Free CISI CMP Sec/Deriv Practice Questions: Securities: Markets

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: Markets. 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: Markets

A broker is explaining to a trainee why two capital-markets products use different trading channels. Review the trading note and identify the best supported interpretation.

Trading note:

• Instrument A: ordinary shares in a large listed company; identical units; high daily turnover; many buy and sell orders; prices disseminated throughout the trading day.
• Instrument B: a privately placed corporate bond issue; large institutional lot sizes; few outstanding holders; irregular secondary trading; price normally found by asking several dealers for executable quotes.

Which interpretation is best supported by the note?

• A. Both instruments should mainly trade on exchange because any transferable security can use a central order book efficiently.
• B. Standardised, liquid instruments with broad participation tend to suit exchange trading, while infrequently traded institutional instruments often rely on dealers or bilateral negotiation.
• C. Instrument A should trade bilaterally because high turnover requires dealer capital, while Instrument B should trade on exchange because few holders make orders easier to match.
• D. Trading venue is driven mainly by whether the return is paid as dividends or coupons, rather than by liquidity, standardisation, and market participation.

Best answer: B

What this tests: Securities: Markets

Explanation: Exchange trading works best where instruments are standardised, widely held, and actively traded, because a central market can bring together many buyers and sellers and publish frequent prices. Large listed ordinary shares commonly fit this pattern. Dealer or bilateral markets are more common where trades are larger, less frequent, more relationship-driven, or harder to standardise. Many corporate bonds have fragmented holdings and intermittent secondary-market interest, so investors often request prices from dealers that know the market and may commit capital. The key distinction is not simply that one product is a share and the other is a bond, but whether the product has the liquidity, standardisation, and breadth of participation needed for continuous exchange trading.

• Treating every transferable security as equally suitable for a central order book ignores the importance of liquidity and continuous two-way interest.
• Reversing the channels misreads the note: high turnover supports exchange trading, while few holders and irregular trading support dealer quote-finding.
• Focusing on dividends versus coupons misses the market-structure drivers: standardisation, trade frequency, participant breadth, and price discovery needs.

The share has the standardisation and liquidity suited to exchange trading, while the bond needs dealer quote-finding because trading interest is less continuous.

Question 2

Topic: Securities: Markets

A trading venue is reviewing why price discovery is weak in a secondary market for a recently issued UK corporate bond.

Market observations:

• The bond is a standard fixed-rate issue with a large amount outstanding.
• Most trades are arranged bilaterally by telephone with a small number of dealers.
• Investors see indicative prices, but not firm executable quotes across the market.
• Executed trade prices are published only in an end-of-day summary.
• Settlement already occurs through DVP without recurring fails.

Which change would be the single best way to improve price discovery?

• A. Limit trading to the original underwriting syndicate so that only dealers familiar with the issue can make prices.
• B. Introduce an electronic venue showing competing executable quotes and publish executed prices promptly after trades.
• C. Allow investors to see only daily indicative mid-prices to avoid revealing dealer inventory positions.
• D. Shorten the settlement cycle while leaving trading bilateral and trade-price publication unchanged.

Best answer: B

What this tests: Securities: Markets

Explanation: Price discovery improves when market participants can observe reliable buying and selling interest and recent transaction prices. In this case, the main weaknesses are opaque bilateral trading, few competing dealers, non-firm indications, and delayed trade-price publication. An electronic venue with competing executable quotes improves pre-trade transparency, while prompt publication of executed trades improves post-trade transparency. Together, these help investors assess fair value and narrow the range of possible prices. Settlement efficiency is helpful for market functioning, but it is not the decisive weakness here because DVP is already working. Restricting participation or publishing only indicative prices would reduce information available to the market and would weaken, not improve, price discovery.

• Shortening settlement may reduce operational risk, but it does not address opaque quoting or delayed trade information.
• Limiting trading to the original syndicate reduces competition and concentrates pricing power.
• Daily indicative mid-prices are weaker than executable quotes and prompt transaction reporting for discovering current market prices.

Greater pre-trade and post-trade transparency, combined with competing executable interest, directly improves the market’s ability to form reliable prices.

Question 3

Topic: Securities: Markets

An exchange is used for an issue of new shares and then for secondary trading in the same company’s shares.

Market data:

• New ordinary shares issued by the company: 8,000,000 at 375p per share
• Existing shares traded between investors on the first day: 2,000,000 at an average price of 390p
• Closing auction price published by the exchange: 392p

Ignoring fees and taxes, which statement correctly describes what the market has done?

• A. The company raises £31.36 million because the closing auction price should be applied to the new shares instead of the issue price.
• B. The company raises £30.0 million, and the first-day trading creates no market purpose because it does not issue new shares.
• C. The company raises £37.8 million because both the new issue and first-day trading provide capital to the issuer.
• D. The company raises £30.0 million; the £7.8 million of secondary turnover supports liquidity, price discovery, and transfer of share-price risk between investors.

