CISI Capital Markets Programme: Unit 2 Securities Checkpoint

Comprehensive practice flashcards covering participants, asset classes, primary/secondary markets, corporate actions, accounting analysis, and risk management based on the CISI Capital Markets Unit 2 transcript.

How do Building societies differ from Retail banks in terms of ownership?

Building societies are mutually owned, whereas retail banks usually are not.

Which industry participants are responsible for the 'safekeeping and administration services' of investment portfolios?

Custodian banks.

According to the transcript, what is the role of Non-executive directors?

They are responsible for overseeing the other directors.

Define the 'Issue price' of a share.

The price at which a share is initially sold by the company.

What is the formula provided for Market capitalisation?

$$\text{Market value per share} \times \text{Number of shares issued}$$

Explain the characteristic of 'Cumulative' preference shares.

Any unpaid dividends accumulate in the share.

How are debt securities with lives of less than one year at issue classified?

They are classified as bills and form part of the money markets.

Who is the 'Flat yield' (or Simple yield) most relevant to?

An investor seeking regular income who does not pay tax, such as a pensioner.

What is the difference between 'clean' and 'dirty' bond prices?

Clean prices are quoted excluding accrued interest, while dirty prices actually paid include accrued interest.

What day count convention is used to calculate accrued interest for the dirty price of a bond?

The actual/actual day count convention.

According to Yield curve theory, what does a normal yield curve illustrate?

Liquidity preference theory.

What are 'STRIPS' in the context of UK government bonds?

Separate Trading of Registered Interest and Principal Securities.

How many zero coupon bonds can a five-year strippable gilt be stripped into?

$11$ zero coupon bonds.

Compare the settlement times for UK Gilts and German Bunds in the transcript summary.

UK Gilts settle at $T+1$, بينما German Bunds settle at $T+2$.

Define a 'Debenture' in the context of UK corporate bonds.

A secured debt instrument where the holder is entitled to enforce security if the company defaults.

What is the role of the 'Security trustee' in secured debt?

To fulfill the requirements of the trust deed and protect the assets on behalf of the beneficiaries.

True or False: High coupon long dated bonds are relatively low risk investments.

False. Low coupon long dated bonds are high-risk; high coupon short dated bonds are low-risk.

What is 'LIBOR' and how is it calculated?

The average price offered in London by banks, calculated as at $11.00\text{am}$ by ICE Benchmark Administration.

What is the most common life (duration) for a Treasury Bill (T-bill)?

$3$ months.

What is the settlement period and day count convention for Eurobonds?

Settle $T+2$ with a $30/360$ day count convention.

What is the name of the creation fee HMRC imposes on the conversion of UK shares into Depositary Receipts?

$1.5\%$ creation fee.

What is the provided formula for a Warrant's Conversion premium?

$$\text{Strike price on warrant} + \text{Warrant price} - \text{Current share price}$$

In Foreign Exchange (FX), what is the standard settlement for spot transactions?

$T+2$ days.

In the context of Unit Trusts, what constitutes the constitution of the scheme?

The trust deed, drawn up by the manager and the trustee.

What is the primary difference between accumulation units and income units?

Income units periodically distribute income, whereas accumulation units add income to the capital of the fund.

Who is the Authorised Corporate Director (ACD) in an ICVC?

The official responsible for investment decisions and pricing, equivalent to a unit trust fund manager.

What does it mean that Investment Trusts are 'closed-ended'?

After their launch, they do not normally expand or contract in size; shares must be bought and sold in the secondary market.

What is 'gearing' (or leverage)?

The process whereby companies borrow money to expand their businesses.

Identify two characteristics of Hedge Funds noted in the transcript.

Most are unauthorised/unregulated, require high investment entry levels (e.g. over $\pounds 50,000$), and often impose 'lock-in' periods.

What is a 'Greenshoe' in the primary market?

The option to increase the number of shares an issuing house will market to the public.

Describe an 'Offer for sale'.

An issuing house bank buys the shares from the company before offering them to the public.

What is the 'Free float' requirement for a company to list on the main market?

$10\%$ share ownership to the public.

Distinguish between a 'Limit order' and a 'Market order' on the London Stock Exchange.

A Limit order specifies a price and volume; a Market order specifies size but not a price.

What is an 'Iceberg order'?

A type of limit order that allows part of the order to be hidden.

Define the 'novation' process performed by a Central Counterparty (CCP).

