Free CISI CMP Sec/Deriv Practice Questions: Securities: Asset Classes

CISI means Chartered Institute for Securities & Investment. CMP means Capital Markets Programme, and this page is for the Securities/Derivatives unit. Use this focused CISI CMP Securities/Derivatives page as a short practice test for Securities: Asset Classes. The items are original Finance Prep sample exam questions built for scenario-based practice, not trivia, puzzle questions, official CISI questions, copied live-exam content, or exam dumps.

Topic snapshot

Sample questions

These are original Finance Prep practice questions aligned to this topic area. They are not official CISI questions, copied live-exam content, or exam dumps. Use them to preview question style and explanation depth before continuing with topic drills, mixed sets, and timed mock exams in Finance Prep.

Question 1

Topic: Securities: Asset Classes

A portfolio analyst reviews the following issue summary before classifying a new debt holding. Which classification is best supported?

• A. Convertible bond
• B. Securitised debt
• C. Floating-rate note
• D. Government bond

Best answer: B

What this tests: Securities: Asset Classes

Explanation: Securitised debt is created when cash-flow-producing assets, such as loans or receivables, are transferred to a special purpose vehicle that issues notes to investors. The investors’ interest and principal are funded from the asset pool rather than from the general credit of a sovereign or ordinary operating company. A floating-rate note is identified by a coupon that resets against a reference rate, not merely by variable cash collections. A convertible bond gives holders a right to convert into equity. A government bond is issued or guaranteed by a sovereign or public authority, which is absent here.

• A floating-rate note would have a coupon linked to a reference rate such as SONIA, EURIBOR, or SOFR; the summary states a fixed coupon.
• A convertible bond would include a right to exchange the bond for shares; the summary states no conversion right.
• A government bond would be issued or guaranteed by a government; the issuer is an SPV with no government guarantee.

The notes are issued by an SPV and serviced from a pool of receivables, which is characteristic of securitised debt.

Question 2

Topic: Securities: Asset Classes

A client is comparing ways to gain exposure to UK commercial property. Review the analyst’s note:

Portfolio note:

• Mandate: broad property-market exposure over three to five years.
• Direct property: ownership of buildings with rental income; periodic valuations; large deal sizes; legal, agency, tax, and management costs; disposals may take months.
• Listed property securities: shares in listed property companies and REITs; exchange-traded in small dealing sizes; prices respond to property expectations and wider equity-market sentiment.
• Client preference: daily liquidity and a low minimum investment, with acceptance of quoted price volatility.

Which interpretation is best supported?

• A. Direct property better matches the liquidity preference because its valuations are less frequent and therefore less volatile.
• B. Listed property securities better match the liquidity and access preference, but their prices may reflect equity-market sentiment as well as property fundamentals.
• C. Direct property and listed property securities should have identical short-term price behaviour because both are ultimately exposed to rental income and capital values.
• D. Listed property securities provide the same control over individual buildings as direct property, but with lower transaction costs.

Best answer: B

What this tests: Securities: Asset Classes

Explanation: Direct property exposure means holding the underlying property assets, so investors are closer to rental income and property valuations but face large lot sizes, transaction costs, management responsibilities, valuation lags, and illiquidity. Listed property securities, such as shares in property companies or REITs, provide indirect exposure through exchange-traded securities. They can be bought in smaller amounts and sold more easily, but their quoted prices can move with general equity-market conditions, sentiment, interest-rate expectations, and company-specific factors. The client’s preference for daily liquidity and a low minimum investment points toward listed securities, provided the client accepts that quoted prices may not track direct property valuations exactly in the short term.

• Lower volatility from infrequent valuations does not create liquidity; direct property can still be slow and expensive to sell.
• Shares in property companies or REITs do not give the investor direct control over specific buildings.
• Shared exposure to rents and property values does not make direct property and listed securities behave identically in the short term.

The note supports using listed property securities for daily dealing and smaller ticket sizes while recognising that they are securities with market-price volatility.

Question 3

Topic: Securities: Asset Classes

A client is comparing listed instruments linked to Helix plc and UK property. Helix ordinary shares are trading at 520p.

