CISI IoI Equities and Bonds Basics 2

Question 1

What is a 'gilt strip'?

Accepted Answer

A process by which the coupon payments and principal repayment of a gilt are separated and sold individually as zero-coupon bonds

Answer

Gilt strips are created by separating (stripping) the individual cash flows of a conventional gilt — each coupon payment and the principal repayment — into separate zero-coupon bonds that can be traded independently.

Question 2

What is 'par value' (also called face value or nominal value) of a bond?

Accepted Answer

The value at which the bond will be redeemed at maturity, typically £100 per £100 nominal

Answer

The par (or face) value is the amount the issuer repays the bondholder at maturity — for UK gilts, this is £100 per £100 nominal. Bonds can trade above par (at a premium) or below par (at a discount) in the secondary market.

Question 3

What is a 'rights issue'?

Accepted Answer

An offer by a company to existing shareholders to buy additional new shares at a discount to the current market price

Answer

A rights issue is a way for a company to raise additional equity capital by offering existing shareholders the right to purchase new shares at a discounted price, usually in proportion to their existing holding.

Question 4

What is an 'index-linked gilt'?

Accepted Answer

A gilt whose coupon and principal are adjusted in line with the Retail Prices Index (RPI)

Answer

Index-linked gilts are UK government bonds where both the coupon payments and the redemption value are adjusted in line with the Retail Prices Index (RPI), protecting the investor's return from the erosive effects of inflation.

Question 5

What is 'earnings per share' (EPS)?

Accepted Answer

A company's net profit divided by the number of shares in issue

Answer

EPS is calculated by dividing a company's net profit (after tax) by the number of ordinary shares in issue. It measures the profitability attributable to each share and is a key metric used in valuing equities.

CISI Introduction to Investment Practice Test

CISI Introduction to Investment Practice Test

CISI IoI Equities and Bonds Basics 2