Free CISI ICWIM Practice Questions: Asset Classes and Financial Markets

CISI means Chartered Institute for Securities & Investment. ICWIM means International Certificate in Wealth and Investment Management. Use this focused CISI ICWIM page as a short practice test for Asset Classes and Financial 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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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: Asset Classes and Financial Markets

Which statement correctly distinguishes a call option from a put option?

• A. A call option is used only for commodities, while a put option is used only for shares.
• B. A call option gives the holder the right, but not the obligation, to buy an underlying asset; a put option gives the holder the right, but not the obligation, to sell it.
• C. A call option obliges the holder to buy an underlying asset; a put option obliges the holder to sell it.
• D. A call option gives the holder the right to sell an underlying asset; a put option gives the holder the right to buy it.

Best answer: B

What this tests: Asset Classes and Financial Markets

Explanation: An option gives its holder a right, not an obligation. The key distinction is the direction of that right. A call option gives the holder the right to buy the underlying asset at the agreed exercise price. A put option gives the holder the right to sell the underlying asset at the agreed exercise price. The writer of the option may have an obligation if the holder exercises, but the holder can choose not to exercise if it is not beneficial.

• Reversing buy and sell confuses the core definitions: calls are for buying rights, puts are for selling rights.
• Describing the holder as obliged to trade confuses options with binding forward or futures-style commitments.
• Linking calls and puts to different asset classes is incorrect; both can be written on various underlying assets.

Calls are rights to buy and puts are rights to sell, with the holder choosing whether to exercise.

Question 2

Topic: Asset Classes and Financial Markets

A private client has £99,250 temporarily available and wants to keep the holding suitable for short-term liquidity.

Cash need: £60,000 is expected in 30 days; any remaining amount may stay invested for up to 90 days.

Near-cash choices being discussed:

Which conclusion best distinguishes the treasury bill from the money market fund?

• A. Both choices provide the same guaranteed redemption value on any dealing day, so the client should choose only by comparing quoted yields.
• B. The treasury bill is a money market instrument with a £750 holding-period gain if held to maturity, while the money market fund is a collective investment that may better match the 30-day liquidity need through unit redemptions.
• C. The money market fund must be held until the instruments inside it mature, while the treasury bill can always be redeemed early at its maturity value.
• D. The treasury bill is a money market fund because it invests in short-term government debt, while the money market fund is a single money market instrument.

Best answer: B

What this tests: Asset Classes and Financial Markets

Explanation: A treasury bill is a money market instrument: a short-term debt security issued at a discount and redeemed at maturity. Here, holding it to 90 days produces a gain of £100,000 − £99,250 = £750. That known redemption applies at maturity, not necessarily after 30 days. If cash is needed before maturity, the client may have to sell the bill in the market and accept the available price. A money market fund is different. It is a collective investment that holds a portfolio of short-term instruments and allows investors to buy or redeem units, usually with short settlement. Its NAV and income are not the same as a single instrument’s fixed maturity proceeds, but its dealing structure may be more convenient for near-term liquidity.

• Treating the treasury bill as a fund reverses the distinction between a direct instrument and a collective investment.
• Assuming both choices guarantee the same value on any dealing day ignores market-price risk and NAV movement.
• Saying the fund must be held until its underlying instruments mature misunderstands how daily-dealt fund units provide liquidity.

The treasury bill’s maturity proceeds exceed its purchase price by £750, but the fund structure provides daily dealing rather than relying on holding a single instrument to maturity.

Question 3

Topic: Asset Classes and Financial Markets

An adviser is reviewing four bond funds for a client who is worried that market interest rates may rise. The factsheet gives modified duration.

For small yield changes, use: approximate price change (%) = -modified duration × yield change (%).

Assume yields rise by 0.75% and ignore credit-spread and currency effects.

Which fund should be expected to be most sensitive to the interest-rate rise?

• A. Investment grade corporate bond fund
• B. Short-dated government bond fund
• C. Global long corporate bond fund
• D. High-coupon strategic bond fund

Best answer: C

What this tests: Asset Classes and Financial Markets

Explanation: Modified duration is a practical measure of a bond or bond fund’s sensitivity to changes in market yields. A higher modified duration means a larger expected price movement for a given interest-rate change. Here, the estimated fall is found by multiplying duration by the 0.75% yield rise. The global long corporate bond fund has a modified duration of 10.1 years, giving an approximate fall of 10.1 × 0.75% = 7.6%. This is larger than the estimated falls for the other funds. Term to maturity is relevant because longer-dated bonds usually have higher interest-rate risk, but duration is the more direct measure when it is provided.

