IMC Asset Classes 1

Question 1

Which of the following is the primary characteristic of an equity investment?

Accepted Answer

Ownership stake in a company with a claim on residual profits and assets

Answer

Equity represents ownership in a company. Shareholders have a residual claim on profits (dividends at the board's discretion) and assets after all other claimants (including bondholders) are paid. Returns are variable, not guaranteed.

Question 2

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

Accepted Answer

Preference shares have priority over ordinary shares for dividends and capital repayment, usually with a fixed dividend

Answer

Preference shares rank ahead of ordinary shares for dividend payments and in a liquidation. They typically pay a fixed dividend. Ordinary shares receive residual profits and usually carry voting rights; preference shares often do not.

Question 3

What is a 'coupon' on a bond?

Accepted Answer

The regular interest payment made to the bondholder

Answer

The coupon is the periodic interest payment paid by the bond issuer to the bondholder, usually expressed as a percentage of the bond's face (par) value. For example, a 5% coupon on a £1,000 bond pays £50 per year.

Question 4

What happens to a bond's price when interest rates rise?

Accepted Answer

Bond prices fall

Answer

Bond prices and interest rates have an inverse relationship. When rates rise, newly issued bonds offer higher yields, making existing bonds with lower coupons less attractive, so their prices fall to offer a competitive yield.

Question 5

Which asset class is generally considered to have the lowest risk and lowest expected return?

Accepted Answer

Cash and cash equivalents

Answer

Cash and cash equivalents (money market instruments, savings accounts) carry the lowest risk as capital is largely protected and returns are predictable, but they also offer the lowest expected long-term return due to the risk-return trade-off.

IMC Practice Test

IMC Practice Test

IMC Asset Classes 1