Free CISI Intro Practice Exam: Introduction to Investment

This free full-length CISI Intro practice exam includes 50 original Finance Prep questions across the exam domains.

These are original Finance Prep practice questions aligned to the exam outline. 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 mixed sets, topic drills, and timed mock exams in Finance Prep.

Practice count note: exam sponsors can describe total questions, scored questions, duration, or administrative exam-day rules differently. Always confirm current exam-day rules with the sponsor.

Practice questions

Questions 1-25

Question 1

Topic: Introduction

An investor is reviewing an online platform that offers peer-to-peer lending and investment crowdfunding. The platform says crowdfunding projects are unlisted company investments, not units in a regulated fund. Ignore tax.

Which statement best interprets the peer-to-peer figures and the nature of these platform products?

• A. The expected net return for the year is £240, or 12%; the expected credit loss is added because credit risk increases the return.
• B. The expected net return for the year is £80, or 4%; these are platform-based direct investments, not bank deposits, listed securities, or conventional fund units.
• C. The expected net return for the year is £160, or 8%; the quoted interest rate makes the loan equivalent to a bank deposit.
• D. The expected net return for the year is £140, or 7%; using one platform means the crowdfunding offers are conventional pooled-fund units.

Best answer: B

What this tests: Introduction

Explanation: The calculation starts with the stated interest and then deducts the platform fee and expected credit loss. Here, 8% of £2,000 is £160, the 1% fee is £20, and the 3% expected credit loss is £60, leaving an expected net return of £80, or 4% of £2,000. Peer-to-peer lending is not the same as placing money on deposit with a bank. The platform connects lenders and borrowers, and the lender bears borrower credit risk. Investment crowdfunding also differs from conventional fund products and listed securities because it often involves unlisted companies or projects accessed through a platform, rather than units in an OEIC or unit trust or shares traded on a stock exchange.

• Using the 8% interest rate alone ignores both the platform fee and the expected credit loss.
• Subtracting only the 1% platform fee gives 7%, but it misses the expected borrower loss.
• Adding the expected credit loss treats a risk cost as extra income, which reverses the sign of the adjustment.

Interest of £160 less a £20 fee and £60 expected credit loss leaves £80, and the products are direct platform investments rather than deposits, listed securities, or fund units.

Question 2

Topic: Derivatives

A trader enters one FTSE 100 index futures contract. The contract is worth £10 per index point and dealing costs are ignored.

Which interpretation best describes the trader’s position direction?

• A. Short futures position, since an 80-point fall produces an £800 gain at £10 per point.
• B. Long futures position, since an 80-point fall produces an £800 gain at £10 per point.
• C. Bought call option, since the trader profits when the market moves away from the opening price.
• D. Bought put option, since any gain from a fall must come from an option rather than a future.

Best answer: A

What this tests: Derivatives

Explanation: For futures, position direction determines how price movements affect profit or loss. A long futures position benefits if the futures price rises and loses if it falls. A short futures position benefits if the futures price falls. Here, the price moved from 7,500 to 7,420, a fall of 80 points. At £10 per point, that movement is worth £800. Because the reported result is a profit after a fall, the trader must have been short. The facts do not require changing the derivative type; the contract is a future, and the key issue is whether the market movement matches a long or short position.

• A long futures position would lose £800 on an 80-point fall, not gain it.
• A bought put can benefit from a falling market, but the trade described is a futures contract and the profit is explained by being short.
• A bought call benefits from a rise in the underlying price, so it does not match a profit from this fall.

The price fell by 80 points, so a profit of £800 at £10 per point is consistent with being short.

Question 3

Topic: Equities

Which statement best describes a stock exchange’s function across the primary and secondary markets?

• A. Recording ownership and paying dividends for issuers
• B. Fixing security prices by regulatory decision
• C. Listing securities and hosting trading in existing shares, aiding price discovery and liquidity
• D. Underwriting securities and guaranteeing sale at the last price

Best answer: C

What this tests: Equities

Explanation: The core function of a stock exchange spans both markets. In the primary market, it provides the framework for securities to be listed or admitted to trading, helping issuers access investors. In the secondary market, it offers an organised venue where existing securities are bought and sold between investors. As orders meet in the market, prices adjust to available information, which is the basis of price discovery. Regular trading activity also improves liquidity, because investors are more likely to find counterparties when they want to deal.

A stock exchange does not itself guarantee prices, act as the company registrar, or decide prices by regulation. Its key role is to support orderly trading and transparent market pricing.

• Underwriting confusion: Underwriting is usually performed by an investment bank or syndicate, not by the stock exchange, and no exchange guarantees exit at the last traded price.
• Registrar confusion: Recording legal ownership and arranging dividend payments are registrar functions, not the exchange’s main market role.
• Price-setting confusion: Exchanges facilitate price formation through trading; they do not administratively fix market prices.

A stock exchange admits securities to listing and provides an organised venue for secondary-market trading, which helps prices form and supports liquidity.

Question 4

Topic: Taxation, Investment Wrappers and Trusts

Which UK investment term refers to a tax wrapper that allows eligible investments to grow free of UK income tax and capital gains tax, without pension-style restrictions on normal access?

• A. Unit trust
• B. Open-ended investment company (OEIC)
• C. Stocks and shares ISA
• D. Self-invested personal pension (SIPP)

Best answer: C

What this tests: Taxation, Investment Wrappers and Trusts

Explanation: An ISA is a UK tax wrapper, not a type of fund. A stocks and shares ISA can hold eligible investments such as funds, shares, and bonds, and the income and capital gains within the wrapper are generally free from UK tax. Unlike a pension wrapper such as a SIPP, an ISA is not mainly designed around retirement access rules. OEICs and unit trusts are pooled investment fund structures; they may be held inside an ISA, but they are not themselves the tax wrapper.

• A SIPP is also tax-advantaged, but it is a pension wrapper with retirement access restrictions.
• An OEIC is an open-ended fund structure, not the wrapper that gives ISA tax treatment.
• A unit trust is another pooled fund structure and can be held inside a wrapper, but it is not the wrapper itself.

A stocks and shares ISA is a tax wrapper for eligible investments, with tax-free income and gains and no normal pension-style access restriction.

Question 5

Topic: Equities

A retail client holds UK listed shares through a broker’s nominee account. The broker sends the following account extract:

ABC plc account activity
8 May: Rights issue taken up - 1 new share for every 4 held at 120p.
       Shares allotted by ABC plc.
10 May: Bought 400 ABC plc ordinary shares on the London Stock Exchange at 145p.
        Trade matched; settlement due through CREST in two business days.

Which conclusion is best supported by the extract?

• A. CREST matching means the client is personally entered on ABC plc’s share register on the trade date.
• B. Both entries are secondary-market trades because both involve the client paying money for ABC plc shares.
• C. The 10 May purchase is primary-market issuance because the client bought ordinary shares of ABC plc.
• D. The rights issue is primary-market issuance, while the 10 May purchase is secondary-market trading followed by settlement and nominee record updating.

Best answer: D

What this tests: Equities

Explanation: A primary-market transaction involves the issue of new securities by the company, such as a rights issue where existing shareholders are offered new shares. A secondary-market transaction is a purchase or sale of existing securities between investors on a market such as the London Stock Exchange. After a secondary-market trade is agreed, post-trade processes follow, including matching, clearing, settlement and updating custody or nominee records. The extract distinguishes these stages: the rights issue says the shares were allotted by ABC plc, while the later purchase was an exchange trade with settlement through CREST. Holding through a nominee also means the broker’s custody records are relevant to the client’s beneficial holding.

• Paying money for shares does not by itself make a transaction secondary-market trading; new shares can also be bought from an issuer.
• Buying ordinary shares on an exchange is normally trading in existing shares, not a fresh issue by the company.
• CREST settlement is a post-trade process; it does not mean the client is personally registered on trade date when the holding is through a nominee.

The extract shows new shares allotted by the company for the rights issue and a separate exchange trade that must settle through CREST.

Question 6

Topic: Economic Environment

A UK economic update reports that GDP growth has accelerated, unemployment has fallen, the trade deficit has narrowed, and sterling has weakened against major trading partners. Which broad market sentiment pattern is most consistent with these facts?

• A. Sentiment should be neutral because trade balances and exchange rates do not affect investment markets.
• B. Sentiment should worsen because a weaker currency always means domestic companies are becoming less competitive.
• C. Sentiment may improve toward growth-sensitive investments because the data suggest stronger activity and better export competitiveness.
• D. Sentiment should focus only on unemployment, because GDP and currency movements are not macroeconomic indicators.

Best answer: C

What this tests: Economic Environment

Explanation: Broad investment-market sentiment is influenced by signals about economic strength and competitiveness. Faster GDP growth suggests rising output and demand, while falling unemployment points to a stronger labour market. A narrowing trade deficit can indicate that exports are improving relative to imports. If sterling weakens, UK exporters may become more competitive overseas because their goods are cheaper to foreign buyers, although import costs may rise. Taken together, these facts would commonly support more positive sentiment toward growth-sensitive assets such as equities, while still not guaranteeing market gains.