• The short-dated government bond fund has the lowest duration, so it should be the least sensitive to the rate rise.
• The investment grade corporate bond fund has moderate sensitivity, but its 5.3-year duration implies a smaller fall than the long corporate fund.
• The high-coupon strategic bond fund has a 10-year term, but its lower duration means it is less rate-sensitive than the fund with a 10.1-year duration.

It has the highest modified duration, so a 0.75% rise in yields implies the largest approximate price fall, about 7.6%.

Question 4

Topic: Asset Classes and Financial Markets

A private client in an international wealth-management portfolio buys an investment-grade corporate bond for income.

Trade facts:

• The bank quoted a firm price from its own bond inventory.
• The client accepted the quote and the trade was filled immediately.
• The contract note shows the bank as the seller and counterparty.
• The bank’s remuneration is included in the bid-offer spread rather than shown as a separate commission.

Which is the single best description of the trade?

• A. It is agency trading because the client gave the bank an order to execute.
• B. It is principal trading only if the bank guarantees the bond’s future market value.
• C. It is agency trading because the charge was included in the bid-offer spread rather than shown separately.
• D. It is principal trading because the bank dealt with the client as counterparty from its own inventory.

Best answer: D

What this tests: Asset Classes and Financial Markets

Explanation: In a principal trade, the firm deals on its own account and is the counterparty to the client. It may sell securities from its own inventory or buy securities into its own book, with remuneration often reflected in the quoted bid-offer spread or a markup/markdown. In an agency trade, the firm acts for the client by arranging or executing the trade with another market participant, typically earning a commission or fee. Here, the bank quoted from its own inventory, appeared as seller and counterparty, and earned through the spread, so the transaction is best classified as principal trading.

• Giving an order to a bank does not by itself make the transaction agency trading; the key issue is whether the bank acted as agent or counterparty.
• A spread-based charge is consistent with principal trading and does not prove agency execution.
• A principal trade does not require a guarantee of future value; market risk after purchase remains with the client.

Principal trading applies because the bank sold the bond to the client from its own book and was the counterparty to the transaction.

Question 5

Topic: Asset Classes and Financial Markets

A private client has sold a business and is holding USD 500,000 that will be needed for a property completion in four months.

Client facts:

• The capital must be available on the completion date.
• The client has low risk tolerance for this money.
• The client wants a modest return but accepts that safety and liquidity are more important than growth.

Which is the single best approach for this part of the client’s portfolio?

• A. Invest in a long-dated corporate bond to secure a higher yield until the property purchase is due.
• B. Buy a commodity fund as a temporary store of value until the completion date.
• C. Use a short-term cash deposit or high-quality money market instrument with a maturity matched to the completion date.
• D. Use an equity income fund because it offers daily dealing and potential dividend income.

Best answer: C

What this tests: Asset Classes and Financial Markets

Explanation: Cash deposits and money market instruments are used for short-term needs where liquidity and capital stability are more important than long-term growth. Examples include bank deposits, treasury bills, certificates of deposit, and high-quality commercial paper. They normally offer lower expected returns than bonds or equities, but they are designed to reduce price volatility and provide access to funds over short periods. A suitable near-cash holding should also consider maturity, issuer quality, currency, and access terms. In this case, the client needs USD funds in four months and cannot accept meaningful capital fluctuation, so a short-term deposit or high-quality money market instrument matched to the payment date is the best fit.

• A long-dated corporate bond may offer a higher yield, but its price can move with interest rates and credit risk, which does not suit a four-month capital need.
• An equity income fund may be liquid, but equity prices can be volatile and are not appropriate for money required on a fixed short-term date.
• A commodity fund can fluctuate significantly and is not a near-cash asset for a known property payment.

Cash and near-cash assets are most suitable where capital stability, liquidity, and a short time horizon are the decisive needs.

Question 6

Topic: Asset Classes and Financial Markets

A wealth manager is comparing two venues for a client who wants to place a market order to buy 600 shares of the same company. Ignore commissions, taxes, and any hidden liquidity.

Venue information:

• Venue X:
  • Displayed sell orders in the limit order book: 400 shares at £10.00, then 300 shares at £10.05.
• Venue Y:
  • Market maker quote for up to 1,000 shares: bid £9.95, offer £10.10.

Which conclusion correctly distinguishes the trading mechanisms and the expected execution cost?