Best answer: D

What this tests: Securities: Markets

Explanation: Capital formation occurs when the company issues new securities and receives the proceeds. Here, 8,000,000 shares at 375p, or £3.75, raise £30.0 million before costs. The later trading of existing shares is secondary-market activity, so it does not add more capital to the company. It still has important market purposes: it gives investors liquidity, helps establish observable prices through trading and the closing auction, and transfers share-price risk from sellers to buyers. The average traded value of the secondary activity is 2,000,000 shares at £3.90, or £7.8 million of turnover between investors.

• Adding secondary turnover to issue proceeds confuses primary-market funding with investor-to-investor trading.
• Saying secondary trading has no purpose overlooks liquidity, price discovery, and the transfer of ownership risk.
• Repricing the new issue at the closing auction price ignores the actual issue price at which the company sold the new shares.

Only the new shares raise issuer capital, while secondary trading gives investors a tradable price and transfers ownership risk.

Question 4

Topic: Securities: Markets

A UK technology company is preparing to list its ordinary shares.

Facts:

• It issues new ordinary shares to institutional and retail investors and receives the issue proceeds.
• The shares are admitted to an exchange-operated electronic order book after the offer.
• Buyers and sellers enter orders during the day, and executed trade prices are published.
• An early investor plans to sell part of its holding after admission without negotiating privately with the company.

Which statement best explains the market functions being served?

• A. The order book mainly transfers credit risk to the exchange; capital formation occurs only when existing investors sell after admission.
• B. The published trade prices remove investment risk, so the main market functions are risk elimination and guaranteed liquidity.
• C. The new issue supports capital formation; secondary exchange trading supports price discovery and liquidity and transfers equity exposure between buyers and sellers.
• D. The new issue mainly provides liquidity for existing holders; secondary trading forms capital for the company because each trade sends new cash to the issuer.

Best answer: C

What this tests: Securities: Markets

Explanation: Markets support different needs at different stages. In the primary market, an issuer sells new securities and receives the proceeds, which supports capital formation. Once securities are admitted to secondary trading, the issuer generally does not receive cash from investor-to-investor trades. The secondary market instead supports price discovery through orders, quotes, and executed trade prices. It also supports liquidity by giving investors a route to buy or sell without arranging a private negotiation with the issuer. When an investor sells shares, the buyer takes on the equity exposure, so risk is transferred rather than eliminated.

• Treating secondary trades as new cash for the issuer confuses primary-market proceeds with investor-to-investor trading.
• Describing the order book as mainly transferring credit risk misses the ordinary share context; the traded exposure is equity ownership risk.
• Published prices improve transparency, but they do not eliminate market risk or guarantee that trading will always be possible at the desired price.

Cash from newly issued shares funds the company, and later exchange trading helps investors find prices, trade positions, and shift ownership risk.

Question 5

Topic: Securities: Markets

A portfolio manager wants to buy £2,000,000 nominal of an investment-grade corporate bond immediately. An evaluated mid-price is 101.10 per £100 nominal.

Available execution routes:

Assume no fees, taxes, or accrued interest, and both routes settle DVP on the same settlement date. Which conclusion best recognises the market-structure effect on execution?

• A. Use the OTC dealer quote: it is £750 cheaper than sweeping the order book and shows that a quote-driven market may provide better immediate size liquidity despite lower displayed depth.
• B. Use the exchange order book: it is £750 cheaper because the first visible offer at 101.20 is below the dealer’s 101.35 quote.
• C. Use the OTC dealer quote: it is £5,000 cheaper because DVP removes the price impact of trading through the order book.
• D. The routes are economically equivalent because both settle DVP on the same settlement date.

Best answer: A

What this tests: Securities: Markets

Explanation: In an order-driven market, displayed prices must be read together with displayed size. The best offer at 101.20 is available for only £500,000 nominal, so buying £2,000,000 requires taking the next £1,500,000 at 101.45. That gives a volume-weighted order book price of 101.3875 and a cash price of £2,027,750. The OTC dealer’s firm quote at 101.35 costs £2,027,000, saving £750. The result illustrates a market-structure trade-off: an order book provides visible depth and price levels, but full immediate execution can become more expensive if depth at the best price is limited. A quote-driven dealer may provide firm full-size liquidity by committing balance sheet, although market-wide pre-trade transparency may be lower. DVP affects settlement risk, not the execution price calculation.

• The 101.20 order book price applies only to £500,000 nominal, so it cannot price the whole order.
• The £5,000 figure is the dealer quote’s cost over the evaluated mid-price, not its saving versus the order book.
• Identical DVP settlement reduces settlement risk in both routes, but it does not make liquidity or execution cost identical.

