Free CISI CMP Sec/Deriv Practice Questions: Securities: Primary 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: Primary 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.

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: Primary Markets

A UK investment-grade company is issuing a £500 million seven-year senior unsecured bond through a syndicate of banks.

Deal facts:

• Initial price thoughts are announced at gilts +180 bps.
• Institutional investors submit orders showing size and spread limits.
• The book becomes oversubscribed, and the banks set the final spread at gilts +155 bps.
• The bonds are then distributed among investors, with some orders scaled back.
• Cash and bonds exchange on the closing date through the settlement system.

Which statement best explains why bookbuilding, pricing, allocation, and settlement are treated as distinct steps?

• A. Bookbuilding fixes the coupon, pricing ranks investors by relationship strength, allocation transfers cash to the issuer, and settlement determines the final spread.
• B. Bookbuilding and allocation are the same step because both involve investor orders, while pricing and settlement are administrative confirmations after trading begins.
• C. Bookbuilding is only relevant to equity IPOs, while bond pricing, allocation, and settlement are all completed automatically once the issuer chooses the syndicate.
• D. Bookbuilding gathers demand and price sensitivity, pricing fixes the final economic terms, allocation decides who receives bonds and in what amount, and settlement completes the exchange of bonds for cash.

Best answer: D

What this tests: Securities: Primary Markets

Explanation: In a syndicated bond offering, the stages are separated because they answer different questions. Bookbuilding tests investor demand by collecting orders, sizes, and price limits. Pricing then uses that demand information, market conditions, and the issuer’s objectives to fix the final terms, such as spread, yield, coupon, and reoffer price. Allocation comes after pricing and decides which investors receive bonds and how much, especially when the issue is oversubscribed. Settlement is the operational completion of the primary issue, where bonds are delivered and cash is paid through the settlement infrastructure. Confusing these steps can lead to errors about who makes the investment decision, when the issuer’s economics are fixed, and when legal or operational completion occurs.

• Treating the final spread as a settlement matter confuses economic pricing with post-pricing operational completion.
• Saying bookbuilding applies only to equity IPOs ignores its common use in institutional bond issuance.
• Combining bookbuilding with allocation misses the difference between gathering demand and deciding the final distribution of securities.

Each step has a separate purpose: market testing, term-setting, distribution of the issue, and operational completion.

Question 2

Topic: Securities: Primary Markets

A company is applying for admission of its ordinary shares to a stock-exchange segment. The exchange states that this route requires:

• expected market capitalisation at admission of at least £30 million
• at least 25% of shares to be in public hands

The following figures are available:

The exchange’s trading notice also says the opening order book will use a 0.5p tick size and market makers have indicated an opening quote of 149p-151p.

What should the admissions team conclude?

• A. The company meets the public-hands test because 20 million new shares are being offered to the public and the tick size is 0.5p.
• B. The company fails the market capitalisation test because the offer raises only £30 million of new money.
• C. The company meets both admission tests because the opening bid-offer spread is only 2p and the expected market value is £150 million.
• D. The company meets the market capitalisation test but fails the public-hands test because public hands are 24% of the enlarged share capital.

Best answer: D

What this tests: Securities: Primary Markets

Explanation: Admission requirements are tests that an issuer must satisfy before its securities can be admitted to a stock-exchange segment. Here, the expected market capitalisation is based on the enlarged share capital of 100 million shares at 150p, giving £150 million, so the £30 million threshold is met. The public-hands calculation uses the shares available to the public after admission: 20 million new public shares plus 4 million existing public shares, or 24 million out of 100 million. That is 24%, below the required 25%. The opening quote, tick size and order book arrangements are secondary-market trading mechanics. They affect how admitted shares may trade, but they do not replace or satisfy the admission tests.

• Treating the bid-offer spread as evidence of admission eligibility confuses secondary-market liquidity with issuer admission criteria.
• Comparing only the £30 million issue proceeds with the market capitalisation threshold uses the wrong base; market capitalisation reflects all shares at the admission price.
• Counting only the 20 million new shares ignores existing public holdings and still does not use the tick size as an admission criterion.

The enlarged share capital is 100 million shares, public hands are 24 million shares, and 24% is below the stated 25% admission requirement.

Question 3

Topic: Securities: Primary Markets

A corporate broker is reviewing an equity offer before launch. Which action is best supported by the draft issue summary?

Draft issue summary:

• Issuer: listed manufacturing company raising new ordinary share capital

• Method: public offer to retail investors alongside an institutional placing

• Use of proceeds: construction of a new production facility

• Draft prospectus wording: “All material planning and environmental approvals for the facility have been obtained.”