Terms under review:

• Ordinary shares: variable dividends, voting rights, and last ranking in insolvency.
• Preference shares: fixed preference dividend, normally limited voting, and priority ahead of ordinary shares for income and capital.
• Depositary receipts: receipts representing deposited ordinary shares, with economic exposure to the underlying shares and relevant custody or FX risks.
• Warrants: each warrant gives the right, not the obligation, to subscribe for one new ordinary share at 480p; no dividends or votes before exercise.
• Property-linked shares: listed company shares backed by property assets; price may diverge from property net asset value.

The client wants geared upside to Helix with no obligation to buy the shares and no shareholder rights unless the instrument is exercised. Which conclusion is correct?

• A. The property-linked share fits; it gives direct title to properties and removes quoted share-price risk.
• B. The depositary receipt fits; it is a subscription right rather than economic exposure to deposited ordinary shares.
• C. The warrant fits; its intrinsic value is 40p and the holder has no dividends or votes before exercise.
• D. The preference share fits; its fixed dividend gives the same upside and voting rights as the ordinary share.

Best answer: C

What this tests: Securities: Asset Classes

Explanation: A warrant is the instrument that matches the client’s objective. It gives the holder a right, not an obligation, to subscribe for shares at a fixed exercise price. With the ordinary share at 520p and the exercise price at 480p, the warrant is 40p in-the-money before considering time value or market premium. Until exercise, the warrant holder is not an ordinary shareholder and does not receive dividends or voting rights. Ordinary shares carry ownership rights but full downside equity risk. Preference shares usually provide a fixed preferential dividend and priority over ordinary shares, but they do not provide the same upside as ordinary shares. Depositary receipts represent deposited shares rather than a right to subscribe for new shares. Property-linked shares give exposure to property assets through a listed security, so both property risk and quoted share-price risk can remain.

• A fixed-dividend preference share does not provide the same voting rights or variable upside as an ordinary share.
• A depositary receipt represents underlying shares held through a depositary arrangement; it is not a warrant-style subscription right.
• Property-linked shares do not give direct legal title to buildings and do not remove quoted market-price risk.

The warrant’s intrinsic value is 520p less 480p, and it gives a subscription right without ordinary shareholder rights before exercise.

Question 4

Topic: Securities: Asset Classes

A client is considering buying ordinary shares in a listed company and asks how the investor’s rights differ from holding debt.

Security terms sheet:

Which interpretation is best supported by the terms sheet?

• A. The investor gains ownership and voting participation, but dividends are not guaranteed and the investor bears residual risk.
• B. The investor receives a fixed dividend before preference shareholders because ordinary shares carry voting rights.
• C. The investor becomes a creditor with a contractual income entitlement and priority over shareholders on winding up.
• D. The investor’s voting rights remove residual risk because shareholders can require repayment before creditors.

Best answer: A

What this tests: Securities: Asset Classes

Explanation: Ordinary shares represent ownership in a company rather than a debt claim. Ordinary shareholders commonly have voting rights, such as voting at general meetings, but those rights do not turn their investment into a protected or fixed-income claim. Dividends on ordinary shares are usually discretionary: they depend on profits, company policy, and board declaration, so they are expectations rather than contractual payments. The return can be attractive if the company performs well, but ordinary shareholders also bear residual risk. On a winding up, creditors and any higher-ranking share classes, such as preference shares, are paid before ordinary shareholders receive anything. This residual position is a key reason equity can offer higher potential reward but higher risk than debt.

• A creditor interpretation confuses equity ownership with lending; debt holders have contractual payment and priority features that ordinary shares do not provide.
• A fixed dividend before preference shareholders is inconsistent with ordinary share dividends being discretionary and lower-ranking.
• Voting rights give governance participation, not repayment priority or protection from residual risk.

Ordinary shareholders own the residual equity interest, may vote, receive discretionary dividends, and rank behind prior claims.

Question 5

Topic: Securities: Asset Classes

An investor pays £10,000 for a 5-year product issued by a bank. It is documented as an unsecured note, not as units in a fund. The issuer is solvent at maturity.