• A. Venue X is order-driven and the purchase would cost £6,010; Venue Y is quote-driven and the purchase would cost £6,060.
• B. Venue X is quote-driven and the purchase would cost £6,010; Venue Y is order-driven and the purchase would cost £6,060.
• C. Both venues are order-driven; the purchase would cost £6,010 on Venue X and £6,060 on Venue Y.
• D. Venue X is order-driven and the purchase would cost £6,000; Venue Y is quote-driven and the purchase would cost £5,970.

Best answer: A

What this tests: Asset Classes and Financial Markets

Explanation: An order-driven market matches buyers and sellers through an order book. Venue X is order-driven because the available sell orders determine both the execution price and the quantity filled at each price level. A 600-share market buy would take 400 shares at £10.00 and the next 200 shares at £10.05, for a total cost of £6,010. A quote-driven market is based on dealers or market makers quoting prices at which they are willing to trade. Venue Y is quote-driven because the market maker quotes a bid and an offer for up to 1,000 shares. A buyer pays the offer price, so 600 shares at £10.10 cost £6,060.

• Treating Venue X as quote-driven confuses visible client orders in a limit order book with dealer quotes.
• Using £6,000 assumes all 600 shares can trade at the best visible sell price, but only 400 shares are available at £10.00.
• Using £5,970 for Venue Y incorrectly applies the bid price; a buyer normally trades at the offer.
• Classifying both venues as order-driven ignores the market maker’s bid-offer quote on Venue Y.

Venue X matches the buy order against sell orders in the order book, while Venue Y requires a buyer to trade at the market maker’s offer price.

Question 7

Topic: Asset Classes and Financial Markets

A wealth manager is reviewing a client’s holding after a corporate action announcement.

Corporate action: A company is making a 1-for-3 rights issue of new ordinary shares at £4.00 per new share. The rights are tradable until the deadline; if the client neither subscribes nor sells them, they will lapse.

Client position:

• Current ordinary shares: 1,200
• Available cash for this holding: £1,600
• Client priority: maintain the same percentage ownership if possible

Which investor consideration is most appropriate?

• A. Subscribing for 400 new shares at a total cost of £1,600 would maintain the client’s proportionate ordinary-share holding.
• B. Letting the rights lapse would maintain the client’s economic position because the existing share count is unchanged.
• C. Buying 1,200 new shares is required because each existing share creates an entitlement to one new share.
• D. Selling 400 existing shares is required before the client can subscribe for the new shares.

Best answer: A

What this tests: Asset Classes and Financial Markets

Explanation: A rights issue gives existing shareholders the right to buy new shares in proportion to their existing holding. Here, a 1-for-3 issue on 1,200 shares gives an entitlement to 400 new shares. At £4.00 per share, the full subscription cost is £1,600, which matches the client’s available cash. Taking up the full entitlement maintains the client’s proportionate ownership because the holding increases in line with the new shares being issued. If the client ignores the rights and other shareholders subscribe, the client’s percentage ownership, voting influence, and claim on future profits may be diluted. If the client did not want to commit cash, selling tradable rights before the deadline could be considered to avoid losing all value.

• Letting rights lapse ignores the dilution risk and may forfeit the value of tradable rights.
• Selling existing shares is not a requirement for taking up a rights entitlement.
• Treating the issue as one-for-one misreads the stated 1-for-3 terms.

A 1-for-3 rights issue on 1,200 shares gives 400 new shares, costing £1,600 at £4.00 each.

Question 8

Topic: Asset Classes and Financial Markets

A wealth manager receives the following corporate action notice for a client’s international equity portfolio:

• The client holds 2,000 ordinary shares in a listed company.
• Existing shareholders may subscribe for 1 new ordinary share for every 5 shares held.
• The subscription price is €8 per new share; the current market price is €10.
• The entitlement is renounceable and can be sold before the deadline.
• The client has limited spare cash and does not want to increase exposure to this company.

Which is the single best way to explain the notice to the client?

• A. It is an open offer, so the entitlement should be sold in the market if the client does not subscribe.
• B. It is a warrant exercise, so the client must exercise the warrants to avoid losing the existing shares.
• C. It is a mandatory bonus issue, so no cash payment or client instruction is required.
• D. It is a rights issue, so the client can choose not to subscribe and may consider selling the rights before the deadline.

Best answer: D

What this tests: Asset Classes and Financial Markets

Explanation: A rights issue gives existing shareholders the option to subscribe for new shares, usually in proportion to their current holding and often at a discount to the market price. If the rights are renounceable, the shareholder may be able to sell the entitlement rather than taking up the new shares. This matters where the client has limited cash or does not want to increase concentration in the company. An open offer is also an invitation to existing shareholders to buy shares, but it is typically non-renounceable, so the entitlement is not usually sold. A warrant exercise involves a separate warrant giving the holder the right to buy shares at an exercise price, normally by a set expiry date.

