Free CISI IAD Securities Practice Questions: Funds, REITs, ETFs, and Structured Products

CISI means Chartered Institute for Securities & Investment. IAD means Investment Advice Diploma, and this page is for the Securities unit. Use this focused CISI IAD Securities page as a short practice test for Funds, REITs, ETFs, and Structured Products. 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: Collective Investments, REITs, ETFs, and Structured Products

A client invests £20,000 in a five-year structured product. The product terms state:

• 100% capital guarantee at maturity, subject to issuer solvency
• No annual income
• At maturity, pays 60% of any positive FTSE 100 price-index growth
• Starting index level: 8,000
• Final index level: 7,600

Which interpretation of the guarantee is correct?

• A. The client is guaranteed repayment of £20,000 at maturity, but no profit or positive investment return is guaranteed.
• B. The client is guaranteed a positive return because a capital guarantee always includes at least some investment growth.
• C. The client is guaranteed a £600 profit because 60% of the 5% index movement is payable.
• D. The client is guaranteed £19,000 because the 5% index fall is deducted from the original capital.

Best answer: A

What this tests: Collective Investments, REITs, ETFs, and Structured Products

Explanation: A capital guarantee is not the same as a guaranteed profit or guaranteed investment return. Here the index moves from 8,000 to 7,600, a fall of 5%. The participation feature applies only to positive index growth, so it adds nothing at maturity. Subject to the issuer meeting its obligations, the capital guarantee means the client should receive the original £20,000 back at maturity. The result is capital preservation in nominal terms, not a gain. A guaranteed return would require a separate promise to pay interest, a fixed coupon, or a minimum redemption amount above the original capital.

• Applying 60% to the index fall as if it created a profit misreads the participation feature, which only applies to positive growth.
• Deducting the index fall from the capital ignores the stated 100% capital guarantee at maturity.
• Treating capital protection as automatic investment growth confuses repayment of original capital with a guaranteed return.

The index has fallen by 5%, so the participation feature pays nothing and the capital guarantee only protects the original £20,000 at maturity.

Question 2

Topic: Collective Investments, REITs, ETFs, and Structured Products

A UK resident retail client holds shares in a UK REIT outside a tax wrapper and is not eligible to receive property income distributions gross. The REIT declares a total distribution of £1,200, made up as follows:

• Property income distribution (PID): £900
• Non-PID dividend: £300

For this client, the PID is treated as UK property income and is paid after 20% withholding tax. The non-PID dividend is paid gross and treated as dividend income. What is the client’s cash receipt and tax classification?

• A. £1,020 cash; £900 property income with £180 tax withheld, and £300 dividend income
• B. £1,140 cash; £900 is property income paid gross and £300 is dividend income with £60 tax withheld
• C. £1,200 cash; £900 is property income and £300 is dividend income, both paid gross
• D. £960 cash; the whole £1,200 is treated as property income with £240 tax withheld

Best answer: A

What this tests: Collective Investments, REITs, ETFs, and Structured Products

Explanation: A UK REIT can pay distributions in two components. The PID represents profits from the tax-exempt property rental business and is treated as property income in the investor’s hands. Where withholding applies, the tax is deducted from the PID only. Here, 20% of the £900 PID is £180, so the net PID cash is £720. The £300 non-PID element is not part of the property income distribution and is treated as an ordinary dividend paid gross on the facts supplied. Total cash received is therefore £720 + £300 = £1,020, with separate tax classifications for the two elements.

• Withholding on the whole £1,200 incorrectly taxes the non-PID dividend as if it were a PID.
• Paying both elements gross ignores the stated 20% withholding on the property income distribution.
• Withholding on only the non-PID dividend reverses the tax treatment given in the facts.

The PID is reduced by 20% withholding tax, so £900 less £180 gives £720, plus the £300 non-PID dividend gives £1,020 cash.

Question 3

Topic: Collective Investments, REITs, ETFs, and Structured Products

A split-capital investment trust is approaching its planned wind-up date. The share class terms and wind-up figures are:

• Bank borrowing ranks first and totals £5.0 million.
• Class A shares pay no dividends during the trust’s life.
• Class A ranks after the bank borrowing but before the income shares and capital shares.
• Class A has 30.0 million shares in issue and a planned final entitlement of 150p per share.
• The trust’s assets at wind-up are worth £47.0 million.

