Free CISI CMP Sec/Deriv Practice Questions: Securities: Corporate Actions

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: Corporate Actions. 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.

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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: Corporate Actions

An investor holds shares in a UK listed company that is making a rights issue. The shares are still trading cum-rights.

Terms:

• Cum-rights market price: 240p per share
• Rights issue: 1 new share for every 4 existing shares held
• Subscription price: 180p per new share
• Existing holding: 800 shares
• Ignore costs, taxes, and rounding
• Assume the shares move to the theoretical ex-rights price and nil-paid rights can be sold at their theoretical value.

If the investor sells all the nil-paid rights rather than subscribing, what sale proceeds should the investor expect?

• A. £96
• B. £24
• C. £360
• D. £120

Best answer: A

What this tests: Securities: Corporate Actions

Explanation: In a rights issue, the entitlement is calculated from the existing holding. A 1-for-4 issue gives the investor 800 ÷ 4 = 200 rights. The theoretical ex-rights price is based on four existing shares at 240p plus one new share at 180p: 1,140p for five shares, or 228p per share. A nil-paid right is theoretically worth the difference between the ex-rights value of the share and the subscription price: 228p - 180p = 48p. Selling 200 rights at 48p gives 9,600p, which is £96.

• £24 applies the 12p fall per existing share to the 200 rights, rather than valuing each nil-paid right.
• £120 compares the cum-rights price with the subscription price, ignoring the dilution effect reflected in the theoretical ex-rights price.
• £360 is the cash needed to subscribe for 200 new shares at 180p, not the proceeds from selling the rights.

The investor receives 200 rights, each theoretically worth 48p, giving sale proceeds of 200 × 48p = £96.

Question 2

Topic: Securities: Corporate Actions

An investor is accumulating shares in a listed company. The facts are:

The buyback shares are purchased from holders other than the investor. No offer has yet been made to all shareholders, and there is no agreed merger document or court-approved scheme process.

Assume the relevant takeover rules require a mandatory offer if a person and concert parties move above 30% of voting rights.

Which conclusion is most accurate after these events?

• A. The investor has built a stake to about 35.6% of the reduced voting share capital, so the stated mandatory offer threshold has been crossed.
• B. The company and investor have completed a merger because the investor’s holding is now above 30% of voting rights.
• C. The transaction is a scheme of arrangement because the company cancelled shares and changed the investor’s percentage holding.
• D. The investor has made a takeover offer because it acquired 4 million shares from institutions and now holds 32.0% of the company.

Best answer: A

What this tests: Securities: Corporate Actions

Explanation: Stake building is the accumulation of shares by an investor, often through market or private purchases, before or alongside any formal control transaction. A share buyback is different: it is the company buying its own shares, often for cancellation, which reduces shares in issue. Here, the investor increases its holding from 28 million to 32 million shares. The company buyback then reduces the denominator from 100 million to 90 million shares. The investor’s voting stake is therefore approximately 35.6%. Because the supplied rule sets a 30% mandatory offer threshold, the investor has crossed that threshold. That does not itself mean a merger or scheme has occurred, and it is not the same as having already made a takeover offer to all shareholders.

• Treating the 4 million purchase as a takeover offer confuses market purchases with an offer made to all shareholders.
• Calling the result a merger is unsupported because no agreed business combination is described.
• A share cancellation after a buyback does not make the transaction a scheme of arrangement; a scheme requires a specific shareholder and court process.

After the investor holds 32 million shares and the company cancels 10 million shares, the holding is 32 million out of 90 million, or about 35.6%.

Question 3

Topic: Securities: Corporate Actions

An investor holds £120,000 nominal of a corporate bond.

Event terms:

What is the investor’s cash receipt and remaining nominal holding on the payment date?

• A. £30,600 cash and £90,000 nominal remaining
• B. £33,000 cash and £90,000 nominal remaining
• C. £31,350 cash and £90,000 nominal remaining
• D. £33,600 cash and £90,000 nominal remaining

Best answer: D

What this tests: Securities: Corporate Actions

Explanation: For a bond income or repayment event, distinguish the coupon cash flow from the redemption cash flow. The six-month coupon is half of the 5% annual coupon on the full £120,000 holding, so the income payment is £3,000. The partial redemption applies to 25% of the nominal holding, so £30,000 nominal is repaid. Because the redemption price is 102%, the repayment cash flow is £30,600. Total cash received is therefore £33,600. Only the redeemed nominal is removed from the holding, so £90,000 nominal remains after the event.