• Late update: the key environmental permit has been delayed for at least six months and may require redesign of part of the facility

• Launch plan: open applications tomorrow and update investors only if the delay becomes permanent

• A. Disclose the permit delay only to the underwriting syndicate because they bear the financial risk if the offer is undersubscribed.

• B. Continue taking applications but reduce the issue price to compensate investors for the undisclosed project risk.

• C. Delay launch until the prospectus is corrected or supplemented to disclose the permit delay and its possible effect on the project.

• D. Proceed with launch because the offer includes an institutional placing, and institutional demand can validate the issue for retail investors.

Best answer: C

What this tests: Securities: Primary Markets

Explanation: In a primary equity offer, investor protection depends heavily on clear, accurate, and complete disclosure before investors commit funds. The permit delay directly affects the stated use of proceeds and the risk profile of the new issue. A prospectus or offer document that says all material approvals have been obtained would be misleading if a key approval is delayed and may require redesign. The appropriate action is to correct or supplement the disclosure before opening applications. Pricing, underwriting, or institutional participation cannot cure a material omission in documents used by investors to decide whether to subscribe.

• Institutional demand may help price or distribute an issue, but it does not validate misleading disclosure for retail investors.
• A lower issue price does not remove the need to disclose a material project risk before subscriptions are accepted.
• Underwriters face subscription risk, but disclosure duties are aimed at investors who rely on the offer document.

The permit delay is material to the purpose and risk of the fundraising, so investors need accurate disclosure before applying.

Question 4

Topic: Securities: Primary Markets

An equity capital markets analyst is reviewing a draft IPO launch note and must separate admission matters from secondary-market trading mechanics.

Draft launch note:

Which interpretation is best supported?

• A. The prospectus and free float points relate to admission; the order book and market maker quote points relate to secondary-market trading.
• B. All four points are admission requirements because each affects whether investors will buy the shares.
• C. The order book and market maker quote points are admission requirements; the prospectus and free float points are trading mechanics.
• D. The free float and market maker quote points are underwriting matters; the prospectus and order book points are settlement mechanics.

Best answer: A

What this tests: Securities: Primary Markets

Explanation: Stock-exchange admission requirements concern whether a security and issuer can be admitted to the relevant market. Typical admission matters include required disclosure, an approved prospectus where applicable, eligibility conditions, adviser or sponsor involvement, and requirements such as shares being sufficiently available to the public. Secondary-market trading mechanics concern what happens once the security is admitted and trading begins. These include whether trading is order-driven or quote-driven, how orders are matched, the role of market makers, and the effect of bid and offer prices on execution. The exhibit separates pre-trading eligibility and disclosure from post-admission dealing arrangements.

• Investor demand may be relevant to a successful issue, but it does not make order matching or market maker quotes admission requirements.
• Reversing the categories confuses pre-admission eligibility with post-admission trading.
• Underwriting concerns the primary issue process, and settlement concerns post-trade completion; neither is the main classification shown in the note.

Admission focuses on eligibility and disclosure before trading starts, while order matching and quoted prices describe how trading occurs after admission.

Question 5

Topic: Securities: Primary Markets

A corporate issuer is preparing a board note on a proposed bond launch. Fees and accrued interest can be ignored.

Issue summary:

Which interpretation is best supported by the issue summary?

• A. The firm commitment underwriting means the issuer keeps the risk that investors do not subscribe for the full issue.
• B. The issuer would receive £200 million before fees because the nominal amount, not the issue price, determines primary-market proceeds.
• C. The issuer would receive £198 million before fees, while investors subscribing at issue would also expect a £1 redemption uplift for each £100 nominal held to maturity.
• D. The 4.25% coupon would be paid on £198 million because the issue price reduces the amount on which interest is calculated.

Best answer: C

What this tests: Securities: Primary Markets

Explanation: In a primary-market bond issue, the nominal amount is the face amount on which coupon and redemption are based, while the issue price determines the cash raised before fees. Here, 99.00% of £200 million gives proceeds of £198 million. The coupon is still calculated on the £200 million nominal amount, not on the discounted proceeds. Because the bond redeems at 100.00% of nominal, an investor subscribing at 99.00% and holding to maturity receives the annual coupon plus a capital uplift of 1% of nominal, assuming no default. A firm commitment underwriting also shifts the risk of unsold securities to the underwriting syndicate, subject to the agreed underwriting terms.

