CISI IAD Securities Technical Unit Quick Review

Quick Review purpose

This Quick Review is for candidates preparing for the Chartered Institute for Securities & Investment CISI IAD Securities Technical Unit exam, code CISI IAD Securities. Use it to refresh core ideas before moving into topic drills, mock exams, and detailed explanations.

It is not a replacement for the current Chartered Institute for Securities & Investment syllabus or workbook. It is independent companion practice support designed to help you identify what to review, where candidates commonly lose marks, and how to connect concepts to original practice questions.

High-yield exam map

The core suitability decision path

Use this decision path when a question asks which investment, portfolio action, or product is most appropriate.

    flowchart TD
	    A[Client facts] --> B[Objective: income, growth, preservation, speculation]
	    B --> C[Time horizon and liquidity need]
	    C --> D[Risk tolerance and capacity for loss]
	    D --> E[Knowledge, experience, and complexity]
	    E --> F[Tax position and wrappers]
	    F --> G[Costs, charges, and dealing implications]
	    G --> H[Match asset class]
	    H --> I[Select instrument or fund structure]
	    I --> J[Explain key risks and rationale]

Fast decision rules

Securities markets: quick concepts

Primary vs secondary markets

Trading, pricing, and liquidity

Common market-structure traps

• Bid vs offer: investors sell at the bid and buy at the offer.
• Price vs value: a security’s quoted market price may differ from intrinsic value.
• Liquidity vs solvency: a liquid market does not mean the issuer is financially strong.
• Execution certainty vs price certainty: market orders and limit orders solve different problems.
• Diversification vs liquidity: a diversified portfolio can still contain assets that are difficult to sell quickly.

Equity securities

Ordinary shares

Ordinary shares represent ownership. Shareholders usually have voting rights, variable dividends, and residual claims after creditors and preference shareholders.

High-yield points:

• Ordinary shareholders have upside potential but rank behind debt holders.
• Dividends are not guaranteed.
• Equity returns come from capital growth plus dividends.
• Equity risk includes business risk, market risk, currency risk, liquidity risk, and valuation risk.
• A company can be profitable but still experience a falling share price if expectations deteriorate.

Preference shares

Preference shares often pay a fixed dividend and rank ahead of ordinary shares for dividends and capital repayment, but behind debt.

Equity ratios and interpretation

Key equity formulas

\[ \text{Dividend yield} = \frac{\text{Dividend per share}}{\text{Current share price}} \times 100 \]\[ \text{P/E ratio} = \frac{\text{Share price}}{\text{Earnings per share}} \]\[ \text{Dividend cover} = \frac{\text{Earnings per share}}{\text{Dividend per share}} \]

Corporate actions

Rights issue review

A rights issue question often tests dilution, theoretical ex-rights price, or whether the shareholder should subscribe, sell rights, or do nothing.

\[ \text{TERP} = \frac{ (\text{old shares} \times \text{cum-rights price}) + (\text{new shares} \times \text{subscription price}) }{ \text{total shares after issue} } \]

Decision points:

1. Compare the subscription price with the market price.
2. Calculate the value of the right if required.
3. Identify whether the investor has cash to subscribe.
4. Recognise that selling rights may preserve economic value better than ignoring them.
5. Do not assume a discounted issue is automatically a bargain; consider the reason capital is being raised.

Fixed income securities

Bond anatomy

Price-yield relationship

The core rule is simple:

• When market yields rise, fixed-rate bond prices fall.
• When market yields fall, fixed-rate bond prices rise.
• Longer-dated and lower-coupon bonds are generally more sensitive to yield changes.
• Higher duration means higher price sensitivity.
• A bond trading above par has a coupon higher than the market yield for similar risk and maturity.
• A bond trading below par has a coupon lower than the market yield for similar risk and maturity.

Fixed income risks

Bond yield shortcuts

\[ \text{Running yield} = \frac{\text{Annual coupon}}{\text{Market price}} \times 100 \]

Duration and price sensitivity

A useful approximation:

\[ \text{Approximate price change \%} \approx -\text{Modified duration} \times \text{Yield change \%} \]

Example interpretation: if modified duration is 6 and yields rise by 1 percentage point, the bond price is expected to fall by approximately 6%, before considering convexity and other factors.