• Redemption proceeds alone miss the coupon due on the same payment date.
• Redemption at par ignores the 102% repayment price.
• Coupon only on the redeemed nominal understates the income because the coupon is paid on the full holding before redemption.

The investor receives a £3,000 coupon on £120,000 plus £30,600 for £30,000 nominal redeemed at 102%, leaving £90,000 nominal outstanding.

Question 4

Topic: Securities: Corporate Actions

An analyst is reviewing a proposed takeover of a listed target. Which interpretation is best supported by the issue summary?

Issue summary:

• The bidder has built a material stake through market purchases; counsel says the next purchase will require a public holding disclosure.

• The target board says it is prepared to recommend the offer if final terms are agreed.

• Completion still depends on target shareholders accepting the offer or approving the transaction.

• Competition counsel warns that the enlarged group may face merger-control review because the parties overlap in a product market.

• A. Competition review is concerned only with the price offered to target shareholders, so product-market overlap should not affect takeover certainty.

• B. The board recommendation is sufficient to transfer control because directors can bind shareholders once terms are agreed.

• C. Board support can help persuade shareholders, but it does not replace disclosure obligations, the shareholder decision, or any competition review that may affect completion.

• D. The stake-building disclosure can be deferred until after completion because it is irrelevant to shareholders before an offer closes.

Best answer: C

What this tests: Securities: Corporate Actions

Explanation: In a takeover or other control event, several processes can matter at the same time. Stake-building disclosure helps ensure the market and shareholders know when a party has accumulated a significant interest. A board recommendation may be influential, especially where shareholders look to directors for a view on the offer, but it is not the same as shareholder acceptance or approval. Shareholders still decide whether to accept an offer or vote for a transaction where approval is required. Separately, competition or merger-control review can affect timing, conditions, or completion if the transaction may reduce competition in a relevant market. The issue summary therefore supports treating these as distinct matters rather than assuming one approval or recommendation cures all other requirements.

• Treating a board recommendation as binding on shareholders confuses influence with legal approval or acceptance.
• Deferring stake-building disclosure ignores the market-transparency purpose of disclosure during the control process.
• Limiting competition review to offer price misses its focus on market structure, customer choice, and competitive effects.

The facts show separate control-event considerations: transparency for stake building, shareholder consent, board influence, and possible merger-control clearance.

Question 5

Topic: Securities: Corporate Actions

Harbour plc, a UK-listed company, announces a recommended acquisition by a trade buyer.

Deal facts:

• The buyer will obtain control of Harbour if the transaction completes.
• The acquisition is structured as a scheme of arrangement, so Harbour shareholders must vote on it.
• Harbour’s board has recommended that shareholders support the proposal.
• The announcement and circular disclose the offer terms and key conditions.
• A competition authority is reviewing the deal because the parties overlap in a regional market.

Which is the single best explanation of why these steps matter in this control event?

• A. They are optional investor-relations steps because once the buyer and target board agree the price, all target shares transfer automatically.
• B. They determine the buyer’s post-acquisition accounting treatment, including goodwill and gearing, rather than whether the offer can proceed.
• C. They are mainly settlement controls that confirm CREST can transfer the shares and that delivery-versus-payment can occur on the intended settlement date.
• D. They help shareholders and the market make an informed decision, provide the shareholder vote needed for the scheme, and allow competition concerns to be reviewed before completion.

Best answer: D

What this tests: Securities: Corporate Actions

Explanation: In a takeover or similar control event, process controls are not merely administrative. Disclosure matters because target shareholders and the wider market need timely information about the terms, conditions and implications of the proposal. A board recommendation is important because the target directors are giving shareholders their view on whether the proposal should be supported, although shareholders still decide where a vote or acceptance is required. For a scheme of arrangement, shareholder approval is central because the scheme binds shareholders only if the required approvals and court process are satisfied. Competition review can also be decisive: even if shareholders support the deal, a competition authority may investigate, impose conditions, delay completion or prevent the transaction if it raises market-concentration concerns.

• Settlement mechanics such as CREST and DVP are relevant after a transaction is capable of settling, but they do not explain shareholder voting, board recommendation or competition review.
• Agreement between the buyer and target board does not automatically transfer all shares; shareholder action and deal conditions can still be required.
• Accounting outcomes may matter after completion, but goodwill and gearing do not explain whether the control event can proceed.

Disclosure, board recommendation, shareholder approval and competition review each address a different condition or protection in completing a change of control.