• Treating sterling weakness as always negative ignores its potential benefit for exporters and trade competitiveness.
• Saying trade balances and exchange rates do not affect markets overlooks their influence on company earnings, inflation expectations and investor confidence.
• Focusing only on unemployment is too narrow; GDP, trade and exchange-rate movements are also important macroeconomic signals.

Stronger GDP growth, lower unemployment, a narrower trade deficit and a weaker currency that supports exports can all point to improving economic momentum.

Question 7

Topic: Economic Environment

A market update mentions UK CPI inflation of 4.2%, while three investment factsheets show an OEIC ongoing charge of 0.75%, a corporate bond coupon of 5%, and an equity dividend yield of 3%. Which item is a macroeconomic indicator rather than a product-level investment characteristic?

• A. Corporate bond coupon of 5%
• B. UK CPI inflation of 4.2%
• C. OEIC ongoing charge of 0.75%
• D. Equity dividend yield of 3%

Best answer: B

What this tests: Economic Environment

Explanation: A macroeconomic indicator measures conditions across the wider economy, such as inflation, growth, or unemployment. UK CPI inflation is therefore a macro indicator because it tracks the general rise in consumer prices and helps investors judge purchasing-power risk and the economic backdrop.

By contrast, an OEIC ongoing charge, a bond coupon, and a share’s dividend yield are product-level characteristics. They describe the costs or income features of particular investments rather than the state of the economy as a whole.

The key distinction is whether the figure relates to the whole economy or to one security or fund.

• Fund cost: An OEIC ongoing charge is a charge applied within a specific pooled investment, so it is a product feature.
• Bond income: A bond coupon is the stated interest rate on that bond, not a reading on the economy.
• Share income measure: Dividend yield relates to a particular company’s shares and current price, so it is not macroeconomic.

CPI inflation measures economy-wide price changes, so it is a macroeconomic indicator rather than a feature of one investment product.

Question 8

Topic: Economic Environment

A UK investment analyst is reviewing a short macro update before a client meeting.

Which interpretation is best supported by the update?

• A. Sterling has weakened, which should improve sentiment toward UK importers.
• B. Domestic growth signals are broadly supportive for market sentiment, but the wider trade deficit and stronger sterling may temper enthusiasm.
• C. The trade position has moved into surplus, so sentiment should be positive across all UK-listed companies.
• D. The economy is showing clear recession conditions, so equity market sentiment should be strongly negative.

Best answer: B

What this tests: Economic Environment

Explanation: GDP growth and unemployment are widely watched indicators of domestic economic strength. Faster GDP growth and a lower unemployment rate usually support investor confidence because they suggest stronger output, employment, and potential company earnings. The update is not wholly positive, however. A wider trade deficit can be viewed as a negative external-balance signal, and a stronger sterling exchange rate can reduce the value of overseas earnings for some UK companies and make UK exports less price-competitive. The most balanced interpretation is therefore supportive but mixed, rather than uniformly bullish or bearish.

• Recession conditions are not supported because GDP growth has accelerated and unemployment has fallen.
• Sterling has strengthened, not weakened, and the effect differs between importers, exporters, and companies with overseas earnings.
• A widened deficit is not a surplus, and no single macro indicator guarantees positive sentiment across all UK-listed companies.

Rising GDP and falling unemployment are generally positive for sentiment, while a larger trade deficit and stronger pound can be less supportive for some sectors.

Question 9

Topic: Financial Advice

An adviser is completing a basic fact-find for Samira.

• She wants to keep £5,000 available for rent and emergencies.
• She wants £25,000 for a first-home deposit in about two years.
• She also wants to build retirement savings over 30 years.
• After essential spending and debt repayments, she can commit £200 a month.
• She is comfortable with short-term market falls in her pension, but losing any deposit money would delay the home purchase.
• She asks for documents by secure email because phone calls are difficult during her shift work.

Which statement best applies suitability principles to these facts?

• A. Because she can afford £200 a month, the adviser can prioritise long-term growth for both goals; her shift-work email request is evidence of legal capacity.
• B. Because Samira accepts pension volatility, the same attitude to risk can be applied to the deposit; her £25,000 target is affordability; secure email is not relevant to suitability.
• C. Because the deposit target is clear, capacity for loss is satisfied; the £200 monthly amount is mainly a time horizon factor; the emergency cash is an investment objective.
• D. Keeping £5,000 available is a need; the deposit and pension are objectives with different time horizons; £200 monthly is affordability; risk comfort concerns attitude to risk; deposit-loss impact concerns capacity for loss; secure email is a communication preference.

Best answer: D

What this tests: Financial Advice

Explanation: Suitability requires different client facts to be classified and assessed separately. Objectives are what the client wants to achieve, such as a house deposit and retirement savings. Needs are essential requirements, such as keeping cash available for rent and emergencies. Affordability concerns what the client can sustainably commit after normal outgoings. Attitude to risk is the client’s willingness to accept investment uncertainty, while capacity for loss is the financial effect if the investment falls in value. Here, Samira may accept volatility in a 30-year pension, but she has low capacity for loss on money needed for a home deposit in two years. Her request for secure email is a communication preference, not a risk or legal-capacity point.

• Applying pension risk comfort to the deposit ignores that each goal has its own time horizon and capacity for loss.
• Treating a target amount as affordability confuses the amount needed with the amount available to save.
• Treating a communication preference as legal capacity misclassifies a practical service requirement.

This correctly separates the client’s goals, essential needs, affordability, risk attitude, capacity for loss, time horizons, and preferred communication method.

Question 10

Topic: Financial Assets and Markets

A UK bank has a temporary cash shortfall and needs to borrow funds for 30 days to manage day-to-day liquidity. It does not want to issue shares or long-term debt. Which market is most relevant to this need?

• A. Foreign exchange market
• B. Equity market
• C. Securities settlement system
• D. Money market

Best answer: D

What this tests: Financial Assets and Markets

Explanation: Short-term liquidity management is a core function of the money market. Banks and other wholesale participants use it to borrow or lend funds over short periods, often from overnight to a few months. The decisive facts are the 30-day horizon and the need to borrow cash temporarily rather than raise permanent or long-term finance. Equity markets are for issuing and trading shares, while longer-term debt markets are more relevant to sustained capital raising. Foreign exchange markets deal with converting one currency into another. Settlement systems support the transfer of securities and cash after trades, rather than providing short-term funding.

• Equity market fails because issuing shares raises ownership capital, not short-term liquidity.
• Foreign exchange market fails because no currency conversion is needed.
• Securities settlement system fails because the need is funding, not completing a securities trade.

The money market is used by financial institutions and other large participants for short-term borrowing and lending.

Question 11

Topic: Introduction

A UK investment website allows individuals to open an account, read generic fund factsheets and place their own orders in OEICs. The firm states that it will not assess suitability and will not make personal recommendations. Which service route is being described?

• A. Professional-client dealing service
• B. Execution-only service
• C. Independent financial advice
• D. Discretionary portfolio management

Best answer: B

What this tests: Introduction

Explanation: An execution-only route is used where the customer decides what to buy or sell and the firm simply carries out the transaction. Generic information, fund factsheets and risk warnings can be provided, but they do not amount to a personal recommendation. Because the firm is not assessing suitability or advising on a specific investment, the responsibility for the choice remains with the investor. This differs from advised services, where a recommendation is made, and from discretionary management, where the manager is authorised to make investment decisions for the client.

• Independent financial advice would involve a personal recommendation based on the client’s circumstances and a broad market assessment.
• Discretionary portfolio management would allow the manager to make investment decisions on the client’s behalf.
• Professional-client dealing service is aimed at clients with the experience and resources to be treated as professional, not ordinary individuals using a self-directed website.

The client makes the investment decision, while the firm only provides access, information and order handling without a personal recommendation.

Question 12

Topic: Bonds

A UK retail investor wants to compare the income return on a fixed-rate corporate bond with a savings account. The bond has a £100 nominal value, pays a 6% annual coupon, and is trading at £96. Ignoring redemption gains or losses, what is its flat yield?

• A. 5.76%
• B. 6.25%
• C. 6.00%
• D. 4.17%

Best answer: B

What this tests: Bonds

Explanation: Flat yield is a simple bond income measure. It uses the annual coupon amount and the current market price paid for the bond, while ignoring any capital gain or loss on redemption. Here, a 6% coupon on £100 nominal means annual income of £6.

• Annual coupon = £6
• Market price = £96
• Flat yield = £6 ÷ £96 × 100 = 6.25%

Because the bond is bought below par, the flat yield is slightly higher than the 6% coupon rate. A figure based only on nominal value is therefore too low, and a figure based on the £4 discount is measuring capital difference rather than income yield.

• The 6.00% figure is the coupon rate on nominal value, not the yield on the price actually paid.
• The 5.76% figure applies the price adjustment in the wrong direction; buying below par should increase flat yield, not reduce it.
• The 4.17% figure uses the £4 discount to par rather than the annual coupon, so it is not a flat yield calculation.

Flat yield is annual coupon divided by market price, so £6 ÷ £96 = 6.25%.

