Investment Environment & UK Markets Flashcards
6 cards from real IMC practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 Investment Environment & UK Markets flashcards as text
What is the purpose of a Central Counterparty (CCP) in financial markets?
Answer: To interpose itself between buyers and sellers, reducing counterparty risk through novation
A CCP acts as buyer to every seller and seller to every buyer, taking on the counterparty risk of both sides through a process called novation. It reduces systemic risk by mutualising and managing default risk.
What is 'settlement risk' in securities markets?
Answer: The risk that one party delivers securities or cash while the other fails to deliver their side
Settlement risk, also known as delivery risk, arises when one party fulfils their obligation in a transaction (delivering securities or cash) but the counterparty fails to fulfil theirs, potentially causing loss.
Which of the following is an example of a 'systematic risk' factor?
Answer: A rise in UK interest rates affecting all bond prices
Systematic risk (also called market risk) affects all securities in a market and cannot be eliminated through diversification. A rise in interest rates affects all bond prices. The other examples are idiosyncratic (firm-specific) risks.
What does 'NAV' stand for in collective investment schemes?
Answer: Net Asset Value
NAV (Net Asset Value) is calculated by subtracting the fund's total liabilities from its total assets. For unit trusts and OEICs, the price at which investors buy and sell units is based on the NAV.
In UK markets, what is the 'bid-offer spread'?
Answer: The difference between the price at which a market maker will buy and the price at which they will sell
The bid-offer spread is the difference between the price a market maker will pay to buy a security (bid) and the price at which they will sell it (offer/ask). It represents the market maker's profit margin and a transaction cost for investors.
What is a 'prospectus' in the context of new securities issuance?
Answer: A legal document providing details about an investment offering to enable informed investment decisions
A prospectus is a formal legal document required for public offerings of securities. It discloses material information about the issuer, the securities, financial statements, risk factors, and use of proceeds to enable investors to make informed decisions.