CISI INVESTMENT RISK TAXATION STUDY EXAMS
GUIDE QUESTIONS AND ANSWERS SURE A+
✔✔dividend yield - ✔✔dividend/market cap x 100
✔✔rights issue - ✔✔one method by which a company can raise additional capital.
existing shareholders are given the right to buy additional shares at a discounted price-
pre-emptive rights
✔✔bonus issue - ✔✔4:5 for every 5 shares they get 4 new shares
Mandatory corporate action
✔✔What is a Corporate Action? - ✔✔Any event within a company that affects its
shareholders or bondholders.
✔✔Mandatory corporate action - ✔✔Does not require any intervention from
shareholders or bondholders. e.g. Dividend payment.
✔✔Mandatory corporate action with options - ✔✔The shareholder has a choice until a
specified date, there is a default option if they do not intervene. e.g. Rights issue.
✔✔Voluntary corporate action - ✔✔Requires the shareholder/bondholder to
intervene/make a decision. e.g. Takeover.
,✔✔Right to subscribe? - ✔✔Shareholders have the pre-emptive right to buy any new
shares in the company before they are issued to the public to stop their proportionate
holding being diluted.
✔✔renouncable - ✔✔selling rights to another investor
✔✔market/price risk - ✔✔Risk that the price of an investment will go down. Price risk
varies between companies: volatile shares tend to exhibit more price risk than more
'defensive' shares, such as utility companies and general retailers.
✔✔Liquidity Risk - ✔✔Liquidity risk is the risk that shares may be difficult to sell at a
reasonable price or traded quickly enough in the market to prevent a loss.
✔✔Issuer risk - ✔✔The risk that the issuing company collapses and the ordinary shares
become worthless
✔✔Early redemption - ✔✔the risk that the issuer may invoke a call provision (if the bond
is callable).
✔✔Seniority risk - ✔✔In event of default, which claims are paid first? Debt with the
highest seniority is repaid first in the event of liquidation;
✔✔inflation risk - ✔✔the risk of inflation rising unexpectedly and eroding the real value
of the bond's
coupon and redemption payment.
✔✔Exchange rate risk - ✔✔bonds denominated in a currency different from that of the
investor's home
currency are potentially subject to adverse exchange rate movements.
✔✔Quote driven trading system - ✔✔Employ market makers to provide continuous two-
way, or bid and offer. E.g. SEAQ
✔✔Order driven system - ✔✔One that employs either an electronic order book or an
auction process, such as that on the NYSE floor, to match buyers with sellers. E.g.
SETS
✔✔SEAQ - ✔✔fixed interest securities
✔✔SETSqx - ✔✔for less liquid shares that are not traded on SETS
✔✔retail service providers - ✔✔provide electronic quotation and dealing facilities for
retail stockbrokers and it is a quote-driven system operated by UK market makers
, ✔✔bearer share - ✔✔A corporate share that is owned by the holder of the share
certificate and is not registered; therefore, ownership remains private.
✔✔registered form - ✔✔registrar of company records ownership of each bond; payment
is made directly to the owner of record
✔✔dematerialised - ✔✔System where securities are held electronically without
certificates.
✔✔clearing - ✔✔process through which the obligations held by buyer and seller to a
trade are defined and legally formalised.
✔✔settlement - ✔✔the process through which legal title (ie, ownership) of a security is
transferred from seller to buyer in exchange for the equivalent value in cash. Ideally,
these two transfers should occur simultaneously, known as delivery versus payment
✔✔CREST - ✔✔CREST is a UK-based central securities depository that holds UK
equities and UK gilts, as well as Irish equities and other international securities.
✔✔Settlement in CREST - ✔✔Trade Matching, Stock Settlement, Cash Settlement,
Register Update
✔✔Dow Jones Industrial Average US Nikkei 225 - Japan - ✔✔Price Weighted
✔✔government bond - ✔✔bonds are issued on behalf of the government by the Debt
Management Office (DMO), an executive agency of HM Treasury
✔✔conventional government bonds - ✔✔Represent around 75% of issue- instruments
that carry a fixed coupon and a single repayment date,
✔✔index-linked bonds - ✔✔Bonds whose coupon payments and/or principal repayment
are linked to a spec nstruments that carry a fixed coupon and a single repayment date,
✔✔striping - ✔✔Refers to breaking it down into its individual cash flows which can be
traded separately as zero coupon gilts.
✔✔What are the 3 stages of money laundering? - ✔✔Placement= involves placing the
criminally derived cash into a form of bank or building society account.
Layering= involves moving the money around to make it difficult for authorities to link
the illegal funds with the ultimate beneficiary.