Which statement correctly classifies Class A and states the amount actually available to repay it?

• A. Class A is income shares; actual repayment is £42.0 million.
• B. Class A is zero dividend preference shares; actual repayment is £42.0 million.
• C. Class A is annuity shares; actual repayment is £45.0 million.
• D. Class A is capital shares; actual repayment is £45.0 million.

Best answer: B

What this tests: Collective Investments, REITs, ETFs, and Structured Products

Explanation: A split-capital investment trust separates the rights to income and capital among different share classes. Zero dividend preference shares normally pay no income and instead have a predetermined capital entitlement at wind-up, ranking ahead of lower-ranking ordinary income and capital shares but behind prior creditors such as bank lenders. Here, the planned entitlement is 30.0 million shares × £1.50 = £45.0 million. However, the trust has only £47.0 million of assets and must first repay £5.0 million of bank borrowing, leaving £42.0 million. That amount is available for Class A, so the zero dividend preference shareholders receive less than their planned entitlement.

• Income shares are associated with receiving income, which does not fit a class that pays no dividends.
• Annuity shares are associated with a fixed income stream, not a zero-income share with only a final capital entitlement.
• Capital shares receive residual capital after prior-ranking claims, so they would not have the fixed priority entitlement described.

Class A has no dividends and a predetermined capital entitlement, but only £42.0 million remains after repaying the bank borrowing.

Question 4

Topic: Collective Investments, REITs, ETFs, and Structured Products

A client gives an adviser an instruction at 10:30 to invest £15,000 in a UK authorised OEIC. The fund is single-priced, deals once each business day, and its next valuation point is 12:00. The platform shows yesterday’s published price but states that the fund uses forward pricing.

Which is the single best interpretation of the dealing price?

• A. The investment will be priced continuously during the day in line with the exchange-traded market price of the fund.
• B. The investment will be priced at the bid price because purchases in authorised funds are always executed on a bid basis.
• C. The investment will be priced at yesterday’s published price because that is the latest available price when the order is placed.
• D. The investment will be priced using the NAV calculated at the 12:00 valuation point, so the final price is not known at 10:30.

Best answer: D

What this tests: Collective Investments, REITs, ETFs, and Structured Products

Explanation: Forward pricing is used to prevent investors from dealing on a known historic price after market movements have occurred. For a fund that deals once daily, an order received before the valuation point is normally executed at the price calculated at that next valuation point. In this case, the 10:30 instruction is before the 12:00 valuation point, so the relevant price is the noon NAV-based price. The client can specify the cash amount to invest, but the exact price and resulting number of shares or units will only be known after the valuation calculation has been completed.

• Yesterday’s published price is visible information, but forward pricing deliberately avoids dealing at that known historic price.
• A single-priced OEIC does not make a purchase automatically a bid-price transaction; bid and offer terminology is associated with dual pricing.
• Continuous intraday market pricing is more characteristic of exchange-traded instruments such as ETFs, not a daily-dealt OEIC in this scenario.

Forward pricing means an order received before the valuation point is dealt at the next calculated price, not the last published price.

Question 5

Topic: Collective Investments, REITs, ETFs, and Structured Products

An adviser is reviewing a split-capital investment trust for a client who can accept some equity risk but does not want highly geared or highly subordinated exposure. The trust is closed-ended and has bank borrowing equal to 25% of gross assets. On a planned wind-up, assets would be applied in this order: bank debt, zero-dividend preference shares, income shares, then capital shares. The zero-dividend preference shares trade at a 4% premium to their accrued entitlement. The capital shares trade at an 18% discount to their attributable NAV.

Which assessment best applies the risk-return trade-off?

• A. The capital shares remain the higher-risk exposure, because gearing and their last-ranking priority can magnify losses; the discount does not guarantee a margin of safety.
• B. The bank borrowing reduces risk for all share classes, because debt finance smooths the returns earned by shareholders.
• C. The capital shares are the lower-risk exposure, because buying at an 18% discount limits the investor’s capital loss to that discount.
• D. The zero-dividend preference shares are automatically the highest-risk exposure, because paying any premium to entitlement makes the security unsuitable.