Question 13

Topic: Financial Services Regulation

A UK authorised investment firm is onboarding a retail client who wants advice on investing £20,000. The client says capital security is important but asks about a high-risk emerging markets fund seen online. The trainee adviser handling the meeting has not yet been signed off as competent to advise on that type of fund. What is the best next step before any recommendation is made?

• A. Pass the case to, or work under supervision of, a competent authorised adviser who completes the fact-find, assesses suitability, and gives clear risk and charge disclosures.
• B. Send the case to the compliance department to choose whether the fund meets the client’s objective.
• C. Arrange the fund purchase as execution-only because the client mentioned the fund first.
• D. Recommend the fund now and provide the detailed risk and charge information after the transaction settles.

Best answer: A

What this tests: Financial Services Regulation

Explanation: Financial-services regulation is designed to protect customers and maintain trust in markets. For an advised retail investment, the firm should act with integrity, due skill, care and diligence, and treat the customer fairly. That means using a competent person, collecting enough information about the client’s circumstances and objectives, assessing suitability, and explaining material risks and charges in a clear, fair and not misleading way before the client commits. Here, the client’s stated desire for capital security conflicts with interest in a high-risk fund, so the firm must not shortcut the process or rely only on the client’s initial request.

• Treating the purchase as execution-only ignores that the client is seeking advice and would bypass suitability safeguards.
• Giving risk and charge details after settlement is too late for an informed decision.
• Compliance may oversee standards, but it does not replace the adviser’s role in fact-finding and suitability assessment.

A competent adviser must ensure the recommendation process is suitable, fairly explained, and based on the client’s needs before any investment is arranged.

Question 14

Topic: Financial Advice

An adviser is reviewing a short extract from a new client’s fact-find before deciding which planning areas to explore first.

• Net monthly income: £4,200
• Regular monthly spending and debt repayments: £4,050
• Credit card balance: £6,800 at 23.9% APR, with minimum payments only
• Cash savings: £800
• Stocks and shares ISA: £15,000
• Mortgage: £180,000 outstanding
• Dependants: spouse and one young child

Which conclusion is best supported by the extract?

• A. Later-life planning is the main need because the client has a mortgage and dependants.
• B. Offshore planning is the main need because the client already holds a stocks and shares ISA.
• C. Tax planning is the main need because the ISA balance is higher than the cash savings balance.
• D. Budgeting and borrowing should be reviewed early because surplus cash is limited and the client has high-cost unsecured debt.

Best answer: D

What this tests: Financial Advice

Explanation: Financial advice covers several planning domains, including budgeting, borrowing, protection, saving and investment, retirement, estate, tax, and offshore planning. The strongest conclusion from the extract is that budgeting and borrowing need attention: the client has only £150 monthly surplus and is carrying credit card debt at a high APR while making only minimum payments. The mortgage and dependants may also lead to protection discussions, but the most directly evidenced issue is cash-flow pressure and expensive borrowing. The ISA does not by itself indicate offshore or tax planning as the priority.

• Holding an ISA is a UK tax-wrapper fact, not evidence of an offshore-planning need.
• Comparing ISA and cash savings balances does not establish that tax planning is the main issue.
• A mortgage and dependants may suggest protection needs, but they do not make later-life planning the clearest conclusion from these facts.

The figures show little spare monthly income and a costly credit card balance, making budgeting and borrowing clear advice areas to address.

Question 15

Topic: Financial Services Regulation

A UK investment firm is reviewing a proposed campaign under the Data Protection Act 2018.

Campaign note
Records: Client names, home addresses, email addresses and investment holdings
Original disclosure: Administration of investment accounts and legal/regulatory duties
Proposed use: Share the list with an unrelated holiday company for its marketing
Permissions held: No consent or other marketing permission recorded

Which conclusion is best supported by the note?

• A. The list should not be shared for that campaign unless the firm has a valid lawful basis and has made that use clear to clients.
• B. The list can be shared because the details were collected from existing clients rather than prospects.
• C. The list can be shared if the recipient agrees not to amend any of the records.
• D. Only the investment holdings are protected, because names and contact details are not personal data.

Best answer: A

What this tests: Financial Services Regulation

Explanation: The Data Protection Act 2018 is part of the UK data protection regime governing how firms handle personal data. At a high level, a firm must process personal data lawfully, fairly and transparently, and should use it for clear and appropriate purposes. The exhibit shows identifiable client information, including names, addresses, email addresses and investment holdings. The stated original purpose was account administration and legal or regulatory duties, but the proposed use is a new third-party marketing activity. Without a valid lawful basis and clear information to clients about this use, the firm should not proceed with the sharing.

• Treating an existing client relationship as automatic permission ignores the need for lawful, fair and transparent processing.
• Restricting protection to investment holdings is wrong because contact details linked to identifiable clients are also personal data.
• A promise not to amend records does not create a lawful basis for a new marketing use.

The proposed use involves identifiable client data for a new marketing purpose without a recorded basis or clear disclosure.

Question 16

Topic: Taxation, Investment Wrappers and Trusts

Which statement about bare, discretionary and interest in possession trusts is correct?

• A. In a bare trust, no beneficiary has a fixed beneficial interest.
• B. In a discretionary trust, each beneficiary has an absolute right to capital.
• C. In a bare trust, trustees decide which beneficiaries receive benefits.
• D. In an interest in possession trust, a beneficiary has a current right to income.

Best answer: D

What this tests: Taxation, Investment Wrappers and Trusts

Explanation: The key distinction is the beneficiary’s entitlement. In an interest in possession trust, a beneficiary, often called a life tenant, has an immediate right to the income generated by the trust assets. The capital does not have to belong to that same person and may pass to another beneficiary later.

In a bare trust, the beneficiary has an absolute beneficial interest in both income and capital, even if trustees hold the assets until the beneficiary is old enough to take control. In a discretionary trust, no beneficiary has an automatic right to income or capital; the trustees decide who benefits, how much, and when.

So the current right to income points to an interest in possession trust, not a bare or discretionary trust.

• Trustee discretion: Saying trustees decide which beneficiaries receive benefits describes a discretionary trust, not a bare trust.
• Fixed entitlement: Saying each beneficiary has an absolute right to capital is wrong for a discretionary trust because beneficiaries have no automatic entitlement.
• Bare trust confusion: Saying no beneficiary has a fixed beneficial interest is the opposite of a bare trust, where the beneficiary’s interest is fixed and absolute.

An interest in possession trust gives the life tenant an immediate entitlement to income, although the capital may pass to someone else later.

Question 17

Topic: Investment Funds

A UK retail client is selecting a fund for the liquid core of a portfolio. The client wants broad diversification, dealing at least daily at a price linked directly to the fund’s net asset value, and a structure intended for mainstream retail investors. The client does not want specialist strategies, unquoted companies, or funds whose liquidity may be heavily affected by direct property holdings. Which fund type best matches these requirements?

• A. A NURS holding direct commercial property
• B. A hedge fund
• C. A UCITS fund
• D. A private equity fund

Best answer: C

What this tests: Investment Funds

Explanation: UCITS funds are a mainstream regulated fund structure for retail investors, with rules intended to support diversification, liquidity, and investor protection. For a liquid core portfolio holding, an open-ended UCITS fund is a natural match because dealing is normally available at least daily and pricing is based on the fund’s net asset value. Other fund types can be valid in different circumstances, but they do not match these stated needs as well. Private equity funds focus on unquoted companies and are usually illiquid. Property funds can face liquidity pressures because buildings cannot be sold quickly. Hedge funds may use specialist strategies such as leverage or short selling and are not the typical first choice for a simple retail core holding.

• Private equity exposure is usually long term and illiquid, which conflicts with the need for a liquid core holding.
• Direct commercial property can be difficult to sell quickly, so liquidity may not match daily investor dealing.
• Hedge funds may pursue specialist strategies and risk profiles that do not fit the client’s preference for a mainstream retail structure.

A UCITS fund is designed for mainstream retail use and typically offers diversified, liquid exposure with pricing linked to net asset value.

Question 18

Topic: Financial Assets and Markets

Amira expects to need £8,000 for home repairs in three months. She is considering keeping it in a cash reserve account and reviews the summary below:

Which conclusion is best supported?

• A. The account locks the money away for a year because the interest rate is quoted as an AER.
• B. The account is suitable for short-term liquidity, but the money may lose purchasing power if inflation stays above the interest rate.
• C. The account removes all possible loss because FSCS protection applies without conditions or limits.
• D. The account guarantees a positive real return because the quoted AER is above zero.

Best answer: B

What this tests: Financial Assets and Markets

Explanation: Cash is commonly used as a liquidity reserve because it is readily accessible and its nominal value is usually stable compared with market-traded investments. That makes it suitable for known short-term needs, such as money required in three months. The main disadvantage is that the return on cash may be low and may not keep pace with inflation. Here, the account pays a variable 3.2% gross AER while CPI inflation is 4.0%, so the cash could lose purchasing power in real terms. FSCS protection is relevant, but the exhibit states that it is subject to eligibility and limits, not unlimited protection.

• A positive AER is not the same as a positive real return when inflation is higher than the interest rate.
• AER is an annualised rate measure; it does not by itself create a one-year lock-in.
• FSCS protection should not be read as unconditional or unlimited when the summary says eligibility and limits apply.

