Free CISI IAD Securities Practice Questions: Fixed-Income Securities and Debt Markets

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 Fixed-Income Securities and Debt 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: Fixed-Income Securities and Debt Markets

A UK issuer proposes to bring ordinary shares and a secured corporate bond to market at the same time. The ordinary shares are expected to have a market value of £620,000 and the bond issue is expected to have a market value of £250,000.

The relevant thresholds are:

• A company bond issue must have a market value of at least £200,000.
• A company bringing both debt and equity or other securities to market must have a total market value of at least £900,000.

Which conclusion best applies?

• A. The securities meet the threshold because secured bonds rank ahead of ordinary shares on insolvency.
• B. The securities meet the threshold because the bond issue exceeds £200,000 on its own.
• C. The securities fail because each separate class must have a market value of at least £900,000.
• D. The bond issue meets the £200,000 bond threshold, but the combined securities fall £30,000 short of the £900,000 threshold.

Best answer: D

What this tests: Fixed-Income Securities and Debt Markets

Explanation: Where an issuer brings debt to market alongside equity or other securities, the relevant threshold is not assessed only by looking at the bond issue in isolation. Here, the secured bond has an expected market value of £250,000, so it exceeds the stated £200,000 minimum for a company bond issue. However, the issuer is also bringing ordinary shares to market at the same time. The combined expected market value is £870,000 (£620,000 plus £250,000), which is below the stated £900,000 threshold for a combined issue. The implication is that the issuer would need to increase the total market value by £30,000 or change the proposed structure before it could satisfy that stated combined threshold.

• Looking only at the £200,000 bond threshold ignores the extra total-value requirement for a combined issue.
• Bond security and insolvency ranking affect credit standing, not the stated market value admission threshold.
• The £900,000 requirement is stated as a total market value threshold, not a separate minimum for each class.

The issuer is bringing debt and equity to market together, so the £900,000 total market value threshold must also be satisfied.

Question 2

Topic: Fixed-Income Securities and Debt Markets

A UK portfolio manager is reviewing bond purchases for a client who wants part of the fixed-income allocation in securities issued outside the issuer’s home jurisdiction, rather than domestic bond issues. Which purchase is the single best fit?

• A. A conventional gilt issued by the UK Debt Management Office and traded in the UK gilt market.
• B. A sterling bond from a UK utility, privately placed with a UK insurer and documented in the UK market.
• C. A sterling bond from a UK utility, issued through a Luxembourg programme by an international syndicate and settled through Euroclear/Clearstream.
• D. A sterling bond from a UK utility, issued in London under its UK debt programme and sold mainly to UK institutions.

Best answer: C

What this tests: Fixed-Income Securities and Debt Markets

Explanation: A domestic bond issue is normally one where the issuer raises debt in its own home market under that market’s local arrangements. By contrast, international bond issuance involves securities placed outside the issuer’s home jurisdiction, commonly through an international syndicate and international clearing systems. A sterling issue by a UK company is not automatically domestic; the decisive point is where and how it is issued. The Luxembourg programme and international distribution route make the UK utility’s bond an international issue, often described in practice as a Eurosterling-style issue when sterling debt is issued outside the UK market.

• A UK issuer using its London debt programme and selling mainly to UK institutions is a domestic market issue.
• A private placement with a UK insurer remains a UK domestic financing route, even if the investor is institutional.
• A gilt is a UK government domestic sovereign bond, not an international issue outside the issuer’s home jurisdiction.

The UK issuer is raising debt outside its home jurisdiction through the international bond market, so it is not a domestic UK bond issue.

Question 3

Topic: Fixed-Income Securities and Debt Markets

An adviser is comparing two sterling corporate bonds for a client who wants to remain within investment-grade credit exposure and has low tolerance for issuer-default risk. Assume the credit spread is the bond yield to maturity less the matched-maturity gilt yield.

Which credit-risk concern is most relevant when using this rating information in the investment decision?

• A. Bond B offers a 1.8% spread, but it is at the lowest investment-grade rating with a negative outlook, so a downgrade below investment grade is a key concern.
• B. Both bonds have no issuer-default risk because they are compared with matched-maturity gilts.
• C. Bond A has the greater credit-risk concern because its 0.7% spread provides less income than Bond B.
• D. Bond B should be preferred because its 1.8% spread proves the market has fully compensated the client for default risk.

