation

The coupon is calculated on the face (par) value stated in the indenture, so a PKR 1,000 bond with a 10% coupon pays PKR 100 per year regardless of market price. Market price changes affect the yield, not the coupon amount.

Question 5Capital Markets Fundamentals

In a typical equity trade on the Pakistan Stock Exchange, what does T+2 settlement mean?

  1. The investor may cancel the trade for two days
  2. The trade must be paid for within two hours
  3. Ownership transfer and payment are completed two business days after the trade date Correct answer.
  4. Dividends are paid two days after purchase

Explanation

T+2 denotes the settlement cycle: securities and cash are exchanged two business days after the execution date. It does not refer to cancellation rights, payment hours, or dividend timing.

Question 6Capital Markets Fundamentals

A central depository such as the Central Depository Company (CDC) in Pakistan mainly provides:

  1. Price discovery for listed securities
  2. Issuance of government monetary policy
  3. Lending of last resort to banks
  4. Custody and electronic book-entry transfer of securities Correct answer.

Explanation

A central depository holds securities in electronic form and effects transfers by book entry, removing the need for physical certificates. Price discovery happens on the exchange, while lender-of-last-resort and monetary functions belong to the central bank.

Question 7Capital Markets Fundamentals

An investor buys a share for PKR 50 and sells it later for PKR 60, receiving no dividends. What is the capital gain?

  1. PKR 50
  2. PKR 60
  3. PKR 110
  4. PKR 10 Correct answer.

Explanation

Capital gain equals sale proceeds minus purchase cost, so PKR 60 minus PKR 50 gives PKR 10. Dividends would be separate income, and the sale price alone is not the gain.

Question 8Capital Markets Fundamentals

Which of the following best describes a money market instrument?

  1. A 10-year corporate bond
  2. A perpetual preference share
  3. A listed ordinary share
  4. A 6-month Treasury bill Correct answer.

Explanation

Money market instruments are short-term, highly liquid debt securities with maturities typically of one year or less, such as Treasury bills. Long-dated bonds, equities, and perpetual shares belong to the capital market.

Question 9Capital Markets Fundamentals

A bond with a face value of PKR 1,000 pays an annual coupon of PKR 80 and currently trades at PKR 800. What is its current yield?

  1. 80.0%
  2. 8.0%
  3. 12.5%
  4. 10.0% Correct answer.

Explanation

Current yield equals the annual coupon divided by the market price, so PKR 80 divided by PKR 800 is 10%. The 8% figure is the coupon rate on face value, which differs from the yield when price deviates from par.

Question 10Capital Markets Fundamentals

If market interest rates rise sharply after a fixed-rate bond is issued, the bond's price will most likely:

  1. Remain unchanged until maturity
  2. Rise, because the coupon becomes more attractive
  3. Fall, because newly issued bonds offer higher coupons Correct answer.
  4. Rise in line with the coupon rate

Explanation

Bond prices and yields move inversely: when prevailing rates rise, the fixed coupon looks less attractive, so the price must fall to lift the yield to market levels. The coupon itself does not change after issuance.

Question 11Capital Markets Fundamentals

An investor holds a diversified portfolio and adds one more stock with high specific risk but average market risk. The most likely effect is:

  1. A guaranteed reduction in expected return
  2. Elimination of market risk
  3. Little change in portfolio volatility because specific risk is diversified away Correct answer.
  4. A large increase in portfolio volatility

Explanation

In a well-diversified portfolio, firm-specific (unsystematic) risk is largely cancelled out, so adding a stock with average market risk changes total volatility only slightly. Market risk remains because it is common to all securities.

Question 12Capital Markets Fundamentals

The Capital Asset Pricing Model (CAPM) estimates required return using which three inputs?

  1. Earnings per share, book value, and sales
  2. Risk-free rate, beta, and market risk premium Correct answer.
  3. Dividend yield, coupon, and maturity
  4. Inflation, unemployment, and GDP growth

Explanation

CAPM states required return equals the risk-free rate plus beta times the market risk premium. Beta measures sensitivity to market movements, and the risk premium compensates for systematic risk.

Question 13Capital Markets Fundamentals

A stock has a beta of 1.5, the risk-free rate is 6%, and the market risk premium is 8%. Using CAPM, the required return is:

  1. 12%
  2. 20%
  3. 18% Correct answer.
  4. 14%

Explanation

Required return = risk-free rate + beta x market risk premium = 6% + 1.5 x 8% = 6% + 12% = 18%. The premium is multiplied by beta before adding the risk-free rate.

