CISI-Imperial Mocks

Which of the following is least likely to directly influence share prices in equity markets?

• a) Company earnings reports

• b) Changes in interest rates

• c) Changes in a company’s corporate governance structure

• d) Government regulations on currency exchange

Answer explanation

While share prices are influenced by factors like company performance, investor sentiment, and economic indicators, government regulations on currency exchange are more relevant to forex markets rather than directly impacting equity prices. Changes in interest rates and corporate governance structure can impact share prices due to their influence on investor perception and financial performance.

A bond’s price is most sensitive to changes in:

• a) The issuing company’s stock price

• b) Economic growth rates

• c) Interest rates

• d) Investor sentiment

Answer explanation

Bond prices and interest rates have an inverse relationship. When interest rates rise, existing bonds with lower yields become less attractive, causing their prices to fall. Conversely, when rates fall, bond prices increase. While economic growth and investor sentiment may have secondary effects, interest rates are the primary driver of bond pricing.

In forex trading, a currency pair is quoted as EUR/USD = 1.2000. If the quote changes to EUR/USD = 1.1900, this indicates:

• a) The euro has appreciated against the dollar

• b) The euro has depreciated against the dollar

• c) The dollar has depreciated against the euro

• d) There is no significant change in exchange rates

Answer explanation

A lower EUR/USD rate means it takes fewer US dollars to buy 1 euro, indicating the euro has weakened (depreciated) relative to the dollar. Conversely, this would imply the dollar has strengthened (appreciated) relative to the euro.

Which of the following is a key advantage of moving derivatives trading from OTC to exchange-traded platforms?

• a) Reduced counterparty risk

• b) Lower regulatory oversight

• c) Higher transaction costs

• d) Limited product variety

Answer explanation

Exchange-traded derivatives are cleared through a central clearinghouse, which reduces counterparty risk compared to OTC markets, where trades occur directly between parties. Exchange-traded platforms also increase transparency and regulatory oversight, though they often reduce transaction costs.

Which of the following services is NOT typically offered by an investment bank?

• A. Advisory on mergers and acquisitions

• B. Holding assets in safekeeping

• C. Trading in equities, bonds, and derivatives

• D. Finance-raising for governments and companies

Answer explanation

Solution: Investment banks primarily focus on advisory services, trading, and finance-raising. Holding assets in safekeeping is a service offered by custodians, not investment banks.

What is the primary advantage of peer-to-peer (P2P) lending for savers compared to traditional banking?

• A. Reduced risk for savers

• B. Availability of collateral-backed loans

• C. Higher potential returns due to fewer intermediaries

• D. Immediate liquidity without charges

Answer explanation

Solution: P2P lending eliminates the traditional banking intermediary, enabling savers to earn higher returns by directly lending to borrowers. However, this comes with greater risk, as most P2P loans are unsecured.

What is the process by which savings institutions convert into publicly traded banks called?

• A. Consolidation

• B. Mutualisation

• C. Demutualisation

• D. Crowdfunding

Answer explanation

Solution: Demutualisation refers to the process where mutual savings institutions, which are owned by members, transform into publicly traded banks to access more capital and expand operations.

Which of the following is NOT a service typically provided by custodians?

• A. Collecting dividends and interest income

• B. Measuring portfolio performance

• C. Managing cash transactions

• D. Advising on mergers and acquisitions

Answer explanation

Solution: Custodians focus on safe custody services, such as holding assets, managing cash, and reporting on portfolio activities. Advising on mergers and acquisitions is a service provided by investment banks.

What is the primary reason why many companies now offer defined contribution (DC) schemes instead of final salary schemes?

• A. DC schemes are more attractive to employees

• B. Final salary schemes involve higher administrative costs

• C. Final salary schemes are riskier and more expensive for employers

• D. DC schemes provide guaranteed returns

Answer explanation

Solution: Final salary schemes are costly for employers due to increasing life expectancy and volatile market returns. Defined contribution (DC) schemes shift the investment risk to employees, making them more financially sustainable for companies.

What is the primary revenue model for fund managers?

• A. Fixed monthly fees from clients

• B. Charging a percentage of the fund value and/or performance-based fees

• C. Commissions on trades executed on behalf of clients

• D. Flat fee for advisory services

Answer explanation

Solution: Fund managers typically charge clients based on a percentage of the assets they manage. They may also include performance-linked fees based on the returns achieved, making this their primary revenue model.