The procedure where the CCP acts as a central buyer to every seller and a central seller to every buyer.

Which two major indices are 'price weighted' rather than 'market capitalisation weighted'?

The Nikkei 225 and the Dow Jones Industrial Average.

Calculate the theoretical ex-bonus price for a company with a share price of $\pounds 15$ undergoing a $1:2$ bonus issue.

$$\frac{(2 \times 15) + 0}{2 + 1} = \pounds 10$$

What is the 'Theoretical nil paid price' in a rights issue?

$$\text{Theoretical ex-rights price} - \text{Issue price}$$

What are the three stages of the settlement system?

$$1.\text{ Confirmation of trade, } 2.\text{ Clearing, } 3.\text{ Settlement}$$

In settlement models, what characterizes 'Model 1'?

Transfer of securities and funds occurs on a trade-by-trade (gross) basis simultaneously.

What is the 'Record date' for dividend payments?

The date a company inspects its register of members to determine which shareholders receive the dividend.

In the Statement of Financial Position (Balance Sheet), what is the basic accounting equation?

$$\text{Assets} = \text{Equity} + \text{Liabilities}$$

What is the formula for 'Straight line' annual depreciation?

$$\frac{\text{Cost} - \text{Residual value}}{\text{Useful life}}$$

How is the 'Dividend cover' ratio calculated?

$$\frac{\text{Earnings per share}}{\text{Dividend per share}}$$

What is the formula for the 'Quick ratio' (acid test)?

$$\frac{\text{Current Assets} - \text{Inventory}}{\text{Current Liabilities}}$$

Distinguish between Systematic and Non-systematic risks.

Systematic risks affect the financial system as a whole (e.g. inflation); Non-systematic risks are specific to a particular business.

What are the three stages of 'Top down' fund management?

$$1.\text{ Asset allocation, } 2.\text{ Sector selection, } 3.\text{ Stock selection}$$

Define the 'Semi-Strong' form of the Efficient Market Hypothesis (EMH).

States that current market prices reflect all historic share price information plus all other publicly available information.

What is the role of a 'Custodian bank'?

Custodian banks are responsible for the safekeeping and administration services of investment portfolios.

Define 'Market capitalisation'.

Market capitalisation is calculated as $\text{Market value per share} \times \text{Number of shares issued}$.

What does the term 'Cumulative' refer to in preference shares?

It refers to the characteristic where any unpaid dividends accumulate in the share.

What is the significance of the 'Flat yield' for investors?

The flat yield is most relevant to investors seeking regular income who do not pay tax.

How do 'clean' and 'dirty' prices differ for bonds?

Clean prices exclude accrued interest, while dirty prices include accrued interest.

What is the 'actual/actual' day count convention used for?

It's used to calculate accrued interest for the dirty price of a bond.

What does the normal yield curve illustrate according to yield curve theory?

It illustrates liquidity preference theory.

Define 'STRIPS' in the context of UK government bonds.

STRIPS stands for Separate Trading of Registered Interest and Principal Securities.

What is the typical life of a Treasury Bill (T-bill)?

The most common life for a Treasury Bill is $3$ months.

What is the 'Record date' concerning dividend payments?

It is the date a company checks its register to determine eligible shareholders for receiving dividends.

What does 'gearing' mean in finance?

Gearing, or leverage, refers to the process where companies borrow money to expand their businesses.

What is a 'Greenshoe' option in the primary market?

It is the option to increase the number of shares that an issuing house markets to the public.

Identify a key characteristic of Investment Trusts.

Investment Trusts are 'closed-ended', meaning they do not normally expand or contract in size after launch.

In the context of hedge funds, what are two notable aspects?

Most hedge funds are unauthorised/unregulated and require high entry-level investments.

What is meant by an 'Iceberg order' in trading?

An Iceberg order is a type of limit order allowing part of the order to be hidden from the market.

What does the term 'Issue price' refer to?

It refers to the price at which a share is initially sold by the company.

How is the 'Dividend cover' ratio calculated?

It is calculated as $\frac{\text{Earnings per share}}{\text{Dividend per share}}$.

Define 'Systematic risk' in finance.

Systematic risk affects the entire financial system, such as economic downturns or inflation.

Explain the difference between 'Limit order' and 'Market order' on the stock exchange.

A Limit order specifies a price and volume, while a Market order specifies only size.

What is the 'Theoretical nil paid price' in a rights issue?