Best answer: A

What this tests: Collective Investments, REITs, ETFs, and Structured Products

Explanation: Investment trust shares can trade below or above their underlying asset value because they are closed-ended and priced by supply and demand. A discount may offer upside if it narrows, but it can also widen, and it does not protect the investor from falls in the underlying portfolio. In a split-capital structure, the priority order is central to risk assessment. Debt is repaid first, then higher-ranking share classes such as zero-dividend preference shares, leaving lower-ranking income or capital shares more exposed if asset values fall. Gearing adds another layer of risk because borrowing magnifies the impact of portfolio movements on the residual value available to shareholders. A premium on a higher-priority class may add price risk, but it does not make lower-priority capital shares safer simply because they trade at a discount.

• Treating the discount as a guaranteed cushion ignores the possibility of NAV losses and further discount widening.
• Treating any premium as automatically the highest risk ignores the protection provided by priority ranking and asset cover.
• Treating borrowing as risk-reducing reverses the effect of gearing; debt ranks ahead of shareholders and magnifies residual shareholder outcomes.

Lower-ranking split-capital shares are most exposed after debt and prior share classes, and gearing can magnify both NAV movements and discount risk.

Question 6

Topic: Collective Investments, REITs, ETFs, and Structured Products

An adviser is reviewing a client’s proposed purchase in a split-capital investment trust. The client wants an exchange-traded, closed-ended investment company rather than an open-ended fund. Within the trust, the client wants no annual income and wants the share class whose return is intended to be a predetermined capital amount at the trust’s winding-up date. The adviser notes that the entitlement depends on the trust having enough assets after borrowings and other prior claims. Which investment best applies the principle of matching security rights to the client’s risk-return objective?

• A. Income shares of the split-capital trust
• B. Capital shares of the split-capital trust
• C. Zero dividend preference shares of the split-capital trust
• D. Annuity shares of the split-capital trust

Best answer: C

What this tests: Collective Investments, REITs, ETFs, and Structured Products

Explanation: An investment trust is a closed-ended company whose shares are traded on the market. A split-capital trust divides the economic rights of that company into different share classes. Zero dividend preference shares are designed for investors seeking capital growth through a predetermined redemption value rather than ongoing dividends. They normally rank ahead of the more growth-oriented classes, but repayment still depends on the trust’s assets being sufficient after higher-ranking claims such as borrowings. This makes asset cover central to the risk assessment. The client’s preference for no income and a defined capital amount at wind-up points to zero dividend preference shares rather than income, capital, or annuity shares.

• Income shares are aimed at investors seeking distributions from the trust’s income, not a no-income capital entitlement.
• Capital shares usually receive residual upside after other classes are satisfied, so they have higher gearing to portfolio growth and loss.
• Annuity shares are associated with a set income stream, which conflicts with the client’s stated wish for no annual income.

Zero dividend preference shares pay no income and are designed to provide a predetermined capital amount at wind-up, subject to sufficient asset cover.

Question 7

Topic: Collective Investments, REITs, ETFs, and Structured Products

An adviser is reviewing a client’s taxable general investment account. The client owns 10,000 shares in a UK REIT, which has announced a 10p per share distribution:

• 7p per share is a property income distribution (PID) from the REIT’s qualifying property rental business.
• 3p per share is a non-PID ordinary dividend.
• For this payment, the PID is used to meet the REIT requirement to distribute 90% of tax-exempt property rental profits.
• The PID is paid after 20% withholding tax and is taxed in the investor’s hands as property income.
• The non-PID dividend is paid gross and taxed as dividend income.

What is the single best interpretation of the payment for the client?

• A. The client receives £860 cash, all treated as capital gain, because the REIT’s property rental profits are converted into investor gains when distributed.
• B. The client receives £560 net PID and £300 dividend cash, with £700 treated as gross property income and £300 treated as dividend income.
• C. The client receives £800 cash, all treated as property income, because all UK REIT distributions are PIDs.
• D. The client receives £1,000 cash, all treated as dividend income, because REIT shares are listed equities.