Instant access supports a liquidity reserve, while the current interest rate is below CPI inflation.

Question 19

Topic: Bonds

A UK investor is worried that rising prices will reduce the real value of income and capital from a bond holding. Which statement best describes a government-bond feature that can help with this risk?

• A. A conventional gilt always pays a coupon that rises automatically each year.
• B. A Treasury bill protects against inflation because it is issued at a discount.
• C. A government bond removes market risk because the issuer is the state.
• D. An index-linked gilt can increase payments and redemption value in line with inflation.

Best answer: D

What this tests: Bonds

Explanation: The key feature is government bonds that addresses inflation risk. Conventional gilts usually pay a fixed coupon and fixed redemption amount, so inflation can reduce their real purchasing power. By contrast, an index-linked gilt adjusts key bond amounts by reference to inflation, helping preserve the real value of both income and capital.

The important distinction is that government backing mainly relates to credit risk, not to inflation or market-price risk. So a government bond can still fall in value, and not every government bond automatically protects against rising prices.

The best match is the government bond whose structure directly links value to inflation.

• Fixed coupon confusion: A conventional gilt normally pays a fixed coupon, so it does not automatically keep pace with inflation.
• Discount issue mix-up: A Treasury bill is a short-dated government security sold at a discount, but that feature does not by itself provide inflation linkage.
• Risk-free misunderstanding: Government bonds may have very low default risk, yet they can still face inflation risk and market-price risk.

Index-linked gilts are designed to help preserve real value by linking bond amounts to inflation.

Question 20

Topic: Investment Funds

A trainee is preparing a brief dealing note for a client who is considering buying shares in an investment trust on the stock exchange. The trust’s latest net asset value is 250p per share and its quoted market price is 230p per share. Before the order is routed, the dealing note must state whether the trust is priced at a discount or a premium. What should the trainee record next?

• A. It is trading at a premium to net asset value.
• B. It is trading at a discount to net asset value.
• C. It must be bought directly from the fund manager at 250p.
• D. It has no discount or premium because investment trusts always trade at net asset value.

Best answer: B

What this tests: Investment Funds

Explanation: Investment trusts are closed-ended companies whose shares trade on a stock exchange. Their market price is set by supply and demand and can differ from the value of the underlying portfolio, expressed as net asset value per share. If the market price is lower than net asset value, the shares are trading at a discount. If the market price is higher than net asset value, they are trading at a premium. Here, the quoted price of 230p is below the net asset value of 250p, so the dealing note should identify a discount before the order proceeds.

• Calling 230p a premium reverses the rule; a premium applies when the share price is above net asset value.
• Buying directly from the fund manager at net asset value describes open-ended fund dealing, not normal exchange trading in investment trust shares.
• Assuming no discount or premium ignores the closed-ended structure, where the traded share price can move away from net asset value.

The market price is below the net asset value per share, so the investment trust is trading at a discount.

Question 21

Topic: Equities

An operations team is checking three equity records for a client.

For the records shown, how many shares have registered title, and how should records B and C be classified by holding form?

• A. 1,000 shares have registered title; both B and C are dematerialised.
• B. 750 shares have registered title; B is immobilised and C is bearer title.
• C. 400 shares have registered title; B is dematerialised and C is immobilised.
• D. 650 shares have registered title; B is immobilised and C is dematerialised.

Best answer: D

What this tests: Equities

Explanation: Registered title means an identified holder is entered on the issuer’s register. That holder might be the investor or a nominee. Bearer title is different: possession of the bearer certificate evidences title, rather than a name on the register. Record A is registered because the client is named on the register. Record C is also registered because the nominee is named on the register, giving 400 + 250 = 650 registered-title shares. Record B is not dematerialised because a physical bearer certificate still exists. It is immobilised because the certificate is held centrally while transfers are made by book entry. Record C is dematerialised because the holding is uncertificated in CREST and no paper certificate exists.

• Counting only 400 shares misses that a nominee name on the register is still registered title.
• Treating the bearer certificate in the vault as registered title confuses possession-based bearer title with register-based title.
• Calling both B and C dematerialised ignores the physical certificate still existing for the immobilised holding.

Records A and C have a named holder on the issuer register, so 400 + 250 = 650 registered-title shares; B is immobilised because a certificate is held centrally, while C is dematerialised because no certificate exists.

Question 22

Topic: Derivatives

A UK equity fund manager is concerned that the market may fall before a planned reduction in FTSE 100 exposure next month. They review this exchange-traded derivative quote:

FTSE 100 Index Future
Contract month: June
Quoted futures price: 7,850
Contract term: Obligation to transact at the agreed futures price at expiry
Position considered: Sell June FTSE 100 futures

Which conclusion is best supported?

• A. Selling the futures could hedge market exposure by locking in a future price level, so a fall in the index would tend to be offset by a gain on the futures.
• B. The futures position removes all investment risk and guarantees the fund’s exact sale proceeds.
• C. Buying the futures would be needed to hedge a planned sale, because a long futures position profits when the index falls.
• D. The quoted price is an option premium, so the manager may let the contract lapse if the market rises.

Best answer: A

What this tests: Derivatives

Explanation: A futures contract is a binding, usually exchange-traded agreement to buy or sell an asset, or settle by reference to an asset such as an index, at a future date using a price agreed today. Selling an index future creates a short futures position. For a portfolio manager planning to reduce equity exposure, this can be used as a hedge: if the FTSE 100 falls before the planned sale, the short futures position should gain, helping offset the portfolio’s loss. The position can lock in a future price level for hedging purposes, but it does not remove every risk, such as imperfect tracking between the portfolio and the index.

• Treating 7,850 as an option premium misreads the product; futures are obligations, not rights that can simply lapse.
• A long futures position generally benefits from rising prices, so it would not hedge a planned sale against a market fall.
• Claiming an exact guarantee overstates the hedge, because the portfolio may not move exactly in line with the index future.

A short index futures position can hedge a planned equity sale because it gains when the index futures price falls.

Question 23

Topic: Introduction

A UK investment platform gives clients fund factsheets and online dealing access. Clients choose their own investments and place orders themselves. The platform does not make a personal recommendation or assess which investment is suitable. What type of service is this?

• A. Independent advice
• B. Restricted advice
• C. Execution-only service
• D. Robo-advice

Best answer: C

What this tests: Introduction

Explanation: The core concept is whether the firm is advising the client or simply carrying out the client’s instructions. In an execution-only service, the customer selects the investment and the firm executes the order without giving a personal recommendation or assessing suitability.

Independent advice involves a personal recommendation based on a fair and broad analysis of relevant products. Restricted advice also gives a personal recommendation, but within a limited range, provider panel, or product type. Robo-advice still counts as advice when an automated system collects client information and generates a personal recommendation.

Here, the platform only provides factsheets and dealing access, so the pattern clearly matches execution-only rather than any form of advice.

• Independent advice: This would involve a personal recommendation based on a broad review of suitable options, which is absent here.
• Restricted advice: This is still advice, just limited in scope or product range; the stem says no recommendation is made.
• Robo-advice: Automated advice would normally gather client details and produce a recommendation, not just allow self-directed trading.

This is execution-only because the client makes the investment decision without a personal recommendation or suitability assessment.

Question 24

Topic: Investment Funds

A UK listed pooled fund invests mainly in quoted equities. It has a fixed number of shares, can use gearing, and its shares may trade at a discount or premium to net asset value. Which structure best fits this description?

• A. REIT
• B. Unit trust
• C. Investment trust
• D. OEIC

Best answer: C

What this tests: Investment Funds

Explanation: An investment trust is a closed-ended pooled vehicle structured as a company and listed on a stock exchange. Because investors buy and sell existing shares in the market, the share price is driven by supply and demand and can move to a discount or premium to net asset value. Investment trusts can also borrow money, known as gearing, which can increase both gains and losses.

A REIT is also a listed company, but it is specifically designed for property investment, not mainly quoted equities. The key pattern in the stem is therefore the closed-ended, geared equity fund structure of an investment trust.

• REIT: This is mainly a property investment vehicle, so it does not fit a fund investing mainly in quoted equities.
• OEIC: This is open-ended, so units are created or cancelled and pricing is normally aligned more closely to NAV.
• Unit trust: This is also open-ended and does not usually show the same closed-ended discount or premium pattern.

An investment trust is a closed-ended listed fund whose shares can trade away from NAV and which may use gearing.

Question 25

Topic: Equities

A company gives existing shareholders the option of receiving additional shares instead of taking a declared cash dividend. Which corporate action does this describe?

• A. Rights issue
• B. Scrip issue
• C. Bonus issue
• D. Capitalisation issue

Best answer: B

What this tests: Equities

Explanation: The key distinction is why the new shares are being issued. In a scrip issue, the company has declared a dividend and lets shareholders take that value in shares rather than in cash. The shareholder does not pay for those shares, but they are received as an alternative to the cash dividend.

A bonus issue, also called a capitalisation issue, is different. In that case, the company converts reserves into share capital and gives existing shareholders extra fully paid shares free of charge. A rights issue is different again because shareholders are invited to subscribe for new shares and must usually pay a set price.

