Securities and Investments
What this domain tests
You must be able to describe the main securities and evaluate them. For equities, know ordinary shares (voting, residual claim, variable dividend) versus preference shares (fixed dividend, priority over ordinary, often limited voting). For bonds, understand nominal/par value, coupon, yield, maturity, and the inverse relationship between price and yield. Know the issuer categories: government (gilts/Treasuries), corporate, and supranational.
Concepts to master
- Yield measures: current yield = annual coupon ÷ market price; yield to maturity accounts for capital gain/loss and reinvestment assumptions.
- Credit risk and ratings: investment grade versus sub-investment grade (high yield/junk); the meaning of a downgrade.
- Collective investment schemes: open-ended funds (priced at NAV, created/cancelled on demand) versus closed-ended funds and investment trusts (fixed share count, can trade at premium or discount to NAV).
- Costs and charges, accumulation versus income share classes, and diversification.
- Risk types: market, credit, liquidity, interest-rate, inflation.
Traps
A classic error is assuming a higher coupon means a higher yield - price matters. Another is confusing an open-ended fund's NAV pricing with a closed-ended trust's market price (which can differ from NAV). Questions may also test that preference shareholders rank ahead of ordinary shareholders but behind bondholders.
Rule of thumb
When market interest rates rise, existing bond prices fall (and vice versa), because fixed coupons become less attractive relative to new issues.
Worked example: A bond with a £100 nominal value and a 5% coupon pays £5 a year. If it trades at £80, the current yield is 5 ÷ 80 = 6.25%. If it trades at £125, the current yield is 4%. Same coupon, different yield - price drives yield.