Best answer: A

What this tests: Fixed-Income Securities and Debt Markets

Explanation: Credit ratings are opinions on creditworthiness, not guarantees of repayment. The spread calculation is Bond A: 4.9% - 4.2% = 0.7%, and Bond B: 6.0% - 4.2% = 1.8%. Bond B’s higher spread may look attractive, but it is rated BBB-, the lowest investment-grade category shown, and has a negative outlook. For a client seeking investment-grade exposure with low default-risk tolerance, the key concern is that the rating could be downgraded below investment grade, potentially increasing default-risk perception and reducing marketability or price.

• Higher yield does not prove full compensation for default risk; it usually signals that the market requires more reward for taking that risk.
• Lower income is not, by itself, greater credit risk; Bond A has the stronger rating and stable outlook.
• Gilt comparison helps measure spread, but it does not remove the corporate issuer’s default risk.

Bond B’s higher spread reflects extra credit risk, and its BBB- negative status makes downgrade risk especially relevant for an investment-grade client.

Question 4

Topic: Fixed-Income Securities and Debt Markets

A UK investment firm is preparing a note for advisers on how a new conventional gilt reaches investors and remains tradeable after issue. Which statement best applies the market-structure principle that government funding and secondary-market liquidity are supported by different gilt-market roles?

• A. The DMO provides continuous bid and offer prices in the secondary market, while GEMMs only process settlement instructions.
• B. Any investor who bids at a gilt auction automatically becomes a primary dealer with an ongoing obligation to make prices.
• C. The DMO manages gilt issuance for the government, while GEMMs act as primary dealers and support secondary liquidity by making markets in gilts.
• D. Secondary-market liquidity is mainly maintained by HM Treasury buying gilts back from investors at par on request.

Best answer: C

What this tests: Fixed-Income Securities and Debt Markets

Explanation: In the UK gilt market, the Debt Management Office (DMO) manages the government’s debt issuance programme, including gilt auctions and related funding operations. Gilt-edged market makers (GEMMs) are the recognised primary dealers in this market. Their role links the primary and secondary markets: they participate in the issuance process and help provide liquidity after issue by making bid and offer prices in gilts. Not every auction participant has this status or these obligations. Liquidity in the secondary market is therefore not provided by the DMO or by HM Treasury redeeming gilts on demand, but by recognised market makers and other market participants trading outstanding gilts.

• Treating the DMO as the continuous secondary-market quoting entity confuses issuer-side debt management with market-making.
• Treating every auction bidder as a primary dealer ignores the recognised status and obligations of GEMMs.
• Treating HM Treasury as a standing buyer at par confuses secondary-market trading with redemption at maturity or specific official operations.

The DMO is the issuer-side agency, whereas GEMMs are recognised market participants with primary-dealer and market-making functions.

Question 5

Topic: Fixed-Income Securities and Debt Markets

A UK adviser is comparing two sterling bonds with similar maturity and duration for a cautious client. The bond data are:

The utility bond therefore offers an additional yield of 1.25 percentage points, or 125 basis points. Which interpretation best explains why the sovereign issuer may be treated differently for credit-risk purposes?

• A. The gilt issuer and the utility company should have the same credit-risk treatment because both bonds are sterling-denominated fixed-income securities.
• B. The gilt issuer has fiscal powers and issues debt in its own currency, so its default risk is assessed differently from a company dependent on trading cash flows.
• C. The gilt issuer must have stronger asset cover than the utility company because its yield is 125 basis points lower.
• D. The corporate issuer has no credit risk because the additional 125 basis points fully compensates investors for any possible default.

Best answer: B

What this tests: Fixed-Income Securities and Debt Markets

Explanation: Sovereign issuers can be treated differently from corporate issuers because their credit strength is not judged only by balance-sheet assets and trading cash flows. A government borrowing in its own currency has powers that companies do not have, especially taxation and broader fiscal or monetary capacity. This can make default less comparable with corporate insolvency, where repayment depends on business cash generation, refinancing access, and recoveries from assets if the company fails. The 125 basis point yield difference shows the corporate bond offers extra yield over the gilt, commonly reflecting additional credit risk and liquidity or market factors. It does not prove that the gilt is risk-free, nor that the spread fully compensates investors.

• Lower gilt yield does not automatically mean stronger asset cover; sovereign credit is not assessed like corporate secured lending.
• A credit spread is compensation demanded by the market, not a guarantee that default risk has been eliminated.
• Same currency and fixed-income form do not make issuer-default risk the same; issuer powers and repayment sources differ.

A sovereign borrowing in its own currency may be viewed differently because it can raise taxes and has monetary and fiscal capacity that a corporate issuer does not have.