Payoff at maturity:

• If the equity index final level is at least the initial level, pay £10,000 plus 30% of index growth.
• If the final level is below the initial level but at least 70% of the initial level, pay £10,000.
• If the final level is below 70% of the initial level, pay £10,000 reduced in line with the full fall in the index.
• There is no dividend entitlement. Ignore fees and tax.

Which classification and estimated maturity payment is most accurate?

• A. An equity warrant with dividend exposure and an exchange-traded payoff based only on positive index growth; £0.
• B. A bank-issued structured note with equity-index exposure, a barrier-based capital-at-risk payoff, and issuer credit risk; £6,500.
• C. An open-ended collective investment with direct equity ownership through a fund wrapper and market risk in segregated assets; £6,500.
• D. A capital-protected bank deposit with equity-index participation and guaranteed repayment of principal; £10,000.

Best answer: B

What this tests: Securities: Asset Classes

Explanation: A structured product may give exposure to an index without the investor owning the underlying shares or units in a collective investment. Here, the wrapper is an unsecured bank-issued note. The investor’s economic exposure is linked to an equity index, but the payoff is contractual and depends on the issuer remaining able to pay. The final index level is 5,200 / 8,000 = 65% of the initial level, which is below the 70% barrier. Once that barrier condition is failed, the product does not repay full principal. It repays in line with the full index fall, so the estimated payment is 65% of £10,000, or £6,500. There is also issuer credit risk because the note is an unsecured obligation of the bank.

• Treating the product as an open-ended collective investment is wrong because the investor holds a bank note, not fund units backed by segregated portfolio assets.
• Calling it capital-protected ignores the 70% barrier condition and the capital-at-risk wording.
• Describing it as an equity warrant is wrong because the product has a note wrapper and a defined barrier repayment structure, not a simple positive-growth payoff.

The final index level is 65% of the initial level, so the breached barrier makes the note repay £10,000 × 65% = £6,500, subject to the bank issuer’s credit risk.

Question 6

Topic: Securities: Asset Classes

A UK securities firm has £12 million of sterling operational cash to place before a scheduled settlement pay-out.

Requirements:

• Cash must be available in 42 days.
• The firm wants very low credit risk.
• The instrument should be readily saleable before maturity if the settlement date changes.
• The firm does not want equity exposure, currency exposure, or a derivative payoff.

Which instrument is the single best fit?

• A. Five-year conventional gilt
• B. Ordinary shares in a FTSE 100 company
• C. Commercial paper issued by a large company
• D. UK Treasury bill

Best answer: D

What this tests: Securities: Asset Classes

Explanation: Treasury bills are short-term government securities issued at a discount and redeemed at par. They are commonly used in money markets for short-term cash management where preservation of capital, low credit risk, and liquidity are important. In this case, the 42-day horizon, sterling requirement, need for very low credit risk, and possible need to sell before maturity all point to a short-dated government money-market instrument. Commercial paper may be short term and liquid, but it carries corporate issuer credit risk. A five-year gilt has low issuer risk but creates unnecessary maturity and price risk for a 42-day need. Ordinary shares do not match a cash-management objective because they carry equity market risk and no fixed redemption date.

• Commercial paper can suit short-term funding markets, but it is unsecured corporate debt rather than very low-risk government paper.
• A five-year conventional gilt is government debt, but its long maturity exposes the firm to market-price movements before the 42-day cash need.
• Ordinary shares are capital-market instruments with equity risk and no fixed maturity, so they are unsuitable for a known short-term liquidity need.

A UK Treasury bill is a short-term sterling government money-market instrument with very low credit risk and good liquidity.

Question 7

Topic: Securities: Asset Classes

A money-market investor buys a Treasury bill with 183 days to maturity.

• Price paid: £95,000
• Redemption value at maturity: £100,000
• Basis: simple interest, 365-day year
• Fees and tax: ignored

What is the approximate annualised return to maturity, measured on the cash paid?