• Treating nominal as the cash proceeds ignores the issue price, which directly sets the subscription amount paid by investors.
• Reducing the coupon base to the issue proceeds confuses issue price with nominal value; fixed coupons are paid on nominal.
• Saying the issuer keeps unsold-risk conflicts with firm commitment underwriting, where the syndicate commits to take the securities under the agreed terms.

An issue price of 99% means cash proceeds are below nominal, and redemption at par gives investors a capital uplift if held to maturity.

Question 6

Topic: Securities: Primary Markets

An issuer plans a fully underwritten share issue.

Issue terms:

• New shares: 20 million
• Issue price: £5.00 per share
• Underwriting commission: 2% of the total issue value, payable by the issuer
• Investor subscriptions received: 16 million shares
• Underwriter’s commitment: subscribe for any shares not taken by investors at the issue price

Ignoring other costs, which statement best describes the result?

• A. The issuer receives £78.4 million net because the underwriting commission is deducted only from the shares subscribed for by investors.
• B. The issuer receives £100 million net because the underwriting commitment removes both the placement risk and the cost of the issue.
• C. The issuer receives £80 million net because only 16 million shares were taken by investors, and the underwriter is paid only for arranging the issue.
• D. The issuer receives £98 million net before other costs; the underwriter must take £20 million of shares, transferring placement risk to the underwriter for a fee.

Best answer: D

What this tests: Securities: Primary Markets

Explanation: In a firm underwriting, the underwriter commits to take up securities that investors do not buy. That gives the issuer greater certainty that the planned capital will be raised, even if market demand is weaker than expected. Here, the total issue is 20 million shares at £5.00, giving gross proceeds of £100 million. Investors take 16 million shares, leaving 4 million shares. The underwriter must subscribe for those 4 million shares at £5.00, a £20 million placement obligation. The issuer pays a 2% underwriting commission on the total issue value, which is £2 million, so net proceeds before other costs are £98 million. The fee is the price of transferring the issue-placement risk to the underwriter.

• Treating the issue as raising only £80 million ignores the underwriter’s obligation to subscribe for the 4 million-share shortfall.
• Treating the issuer as receiving £100 million net ignores the underwriting commission, which is the cost of the risk transfer.
• Deducting commission only from investor subscriptions misapplies the stated fee basis, which is the total issue value.

The gross issue value is £100 million, the 2% fee is £2 million, and the underwriter must buy the 4 million-share shortfall for £20 million.

Question 7

Topic: Securities: Primary Markets

Britannia Components plc has shares trading at 250p immediately before an equity issue announcement.

Proposed issue:

• Existing shareholders may subscribe for 1 new share for every 4 shares already held.
• The subscription price is 200p per new share.
• Shareholders who do not want to subscribe may sell their entitlement nil-paid in the market.
• Ignore fees, taxes, and market movements.

Which issue method is being used, and what is the estimated theoretical ex-rights price?

• A. Placing; 240p
• B. Rights issue; 240p
• C. Open offer; 240p
• D. Rights issue; 225p

Best answer: B

What this tests: Securities: Primary Markets

Explanation: A rights issue gives existing shareholders the right to subscribe for new shares in proportion to their current holding, and those rights are typically tradable nil-paid. An open offer is also made to existing shareholders, but the entitlement is not normally tradable. A placing is an issue to selected investors rather than a pro-rata offer to all existing holders. The theoretical ex-rights price averages the value of the old shares and the discounted new share across the enlarged holding: four old shares at 250p plus one new share at 200p gives 1,200p for five shares, or 240p per share.

• Calling it an open offer ignores the stated ability to sell the entitlement nil-paid.
• Calling it a placing ignores the pro-rata offer to existing shareholders.
• A 225p TERP does not follow from the 4-for-1 weighting of old shares at 250p and the new share at 200p.

A tradable pro-rata entitlement to existing shareholders is a rights issue, and the TERP is \((4 \times 250p + 1 \times 200p) / 5 = 240p\).

Question 8

Topic: Securities: Primary Markets

An issuer is in the final stage of a UK equity IPO. Review the issue summary.

Issue summary:

• The prospectus has been approved.
• Bookbuilding is complete and institutional allocations have been communicated.
• CREST settlement instructions are ready for the expected timetable.
• The unresolved issue is the exchange’s request for confirmation that the issuer satisfies the admission requirements and that the formal admission application is complete.

Which party is most relevant to resolving the unresolved issue?