Question 14Capital Markets Fundamentals

A preference share that allows the issuer to buy it back at a specified price on specified dates is called:

  1. Callable preference share Correct answer.
  2. Convertible preference share
  3. Participating preference share
  4. Cumulative preference share

Explanation

A callable (redeemable) preference share gives the issuer the right to repurchase the shares at a set price on set dates. Convertibility, participation, and cumulation relate to other features.

Question 15Capital Markets Fundamentals

Which order type on an exchange executes immediately at the best available price but does not guarantee a specific price?

  1. Good-till-cancelled order
  2. Stop-loss order
  3. Limit order
  4. Market order Correct answer.

Explanation

A market order prioritises execution over price and fills at the best available price, so the final price may differ from the last traded price. A limit order sets a maximum or minimum price but may not execute.

Question 16Capital Markets Fundamentals

An investor places a buy limit order at PKR 95 when the market is trading at PKR 100. What will happen?

  1. It converts automatically into a market order
  2. It is rejected because it is below market price
  3. It waits until the price falls to PKR 95 or lower Correct answer.
  4. It executes immediately at PKR 100

Explanation

A buy limit order sets the maximum price the investor will pay, so it rests in the book until the market reaches PKR 95 or below. It does not execute at a higher price or convert automatically.

Question 17Capital Markets Fundamentals

The main purpose of a stock market index is to:

  1. Set the coupon on government bonds
  2. Guarantee returns for index investors
  3. Provide a single measure of the market's overall price movement Correct answer.
  4. Determine the tax rate on capital gains

Explanation

An index aggregates the prices of selected securities into one number that tracks broad market or sector performance. It is a measurement and benchmarking tool, not a guarantee, and it does not set coupons or taxes.

Question 18Capital Markets Fundamentals

Which feature most distinguishes a derivative from a cash market instrument?

  1. It is issued only by the government
  2. It always matures within one year
  3. Its value is derived from an underlying asset Correct answer.
  4. It carries no counterparty risk

Explanation

A derivative such as a future, forward, option, or swap derives its value from an underlying asset, rate, or index. Cash instruments are themselves the asset being traded, and derivatives can carry significant counterparty risk.

Question 19Capital Markets Fundamentals

A mutual fund's net asset value (NAV) per unit is calculated as:

  1. Total assets divided by the number of units
  2. (Total assets minus liabilities) divided by the number of units Correct answer.
  3. Total liabilities divided by the number of units
  4. Total assets plus liabilities divided by the number of units

Explanation

NAV per unit equals the fund's net assets, meaning total assets less liabilities, divided by units outstanding. Using gross assets or liabilities alone misstates the value attributable to each unit.

Question 20Capital Markets Fundamentals

A company has earnings after tax of PKR 20 million and 5 million ordinary shares outstanding. Its earnings per share is:

  1. PKR 2
  2. PKR 10
  3. PKR 25
  4. PKR 4 Correct answer.

Explanation

Earnings per share equals earnings after tax divided by the number of ordinary shares, so PKR 20 million divided by 5 million shares is PKR 4. Dividing the wrong way or adding figures produces the other options.

Question 21Capital Markets Fundamentals

An investor wants protection against a fall in the value of shares she owns. Which derivative position is most suitable?

  1. Buying a call option on the shares
  2. Buying a forward contract to purchase more shares
  3. Buying a put option on the shares Correct answer.
  4. Selling a put option on the shares

Explanation

A put option gives the right to sell the underlying at the strike price, so it gains value when the share price falls and offsets losses on the holding. Buying a call or a forward to buy benefits from rising prices, and selling a put adds downside exposure.

Question 22Capital Markets Fundamentals

A bond is issued at par with a coupon equal to the market yield. If the market yield immediately falls below the coupon rate, the bond will trade:

  1. Below par, because interest rates are lower
  2. At a premium, because its coupon exceeds market yield Correct answer.
  3. At par, because the coupon is fixed
  4. At a discount, because yields fell

Explanation

When the coupon exceeds the prevailing market yield, investors pay more than par to obtain that above-market income, so the bond trades at a premium. A discount arises when the coupon is below the market yield.

Question 23Capital Markets Fundamentals

An investor borrows 50% of the purchase price of shares, so the position is financed half by equity and half by debt. If the shares fall 20%, the loss on the investor's own equity is closest to:

  1. 50%
  2. 20%
  3. 40% Correct answer.
  4. 10%

Explanation

With 50% leverage, a 20% fall in the asset value translates into a loss equal to 20% divided by the 50% equity share, which is 40% of the investor's own capital. Leverage magnifies both gains and losses on equity.