It is calculated as $\text{Theoretical ex-rights price} - \text{Issue price}$.

Describe the 'novation' process by a Central Counterparty (CCP).

Novation is when the CCP becomes a buyer to every seller and a seller to every buyer in the transaction.

What is 'LIBOR' and its significance?

LIBOR is the average interest rate calculated for lending between banks in London, primarily used as a benchmark.

What is 'Top down' fund management?

It involves three stages: Asset allocation, Sector selection, and Stock selection.

Define 'Semi-Strong' form of the Efficient Market Hypothesis (EMH).

It states that current market prices reflect all historic and publicly available information.

What is 'Market value per share'?

The market value per share is the current price at which a share can be bought or sold in the market.

What are 'liabilities' in a financial context?

Liabilities are obligations that a company owes to outside parties, such as loans or accounts payable.

Explain the term 'Equity' in finance.

Equity refers to the ownership value in an asset or business after deducting liabilities.

What is the essence of 'yield' in investments?

Yield represents the income return on an investment, expressed as a percentage of the investment's cost or current market value.

Define 'dividend' as it pertains to shares.

A dividend is a portion of a company's earnings distributed to shareholders, usually in cash or additional shares.

What is a 'trading volume'?

Trading volume is the total number of shares or contracts traded for a specific security during a given time period.

Describe 'capital gain' in investments.

A capital gain is the increase in the value of an asset or investment, realized when the asset is sold.

What does 'risk premium' refer to?

Risk premium is the return in excess of the risk-free rate that investors require for taking on additional risk.

Define 'Asset allocation' in portfolio management.

Asset allocation is the strategy of dividing investments among different asset categories to optimize risk and return.

What is meant by 'Sector selection' in fund management?

Sector selection involves identifying specific sectors of the economy to invest in, based on market trends and economic forecasts.

Explain 'Stock selection'.

Stock selection is the process of choosing specific stocks within investment sectors based on various criteria to maximize returns.

What does 'investing strategy' entail?

An investing strategy is a plan to allocate resources to investments according to defined goals, risk tolerance, and market conditions.

What characterizes a 'money market'?

The money market is a sector of the financial market where financial instruments with high liquidity and short maturities are traded.

What is 'accrued interest'?

Accrued interest is the interest that accumulates on a bond or loan as time passes, but is not yet paid.

Explain the function of a 'trust deed' in investment structures.

A trust deed is a legal document that outlines the terms of a trust, including the responsibilities of the trustee and beneficiary rights.

What pertains to 'investor protection'?

Investor protection involves regulatory measures to safeguard investors' interests and ensure fair treatment in financial markets.

State the role of 'financial intermediaries'.

Financial intermediaries are institutions that facilitate transactions between savers and borrowers, such as banks, brokers, and insurance companies.

Define 'forex market'.

The forex market (foreign exchange market) is a global decentralized marketplace for trading national currencies against one another.

What is a 'compliance officer' responsible for?

A compliance officer is responsible for ensuring that a company adheres to regulatory requirements and internal policies.

Explain 'derivative' instruments.

Derivatives are financial contracts whose value is dependent on the price of an underlying asset, such as stocks or commodities.

What does 'hedging' mean in financial terms?

Hedging is a risk management strategy used to offset potential losses in investments by taking an opposite position in a related asset.

What is the purpose of a 'financial statement'?

Financial statements provide a summary of a company's financial performance and position, essential for decision-making by stakeholders.

Describe the 'debt-to-equity ratio'.

The debt-to-equity ratio measures a company's financial leverage by comparing total liabilities to shareholders' equity.

How do Building societies differ from Retail banks in terms of ownership?

Building societies are mutually owned, whereas retail banks are usually shareholder-owned entities aiming for profit.

Which industry participants are responsible for 'safekeeping and administration' services of investment portfolios?

Custodian banks are responsible for the safekeeping and administration of investment portfolios, ensuring the integrity and reporting of assets.

According to the transcript, what is the role of Non-executive directors?

Non-executive directors oversee the management's execution and provide an independent perspective on the company's strategy and performance.

Define the 'Issue price' of a share.

The issue price is the price at which a company first sells its shares to investors in the primary market, which may differ from the market trading price.

What is the formula for Market capitalisation?

The formula for market capitalisation is given by: $\text{Market capitalisation} = \text{Market value per share} \times \text{Number of shares issued}$.