Mixed Deck — All CISI IAD Topics Flashcards

What is the maximum compensation limit per person per firm under the Financial Services Compensation Scheme (FSCS) for investment claims?

Answer: Up to £85,000

The FSCS provides compensation of up to £85,000 per eligible person per firm for investment claims (where a firm has failed and is unable to pay claims against it). This is separate from the deposit protection limit (also £85,000). The FSCS is funded by levies on authorised firms and acts as the compensation scheme of last resort when firms become insolvent.

In a period of quantitative easing (QE) by the Bank of England, what is the expected effect on gilt prices?

Answer: Gilt prices rise as the Bank purchases gilts

During QE, the Bank of England purchases gilts from the secondary market, increasing demand and pushing prices upward. This in turn reduces gilt yields, lowering borrowing costs across the economy. The mechanism works through asset price channels to stimulate economic activity.

What is 'quantitative easing' (QE) and how does it affect financial markets?

Answer: A central bank policy of purchasing financial assets (typically government bonds) to inject liquidity into the financial system, typically depressing bond yields and supporting asset prices

QE involves the central bank (e.g., Bank of England) creating money electronically to buy assets — primarily government bonds. This pushes up bond prices (depressing yields) and encourages investors to move into higher-risk assets, supporting equity and property prices.

What is the purpose of the EU's Markets Abuse Regulation (MAR)?

Answer: To prohibit insider trading and market manipulation, maintaining the integrity of EU financial markets by criminalising the misuse of inside information

MAR (effective 2016) prohibits insider dealing (trading on inside information), market manipulation (creating artificial prices or volumes), and the improper disclosure of inside information. It applies to all financial instruments admitted to EU trading venues and their related OTC derivatives.

What is the purpose of 'rebalancing' a client's investment portfolio?

Answer: To restore the portfolio to its target asset allocation after market movements have caused drift, maintaining the intended risk level

Rebalancing involves buying and selling assets to restore the portfolio to its target asset allocation after market movements cause drift. For example, if equities outperform and grow from 60% to 70% of the portfolio, rebalancing sells some equities and buys other assets to return to 60%. This maintains the client's intended risk level, enforces a disciplined 'sell high, buy low' approach, and prevents concentration risk. Common approaches include calendar-based (e.g., quarterly) or threshold-based (e.g., when any asset class drifts more than 5%).

What is the relationship between bond prices and interest rates?

Answer: They move in opposite directions

Bond prices and interest rates have an inverse relationship: when rates rise, existing bond prices fall because newer bonds offer higher yields.

Which type of UK government bond is designed to protect investors against inflation?

Answer: Index-linked gilts

Index-linked gilts have both their coupon payments and principal linked to the UK Retail Prices Index (RPI), providing inflation protection.

What is 'performance attribution' in investment management?

Answer: An analysis that decomposes a portfolio's return relative to its benchmark to identify which decisions (asset allocation, stock selection, currency) contributed to outperformance or underperformance

Performance attribution breaks down the difference between a portfolio's return and its benchmark return into component decisions — typically allocation effect (being over/underweight an asset class), selection effect (stock picking), and interaction effect — to identify the source of alpha or underperformance.

When conducting a fact-find for a new client, which of the following is LEAST likely to be relevant?

Answer: The make and model of the client's car

A comprehensive fact-find should cover the client's personal details, income and expenditure, assets and liabilities, existing investments and pensions, protection needs, tax position, objectives (short, medium, long-term), attitude to risk, capacity for loss, and knowledge and experience. While the value of a car might be relevant as an asset, the specific make and model adds no value to the financial planning process.

What does 'basis risk' refer to in fixed income markets?

Answer: The risk that the yield spread between two related instruments changes unexpectedly

Basis risk arises when two related instruments (e.g., a bond and a futures contract used to hedge it) do not move perfectly in tandem, leaving residual exposure.

Which of the following best describes the yield curve in normal economic conditions?

Answer: Long-term yields are higher than short-term yields

A normal (positive) yield curve shows long-term bonds yielding more than short-term bonds. This reflects the term premium — investors demand higher compensation for locking up capital for longer periods due to greater uncertainty about future inflation, interest rates, and credit risk. An inverted curve (short rates above long rates) often signals recession expectations.

What is the primary purpose of the Debt Management Office (DMO) in the UK?

Answer: To manage the UK Government's debt portfolio and issue gilts

The DMO is an executive agency of HM Treasury responsible for carrying out the Government's debt management policy. It issues gilts, manages the gilt portfolio, and conducts cash management operations for the Exchequer. It does not regulate lending or set interest rates.

What is the CGT annual exempt amount (AEA) for individuals in 2025/26?

Answer: £3,000

The CGT annual exempt amount for individuals was significantly reduced: it was £12,300 until April 2023, then £6,000 (2023/24), then £3,000 from April 2024 onwards. For 2025/26 it remains at £3,000, meaning only gains above this level are subject to CGT.

What is the 'enterprise value' (EV) of a company?

Answer: The total value of a company, including equity market capitalisation plus net debt (or minus net cash), representing the theoretical takeover price

Enterprise value = market capitalisation + debt - cash. It represents the total value of the business regardless of its capital structure, making it useful for comparing companies with different debt levels. It is often used in the EV/EBITDA valuation multiple.

What is the 'information ratio' used to assess in investment management?

Answer: The consistency and magnitude of a manager's outperformance relative to a benchmark, calculated as active return divided by tracking error

The information ratio measures the active return (portfolio return minus benchmark return) divided by tracking error (standard deviation of active returns). A higher information ratio indicates more consistent outperformance relative to the risk taken in deviating from the benchmark.

What is 'margin' in futures trading?

Answer: A deposit of good faith (initial margin) placed with the exchange by both buyer and seller, and daily variation margin calls to cover any losses on the position

Futures trading requires both parties to post initial margin as security. Daily mark-to-market means if the position moves against a party, they receive a variation margin call requiring them to post additional funds. Failure to meet a margin call results in the position being closed.

A bond with a face value of £1,000, a coupon rate of 5% and a current market price of £950 has a current yield of approximately:

Answer: 5.26%

Current yield = Annual coupon / Market price = £50 / £950 = 5.26%.

What does the 'price-to-book' (P/B) ratio measure?

Answer: The ratio of a company's market capitalisation to the book value (net assets) of its equity — indicating how much investors are willing to pay over the net asset value

The P/B ratio compares the market's valuation (share price) to the accounting book value of equity (assets minus liabilities per share). A P/B below 1 may indicate an undervalued company; a high P/B implies investors expect high future returns on equity.

Which of the following best describes a 'convertible bond'?

Answer: A bond that gives the holder the right to convert into a specified number of equity shares

A convertible bond gives the bondholder the option to convert the bond into a predetermined number of the issuer's ordinary shares, offering equity upside alongside bond income.

What is a 'futures contract'?

Answer: A legally binding agreement to buy or sell a standardised amount of an asset at a specified price on a specified future date

A futures contract is a standardised, exchange-traded agreement that obligates both parties — buyer and seller — to transact the underlying asset at the agreed price on the specified future delivery date. Unlike options, both parties have an obligation, not just a right.