Question 6

Topic: Fixed-Income Securities and Debt Markets

An adviser is checking a junior analyst’s interpretation of a fixed-rate corporate bond position.

Which interpretation is arithmetically correct?

• A. A £200 price gain, a £500 annual coupon, a 150 basis point spread, and a maturity two years later than the comparator.
• B. A £200 price fall, a £500 annual coupon, a 150 basis point spread, and a maturity two years later than the comparator.
• C. A £200 price fall, a £500 annual coupon, a 150 basis point spread, and a maturity two years earlier than the comparator.
• D. A £200 price fall, a £470 annual coupon, a 1.5 basis point spread, and a maturity two years later than the comparator.

Best answer: B

What this tests: Fixed-Income Securities and Debt Markets

Explanation: The clean price moved from 96 to 94 per £100 nominal, so the holding lost £2 for every £100 nominal. On £10,000 nominal, that is 100 lots of £100, giving a £200 price fall. The coupon is quoted on nominal value, not on the current market price, so the annual coupon is 5% of £10,000, or £500. The yield spread over the comparable gilt is 6.20% minus 4.70%, which is 1.50%, equal to 150 basis points. A maturity date in 2032 is two years later than a 2030 comparator. For a conventional fixed-rate bond, a price fall is generally associated with a yield rise, not a yield fall, all else being equal.

• Treating the move from 96 to 94 as a gain reverses the price direction.
• Calculating the coupon on £9,400 market value uses the wrong coupon basis, and 1.50% is 150 basis points, not 1.5 basis points.
• Saying 2032 is earlier than 2030 reverses the maturity comparison.

The price has fallen by £2 per £100 nominal, the coupon is based on £10,000 nominal, the spread is 1.50%, and 2032 is two years after 2030.

Question 7

Topic: Fixed-Income Securities and Debt Markets

A client is considering a conventional corporate bond with £100 nominal value. It pays a £4 annual coupon, is available at a clean price of £92, and will be redeemed at £100 in five years. Ignore accrued interest, dealing costs, tax, and reinvestment income. Using a simple annualised return based on the purchase price, which statement best applies the bond valuation principle?

• A. The approximate annual return is 4.3%, because only the annual coupon should be divided by the clean price.
• B. The approximate annual return is 6.1%, because the £4 coupon is supplemented by an annualised £1.60 capital gain.
• C. The approximate annual return is 5.6%, because the coupon plus annualised gain should be measured against £100 nominal value.
• D. The approximate annual return is 4.0%, because the coupon rate alone determines the return if the bond is held to redemption.

Best answer: B

What this tests: Fixed-Income Securities and Debt Markets

Explanation: For a simple annualised bond return, combine the annual income with the annualised capital gain or loss, then compare that total with the purchase price. Here, the investor receives a £4 coupon each year and expects an £8 capital gain at redemption (£100 redemption value less £92 purchase price). Spread over five years, that gain is £1.60 per year. The simple annual amount is therefore £5.60. Dividing £5.60 by the £92 price gives about 6.1%. This simplified calculation is not the same as a full yield to redemption, which would discount cash flows and allow for compounding, but it correctly captures the basic effect of buying a bond below par.

• Using 4.0% confuses the coupon rate with the investor’s return from buying at a discount.
• Using 4.3% gives the running yield, but ignores the capital gain on redemption.
• Using 5.6% includes the capital gain but divides by nominal value rather than the actual purchase price.

The annual coupon plus the annualised redemption gain is £5.60, and £5.60 divided by the £92 purchase price is approximately 6.1%.

Question 8

Topic: Fixed-Income Securities and Debt Markets

A securities adviser is reviewing a client’s holding in a sterling fixed-rate corporate bond maturing in 2032. Over the week, the bond’s clean price fell from 101 to 96 and its yield to maturity rose. During the same period, the yield on a comparable-maturity gilt was broadly unchanged. The issuer also released a profit warning and was placed on negative credit watch. There was no coupon date or ex-dividend adjustment during the week.

What is the single best explanation for the bond’s price and yield movement?

• A. The bond’s fixed coupon reset lower following the issuer’s profit warning.
• B. The bond became more attractive because the issuer’s credit quality improved.
• C. The general level of risk-free sterling interest rates rose sharply across the yield curve.
• D. The issuer’s credit spread widened because investors required more yield for higher perceived credit risk.