Best answer: B

What this tests: Collective Investments, REITs, ETFs, and Structured Products

Explanation: A UK REIT can distribute more than one type of income. The PID element represents qualifying property rental business profits that are exempt from corporation tax within the REIT and distributed under the REIT profit-distribution requirement. In the investor’s hands, the PID is treated as property income, not as a normal company dividend, and in this case it is paid after 20% withholding. The gross PID is £700, so withholding is £140 and the net PID cash is £560. The non-PID part is separate: £300 is paid gross and taxed as dividend income. Total cash received is therefore £860, but the taxable classifications remain split between gross property income and dividend income.

• Treating the whole payment as a dividend ignores the REIT statement identifying a PID element.
• Treating the whole payment as property income ignores the separate non-PID ordinary dividend.
• Treating the payment as capital gain confuses income distributions with changes in the share price or disposals.

This applies the PID/dividend split and deducts 20% withholding only from the £700 gross PID.

Question 8

Topic: Collective Investments, REITs, ETFs, and Structured Products

A client holds a UK equity OEIC and a listed investment trust. Over the last quarter, both portfolios had similar falls in underlying asset value, but the investment trust’s share price fell more sharply because its discount to net asset value widened. The trust also discloses a long-term borrowing facility. Which explanation is the single best comparison of the two fund structures?

• A. The investment trust is closed-ended, has shares traded on the market that can move to a discount or premium to net asset value, and can use structural borrowing; the OEIC creates and cancels shares around net asset value and has more restricted borrowing.
• B. The investment trust cannot normally borrow and must keep its share price aligned with net asset value, while the OEIC can use gearing to amplify returns.
• C. Both vehicles continuously create and cancel shares at net asset value, so a wider discount on the investment trust is mainly an operational pricing error.
• D. The OEIC is closed-ended, so its price depends mainly on exchange supply and demand, while the investment trust issues and cancels shares daily at net asset value.

Best answer: A

What this tests: Collective Investments, REITs, ETFs, and Structured Products

Explanation: Open-ended funds, such as OEICs, expand and contract as investors subscribe and redeem. Their dealing price is based on the value of the underlying portfolio, subject to normal pricing adjustments. Closed-ended investment trusts have a fixed capital structure unless they undertake further share issues or buybacks. Their shares trade on the stock market, so the share price is set by investor supply and demand and may stand at a discount or premium to net asset value. Investment trusts can also use borrowing as gearing, which can magnify gains and losses. These features explain why an investment trust’s share price may move more sharply than its portfolio value, especially when its discount widens.

• Reversing the OEIC and investment trust structures confuses open-ended capital with closed-ended market-traded shares.
• Treating both vehicles as daily creators and cancellers of shares ignores the fixed capital nature of investment trusts.
• Saying the trust must avoid borrowing and track net asset value conflicts with the gearing and discount/premium features of closed-ended funds.

A closed-ended investment trust has market-traded shares and can use gearing, while an OEIC expands or contracts its capital through investor subscriptions and redemptions at asset value.

Question 9

Topic: Collective Investments, REITs, ETFs, and Structured Products

An adviser is reviewing a split-capital investment trust with three share classes. Ignore charges and tax. Three clients each want one share class:

• Client A wants security of capital at wind-up and does not need income.
• Client B wants current income of at least 7% a year on the price paid and accepts capital uncertainty.
• Client C wants high-risk capital growth from any surplus assets at wind-up and does not need income.

Current terms:

• Zero dividend preference shares: market price 95p; annual dividend 0p; fixed wind-up entitlement 110p paid before other share classes; latest asset cover for that entitlement is 1.8 times.
• Income shares: market price 80p; expected annual dividend 6p; 20p wind-up entitlement after the zero dividend preference shares are paid.
• Capital shares: market price 50p; annual dividend 0p; residual assets after the prior-ranking entitlements are paid.

Which allocation best matches the clients’ objectives?