• Calling it an open offer ignores the stated fact that the entitlement is renounceable and tradeable.
• Treating it as a warrant exercise confuses a shareholder entitlement with a separate warrant instrument.
• Describing it as a mandatory bonus issue ignores the cash subscription price and the need for an election.

A renounceable pro-rata entitlement to buy new shares is a rights issue, and selling the rights may suit a client who does not want to commit more cash.

Question 9

Topic: Asset Classes and Financial Markets

A client is considering a fixed-rate bond. Ignore tax, accrued interest, and dealing costs.

Approximate yield to redemption is calculated as:

Annual coupon plus annualised capital gain or loss, divided by the average of the purchase price and redemption value.

Which statement correctly interprets the running yield and approximate yield to redemption?

• A. The running yield is 5.00%, and the approximate yield to redemption is also 5.00% because the coupon rate is fixed.
• B. The running yield is about 5.26%, and the approximate yield to redemption is higher at about 6.15% because the bond is expected to be redeemed above its purchase price.
• C. The running yield is about 5.26%, and the approximate yield to redemption is lower because the bond is priced below par.
• D. The running yield is about 6.15%, and the approximate yield to redemption is about 5.26% because redemption value is ignored in the redemption yield.

Best answer: B

What this tests: Asset Classes and Financial Markets

Explanation: Running yield measures annual income as a percentage of the current market price. Here, the bond pays £5 a year on a current price of £95, so running yield is £5 ÷ £95 = 5.26%. Yield to redemption also considers the capital gain or loss if the bond is held until redemption. Because the bond is bought for £95 and redeemed at £100, the investor expects a £5 capital gain over five years, or £1 per year. The approximate yield to redemption is therefore (£5 + £1) ÷ ((£95 + £100) ÷ 2) = £6 ÷ £97.50 = about 6.15%. For a bond bought below par and redeemed at par, redemption yield will normally be higher than running yield, all else equal.

• Treating both yields as 5.00% confuses the coupon rate with yield based on market price and redemption value.
• Reversing the two yields is wrong because running yield ignores the redemption gain, while redemption yield includes it.
• Saying the redemption yield is lower because the bond is below par misunderstands the effect of buying at a discount and redeeming at par.

The annual coupon is £5, so running yield is £5 ÷ £95, while the expected £5 capital gain over five years increases the approximate yield to redemption.

Question 10

Topic: Asset Classes and Financial Markets

A wealth manager is reviewing a US dollar corporate bond for a private client who wants income and can hold the investment to maturity.

Bond facts:

• Nominal value: £1,000 per bond
• Coupon: 5% per year, paid annually
• Market price: 96
• Repayment term: redeemable at par in six years, assuming no default
• Credit rating: BBB

Which statement is the single best explanation of these bond features?

• A. The bond would cost £1,000, pay 5% of its changing market price each year, and repay £960 at maturity.
• B. The bond would cost £96 per £1,000 nominal value, and the 5% coupon shows the investor’s guaranteed total return.
• C. The bond’s nominal value will rise and fall with market conditions, while the BBB rating means the issuer has no default risk.
• D. The bond would cost about £960 per £1,000 nominal value, pay £50 annual coupon income, and repay £1,000 at maturity if the issuer does not default.

Best answer: D

What this tests: Asset Classes and Financial Markets

Explanation: A bond’s nominal value, also called par or face value, is the reference amount used to calculate coupon payments and the amount normally repaid at maturity if the issuer does not default. A 5% annual coupon on £1,000 nominal value is £50 per year. A market price quoted as 96 normally means 96% of nominal value, so the purchase price is about £960 per £1,000 nominal value before costs and accrued interest. Redemption at par means repayment of £1,000 at maturity. The BBB credit rating is an assessment of issuer credit quality; it does not remove default risk or guarantee returns.

• Treating the coupon as a percentage of the changing market price confuses coupon income with yield.
• Saying nominal value rises and falls with the market confuses face value with market price.
• Interpreting a price of 96 as £96 per £1,000 nominal value misreads standard bond price quotation.
• A credit rating indicates assessed creditworthiness, not a guarantee of repayment or total return.

A price of 96 means 96% of nominal value, the coupon is calculated on nominal value, and redemption at par means repayment of the nominal amount subject to issuer credit risk.

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