Best answer: D

What this tests: Fixed-Income Securities and Debt Markets

Explanation: For a fixed-rate bond, price and yield move inversely. If the bond’s yield rises, its price falls because investors now require a higher return from the same fixed cash flows. Here, the comparable gilt yield was broadly unchanged, so the movement is unlikely to be driven by a general rise in risk-free interest rates. The decisive issuer-specific facts are the profit warning and negative credit watch. These would normally increase perceived default or downgrade risk, causing investors to demand a wider credit spread over gilts. That higher required spread raises the corporate bond’s yield and lowers its price.

• A rise in the whole sterling risk-free curve does not fit the fact that the comparable gilt yield was broadly unchanged.
• A fixed-rate corporate bond coupon does not normally reset because the issuer has issued a profit warning.
• Improved credit quality would usually narrow the credit spread, lowering yield and supporting the bond’s price, not causing this movement.

The unchanged comparable gilt yield points away from a risk-free rate move, while the profit warning and negative credit watch indicate higher issuer-specific credit risk.

Question 9

Topic: Fixed-Income Securities and Debt Markets

An adviser is comparing two sterling corporate bonds for a retail client. Bond A has a public investment-grade rating from one of S&P Global Ratings, Moody’s or Fitch. Bond B is unrated because the issuer has not obtained a public rating. The client asks what practical role the rating should play in assessing the bonds. Which statement best applies the purpose of credit ratings in debt markets?

• A. They set the bond’s market yield and remove the need to assess the issuer’s financial position.
• B. They confirm that the bond has been approved as suitable for all retail investors.
• C. They guarantee that coupon and redemption payments will be made in full and on time.
• D. They provide an external opinion on relative creditworthiness and default risk, to be considered alongside yield, terms, liquidity and suitability.

Best answer: D

What this tests: Fixed-Income Securities and Debt Markets

Explanation: Credit ratings are used in debt markets as independent opinions on the relative creditworthiness of issuers or specific debt issues. Major agencies such as S&P Global Ratings, Moody’s and Fitch assess factors such as the issuer’s ability and willingness to meet interest and principal payments. A higher rating generally indicates lower perceived default risk, while a lower or absent rating may require more careful credit analysis and may affect investor demand and pricing. Ratings are not guarantees, do not determine yield by themselves, and do not make a security automatically suitable. An adviser should use them as one input alongside the bond’s terms, maturity, seniority, liquidity, yield and the client’s objectives and risk tolerance.

• Treating a rating as a guarantee misunderstands it: agencies give opinions, not insurance against default.
• Assuming ratings set yield ignores market pricing, liquidity, maturity, seniority and changing credit conditions.
• Equating a rating with retail suitability confuses credit assessment with regulated suitability advice.

Credit ratings are agency opinions on an issuer’s or issue’s credit risk and should inform, not replace, wider bond analysis.

Question 10

Topic: Fixed-Income Securities and Debt Markets

An adviser is comparing a corporate bond with the relevant government and swap market yields.

For this comparison, treat the 5-year UK government bond yield as the risk-free yield. Which interpretation is correct?

• A. The coupon rate is 4.00%; the running yield is about 4.21%; and the credit spread over the risk-free yield is 1.50 percentage points.
• B. The yield curve information is shown by the difference between the bond’s coupon rate and its running yield.
• C. The coupon rate is 4.21%; the running yield is 4.00%; and the credit spread over the swap rate is 1.50 percentage points.
• D. The redemption yield is 4.21% because it uses the annual coupon divided by the current clean price.

Best answer: A

What this tests: Fixed-Income Securities and Debt Markets

Explanation: The coupon rate is fixed by the bond terms: annual coupon divided by nominal value, so £4/£100 = 4.00%. Running yield relates the annual income to the current market price, so £4/£95 = 4.21% approximately. Redemption yield is broader than running yield because it reflects income, the price paid, the redemption amount, and the time to maturity; here it is already quoted as 5.30%. A credit spread is commonly measured as the extra redemption yield over a comparable risk-free yield, so 5.30% - 3.80% = 1.50 percentage points. The swap rate is a separate benchmark rate and is not the same thing as the risk-free government yield in this comparison.

• Treating £4/£95 as the coupon rate confuses the fixed coupon with the market-price-based running yield.
• Calling £4/£95 the redemption yield ignores the capital gain or loss to maturity and timing of cash flows.
• Yield curve information concerns yields across maturities, not the gap between a bond’s coupon rate and running yield.

The coupon rate is £4/£100, the running yield is £4/£95, and the credit spread is 5.30% minus 3.80%.

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