So the feature of choosing shares instead of cash points specifically to a scrip issue.

• Bonus issue: This gives existing shareholders extra shares free of charge, but not as an alternative to a declared cash dividend.
• Capitalisation issue: This is essentially another name for a bonus issue, so it also does not match a dividend taken in shares.
• Rights issue: This invites shareholders to buy new shares, so payment is normally required.

A scrip issue allows shareholders to take shares in place of a cash dividend.

Questions 26-50

Question 26

Topic: Other Financial Products

A borrower is comparing two £8,000 loans with the same term and no arrangement fees. One loan quotes 7.8% interest compounded monthly, while the other quotes 8.0% interest compounded annually. Which borrowing-cost measure best matches the need to compare the true annual cost after allowing for compounding?

• A. Annual percentage rate
• B. Arrangement fee
• C. Effective annual rate
• D. Loan term

Best answer: C

What this tests: Other Financial Products

Explanation: Where borrowing rates are quoted with different compounding frequencies, the decisive comparison is the effective annual rate. A nominal rate compounded monthly can produce a higher annual cost than its headline percentage suggests, because interest is charged on interest during the year. In this case, the term and fees are the same, so they do not drive the comparison. The relevant issue is how compounding changes the actual annual cost of borrowing.

• Annual percentage rate is useful for comparing credit costs including relevant charges, but the stated issue here is compounding frequency with no fees.
• Loan term affects total interest paid over time, but both loans have the same term.
• Arrangement fee can alter the overall cost of borrowing, but the stem states that neither loan has one.

The effective annual rate shows the annual cost after allowing for the effect of compounding.

Question 27

Topic: Derivatives

A UK investor already owns 1,000 shares in ABC plc. She sells call options on those shares and receives an option premium. Which term best matches her role on the option contract?

• A. Naked writer
• B. Covered writer
• C. Premium payer
• D. Option holder

Best answer: B

What this tests: Derivatives

Explanation: In an option contract, the writer is the seller and receives the premium. If that writer already owns the underlying shares, the position is described as covered because the shares are available if the option is exercised. In this case, the investor owns the ABC plc shares before selling the call, so she is a covered writer.

A naked writer also sells the option and receives the premium, but does not own the underlying asset or have an offsetting position. The holder is the buyer of the option and pays the premium for the contractual right. The key point is that selling the option makes her the writer, and owning the shares makes that writing covered.

• Naked vs covered: a naked writer has sold the option without owning the underlying shares or another suitable offsetting position.
• Holder: the holder is the buyer of the option and has the right under the contract, not the obligation to write it.
• Premium flow: the premium is paid by the buyer and received by the writer, so premium payer does not fit these facts.

She has written the call and already owns the underlying shares, so the position is covered.

Question 28

Topic: Bonds

A corporate bond has a nominal value of £100, pays a 5% annual coupon, has three years to maturity, and is expected to redeem at £100. Its current market price is £95. Which yield interpretation is most appropriate?

• A. Its yield to redemption should be higher than its coupon rate because the holder receives coupon income and a capital gain if held to maturity.
• B. Its coupon rate should rise because the market price has fallen below nominal value.
• C. Its yield to redemption should be lower than its coupon rate because the bond is trading below £100.
• D. Its running yield must equal 5% because the annual coupon is 5% of nominal value.

Best answer: A

What this tests: Bonds

Explanation: A bond’s coupon rate is based on its nominal value, not its market price. Here, the bond pays £5 a year on £100 nominal value. Because it can be bought for £95 and is expected to redeem at £100, an investor holding it to maturity would receive both the coupon income and a £5 capital gain. That makes the yield to redemption higher than the stated coupon rate. The running yield would also be above 5% because £5 of income is being earned on a £95 price, but it does not include the capital gain to redemption.

• A price below redemption value creates a capital gain if the bond is held to maturity.
• A falling price does not change the fixed coupon paid by the issuer.
• The coupon rate is calculated on nominal value, while running yield uses the current market price.
• Trading below par usually raises, rather than lowers, the investor’s yield, other things being equal.

Buying below redemption value adds a capital gain to the coupon income, increasing the yield to redemption above the coupon rate.

Question 29

Topic: Investment Funds

A trainee at a UK fund platform is checking roles recorded for an OEIC before updating the product page.

Fund file extract
Structure: OEIC
Authorised corporate director: Brookmere Fund Services Ltd
Depositary: Albion Trustee & Depositary Ltd
Operational note: The authorised corporate director operates the company and may appoint an investment manager. The depositary is independent and is responsible for safekeeping the scheme property and oversight of the authorised corporate director.

Which conclusion is best supported by the file extract?

• A. Brookmere and Albion have the same responsibilities because both are named in the OEIC structure.
• B. Brookmere’s role is limited to holding the OEIC’s assets in custody for shareholders.
• C. Brookmere operates the OEIC, while Albion has safekeeping and oversight responsibilities.
• D. Albion makes the OEIC’s portfolio decisions because it is independent of the authorised corporate director.

Best answer: C

What this tests: Investment Funds

Explanation: In an OEIC, the authorised corporate director is responsible for operating the company and overseeing its management. It may appoint an investment manager, but that does not turn the depositary into the portfolio manager. The depositary is separate and independent, with responsibilities such as safekeeping the scheme property and monitoring aspects of the authorised corporate director’s conduct. The file extract therefore supports the conclusion that Brookmere is responsible for operating the OEIC, while Albion performs the independent safekeeping and oversight role.

• Treating Albion as the portfolio decision-maker confuses depositary independence with investment management authority.
• Limiting Brookmere to custody reverses the usual OEIC roles of authorised corporate director and depositary.
• Giving both firms the same responsibilities ignores the different role labels and duties stated in the file extract.

The extract identifies Brookmere as the authorised corporate director and Albion as the independent depositary.

Question 30

Topic: Equities

A UK listed company is comparing a bonus issue with another possible corporate action. The directors want a method that raises new equity cash and gives existing shareholders the choice to buy additional shares in proportion to their holdings; shareholders who do not participate may see their percentage ownership reduced. Which term best matches that second corporate action?

• A. Bonus issue
• B. Scrip dividend
• C. Rights issue
• D. Share split

Best answer: C

What this tests: Equities

Explanation: A rights issue is a corporate action used to raise new share capital. Existing shareholders are offered the right to buy new shares, normally in proportion to their current holdings and often at a discount to the market price. Because new shares are issued, a shareholder who does not take up the rights may own a smaller percentage of the company after the issue. This makes dilution the key feature in the scenario. A bonus issue and a share split increase the number of shares in issue but do not raise new cash from shareholders. A scrip dividend gives shareholders shares instead of a cash dividend, so it is mainly about dividend choice rather than raising fresh equity capital.

• A bonus issue gives free additional shares to existing shareholders, usually by capitalising reserves, and does not raise new cash.
• A share split changes the number and nominal value of shares but should not by itself change each shareholder’s proportionate ownership.
• A scrip dividend is a choice to receive shares instead of a cash dividend, not a pro rata cash-raising issue with dilution risk.

A rights issue offers existing shareholders the right to subscribe for new shares, usually pro rata, and non-participation can dilute their percentage ownership.

Question 31

Topic: Equities

A small UK growth company wants its shares traded on a public market operated by the London Stock Exchange, but it is not ready for the more demanding admission and continuing obligations of the Main Market. It accepts that trading may be less liquid than in the largest listed companies. Which market best matches this situation?

• A. The Main Market
• B. The gilt market
• C. The FTSE 100
• D. AIM

Best answer: D

What this tests: Equities

Explanation: AIM is commonly associated with smaller and growing companies seeking access to public equity capital. Compared with the London Stock Exchange Main Market, AIM has a less demanding regulatory and admission framework, although shares in AIM companies may carry higher risk and can be less liquid. The Main Market is generally associated with larger companies meeting fuller listing and disclosure requirements. The FTSE 100 is not a trading venue; it is an index of large companies. The gilt market is for UK government bonds, not company shares.

• The Main Market is more suitable for larger companies able to meet higher admission and continuing obligations.
• The FTSE 100 measures the performance of major listed companies; it is not where a company applies to trade its shares.
• The gilt market deals in UK government debt securities rather than ordinary company shares.

AIM is the London Stock Exchange market designed for smaller and growing companies, with a lighter regulatory framework than the Main Market.

Question 32

Topic: Financial Assets and Markets

A UK retail client has this cash position:

• Account: instant-access savings account with one authorised bank
• Balance: £100,000
• Assumed deposit protection limit: £85,000 per eligible person per authorised bank
• Need: possible access to the money at short notice

Which description best matches the cash holding?

• A. It offers certainty of full access only if the client gives notice before withdrawing.
• B. It is protected only up to £15,000, with £85,000 above the limit.
• C. It is fully protected because it is held in an instant-access account.
• D. It is highly liquid, but £15,000 is above the stated deposit protection limit.