• A. Client A: income shares; Client B: zero dividend preference shares; Client C: capital shares.
• B. Client A: zero dividend preference shares; Client B: income shares; Client C: capital shares.
• C. Client A: capital shares; Client B: income shares; Client C: zero dividend preference shares.
• D. Client A: zero dividend preference shares; Client B: capital shares; Client C: income shares.

Best answer: B

What this tests: Collective Investments, REITs, ETFs, and Structured Products

Explanation: Split-capital investment trusts divide rights between different share classes. Zero dividend preference shares normally pay no income but have a predetermined entitlement at wind-up and rank ahead of other classes, so they are the closest match for a security-of-capital objective, subject to asset cover and not a guarantee. Income shares are designed to deliver dividends. Here the expected running yield is 6p divided by 80p, or 7.5%, meeting Client B’s income requirement. Capital shares receive the residual value only after prior-ranking entitlements have been met, so they offer geared capital-growth potential with higher risk.

• Assigning capital shares to the income mandate fails because they pay no annual dividend and depend on residual assets.
• Assigning zero dividend preference shares to the income mandate fails because their annual dividend is 0p, despite the 110p final entitlement.
• Assigning income shares to the capital-security mandate overstates their protection, as the 20p entitlement ranks behind the zeros and is well below the 80p price.
• Assigning zero dividend preference shares to the growth mandate confuses a defined entitlement with residual upside.

Zeros best fit the capital-security objective, income shares yield 7.5% from 6p on 80p, and capital shares provide residual growth exposure.

Question 10

Topic: Collective Investments, REITs, ETFs, and Structured Products

An adviser is selecting an ETF for a retail client who wants an £80,000 core holding that tracks the FTSE 100. The client intends to hold for at least five years, wants transparent physical holdings rather than swap exposure, and may need to sell quickly during normal market hours. The dealing desk supplies these facts:

• Alpha FTSE 100 ETF: full physical replication; OCF 0.07%; 12-month tracking error 0.08%; typical bid-offer spread 0.04%; high LSE turnover.
• Beta FTSE 100 ETF: swap-based synthetic exposure; OCF 0.04%; 12-month tracking error 0.03%; typical bid-offer spread 0.03%; high LSE turnover.
• Gamma UK All-Share ETF: physical sampling; OCF 0.15%; 12-month tracking error 0.35%; typical bid-offer spread 0.12%; high LSE turnover.
• Delta FTSE 100 ETF: full physical replication; OCF 0.35%; 12-month tracking error 0.60%; typical bid-offer spread 0.40%; low LSE turnover.

Which ETF is the single best fit?

• A. Beta FTSE 100 ETF, because its synthetic structure gives the lowest tracking error and lowest ongoing charge.
• B. Delta FTSE 100 ETF, because full physical replication is more important than liquidity or total cost for a long-term investor.
• C. Gamma UK All-Share ETF, because physical sampling avoids swap exposure and gives broader UK equity diversification.
• D. Alpha FTSE 100 ETF, because it provides physical FTSE 100 exposure with low tracking error, low cost, tight spread, and good exchange liquidity.

Best answer: D

What this tests: Collective Investments, REITs, ETFs, and Structured Products

Explanation: ETF selection should match the benchmark and the client’s product-risk preference before comparing marginal cost advantages. Full physical replication means the ETF holds the underlying shares, which fits a client who wants transparent physical holdings and wants to avoid swap-based exposure. A synthetic ETF may track closely and be cheap, but it relies on derivative exposure and introduces counterparty and collateral considerations. Tracking error shows how closely the ETF follows the index, while the OCF, bid-offer spread, and market turnover affect total ownership and dealing costs. Alpha is the best balance: it tracks the required FTSE 100, uses full physical replication, has low tracking error, a low OCF, a tight spread, and good liquidity.

• Beta is attractive on tracking error and OCF, but its swap-based structure conflicts with the client’s wish to avoid synthetic exposure.
• Gamma is physical, but it tracks a different UK equity benchmark and has higher tracking error and dealing costs.
• Delta tracks the right index physically, but its higher OCF, wider spread, weaker tracking, and lower turnover make it a poorer fit.

It satisfies the client’s physical-replication preference while keeping tracking, holding cost, dealing spread, and liquidity risk low.

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