• A. 5.0%
• B. 5.3%
• C. 10.5%
• D. 20.0%

Best answer: C

What this tests: Securities: Asset Classes

Explanation: A discount instrument such as a Treasury bill is bought below its redemption value and normally pays no coupon. The investor’s cash gain is the difference between the redemption value and the price paid: £100,000 minus £95,000, or £5,000. Because the return is measured on the cash paid, the holding-period return is about £5,000 divided by £95,000, which is approximately 5.26%. The bill has 183 days to maturity, almost half of a 365-day year, so simple annualisation roughly doubles that holding-period return. This gives approximately 10.5%. The key is not to add coupon interest or use compounding when the facts specify a simple return on a discount instrument.

• 5.0% uses the gain as a percentage of face value and does not annualise it.
• 5.3% is the approximate holding-period return, not the annualised return.
• 20.0% overstates the return by applying an excessive annualisation or using the wrong investment base.

The £5,000 discount gain is about 5.26% of the £95,000 paid for roughly half a year, giving about 10.5% on a simple annualised basis.

Question 8

Topic: Securities: Asset Classes

A UK investor wants exposure to an overseas company’s ordinary shares without buying the shares directly in the local market. Four London-traded securities are being reviewed.

Sakura Motors ordinary shares trade in Tokyo at ¥800. The spot exchange rate is £1 = ¥200. The Sakura Motors GDR trades in London at about £20.

Which security provides access to foreign shares rather than a separate underlying business?

• A. BlueRiver plc ordinary shares
• B. Baltic Property REIT shares
• C. Andes Mining warrant
• D. Sakura Motors GDR

Best answer: D

What this tests: Securities: Asset Classes

Explanation: A depositary receipt is not a separate operating business. It is a negotiable certificate issued by a depositary that represents a specified number of an overseas company’s shares held in custody. Here, the Sakura Motors GDR’s value is consistent with that structure: five Tokyo ordinary shares at ¥800 each equal ¥4,000, which converts to about £20 at £1 = ¥200. That matches the London GDR price, indicating access to Sakura Motors foreign shares through the receipt. By contrast, overseas revenues, overseas property ownership, or a warrant over shares do not make an instrument a depositary receipt.

• A UK company with overseas revenues is still an ordinary share in that UK company, not a receipt over foreign shares.
• A warrant gives a right to subscribe for or buy shares; it does not itself represent deposited shares held by a depositary.
• A property company or REIT gives exposure to a property-owning business, not direct access to foreign ordinary shares through a receipt.

The GDR represents deposited Sakura Motors ordinary shares, and 5 × ¥800 ÷ ¥200 gives an underlying value of about £20.

Question 9

Topic: Securities: Asset Classes

An analyst is comparing bonds for a sterling cash portfolio whose mandate emphasises capital preservation and low price volatility. Assume normal secondary-market liquidity and no tax effects. Which assessment is most accurate?

Bonds under review:

• Bond A: GBP, AA, senior unsecured, 3 years to maturity, 4.00% fixed coupon, yield 4.20%, no embedded option.

• Bond B: USD, BBB-, subordinated, 12 years to maturity, 7.00% fixed coupon, yield 8.10%, callable by the issuer at par after year 5.

• Bond C: GBP, AAA covered bond, 7 years to maturity, 2.00% fixed coupon, yield 3.80%, no embedded option.

• Bond D: EUR, A, senior unsecured, 5 years to maturity, 5.00% fixed coupon, yield 4.70%, puttable by the investor at par after year 3.

• A. Bond A has the highest overall risk: its lower yield means the investor receives inadequate compensation compared with the higher-yielding bonds.

• B. Bond C has the highest overall risk: its low coupon and 7-year maturity make it riskier than the lower-rated subordinated callable bond.

• C. Bond B has the highest overall risk: weaker credit quality, subordinated ranking, longer maturity, USD exposure and the issuer call outweigh its higher coupon and yield.

• D. Bond D has the highest overall risk: its EUR currency exposure dominates the comparison despite A credit quality, senior ranking and the investor put.

Best answer: C

What this tests: Securities: Asset Classes

Explanation: Bond risk is assessed across several features, not by coupon or yield alone. Longer maturity generally increases price sensitivity to changes in yields. Lower credit quality increases default risk, and subordinated debt usually has greater loss severity than senior debt if the issuer fails. A foreign-currency bond adds exchange-rate risk for a sterling portfolio. Embedded options also matter: an issuer call benefits the issuer and can cap upside or create reinvestment risk for the investor, while an investor put is generally protective. A higher coupon may reduce duration compared with an otherwise identical lower-coupon bond, but a high yield often represents compensation for credit, currency, maturity or option risk rather than evidence of safety.