Best answer: D

What this tests: Financial Assets and Markets

Explanation: An instant-access cash deposit is normally suitable where the saver may need money at short notice, because access is the key feature. Deposit protection is a separate issue. Using the stated limit, the protected amount is £85,000 and the excess is £100,000 - £85,000 = £15,000. Cash deposits can provide capital certainty in normal conditions, but that does not mean every pound is covered if a bank fails. Notice accounts or fixed-term deposits may offer different rates, but they reduce immediate access.

• Full protection confuses account access with deposit protection; instant access does not increase the protection limit.
• Treating £15,000 as the protected amount reverses the calculation.
• Requiring notice does not match an instant-access account and would weaken short-notice liquidity.

Instant access supports short-notice liquidity, while £100,000 less the £85,000 protection limit leaves £15,000 unprotected.

Question 33

Topic: Bonds

Which bond issue is best classified as a eurobond?

• A. A Canadian company issuing US dollar bonds in London
• B. A UK company issuing sterling bonds in London
• C. A Canadian company issuing sterling bonds in London
• D. A Canadian company issuing Canadian dollar bonds in Toronto

Best answer: A

What this tests: Bonds

Explanation: The key distinction is the relationship between the market of issue, the bond’s currency, and the issuer. A domestic bond is issued by a domestic borrower in its home market and home currency. A foreign bond is issued by a foreign borrower in a domestic market and in that market’s currency. A eurobond is issued outside the domestic market of the currency in which it is denominated.

Here, the Canadian company is issuing US dollar bonds in London, so the currency is US dollars but the issue market is outside the US. That matches a eurobond. The closest alternative is the Canadian company issuing sterling bonds in London, which is a foreign bond because the issuer is foreign to the UK market but uses that market’s currency.

• Home market issue: A UK company issuing sterling in London is a domestic bond because the issuer, market, and currency all match.
• Foreign issuer in local currency: A Canadian company issuing sterling in London is a foreign bond, not a eurobond, because it is issued in the UK market in sterling.
• Domestic Canadian issue: A Canadian company issuing Canadian dollars in Toronto is also a domestic bond because it is issued at home in the home currency.

A eurobond is issued outside the home market of its currency, so US dollar bonds issued in London meet the definition.

Question 34

Topic: Taxation, Investment Wrappers and Trusts

In a trust, which party holds legal ownership of the assets and controls them for the benefit of the beneficiaries?

• A. Trustee
• B. Settlor
• C. Executor
• D. Beneficiary

Best answer: A

What this tests: Taxation, Investment Wrappers and Trusts

Explanation: The key distinction in a trust is between legal ownership and beneficial interest. The trustee holds the legal title to the trust assets and makes decisions about administration, subject to the terms of the trust and fiduciary duties. The beneficiaries are the people entitled to benefit from the trust property, while the settlor is the person who created the trust by placing assets into it. An executor is different again: that role relates to administering a deceased person’s estate, not acting as the ongoing legal owner of trust assets unless separately appointed. Where the question points to legal control exercised for others’ benefit, the correct term is trustee.

• Settlor: this is the person who creates or funds the trust, not the party who usually holds legal title after it is set up.
• Beneficiary: this party has the benefit of the trust assets, but not the legal ownership and control described in the stem.
• Executor: this role concerns administering an estate after death, so it is not the standard term for controlling trust assets.

A trustee holds the legal title to trust assets and must manage them for the beneficiaries.

Question 35

Topic: Financial Advice

Which term describes the people legally responsible for collecting a deceased person’s assets, settling debts, and distributing the estate?

• A. Trustees
• B. Attorneys
• C. Personal representatives
• D. Beneficiaries

Best answer: C

What this tests: Financial Advice

Explanation: The core concept is estate administration after death. Personal representatives is the general legal term for the people authorised to administer a deceased person’s estate. If there is a valid will, they are usually the executors named in it. If there is no will, administrators are appointed instead. Their role is to collect assets, pay debts and taxes, and distribute the estate to the correct recipients.

Trustees are different because they manage trust property, not the general estate of a deceased person. Beneficiaries receive assets but do not automatically administer the estate. Attorneys act under a power of attorney during the donor’s lifetime, and that authority normally ends on death.

A useful distinction is that personal representatives deal with the estate first; trustees may become involved later if assets are held in trust.

• Trustees: manage assets held in a trust for beneficiaries, rather than administering the whole estate after death.
• Beneficiaries: are entitled to receive assets, but they are not automatically the people with legal authority to collect and distribute the estate.
• Attorneys: can act for a living person under a power of attorney, but that authority usually stops when the person dies.

Personal representatives are the executors or administrators who administer a deceased person’s estate.

Question 36

Topic: Other Financial Products

A customer is comparing two ways to borrow £20,000. Based only on the product notes, which conclusion is best supported?

• A. Offer A is secured borrowing: the home is used as collateral, giving the lender more protection and a lower stated APR.
• B. Offer B has the lower stated borrowing cost because 12.4% is below 7.2%.
• C. Offer A is unsecured borrowing because the funds are not being used to buy the property.
• D. Offer B is secured borrowing because its higher APR means the lender has greater protection.

Best answer: A

What this tests: Other Financial Products

Explanation: Secured borrowing is backed by a specific asset, such as a property, that gives the lender protection if the borrower defaults. This usually lowers the lender’s risk and can result in a lower borrowing cost than comparable unsecured credit. Unsecured borrowing is not backed by specific collateral, so the lender relies more on the borrower’s creditworthiness and may charge a higher rate. Here, Offer A states that there is a legal charge over the borrower’s home, so it is secured. Offer B states that no security is required, so it is unsecured. The APRs shown also support the usual pattern: 7.2% for the secured loan and 12.4% for the unsecured loan.

• Treating Offer A as unsecured ignores the legal charge over the home.
• Treating Offer B as secured confuses a higher APR with lender protection; the notes say no security is required.
• Reading 12.4% as lower than 7.2% misreads the stated borrowing costs.

A legal charge over the home makes Offer A secured, and its APR is lower than the unsecured personal loan shown.

Question 37

Topic: Equities

A UK investment platform holds a client’s shares through a nominee account, maintains records of the client’s holdings, receives dividends, and processes corporate actions on the client’s behalf. Which broad function is the platform mainly providing?

• A. Clearing
• B. Settlement
• C. Secondary-market trading
• D. Custody

Best answer: D

What this tests: Equities

Explanation: Custody is the post-trade function of safeguarding client assets and administering holdings. In a nominee arrangement, the platform or its custodian holds the shares on behalf of the client, keeps records of the client’s position, collects income such as dividends, and deals with corporate actions like rights issues or takeovers. Those are classic custody and asset-servicing tasks.

Settlement is the final transfer of cash and securities after a trade. Clearing comes before settlement and focuses on confirming and calculating obligations between parties. Secondary-market trading is the buying and selling of existing shares, not the ongoing safekeeping of them.

The key pattern is ongoing safekeeping and administration, which points to custody.

• Settlement: this is the completion stage where cash and shares are exchanged, not the ongoing holding and servicing of investments.
• Clearing: this is the matching and netting of trade obligations before completion, rather than maintaining client holdings.
• Secondary-market trading: this is the buying and selling of existing shares on the market, not the post-trade administration of assets.

Custody is the safekeeping and administration of investments, including holding assets, recording holdings, and handling dividends and corporate actions.

Question 38

Topic: Bonds

An investor is considering £10,000 nominal of a corporate bond. It pays a 4% annual coupon, is priced at £96 per £100 nominal, and its terms allow exchange into a fixed number of the issuer’s ordinary shares before maturity. The investor wants the feature that provides potential equity upside while still understanding the income yield. Which description is correct?

• A. A conversion right, with a flat yield of about 3.8%
• B. Senior secured ranking, with a flat yield of about 96.0%
• C. Index linkage, with a flat yield of about 4.2%
• D. A conversion right, with a flat yield of about 4.2%

Best answer: D

What this tests: Bonds

Explanation: A bond that can be exchanged into a fixed number of the issuer’s ordinary shares is a convertible bond. That feature is relevant to an investor seeking potential equity participation. The flat yield is a simple income measure: annual coupon divided by current market price. For each £100 nominal, the annual coupon is £4 and the price is £96, so the flat yield is \(4 / 96 \times 100\), approximately 4.2%. Flat yield does not measure the value of the conversion right, redemption at maturity, or default risk.

• Index linkage would relate payments to inflation; no inflation adjustment is described.
• A 3.8% yield would use the wrong price basis, such as treating the bond as priced above par.
• Senior secured ranking concerns credit priority and security, and £96 is the price per £100 nominal, not a 96.0% yield.

The exchange into ordinary shares is a conversion right, and the flat yield is £4 coupon divided by £96 price, or about 4.2%.

Question 39

Topic: Financial Assets and Markets

A company has £1,000,000 that must be available in 28 days. Its treasury policy says the cash should be placed in a money-market instrument only if it matures by that date, with lowest credit risk preferred over the highest return. Each quoted instrument pays £1,000,000 at maturity.

Which instrument should be selected?