The order book’s volume-weighted price is 101.3875, so the dealer’s 101.35 quote saves £750 on £2,000,000 nominal.

Question 6

Topic: Securities: Markets

A broker-dealer is comparing two possible trading contexts for a UK institutional client:

• Equity order: A liquid listed share traded on an order-driven regulated exchange, with many anonymous buy and sell orders visible through the central order book.
• Debt trade: A large block of an infrequently traded corporate bond negotiated by telephone with one dealer, with settlement through an international central securities depository.
• Client concern: The client asks why the exchange has stricter membership access, standardised trading rules, and more visible prices, while the bond trade is negotiated more privately but still subject to trade reporting.

Which is the single best answer?

• A. Both trades should have identical pre-trade transparency and membership rules because all securities markets perform the same economic function of transferring ownership.
• B. The exchange relies on standardised instruments and multilateral price discovery, so it needs transparent orders, defined member access and public reporting; the negotiated bond market is more bilateral and less standardised, so transparency and reporting are adapted to its liquidity and trading method.
• C. The exchange has stricter rules only because shares are higher risk than bonds, so investor protection rules are unnecessary for the negotiated bond trade.
• D. The bond trade has no transparency or reporting duties because it settles through an international central securities depository rather than through the exchange’s systems.

Best answer: B

What this tests: Securities: Markets

Explanation: Market rules differ because market structures differ. A regulated exchange with a central order book brings together many participants in a standardised, multilateral environment. Membership criteria, order-handling rules, price publication and trade reporting support fair access, orderly trading and price discovery. A negotiated corporate bond trade is often dealer-intermediated, larger, less frequent and less standardised. Full pre-trade transparency may be less practical because liquidity can be limited and prices are often formed through bilateral negotiation. That does not mean there is no oversight: post-trade reporting and conduct obligations can still apply, but they are calibrated to the trading method and instrument characteristics rather than copied exactly from an equity exchange model.

• Settlement through a central securities depository does not remove market transparency or reporting duties.
• Shares are not subject to stricter market rules simply because they are always riskier than bonds; the decisive issue is market structure and trading method.
• Securities markets share broad economic purposes, but order-driven exchange trading and negotiated dealer trading require different access, transparency and reporting arrangements.

Centralised exchange trading requires rules that support fair access and price discovery, while OTC-style bond trading uses more flexible bilateral negotiation with reporting obligations tailored to the market.

Question 7

Topic: Securities: Markets

A junior sales trader is asked how to handle an institutional sale. Review the trading note and identify the best supported action.

Trading note:

• Security: sterling senior unsecured corporate bond, fixed coupon, maturity 2031
• Size: £18 million nominal; client can split the trade if needed
• Liquidity: no continuous public order book; most recent prints were negotiated bilaterally
• Pricing: portfolio manager asks for levels versus gilts from several bank bond desks

Which action best matches the product characteristics and the market structure in which it is commonly traded?

• A. Run an OTC request-for-quote process with selected bond dealers and compare their executable prices.
• B. Enter a market order into a central limit order book designed for highly liquid exchange-traded shares.
• C. Ask the issuer’s registrar to find a buyer by using the register of bondholders.
• D. Treat the order as a primary-market bookbuild and place it with the issuer’s syndicate.

Best answer: A

What this tests: Securities: Markets

Explanation: Market structure should fit product liquidity and standardisation. Highly liquid listed equities are commonly suited to transparent order-driven central books, where many buyers and sellers submit standardised orders. Institutional corporate bonds, especially larger or less frequently traded issues, are often traded in quote-driven OTC markets. Dealers make or source prices, trades may be negotiated bilaterally or through RFQ platforms or voice brokers, and pricing is commonly discussed as a yield or spread over a benchmark such as gilts. The note describes a secondary sale of an existing corporate bond, not a new issue by the borrower. The appropriate action is to seek competitive dealer quotes rather than rely on an exchange order book, the issuer’s register, or a primary-market syndicate.

• A central limit order book is more typical for liquid, standardised exchange-traded shares, not an illiquid institutional bond block.
• A registrar records ownership and processes title changes; it does not act as the market for finding secondary-market buyers.
• A bookbuild is a primary-market distribution method for new securities, not the normal route for selling an existing holding.

The bond is large, infrequently traded, and priced by dealer quotes, so a quote-driven OTC process is the usual secondary-market route.

Question 8

Topic: Securities: Markets

A trading analyst reviews activity in the ordinary shares of Northport plc during the first 30 minutes after a material earnings announcement. Which interpretation of the market-data snapshot is best supported?