Question 24Capital Markets Fundamentals

A stock trades at PKR 100 and pays a dividend of PKR 5 per share. If the dividend is expected to grow at 3% per year forever and the required return is 8%, the Gordon growth model value is closest to:

  1. PKR 160.00
  2. PKR 100.00
  3. PKR 62.50
  4. PKR 103.00 Correct answer.

Explanation

The Gordon growth model values the share as next year's dividend divided by the required return minus growth: PKR 5 x 1.03 / (0.08 - 0.03) = PKR 5.15 / 0.05 = PKR 103. Using the current dividend without growth gives PKR 100.

Question 25Capital Markets Fundamentals

A central securities depository and a clearing house perform different functions. Which statement correctly distinguishes them?

  1. The clearing house holds securities certificates while the depository guarantees trades
  2. The clearing house manages counterparty risk and novation, while the depository holds and transfers securities by book entry Correct answer.
  3. Both perform identical functions and are interchangeable
  4. The depository sets monetary policy while the clearing house issues shares

Explanation

A clearing house interposes itself between counterparties, nets obligations, and manages settlement risk through novation and margin. A central depository provides custody and electronic transfer of securities ownership. They are complementary but distinct functions.

Question 26Capital Markets Fundamentals

In Pakistan's capital market, the primary market is best described as the segment where:

  1. newly issued securities are sold by the issuer to investors for the first time Correct answer.
  2. the central bank conducts open market operations in government paper
  3. previously issued shares are traded between investors on the exchange
  4. only debt securities are listed and quoted for trading

Explanation

The primary market is where an issuer raises fresh capital by offering new securities, for example through an IPO or a new bond issue. Funds flow from investors to the issuer. Trading of already-issued securities happens in the secondary market.

Question 27Capital Markets Fundamentals

Which regulatory body is the principal regulator of Pakistan's securities market and stock exchanges?

  1. Securities and Exchange Commission of Pakistan Correct answer.
  2. Pakistan Stock Exchange Limited
  3. State Bank of Pakistan
  4. Central Depository Company

Explanation

The Securities and Exchange Commission of Pakistan (SECP) is the apex regulator for the securities market, including exchanges and market intermediaries. The State Bank regulates banking and monetary matters. The exchange and depository are market institutions, not regulators.

Question 28Capital Markets Fundamentals

A firm raises capital by issuing ordinary shares to the public for the first time. This transaction is known as:

  1. an initial public offering Correct answer.
  2. a bonus issue
  3. a rights issue
  4. a share split

Explanation

An initial public offering (IPO) is the first sale of shares by a company to the general public, moving it from private to listed status. It raises new capital for the firm. A rights issue, bonus issue and split involve existing shareholders.

Question 29Capital Markets Fundamentals

Which of the following is a characteristic of an ordinary (common) share rather than a bond?

  1. A fixed contractual coupon paid regardless of profits
  2. A residual claim on assets after all creditors are paid Correct answer.
  3. A stated maturity date at which principal is repaid
  4. Priority over creditors in the event of liquidation

Explanation

Ordinary shareholders hold a residual claim, meaning they are paid only after all creditors and other prior claims are settled. Their dividend is not contractual and there is no maturity date. Bonds carry fixed coupons, priority over shareholders and a maturity date.

Question 30Capital Markets Fundamentals

A Treasury bill is sold at a discount to its face value and matures within one year. This instrument is best classified as:

  1. a derivative contract
  2. a capital market instrument
  3. a money market instrument Correct answer.
  4. an equity instrument

Explanation

Short-term debt with a maturity of one year or less, such as a Treasury bill, belongs to the money market. The money market handles short-term liquidity needs, while the capital market handles long-term securities. T-bills are debt, not equity or derivatives.

Question 31Capital Markets Fundamentals

The Pakistan Stock Exchange's KSE-100 Index is best described as:

  1. a list of companies that have applied for listing
  2. a fixed-income index of government securities
  3. a market capitalisation weighted index of selected listed companies Correct answer.
  4. a measure of the rupee's value against the dollar

Explanation

The KSE-100 is a market capitalisation weighted index tracking a selected basket of companies listed on the Pakistan Stock Exchange. Larger companies carry greater weight. It reflects equity price performance, not bond yields or currency values.

Question 32Capital Markets Fundamentals

An investor wants to buy shares but is unwilling to pay more than PKR 250 per share. Which instruction should the investor give to the broker?

  1. A sell stop order at PKR 250
  2. A market order to buy
  3. A sell limit order at PKR 250
  4. A buy limit order at PKR 250 Correct answer.

Explanation

A buy limit order sets the maximum price the investor is willing to pay, so it will execute only at PKR 250 or lower. A market order accepts whatever price prevails. Sell orders are on the opposite side of the intended purchase.