• A. Certificate of deposit
• B. Commercial paper
• C. UK Treasury bill
• D. Corporate bond

Best answer: C

What this tests: Financial Assets and Markets

Explanation: A Treasury bill is a short-term money-market instrument issued by the government, normally sold at a discount and redeemed at face value at maturity. In this case, the cash is needed in 28 days and the policy prioritises lowest credit risk over return. The Treasury bill fits the 28-day maturity requirement and has lower credit risk than commercial paper issued by a company. Although the commercial paper offers a larger cash gain (£2,000 rather than £1,200), it does not satisfy the preference for the lowest credit risk. The certificate of deposit and corporate bond do not match the time horizon.

• Commercial paper matures in 28 days and gives a higher discount return, but it carries corporate credit risk.
• The certificate of deposit is a money-market instrument, but its 90-day maturity is too long for the cash need.
• The corporate bond is a longer-term capital-market instrument, not a suitable 28-day liquidity placement.

It matures within the 28-day need and has the lowest credit risk among the listed money-market choices.

Question 40

Topic: Other Financial Products

Amira needs £1,500 for a 30-day cash shortfall and will repay the borrowing in full at the end of 30 days. For comparison, treat 30 days as one month and ignore compounding.

Which statement correctly interprets the borrowing choices?

• A. The credit card cash withdrawal costs about £60 and is generally the best match because credit cards are designed mainly for cash borrowing.
• B. The credit card cash withdrawal costs about £30 because the fee is not charged if the balance is repaid after one month.
• C. The personal bank loan costs about £30 because only one month of a 12-month facility is being used.
• D. The arranged overdraft costs about £30 and is the most flexible fit for a short temporary cash shortfall.

Best answer: D

What this tests: Other Financial Products

Explanation: Cost comparison should follow the stated product terms. For the arranged overdraft, the one-month interest is £1,500 × 2% = £30. For credit card cash borrowing, the 2% fee is £30 and the 2% interest is another £30, so the cost is about £60. The loan cost is given as £75 if repaid after 30 days. This makes the overdraft the lowest-cost choice here, and its structure is also the natural fit for a temporary current-account shortfall because it can be drawn and repaid flexibly. A bank loan is usually more structured and suited to planned borrowing over a set term. Credit cards are typically more suitable for purchases than for cash withdrawals, which can carry extra charges.

• The bank loan should not be treated as a pro-rated 12-month cost; the table gives a £75 cost if settled after 30 days.
• Ignoring the credit card cash withdrawal fee understates the cost of that borrowing.
• Calculating the credit card cost as £60 is arithmetically right, but it is still more expensive than the overdraft and is not usually the best match for short-term cash borrowing.

The cost is £1,500 × 2% = £30, and an arranged overdraft is normally flexible current-account borrowing for short-term needs.

Question 41

Topic: Investment Funds

Which statement correctly distinguishes a UK unit trust from a UK OEIC in legal form and key parties?

• A. Unit trust: trust, units, trustee; OEIC: company, shares, authorised corporate director and depositary.
• B. Unit trust and OEIC: both companies; the difference is only trustee versus depositary.
• C. Unit trust: trust, shares, authorised corporate director; OEIC: company, units, trustee.
• D. Unit trust: company, shares, authorised corporate director; OEIC: trust, units, trustee.

Best answer: A

What this tests: Investment Funds

Explanation: The core distinction is legal structure. A unit trust is created under a trust deed, and investors are unitholders in a trust arrangement; the trustee holds the scheme property on behalf of investors. An OEIC, by contrast, is an incorporated open-ended investment company, so investors hold shares in a company. Its day-to-day management is carried out by the authorised corporate director, while the depositary performs an independent oversight and safekeeping role.

Both are pooled, open-ended funds and can look similar from an investor’s perspective, but they are not the same legal form. The common exam trap is to swap the trustee structure of a unit trust with the corporate structure of an OEIC.

• Reversing the structures is the main trap: the trust structure belongs to the unit trust, not the OEIC.
• Giving a unit trust shares and an authorised corporate director mixes OEIC features into a trust-based fund.
• Saying both are companies confuses open-ended dealing with legal form; legal structure is one of the key differences.

A unit trust is a trust-based fund with a trustee, whereas an OEIC is an incorporated fund run by an authorised corporate director with a depositary.

Question 42

Topic: Financial Assets and Markets

A UK charity has £500,000 that will be needed in three months for a property purchase. It wants a low-risk instrument that is normally highly liquid and used for short-term cash management. Which investment is the single best choice?

• A. A 5-year sterling corporate bond
• B. Ordinary shares in a FTSE 100 company
• C. A 3-month UK Treasury bill
• D. A 10-year UK gilt

Best answer: C

What this tests: Financial Assets and Markets

Explanation: The key distinction is that money-market instruments are short-dated, typically maturing within one year, and are commonly used for short-term borrowing or temporary cash investment. A 3-month UK Treasury bill fits the charity’s need to hold cash safely for only three months while keeping the investment normally highly liquid.

Capital-market instruments are generally used for longer-term funding and investment. A 10-year gilt and a 5-year corporate bond both have much longer maturities, so their market prices can move more over a short holding period. Ordinary shares have no maturity date at all and carry equity market risk. For a known short-term cash need, the money-market instrument is the most suitable choice.

• A long-dated gilt can be liquid, but its 10-year maturity makes it a capital-market instrument with more interest-rate risk over a three-month holding period.
• A 5-year corporate bond is medium-term debt used for longer-term funding, not typical short-term cash management.
• Ordinary shares may be easy to trade, but they have no maturity date and can fall sharply in value before the cash is needed.

A 3-month UK Treasury bill is a money-market instrument with very short maturity and high liquidity, making it suitable for temporary cash placement.

Question 43

Topic: Derivatives

Which statement correctly distinguishes hedging from speculation when derivatives are used?

• A. Hedging and speculation both require ownership of the underlying asset.
• B. Hedging is only done with options, while speculation is only done with futures.
• C. Hedging reduces an existing risk exposure; speculation seeks profit from price movements.
• D. Hedging increases market exposure; speculation reduces it.

Best answer: C

What this tests: Derivatives

Explanation: At foundation level, derivatives are commonly used for hedging, speculation, and exposure management. Hedging means using a derivative to offset or reduce the effect of an adverse move in an existing position, such as protecting a shareholding or currency exposure. Speculation is different: the investor takes on market exposure through the derivative because they expect prices to move in their favour.

A derivative does not have to eliminate all risk to be a hedge; it is used to manage risk. Equally, speculation does not require owning the underlying asset first. Both futures and options can be used for either purpose, depending on the objective.

The main test is the intention behind the trade: risk reduction points to hedging, while seeking gain from price direction points to speculation.

• Reversed purpose: Saying hedging increases exposure and speculation reduces it turns the definitions around.
• Ownership confusion: A speculator can use derivatives without holding the underlying asset, so ownership is not required for both uses.
• Instrument confusion: Both options and futures can be used for hedging or speculation; the use depends on the objective, not the contract type.

Hedging offsets or limits an existing exposure, while speculation deliberately takes exposure to profit from market moves.

Question 44

Topic: Financial Services Regulation

A compliance trainee is comparing two UK anti-money-laundering frameworks. One is mainly concerned with criminal offences, criminal property and suspicious activity reporting. The other sets preventive requirements for relevant firms, including customer due diligence, record keeping and ongoing monitoring. Which framework best matches the preventive requirements described?

• A. The Financial Services and Markets Act
• B. The Data Protection Act
• C. The Money Laundering Regulations
• D. The Proceeds of Crime Act

Best answer: C

What this tests: Financial Services Regulation

Explanation: At foundation level, the Proceeds of Crime Act is mainly associated with money laundering offences, criminal property and the duty to report suspicions through the appropriate internal and external reporting channels. The Money Laundering Regulations focus on prevention within regulated firms. They require firms to have proportionate AML systems and controls, verify customer identity, understand the purpose of the relationship, keep records and monitor transactions on an ongoing basis. In the scenario, the decisive differentiator is the set of preventive firm-level controls, so the Money Laundering Regulations are the correct match.

• The Proceeds of Crime Act is linked to offences and reporting suspicions, not the main customer due diligence framework.
• The Financial Services and Markets Act is central to UK financial services regulation, but it is not the specific AML customer due diligence regime described.
• The Data Protection Act concerns personal data handling, not the main AML prevention requirements for regulated firms.

The Money Laundering Regulations set preventive AML obligations for relevant firms, including customer due diligence, record keeping and ongoing monitoring.

Question 45

Topic: Bonds

A client comparing corporate bonds says the priority is predictable cash income, not inflation protection or a chance to convert into shares. Which bond feature is most relevant?

• A. A subordinated ranking behind other bondholders
• B. A fixed coupon payable on stated dates
• C. An index-linked coupon adjusted for inflation
• D. A conversion right into the issuer’s ordinary shares

Best answer: B

What this tests: Bonds

Explanation: For an investor seeking predictable income from a bond, the key feature is a fixed coupon. The coupon rate and payment dates are set when the bond is issued, so the investor can estimate the cash interest they will receive, subject to the issuer remaining able to pay. Index-linked bonds are more relevant where the investor is concerned about inflation eroding purchasing power. Convertible bonds are relevant where the investor wants possible equity participation. Ranking and security are more relevant to credit risk and recovery if the issuer defaults.