Question 6

Topic: Securities: Corporate Actions

An investor holds £20,000 nominal of a corporate bond with these terms:

• Coupon: 6% per year, paid in two equal half-yearly payments
• Maturity: four years from now, repayable at par if not redeemed earlier
• Issuer call: the issuer may redeem all outstanding bonds at 101% of nominal on a coupon date
• Bondholder put: none
• Sinking fund: no scheduled repayment this year

The issuer gives valid notice that it will redeem the bonds on the next coupon date under the issuer call provision.

What cash amount should the investor expect on that date, and how should the event be classified?

• A. £20,800, comprising coupon interest plus an issuer call redemption
• B. £20,600, comprising coupon interest plus scheduled maturity repayment at par
• C. £600, comprising a dividend income event while the bond principal remains outstanding
• D. £20,200, comprising only the issuer call redemption with no coupon interest

Best answer: A

What this tests: Securities: Corporate Actions

Explanation: A bond coupon is an interest payment on the bond’s nominal amount. Here the annual coupon is 6%, paid half-yearly, so the next coupon is £20,000 × 6% ÷ 2 = £600. A call is an issuer’s right to redeem the bond early, before final maturity, usually at a stated call price. The call price is 101% of nominal, so the redemption amount is £20,000 × 101% = £20,200. The total cash received on the call date is therefore £20,800. This is not a dividend, because dividends are distributions on shares. It is not a scheduled maturity, because maturity is four years away. It is not a sinking-fund event, because the facts state there is no scheduled sinking-fund repayment this year.

• Treating the repayment as maturity at par ignores the issuer’s early call at 101%.
• Excluding the coupon misses the separate interest payment due on the coupon date.
• Describing the payment as a dividend confuses equity income with bond coupon interest.
• A sinking-fund repayment would be a scheduled partial retirement of debt, which is not present here.

The investor receives a half-year coupon of £600 plus call redemption proceeds of £20,200 at 101% of nominal.

Question 7

Topic: Securities: Corporate Actions

A fund holds shares in a listed company. An analyst reviews the following corporate-action notice after a sharp price move and must decide how to brief the portfolio manager.

Corporate-action notice:

• BidCo has announced a recommended cash offer for 100% of Northgate plc.
• Offer price: 420p per share; last closing price before announcement: 315p; latest market price: 414p.
• The offer remains subject to shareholder acceptance by 15 May and court sanction expected on 28 May.
• If the scheme becomes effective, cash settlement is expected on 5 June.

What is the best supported interpretation or action?

• A. Take no action until the market price equals the offer price, because the timetable has no operational effect.
• B. Treat the near-offer market price as a realised investment return and report the event as completed performance.
• C. Recognise cash proceeds now because a recommended offer with a stated cash price fixes the final result.
• D. Track the offer as a contingent corporate action, including acceptance, court sanction and settlement dates, before treating the outcome as completed.

Best answer: D

What this tests: Securities: Corporate Actions

Explanation: A takeover or scheme notice is event-control information. It does not by itself prove investment performance has been realised, particularly while conditions remain outstanding. The sharp price move reflects market pricing of the offer and the perceived probability that it completes. The operational risk is missing acceptance, court or settlement dates, or misreporting a contingent value as a completed result. Here, the offer is recommended, but acceptance, court sanction and expected settlement remain relevant. The appropriate action is to monitor the corporate-action timetable and update valuation or reporting as milestones are reached.

• A near-offer market price may reflect expected completion, but it is not the same as realised cash proceeds.
• A recommended offer can still have conditions and deadlines; stating a cash price does not remove event-control work.
• Waiting for the price to equal the offer price misses the timetable that determines acceptance and settlement.

The notice describes a takeover event with conditions and key dates, so timetable control is required before treating the outcome as complete.

Question 8

Topic: Securities: Corporate Actions

A securities operations analyst is reviewing a UK-listed equity holding after a corporate announcement.

Facts:

• The fund has held ordinary shares in Arden plc for six months.
• Arden’s board has recommended an all-cash acquisition at 560p per share, to be implemented by a scheme of arrangement.
• Arden’s share price moved from 432p to 552p on the announcement day.
• The custodian notice lists a shareholder meeting, court sanction hearing, scheme record time, suspension of dealings, and expected cash settlement date.
• The portfolio manager asks whether the price move should be treated as evidence of strong ongoing investment performance.

What is the single best response?