Question 33Capital Markets Fundamentals

In a securities transaction, settlement refers to the process by which:

  1. the trade is matched on the exchange trading system
  2. the buyer and seller agree on the price of the security
  3. the securities are delivered and payment is made between the parties Correct answer.
  4. the broker calculates its commission on the trade

Explanation

Settlement is the post-trade process in which securities are transferred to the buyer and cash is paid to the seller, often through a central depository and clearing system. Price agreement and trade matching occur earlier in the trading cycle.

Question 34Capital Markets Fundamentals

A company's share price rises from PKR 40 to PKR 46 in one year, and it pays no dividend. What is the total return to the shareholder?

  1. 13.0%
  2. 46.0%
  3. 15.0% Correct answer.
  4. 6.0%

Explanation

Total return equals the change in price plus dividends, divided by the initial price. Here (46 − 40)/40 = 15%, with no dividend to add. The result is a percentage gain on the original investment.

Question 35Capital Markets Fundamentals

An investor buys shares worth PKR 200,000 using PKR 100,000 of her own funds and PKR 100,000 of borrowed money. If the share value rises by 20%, what is the return on her own equity before financing costs?

  1. 10%
  2. 30%
  3. 40% Correct answer.
  4. 20%

Explanation

A 20% gain on PKR 200,000 is PKR 40,000. Because only PKR 100,000 of equity was committed, the gain equals 40% of equity before interest. Leverage magnifies both gains and losses on the investor's own capital.

Question 36Capital Markets Fundamentals

A bond with face value PKR 1,000 pays a coupon of PKR 90 per year and is currently priced at PKR 1,125. What is its current yield?

  1. 9.0%
  2. 11.25%
  3. 7.2%
  4. 8.0% Correct answer.

Explanation

Current yield equals the annual coupon divided by the current market price: 90 / 1,125 = 8.0%. It differs from the coupon rate, which uses face value, and from yield to maturity, which accounts for the pull to par at maturity.

Question 37Capital Markets Fundamentals

A zero-coupon bond with face value PKR 1,000 matures in 2 years and currently trades at PKR 850. Its yield to maturity is closest to:

  1. 17.6%
  2. 8.5% Correct answer.
  3. 7.5%
  4. 15.0%

Explanation

For a zero-coupon bond, price equals face value divided by (1 + y) raised to the number of years. Solving 850 = 1,000 / (1 + y)^2 gives (1 + y)^2 = 1.1765, so y is about 8.5%. The investor earns the entire return from the discount at purchase.

Question 38Capital Markets Fundamentals

An investor holds a bond with a modified duration of 5 years. If market yields rise by 1 percentage point, the bond's price will most likely:

  1. rise by approximately 5%
  2. fall by approximately 5% Correct answer.
  3. fall by approximately 0.5%
  4. remain unchanged because the coupon is fixed

Explanation

Modified duration estimates the percentage price change for a small change in yield as duration multiplied by the yield change. A 1 point rise with duration of 5 implies a fall of about 5%. Bond prices move inversely to yields.

Question 39Capital Markets Fundamentals

A bond is described as having an investment-grade rating. This indicates that the issue:

  1. carries a relatively low risk of default Correct answer.
  2. is guaranteed by the government
  3. pays a variable coupon linked to inflation
  4. has a maturity of less than one year

Explanation

Investment-grade ratings denote relatively low credit risk and a strong capacity to meet obligations. They do not imply a government guarantee, a particular coupon structure or a short maturity. Ratings below investment grade are speculative.

Question 40Capital Markets Fundamentals

An investor expects the share price of a company to fall substantially. Which strategy would profit if that expectation proves correct?

  1. Buying the share on margin
  2. Taking a short position in the share Correct answer.
  3. Selling a put option on the share
  4. Buying a call option on the share

Explanation

A short position sells borrowed shares with the aim of buying them back later at a lower price, profiting if the price falls. Buying calls, buying shares or selling puts all benefit from rising or stable prices.

Question 41Capital Markets Fundamentals

A fund's portfolio has total assets of PKR 500 million and liabilities of PKR 20 million, with 24 million units outstanding. The net asset value per unit is:

  1. PKR 25.00
  2. PKR 20.00 Correct answer.
  3. PKR 19.17
  4. PKR 20.83

Explanation

Net asset value equals total assets minus liabilities, divided by units outstanding: (500 − 20) million / 24 million = PKR 20.00 per unit. Liabilities must be deducted before dividing by units.

Question 42Capital Markets Fundamentals

A company declares a dividend of PKR 4 per share and its shares trade at PKR 80. What is the dividend yield?