Bond suitability clues

Funds and pooled investments

Open-ended vs closed-ended structures

Active, passive, and ETF review

Fund charges and returns

Candidates often focus on gross performance and miss cost drag.

Review these concepts:

• Ongoing charges reduce investor return.
• Initial charges, bid-offer spreads, dealing commissions, platform fees, and taxes can affect net outcome.
• A low-cost tracker may outperform a higher-cost active fund if the active manager does not add value.
• A fund with strong past performance may still be unsuitable if its risk profile is wrong.
• Fund liquidity depends partly on underlying assets, not just the fund label.

Investment trust traps

• A trust can perform well at NAV level while shareholders underperform if the discount widens.
• Gearing can magnify gains and losses.
• A discount is not automatically a buying opportunity.
• A premium is not automatically a sign of quality.
• Market price return and NAV return are different.

Derivatives and structured products

Options

Key option terms:

• Strike price: price at which the option may be exercised.
• Premium: price paid by option buyer.
• Intrinsic value: value if exercised immediately.
• Time value: premium above intrinsic value.
• In the money: exercise would have value.
• Out of the money: exercise would not have immediate value.
• Covered call: call written against an existing holding of the underlying asset.
• Protective put: put bought to protect a holding against downside risk.

Futures and forwards

Derivatives: hedging vs speculation

Structured products

Structured products combine securities, derivatives, and payoff rules. They may offer defined returns if conditions are met, but they are not automatically low risk.

Review:

• Capital protection depends on issuer strength and product terms.
• Return may be capped.
• Early redemption features can alter outcome.
• Complex payoff conditions can be misunderstood.
• Liquidity before maturity may be limited.
• Counterparty risk is central.

Portfolio construction and asset allocation

Strategic vs tactical asset allocation

Risk profile components

Do not rely on “attitude to risk” alone.

Correlation and diversification

Important distinction:

• Diversification can reduce unsystematic risk.
• Diversification cannot remove broad market risk.
• A portfolio of many shares in one sector may still be poorly diversified.
• Global diversification introduces currency and geopolitical risk.

Performance and risk measurement

Return measures

Risk and performance ratios

\[ \text{Sharpe ratio} = \frac{\text{Portfolio return} - \text{Risk-free return}} {\text{Standard deviation of portfolio returns}} \]

Higher Sharpe ratio generally indicates more return per unit of total volatility, but it is still backward-looking.

\[ E(R_i) = R_f + \beta_i(E(R_m) - R_f) \]

The capital asset pricing model links expected return to systematic risk, measured by beta.

Tax and account-wrapper awareness

The CISI IAD Securities Technical Unit can test whether tax affects the most suitable investment answer. Avoid memorising only product features; consider the client’s tax position and wrapper availability.

Tax-sensitive review points

Common tax traps

• Selecting the highest-yielding investment without considering tax.
• Ignoring whether the client needs cash income or can accept accumulation.
• Confusing tax efficiency with investment suitability.
• Assuming a wrapper removes investment risk.
• Comparing pre-tax return on one option with post-tax return on another.

Product suitability comparison

Calculation checklist

Before calculating

1. Identify whether the question asks for price, yield, return, value, percentage change, or suitability.
2. Check whether figures are per share, total holding, nominal value, or market value.
3. Watch whether a price is quoted in pence, pounds, percentage of par, or index points.
4. Confirm whether income is annual, semi-annual, gross, net, cum-dividend, or ex-dividend.
5. State the practical interpretation, not just the number.

Frequently tested calculation ideas

Real return approximation

For quick interpretation, candidates often use an approximation:

\[ \text{Approximate real return} \approx \text{Nominal return} - \text{Inflation rate} \]

For a more exact calculation:

\[ 1 + \text{Real return} = \frac{1 + \text{Nominal return}}{1 + \text{Inflation rate}} \]

Common candidate mistakes

Conceptual mistakes

• Treating all bonds as “safe” without considering duration, credit quality, currency, and liquidity.
• Confusing coupon with yield.
• Assuming a high dividend yield is always attractive.
• Forgetting that investment trusts can trade at discounts or premiums to NAV.
• Treating ETFs as risk-free because they are diversified or passive.
• Assuming diversification removes all risk.
• Recommending complex products to clients with limited knowledge and experience.
• Ignoring charges when comparing active and passive options.
• Using past performance as the main suitability reason.
• Choosing an investment based only on return, not risk-adjusted return.