• Index-linked coupons address inflation protection, not the main need for known cash income.
• Conversion rights provide potential equity upside, but they do not make bond income more predictable.
• Subordinated ranking usually increases credit risk compared with senior debt, so it does not support predictable income security.

A fixed coupon gives the investor known interest payments, supporting predictable income.

Question 46

Topic: Taxation, Investment Wrappers and Trusts

Priya, a UK retail investor, buys £15,000 of shares in a large UK-listed company on the main market through an online broker in a standard dealing account. Which tax is most closely linked to the purchase itself?

• A. Inheritance tax
• B. Capital gains tax
• C. Stamp duty reserve tax
• D. Income tax

Best answer: C

What this tests: Taxation, Investment Wrappers and Trusts

Explanation: The key tax point is matching the tax to the event that triggers it. Priya has made a purchase of shares in a UK company on the main market through a standard dealing account. At foundation level, the tax associated with buying such shares is stamp duty reserve tax, commonly grouped under stamp duty on share purchases. She has not sold the investment, so capital gains tax is not the issue. She is not receiving salary, interest, or dividends in the scenario, so income tax is not the main tax here. Inheritance tax concerns estates and certain transfers of wealth, not an ordinary market purchase.

The key takeaway is to identify the taxable event first: here, it is the purchase itself.

• Sale versus purchase: Capital gains tax is considered when an asset is disposed of at a taxable gain, not when it is first bought.
• Income versus transaction: Income tax applies to taxable income such as earnings, interest, or dividends, rather than to the act of purchasing shares.
• Estate transfer: Inheritance tax is linked to death and some lifetime transfers, so it does not fit a routine broker purchase.

Buying most UK main-market shares is associated with stamp duty reserve tax, rather than taxes on gains, income, or transfers on death.

Question 47

Topic: Investment Funds

Which statement best describes an exchange-traded fund (ETF)?

• A. It is a short-term debt instrument issued at a discount and redeemed at par.
• B. It is a closed-ended company that always trades exactly at net asset value.
• C. It trades on an exchange during market hours and may use physical or synthetic replication.
• D. It is bought and sold only once each day and must use physical replication.

Best answer: C

What this tests: Investment Funds

Explanation: The core features of an ETF are its trading style and its replication method. Unlike an OEIC or unit trust, an ETF is bought and sold on an exchange during market hours, so investors can trade it intraday. Many ETFs aim to track an index rather than outperform it.

To do this, an ETF may use:

• physical replication, by holding the underlying securities
• synthetic replication, by using derivatives such as swaps

That combination of exchange trading and either physical or synthetic index tracking is what makes the description of an ETF correct. The closest confusion is with open-ended funds, which are commonly priced and dealt once per day rather than traded continuously on an exchange.

• The once-daily dealing description fits open-ended funds such as OEICs or unit trusts more closely, and ETFs are not limited to physical replication.
• The closed-ended company description points towards an investment trust, and market prices do not have to match net asset value exactly.
• The short-term debt instrument description is commercial paper, not a pooled investment fund.

ETFs are exchange-traded pooled funds, and index exposure can be achieved by holding assets directly or via derivatives.

Question 48

Topic: Financial Services Regulation

An employee of a UK-listed company learns confidential, price-sensitive takeover information before it is public. The company’s ordinary shares are admitted to trading on a UK regulated market. Before the announcement, she buys shares and tells a friend the offer detail so the friend can buy too.

Ignoring costs and tax, which statement correctly identifies the conduct and the simple price gain on the employee’s purchase?

• A. Her purchase is not insider dealing once the offer is announced; the simple price gain is £30,000.
• B. Her conduct is market manipulation rather than insider dealing because the price increase is takeover-related; the simple price gain is £300.
• C. Her conduct is only a company policy breach because ordinary shares are not covered by market abuse rules; the simple price gain is £3,000.
• D. Her purchase is insider dealing and the tip-off is unlawful disclosure and encouragement in a covered share; the simple price gain is £3,000.

Best answer: D

What this tests: Financial Services Regulation

Explanation: Inside information is specific, non-public information likely to affect the price of a covered financial instrument. A listed company’s ordinary shares admitted to trading on a UK regulated market are covered instruments. Buying those shares before the takeover information is public is dealing on inside information. Passing the offer detail to a friend so the friend can trade is also prohibited as unlawful disclosure and encouragement. The figure interpretation is simple: 500p - 400p = 100p, or £1, per share. On 3,000 shares, that is a £3,000 simple gain before costs and tax.

• Treating ordinary shares as outside the rules is wrong; listed shares admitted to trading are covered instruments.
• Market manipulation normally concerns misleading transactions, orders, or information that distort the market; trading ahead of confidential takeover news is insider dealing.
• The next-day announcement does not remove the problem, because the trade and tip-off happened while the information was still non-public.
• Gains of £300 or £30,000 come from decimal or pence-to-pounds conversion errors; 100p equals £1 per share.

The shares are covered instruments, and the conduct uses and passes on inside information before it is public, with a 100p gain on 3,000 shares.

Question 49

Topic: Financial Services Regulation

A new analyst at a UK wealth manager is reviewing a training note on regulators before joining a client-service team. Which conclusion is best supported by the note?

Regulatory briefing extract
FCA: UK conduct regulator for financial services firms and markets.
PRA: UK prudential regulator for banks, insurers and major investment firms.
ESMA: EU securities markets authority promoting consistent regulation and investor protection.
SEC: US securities regulator overseeing securities markets and issuer disclosure.

• A. The PRA is the main UK body for resolving individual customer complaints against investment firms.
• B. ESMA sets UK financial conduct rules because it is the European authority named in the note.
• C. The SEC supervises UK investment firms whenever they provide services to UK retail clients.
• D. The FCA focuses on UK conduct standards, while ESMA and the SEC relate to securities regulation in the EU and US respectively.

Best answer: D

What this tests: Financial Services Regulation

Explanation: At a high level, financial-services regulators have different responsibilities and jurisdictions. In the UK, the FCA is the main conduct regulator, concerned with firm behaviour, market integrity and consumer protection. The PRA is a prudential regulator, focused on the safety and soundness of banks, insurers and major investment firms. At European level, ESMA is concerned with securities markets and consistency of regulation across EU markets. In the US, the SEC regulates securities markets and issuer disclosure. The note does not support extending any regulator’s role beyond its stated jurisdiction or function.

• Treating the PRA as a complaints-resolution body confuses prudential supervision with consumer redress.
• Saying ESMA sets UK conduct rules overstates the role shown in the note.
• Saying the SEC supervises UK-only retail services ignores the note’s US securities-market scope.

The note links the FCA to UK conduct regulation and identifies ESMA and the SEC as securities regulators for the EU and US.

Question 50

Topic: Taxation, Investment Wrappers and Trusts

Daniel holds shares outside any wrapper that have risen sharply in value. He wants to give half to his wife before any sale, and they are married and living together. If he wants to avoid an immediate tax charge on the existing gain, which tax treatment is most likely to apply?

• A. CGT is charged immediately on market value
• B. Income tax is due on the unrealised gain
• C. The dividend allowance covers the transfer
• D. No gain/no loss treatment usually applies for CGT

Best answer: D

What this tests: Taxation, Investment Wrappers and Trusts

Explanation: The core concept is the CGT no gain/no loss rule for transfers between spouses or civil partners who are living together. A gift of shares would usually count as a disposal for CGT, but this specific exemption means the transfer is treated in a way that creates neither an immediate gain nor an immediate loss. The original gain is effectively deferred, and the receiving spouse takes over the asset for a later CGT calculation when it is eventually sold.

Income tax and the dividend allowance deal with income, not capital growth. The nearest alternative is immediate CGT on market value, which is often relevant for gifts to other people, but not for a qualifying spouse transfer.

• Wrong tax type: Income tax does not apply just because shares have risen in value; unrealised growth is a capital gains issue.
• Wrong allowance: The dividend allowance relates to dividend income received, not to transferring shares with a built-up gain.
• Usual rule, but not here: Market-value disposal can apply to gifts, but a transfer between spouses living together is normally treated differently for CGT.

Transfers between spouses living together are generally no gain/no loss for CGT, so the existing gain is not taxed immediately.

Exam snapshot

Full-length exam mix

Continue in the web app

Use Finance Prep for interactive CISI Intro practice with mixed sets, timed mock exams, topic drills, explanations, and progress tracking.

Focused topic pages

• Free CISI Intro Practice Questions: Introduction
• Free CISI Intro Practice Questions: Economic Environment
• Free CISI Intro Practice Questions: Financial Assets and Markets
• Free CISI Intro Practice Questions: Equities
• Free CISI Intro Practice Questions: Bonds
• Free CISI Intro Practice Questions: Derivatives
• Free CISI Intro Practice Questions: Investment Funds
• Free CISI Intro Practice Questions: Financial Services Regulation
• Free CISI Intro Practice Questions: Taxation, Investment Wrappers and Trusts
• Free CISI Intro Practice Questions: Other Financial Products
• Free CISI Intro Practice Questions: Financial Advice

Practice next step

Use the full Finance Prep practice page above for the latest review links and practice page.