  1. 5.0% Correct answer.
  2. 4.0%
  3. 8.0%
  4. 20.0%

Explanation

Dividend yield equals the annual dividend per share divided by the share price: 4 / 80 = 5.0%. It measures the income component of return relative to the price paid.

Question 43Capital Markets Fundamentals

A company earns after-tax profit of PKR 30 million and has 10 million ordinary shares. It pays out 40% of earnings as dividends. What is the dividend per share?

  1. PKR 0.40
  2. PKR 12.00
  3. PKR 1.20 Correct answer.
  4. PKR 3.00

Explanation

Earnings per share are PKR 30 million / 10 million = PKR 3.00. Applying the 40% payout gives PKR 1.20 of dividends per share. The payout ratio converts earnings into distributed cash.

Question 44Capital Markets Fundamentals

An investor buys a call option with a strike of PKR 100 by paying a premium of PKR 5. At expiry the share trades at PKR 112. What is the investor's profit per share?

  1. PKR 17
  2. PKR 7 Correct answer.
  3. PKR 12
  4. PKR 5

Explanation

The call's intrinsic value at expiry is 112 − 100 = PKR 12. Subtracting the PKR 5 premium paid gives a profit of PKR 7 per share. The premium is the cost of acquiring the option right.

Question 45Capital Markets Fundamentals

An investor writes (sells) a put option with a strike of PKR 50 and receives a premium of PKR 3. At expiry the underlying share trades at PKR 44. What is the investor's net result per share?

  1. A profit of PKR 6
  2. A loss of PKR 3 Correct answer.
  3. A profit of PKR 3
  4. A loss of PKR 6

Explanation

The put is exercised because the share is below the strike, so the writer pays 50 − 44 = PKR 6. The premium received of PKR 3 offsets part of this, leaving a net loss of PKR 3 per share. The writer's maximum profit is the premium.

Question 46Capital Markets Fundamentals

A stock has a beta of 0.8, the risk-free rate is 5% and the expected market return is 11%. Using CAPM, the required return is:

  1. 8.8%
  2. 11.0%
  3. 13.8%
  4. 9.8% Correct answer.

Explanation

CAPM gives required return as the risk-free rate plus beta times the market risk premium. The premium is 11% − 5% = 6%, so 5% + 0.8 × 6% = 9.8%. A beta below one implies less systematic risk than the market.

Question 47Capital Markets Fundamentals

Two portfolios have the same expected return, but portfolio A has a higher standard deviation than portfolio B. Under mean-variance analysis, a rational risk-averse investor would:

  1. prefer portfolio B because it achieves the same return with less risk Correct answer.
  2. be indifferent because the expected returns are identical
  3. prefer portfolio A because higher volatility offers more opportunity
  4. prefer portfolio A only if its beta is also higher

Explanation

Mean-variance analysis assumes investors prefer higher return for a given level of risk and lower risk for a given return. With equal expected returns, the portfolio with the lower standard deviation dominates. Volatility is a cost, not a benefit, to a risk-averse investor.

Question 48Capital Markets Fundamentals

Under the efficient market hypothesis in its semi-strong form, prices reflect:

  1. all publicly available information Correct answer.
  2. only past price and volume data
  3. no information at all, moving randomly
  4. only information known to company insiders

Explanation

The semi-strong form holds that prices rapidly incorporate all publicly available information, including financial statements and news. The weak form covers only historical price data, while the strong form extends to private information.

Question 49Capital Markets Fundamentals

A government announces a surprise cut in the policy interest rate. According to the standard transmission to equity markets, which effect is most likely in the short term?

  1. Equity prices rise because the discount rate applied to future cash flows falls Correct answer.
  2. Equity prices are unaffected because interest rates do not influence share valuation
  3. Equity prices fall because lower rates reduce corporate borrowing capacity
  4. Equity prices fall because future cash flows are discounted at a higher rate

Explanation

Lower interest rates reduce the discount rate used to value future cash flows, which raises the present value of equities and tends to support share prices. Lower rates may also reduce corporate financing costs. The effect runs through valuation rather than through reduced borrowing capacity.

Question 50Capital Markets Fundamentals

A company announces a 2-for-1 share split. Which statement correctly describes the immediate effect on the shareholder's position?

  1. The number of shares doubles and the total market value doubles
  2. The number of shares is unchanged and the price per share falls
  3. The number of shares halves and the price per share doubles
  4. The number of shares doubles and the price per share approximately halves Correct answer.

Explanation

A 2-for-1 split doubles the number of shares held while the price per share adjusts to roughly half, leaving total market value unchanged. A split changes the number of units, not the underlying value of the company.