Calculation mistakes

• Mixing pence and pounds.
• Using nominal value instead of market price for equity yield.
• Using market price instead of nominal value for bond coupon.
• Forgetting accrued interest when asked for dirty price.
• Ignoring dilution in rights issues.
• Calculating percentage change from the wrong base.
• Comparing annual and multi-period returns without annualising.
• Forgetting that negative returns compound differently from positive returns.

Suitability mistakes

• Matching “high return” to “growth objective” without checking risk capacity.
• Selecting illiquid investments for a short-term need.
• Recommending leveraged products for a cautious client.
• Ignoring currency exposure for overseas assets.
• Failing to consider concentration in employer shares, property, sector, or country.
• Selecting tax-efficient products without confirming investment suitability.
• Overlooking whether income is required now or growth is preferred.

Exam-style decision rules

If the question asks for the “most suitable” investment

Use this order:

1. Eliminate anything clearly inconsistent with risk tolerance or capacity for loss.
2. Eliminate anything inconsistent with time horizon or liquidity need.
3. Eliminate products the client is unlikely to understand.
4. Compare tax, charges, and diversification.
5. Select the answer with the strongest client-specific rationale.

If the question compares two yields

Ask:

• Is one gross and one net?
• Are they based on the same price?
• Is income fixed or variable?
• Does higher yield reflect higher risk?
• Is capital at risk?
• Is the yield historic, current, running, or redemption-based?

If the question includes a rights issue

Ask:

• How many new shares can be bought?
• What is the subscription price?
• What is the theoretical ex-rights price?
• What is the value of the right?
• Does the investor subscribe, sell rights, or allow dilution?
• Is the company raising capital for growth, repair, or balance-sheet stress?

If the question includes bonds

Ask:

• Fixed, floating, inflation-linked, convertible, callable, or subordinated?
• Short or long duration?
• Government or corporate issuer?
• Investment-grade or higher-risk credit?
• Trading above or below par?
• Is the client seeking income, capital certainty, inflation protection, or total return?

If the question includes derivatives

Ask:

• Is the position long or short?
• Is the client buying or writing the option?
• Is the aim hedging, income generation, or speculation?
• What is the maximum loss?
• Is leverage involved?
• Is margin required?
• Does the client understand the payoff?

Mini review tables by topic

Equity vs debt

Passive vs active

Growth vs income investing

Domestic vs international exposure

How to use this Quick Review with practice

A good final review cycle is:

1. Read one topic section from this page.
2. Complete topic drills from an independent question bank.
3. Review detailed explanations, especially for wrong answers and lucky guesses.
4. Write one-line rules for errors, such as “coupon is based on nominal, yield is based on price.”
5. Return to mixed original practice questions so you can switch topics under exam conditions.
6. Use mock exams only after the main topic gaps are under control.

Practice review log

Final quick scan before practice

Before starting mock exams, make sure you can explain these without notes:

• Why bond prices fall when yields rise.
• Difference between coupon, running yield, and redemption yield.
• How ordinary shares differ from preference shares and bonds.
• Why a rights issue can dilute ownership.
• Difference between open-ended funds and investment trusts.
• Why an investment trust discount matters.
• How options buyers and writers differ.
• Why leverage magnifies both gains and losses.
• Why diversification reduces unsystematic risk but not market risk.
• How risk tolerance differs from capacity for loss.
• Why gross return is not the same as net client outcome.
• How to select the most suitable investment from client facts.

Practical next step

Use this Quick Review to choose your weakest three topics, then work through topic drills and original practice questions in the question bank. Read the detailed explanations carefully, update your error log, and move to full mock exams only when your mistakes are mainly timing-related rather than knowledge gaps.