GUIDE QUESTIONS AND ANSWERS SURE A+
✔✔dividend yield - ✔✔dividend/market cap x 100
✔✔rights issue - ✔✔one method by which a company can raise additional capital.
existing shareholders are given the right to buy additional shares at a discounted price-
pre-emptive rights
✔✔bonus issue - ✔✔4:5 for every 5 shares they get 4 new shares
Mandatory corporate action
✔✔What is a Corporate Action? - ✔✔Any event within a company that affects its
shareholders or bondholders.
✔✔Mandatory corporate action - ✔✔Does not require any intervention from
shareholders or bondholders. e.g. Dividend payment.
✔✔Mandatory corporate action with options - ✔✔The shareholder has a choice until a
specified date, there is a default option if they do not intervene. e.g. Rights issue.
✔✔Voluntary corporate action - ✔✔Requires the shareholder/bondholder to
intervene/make a decision. e.g. Takeover.
,✔✔Right to subscribe? - ✔✔Shareholders have the pre-emptive right to buy any new
shares in the company before they are issued to the public to stop their proportionate
holding being diluted.
✔✔renouncable - ✔✔selling rights to another investor
✔✔market/price risk - ✔✔Risk that the price of an investment will go down. Price risk
varies between companies: volatile shares tend to exhibit more price risk than more
'defensive' shares, such as utility companies and general retailers.
✔✔Liquidity Risk - ✔✔Liquidity risk is the risk that shares may be difficult to sell at a
reasonable price or traded quickly enough in the market to prevent a loss.
✔✔Issuer risk - ✔✔The risk that the issuing company collapses and the ordinary shares
become worthless
✔✔Early redemption - ✔✔the risk that the issuer may invoke a call provision (if the bond
is callable).
✔✔Seniority risk - ✔✔In event of default, which claims are paid first? Debt with the
highest seniority is repaid first in the event of liquidation;
✔✔inflation risk - ✔✔the risk of inflation rising unexpectedly and eroding the real value
of the bond's
coupon and redemption payment.
✔✔Exchange rate risk - ✔✔bonds denominated in a currency different from that of the
investor's home
currency are potentially subject to adverse exchange rate movements.
✔✔Quote driven trading system - ✔✔Employ market makers to provide continuous two-
way, or bid and offer. E.g. SEAQ
✔✔Order driven system - ✔✔One that employs either an electronic order book or an
auction process, such as that on the NYSE floor, to match buyers with sellers. E.g.
SETS
✔✔SEAQ - ✔✔fixed interest securities
✔✔SETSqx - ✔✔for less liquid shares that are not traded on SETS
✔✔retail service providers - ✔✔provide electronic quotation and dealing facilities for
retail stockbrokers and it is a quote-driven system operated by UK market makers
, ✔✔bearer share - ✔✔A corporate share that is owned by the holder of the share
certificate and is not registered; therefore, ownership remains private.
✔✔registered form - ✔✔registrar of company records ownership of each bond; payment
is made directly to the owner of record
✔✔dematerialised - ✔✔System where securities are held electronically without
certificates.
✔✔clearing - ✔✔process through which the obligations held by buyer and seller to a
trade are defined and legally formalised.
✔✔settlement - ✔✔the process through which legal title (ie, ownership) of a security is
transferred from seller to buyer in exchange for the equivalent value in cash. Ideally,
these two transfers should occur simultaneously, known as delivery versus payment
✔✔CREST - ✔✔CREST is a UK-based central securities depository that holds UK
equities and UK gilts, as well as Irish equities and other international securities.
✔✔Settlement in CREST - ✔✔Trade Matching, Stock Settlement, Cash Settlement,
Register Update
✔✔Dow Jones Industrial Average US Nikkei 225 - Japan - ✔✔Price Weighted
✔✔government bond - ✔✔bonds are issued on behalf of the government by the Debt
Management Office (DMO), an executive agency of HM Treasury
✔✔conventional government bonds - ✔✔Represent around 75% of issue- instruments
that carry a fixed coupon and a single repayment date,
✔✔index-linked bonds - ✔✔Bonds whose coupon payments and/or principal repayment
are linked to a spec nstruments that carry a fixed coupon and a single repayment date,
✔✔striping - ✔✔Refers to breaking it down into its individual cash flows which can be
traded separately as zero coupon gilts.
✔✔What are the 3 stages of money laundering? - ✔✔Placement= involves placing the
criminally derived cash into a form of bank or building society account.
Layering= involves moving the money around to make it difficult for authorities to link
the illegal funds with the ultimate beneficiary.