• A. The issuer’s legal advisers
• B. The sponsor or listing adviser
• C. The lead bookrunner
• D. The settlement agent or registrar

Best answer: B

What this tests: Securities: Primary Markets

Explanation: In a primary market transaction, the relevant party depends on the nature of the issue. The lead manager or bookrunner is most closely associated with bookbuilding, pricing and allocation. Legal advisers are central to drafting and reviewing documentation. Settlement agents, registrars and CREST-related parties focus on registration and settlement mechanics. Where the issue concerns whether the issuer satisfies admission requirements and whether the admission application is complete, the sponsor or listing adviser is the most relevant party. That role is linked to guiding the issuer through listing or admission requirements and liaising with the market infrastructure or exchange process.

• The lead bookrunner is a strong candidate for pricing or allocation issues, but the exhibit says those are complete.
• Legal advisers support documentation, but the unresolved point is admission eligibility and application completion.
• The settlement agent or registrar would be relevant if the problem concerned CREST settlement or registration, which is not the unresolved issue.

Admission requirements and the formal admission process are primarily matters for the sponsor or listing adviser.

Question 9

Topic: Securities: Primary Markets

An established software company is preparing an IPO and admission to a UK regulated market.

Offer structure:

• Shares will be offered to institutions and retail investors.
• All shares being sold are existing shares held by a venture-capital investor.
• No new shares will be issued.
• The venture-capital investor will receive the offer proceeds.
• The marketing pack headline says:

£80m fundraise to accelerate product expansion.

Which investor-protection or disclosure concern is the single most relevant?

• A. Retail investors may be exposed to daily variation margin because the issue will be centrally cleared.
• B. Existing shareholders may be denied nil-paid rights because the offer is structured as a rights issue.
• C. The offer documents may mislead investors if they imply the company is raising new capital when the proceeds go to a selling shareholder.
• D. The main concern is whether secondary-market market makers will quote continuous two-way prices after admission.

Best answer: C

What this tests: Securities: Primary Markets

Explanation: In an equity IPO, the investor-protection issue depends heavily on the offer structure. An offer for sale involves existing shareholders selling shares; it does not provide new capital to the issuer unless new shares are also issued. If marketing or prospectus materials suggest that the company is raising £80m for expansion when all proceeds go to a venture-capital seller, investors could misunderstand both the company’s funding position and the seller’s exit. Disclosure should make clear who is selling, whether any new money is being raised by the company, and how proceeds will be used. Rights issue, margining, and secondary-market quoting issues do not match the facts given.

• A rights-issue concern fails because no new shares are being offered to existing shareholders with rights attached.
• Variation margin is a derivatives clearing concept, not the central disclosure issue in an equity IPO.
• Secondary-market quoting may matter after admission, but it does not address the misleading primary-offer description.

An offer for sale of existing shares should clearly disclose the selling shareholder and use of proceeds so investors are not misled about funding for the company.

Question 10

Topic: Securities: Primary Markets

A listed company wants to raise new equity quickly after receiving firm indications of demand from several institutions.

Board priorities:

• Raise at least £50 million net.
• Complete within 5 business days.
• Keep cash issue costs below £1 million.
• Keep immediate dilution below 10%, measured as new shares divided by post-issue shares.
• The board will accept a non-pre-emptive route if these limits are met.

Current ordinary shares in issue: 100 million

Which issue method best matches the board’s priorities?

• A. Public offer
• B. Open offer
• C. Rights issue
• D. Accelerated bookbuild placing

Best answer: D

What this tests: Securities: Primary Markets

Explanation: Issue-method selection depends on the issuer’s objectives and the likely investor base. Here, the company has identified institutional demand and is willing to accept a non-pre-emptive route if speed, cost, net proceeds, and dilution limits are met. The placing raises 10.5 million × £4.85 = £50.925 million gross, or £50.325 million net after costs. Dilution is 10.5 million divided by 110.5 million post-issue shares, about 9.5%. It is also the only proposal that completes within 5 business days and keeps cash costs below £1 million. That combination makes an accelerated placing more suitable than slower pre-emptive or wider public offer methods in this fact pattern.

• The rights issue is pre-emptive, but it is too slow, too costly, and would raise only £49.5 million net.
• The open offer keeps dilution just below 10%, but its net proceeds and timing do not meet the board’s limits.
• The public offer raises enough net cash, but it is slower, costlier, and more dilutive than the board allows.

It raises about £50.3 million net, completes quickly, costs less than £1 million, and creates dilution of about 9.5%.

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