• A. Treat it primarily as a takeover event-control matter, tracking the scheme timetable and settlement dates rather than drawing a performance conclusion from the announcement-day price move.
• B. Ignore the custodian timetable because an all-cash bid settles automatically on the normal equity settlement cycle.
• C. Attribute the full price rise to investment performance because the shares were already held before the announcement.
• D. Buy additional shares because the market price below the offer price means the remaining return is risk-free.

Best answer: A

What this tests: Securities: Corporate Actions

Explanation: A recommended cash takeover, especially one implemented through a scheme of arrangement, is a corporate action requiring close control of dates and instructions. The key operational issues are meeting and court dates, record times, suspension or cancellation of trading, and when cash proceeds are expected. A sharp movement towards the offer price usually reflects the market’s reaction to the bid terms and completion risk, not a standalone conclusion about ongoing stock selection or normal trading performance. The fund may still record a realised gain if the transaction completes, but the immediate priority is to ensure the holding is correctly monitored through the takeover timetable.

• Treating the whole gain as investment performance overlooks that the price movement was caused by a bid announcement.
• Assuming normal equity settlement ignores the special timetable for schemes, record times, suspension, and cash payment.
• Calling the residual spread risk-free ignores completion, timing, and event risks around the takeover process.

A cash takeover implemented by scheme creates critical event dates and settlement actions, so the immediate price move is driven by the corporate action rather than normal investment performance.

Question 9

Topic: Securities: Corporate Actions

A portfolio administrator is reviewing a corporate-action notice for a UK listed company. Which interpretation is best supported by the notice?

• A. It is a bonus issue because shareholders receive additional shares without paying a subscription price.
• B. It is a stock split because each existing share is subdivided into a larger number of lower-priced shares.
• C. It is a rights issue because shareholders receive tradable entitlements to subscribe for new shares at a fixed price.
• D. It is an open offer because shareholders receive a non-tradable invitation to apply for new shares.

Best answer: C

What this tests: Securities: Corporate Actions

Explanation: A rights issue gives existing shareholders the right to subscribe for new shares, usually in proportion to their existing holding and at a stated subscription price. The key clue here is that nil-paid rights are credited and may be sold before the deadline. That makes the entitlement renounceable and tradable, which is characteristic of a rights issue. An open offer may also be made to existing shareholders, but the entitlement is typically not traded separately. Bonus issues and stock splits increase the number of shares held without a cash subscription from the shareholder, while a consolidation reduces the number of shares by combining them. Buybacks and scrip dividends have different purposes and mechanics.

• An open offer can involve new shares for existing holders, but the notice specifically allows the nil-paid entitlement to be sold.
• A bonus issue would not require payment of a subscription price.
• A stock split changes the number of shares in issue mechanically; it does not create a tradable subscription right.

The notice describes a renounceable entitlement, with nil-paid rights that can be sold or used to subscribe for new shares.

Question 10

Topic: Securities: Corporate Actions

A securities operations analyst is reviewing a corporate action notice for a client holding a sterling corporate bond.

Notice details:

• Instrument: 6% senior unsecured bond due 2031
• Coupons: paid half-yearly on 30 June and 31 December
• Event date: 30 June 2027
• Notice wording: the issuer will redeem £5 million of the outstanding principal at par under the bond’s mandatory annual retirement schedule
• No holder election is required and the issuer is not exercising an optional call

What is the single best classification of the 30 June 2027 event?

• A. An issuer call of the bond
• B. A final maturity repayment of the bond
• C. A sinking-fund redemption of part of the bond principal
• D. A coupon payment on the bond

Best answer: C

What this tests: Securities: Corporate Actions

Explanation: Bond income and bond repayment events must be distinguished. A coupon is the periodic interest paid under the bond’s terms, while a repayment event returns principal. Final maturity repays the bond at its scheduled end date. A call is an issuer’s optional right to redeem early if the terms allow it. A put is the holder’s right to require repayment. A sinking fund is a scheduled mechanism requiring the issuer to retire part of the debt over time, often by redeeming a portion of the outstanding principal. Here, the bond is not due until 2031, no holder election is involved, and the issuer is not using an optional call. The decisive fact is the mandatory annual retirement of part of the principal at par.

• A coupon payment would be periodic interest, not redemption of principal.
• An issuer call would involve the issuer exercising an optional early redemption right, which the notice excludes.
• Final maturity would occur on the bond’s due date in 2031, not on an interim scheduled retirement date.

The notice describes a mandatory scheduled retirement of part of the outstanding principal before final maturity, which is a sinking-fund event.

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