• The GBP AAA covered bond has some duration risk from its 7-year maturity and low coupon, but strong credit quality, sterling denomination and covered status reduce overall risk.
• The GBP AA 3-year senior bond has a lower yield because it has relatively lower risk; low yield alone does not make it the riskiest bond.
• The EUR A bond has currency risk, but its shorter maturity, senior ranking and investor put make it less risky overall than the USD subordinated callable 12-year bond.

Bond B combines the main adverse risk drivers for a sterling low-risk portfolio: weaker credit, lower ranking, long maturity, currency exposure and issuer call risk.

Question 10

Topic: Securities: Asset Classes

An operations analyst is checking a short-term money-market purchase before settlement. Which interpretation is best supported by the trading note?

• A. The investor will receive £1,250 as an interim coupon before maturity.
• B. The investor makes a £1,250 loss because the purchase price is below the redemption value.
• C. The investor’s simple cash return before costs is £1,250 if the bill is held to maturity.
• D. The investor’s return is zero because the instrument has no coupon.

Best answer: C

What this tests: Securities: Asset Classes

Explanation: Short-term money-market instruments such as Treasury bills are often issued or traded at a discount to their face value rather than paying periodic interest. The investor’s basic cash gain is the difference between the purchase price and the redemption amount, assuming the bill is held to maturity and ignoring costs or tax. Here, the investor pays £98,750 and receives £100,000 after 91 days, giving a simple return of £1,250. The absence of a coupon does not mean there is no return; the return is embedded in the discounted purchase price. No annualisation is needed unless specifically requested.

• Treating £1,250 as an interim coupon is incorrect because the note states that the bill has no coupon.
• Saying the return is zero confuses no coupon with no return; the discount provides the return.
• Calling the discount a loss reverses the economics, because redemption at a higher amount than cost creates a gain if held to maturity.

A Treasury bill is bought at a discount and redeemed at par, so the simple return is £100,000 less £98,750.

Continue in the web app

Use Finance Prep for interactive CISI CMP Securities/Derivatives practice with mixed sets, timed mock exams, topic drills, explanations, and progress tracking.

Related focused pages

• Free CISI CMP Securities/Derivatives Practice Exam
• Free CISI CMP Sec/Deriv Practice Questions: Securities Industry
• Free CISI CMP Sec/Deriv Practice Questions: Securities: Markets
• Free CISI CMP Sec/Deriv Practice Questions: Securities: Primary Markets
• Free CISI CMP Sec/Deriv Practice Questions: Securities: Secondary Markets
• Free CISI CMP Sec/Deriv Practice Questions: Securities: Corporate Actions
• Free CISI CMP Sec/Deriv Practice Questions: Securities: Clearing and Settlement
• Free CISI CMP Sec/Deriv Practice Questions: Securities: Accounting Analysis
• Free CISI CMP Sec/Deriv Practice Questions: Securities: Investment Management
• Free CISI CMP Sec/Deriv Practice Questions: Derivatives: Introduction to Derivatives
• Free CISI CMP Sec/Deriv Practice Questions: Derivatives: Underlying Markets
• Free CISI CMP Sec/Deriv Practice Questions: Derivatives: Market Structure
• Free CISI CMP Sec/Deriv Practice Questions: Derivatives Pricing and Valuation
• Free CISI CMP Sec/Deriv Practice Questions: Derivatives: OTC Derivatives
• Free CISI CMP Sec/Deriv Practice Questions: Derivatives Clearing and Margin
• Free CISI CMP Sec/Deriv Practice Questions: Derivatives: Delivery and Settlement
• Free CISI CMP Sec/Deriv Practice Questions: Derivatives Trading and Hedging
• Free CISI CMP Sec/Deriv Practice Questions: Derivatives: Regulatory Requirements

Practice next step

Use the Finance Prep web app above when you want interactive practice beyond this static page.