CISI IoI Equities and Bonds

Question 1

What is the key difference between ordinary shares and preference shares?

Accepted Answer

Preference shares typically receive a fixed dividend and have priority over ordinary shares in a liquidation

Answer

Preference shares typically pay a fixed dividend and have priority over ordinary shares for dividend payments and capital return in a liquidation. However, preference shareholders usually have limited or no voting rights, while ordinary shareholders carry votes.

Question 2

A UK government bond (gilt) with a coupon of 4% and a nominal value of GBP 100 is trading at GBP 110. What is its current yield?

Accepted Answer

3.64%

Answer

Current yield = (Annual coupon / Market price) x 100. The annual coupon is 4% of GBP 100 = GBP 4. Current yield = (4 / 110) x 100 = 3.64%. When a bond trades above par (at a premium), the current yield is lower than the coupon rate.

Question 3

What happens to the price of an existing fixed-rate bond when market interest rates rise?

Accepted Answer

The bond price falls

Answer

Bond prices and interest rates have an inverse relationship. When market interest rates rise, existing bonds with lower fixed coupons become less attractive, causing their prices to fall. Conversely, when rates fall, existing bond prices rise.

Question 4

What is a 'rights issue' in relation to equity shares?

Accepted Answer

An offer of new shares to existing shareholders in proportion to their current holdings

Answer

A rights issue is when a company offers existing shareholders the right to purchase additional new shares, usually at a discount to the current market price, in proportion to their existing holdings. This allows companies to raise additional capital while giving existing shareholders the opportunity to maintain their proportional ownership.

Question 5

Which of the following is a characteristic of a zero-coupon bond?

Accepted Answer

It is issued at a discount to par and redeemed at par, with no periodic interest payments

Answer

A zero-coupon bond makes no periodic interest (coupon) payments. Instead, it is issued at a discount to its face (par) value and redeemed at par on maturity. The investor's return is the difference between the purchase price and the redemption value.

CISI Introduction to Investment Practice Test

CISI Introduction to Investment Practice Test

CISI IoI Equities and Bonds