• A. Venue A is likely to provide stronger price discovery because it has tighter spreads, deeper visible orders, real-time reporting, and active trading.
• B. Venue B should set the reference price because wider quotes give dealers more compensation for inventory risk.
• C. Venue B is likely to provide stronger price discovery because delayed dark-pool reporting reduces short-term noise.
• D. Price discovery is equivalent on both venues because the same issuer’s shares and announcement are involved.

Best answer: A

What this tests: Securities: Markets

Explanation: Price discovery is stronger when prices are formed through transparent, active trading with narrow spreads and sufficient depth. Venue A has a real-time lit order book, a much narrower bid-offer spread, higher displayed depth, and many more trades. Those factors make its prices more likely to reflect current supply, demand, and new earnings information. Venue B may still be useful for executing some orders, especially where anonymity is valued, but delayed dark prints, low activity, and a wide spread weaken its contribution to observable market pricing.

• Delayed dark-pool reporting can reduce information leakage, but it also weakens the market’s immediate view of trading interest.
• The same underlying share does not make price discovery equal; market transparency and liquidity conditions matter.
• A wider spread may compensate liquidity providers for risk, but it is a sign of weaker, not stronger, price discovery.

The snapshot shows the transparency, liquidity, depth, and trading frequency that support faster incorporation of information into prices.

Question 9

Topic: Securities: Markets

A UK asset manager wants to sell a £5 million position in a lightly traded corporate Eurobond.

Decisive facts:

• Normal secondary trading is by OTC request-for-quote with dealers.
• There is no central order book displaying firm bids to all participants.
• The dealer quoting the best price would buy as principal.
• Settlement would be delivery versus payment through an international central securities depository.
• Only two dealers have recently shown appetite for this bond in size.

Which conclusion most directly follows from this market structure?

• A. The DVP settlement path means the asset manager can sell immediately at the last published price with no execution risk.
• B. The issuer will be the secondary-market counterparty and must repurchase the bond at the screen mid-price.
• C. Liquidity and price discovery will mainly depend on dealer quotes and balance-sheet capacity; DVP reduces, but does not remove, settlement exposure.
• D. The bond should trade with equity-like transparency because exchange admission creates a continuous displayed central order book.

Best answer: C

What this tests: Securities: Markets

Explanation: Market structure affects how readily a security can be traded, how visible prices are, and where counterparty and settlement risks sit. A lightly traded corporate Eurobond often trades in an OTC dealer market rather than through a transparent central order book. The asset manager must obtain quotes from dealers, so liquidity depends on whether dealers are willing to commit balance sheet and at what price. The dealer acting as principal is the trading counterparty. Delivery versus payment through an international central securities depository reduces the risk that one side delivers securities or cash without receiving the other leg, but it does not guarantee execution, remove price uncertainty, or create market depth.

• Exchange admission does not automatically mean continuous order-book trading or equity-like price transparency.
• DVP addresses settlement exchange-of-value risk, not the availability of buyers or the execution price.
• The issuer is not normally obliged to repurchase bonds in secondary-market trading.
• OTC request-for-quote trading depends on dealer willingness to quote and warehouse risk.

An OTC dealer market with limited dealers is less transparent and less liquid than a central order book, while DVP mitigates settlement principal risk.

Question 10

Topic: Securities: Markets

A broker receives an instruction from an investment manager to buy shares for a UK equity fund.

Trade facts:

• The shares are already listed and admitted to trading on a regulated stock exchange.
• The broker enters a buy order into the exchange’s electronic order book.
• The matched seller is another institutional investor.
• The company whose shares are traded receives no cash from the transaction.
• Settlement is arranged through the normal securities settlement system against payment.

Which market description best fits this trade?

• A. Primary market issuance through a placing to institutional investors
• B. OTC money-market trading in newly issued commercial paper
• C. Secondary market trading of an existing equity on an exchange order book
• D. A corporate action subscription under a rights issue

Best answer: C

What this tests: Securities: Markets

Explanation: A secondary market transaction involves the trading of securities that have already been issued. In this fact pattern, the company does not receive proceeds, the seller is another investor, and the order is matched on an exchange order book. Those facts point to secondary market exchange trading. A primary market transaction would involve the issuer raising new capital by selling securities to investors. A rights issue is also issuer-led and gives existing shareholders the right to subscribe for new shares. Commercial paper is a short-term money-market instrument, not an existing listed equity traded through an equity order book.

• A placing is a primary market route, so it does not fit a trade where the issuer receives no proceeds.
• Commercial paper is a short-term debt instrument and would not match listed equity trading on an exchange order book.
• A rights issue involves shareholder entitlements to subscribe for new shares, not an ordinary matched trade between investors.

The trade is between investors in already-issued shares, with price formation through the exchange order book and no new funds raised by the issuer.

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