This independent Quick Reference supports candidates preparing for the Chartered Institute for Securities & Investment CISI Introduction to Investment exam, code CISI Intro. Use it to review high-yield concepts, product distinctions, calculations, and exam-style decision points.
Exam-Day Mental Model
| Area | What to recognise quickly | Common exam angle |
|---|
| Economic environment | Inflation, interest rates, GDP, exchange rates, fiscal and monetary policy | “What happens to bonds/equities/currency if rates rise?” |
| Financial markets | Primary vs secondary markets, order-driven vs quote-driven, clearing and settlement | “Who issues, trades, clears, or holds the asset?” |
| Equities | Ownership, dividends, voting, capital growth, corporate actions | Ratios, rights issues, dividend entitlement |
| Bonds | Debt, coupon, maturity, yield, credit risk, duration | Price-yield inverse relationship |
| Derivatives | Futures, forwards, options, swaps; hedging vs speculation | Rights vs obligations; leverage and margin |
| Funds | Open-ended vs closed-ended, NAV, diversification, charges | “Which vehicle suits this investor?” |
| Risk and return | Market, credit, liquidity, inflation, currency, concentration risk | Match product risk to investor objective |
| Regulation and ethics | Client classification, suitability, AML, market abuse, conflicts | Identify correct conduct response |
| Tax and wrappers | Taxable account vs tax-advantaged wrapper; income vs gains | Know logic, not unsupported rates |
Core Market Structure
| Concept | Meaning | Exam trap |
|---|
| Primary market | New securities are issued to raise capital | IPOs and bond issues are primary-market events |
| Secondary market | Existing securities are traded between investors | Company usually does not receive sale proceeds |
| Issuer | Entity raising capital: company, government, supranational | Issuer risk matters most for debt repayment |
| Investor | Provides capital and expects return | Return may be income, growth, or both |
| Broker | Acts as agent for client | Usually earns commission or fee |
| Dealer / market maker | Trades as principal using own inventory | Profits from spread and price movement |
| Exchange | Organised venue for trading | Provides rules, transparency, price formation |
| Clearing house / CCP | Manages post-trade obligations and counterparty risk | Does not normally make investment decisions |
| Settlement system / CSD | Transfers securities and cash | Settlement risk is post-trade risk |
| Custodian / nominee | Holds assets for beneficial owner | Legal title and beneficial ownership may differ |
Economic Indicators and Asset-Price Impact
| Indicator / policy move | Usually suggests | Typical market impact | Watch the wording |
|---|
| Rising inflation | Purchasing power falling | Central bank may raise rates; fixed coupons become less attractive | Inflation hurts real returns even if nominal return is positive |
| Falling inflation | Price pressure easing | May support bond prices if rate cuts expected | Deflation can damage growth |
| Rising interest rates | Tighter monetary policy | Bond prices usually fall; borrowing costs rise | Short-dated bonds are usually less sensitive than long-dated bonds |
| Falling interest rates | Easier monetary policy | Bond prices usually rise; growth assets may benefit | Lower deposit income for savers |
| Strong GDP growth | Expanding economy | Can support equities and credit quality | Too-strong growth can raise inflation/rate concerns |
| Rising unemployment | Weak labour market | May reduce consumption and corporate earnings | Could also increase expectations of rate cuts |
| Currency appreciation | Domestic currency stronger | Imports cheaper; exporters may suffer | Foreign investments translate into fewer domestic-currency units |
| Currency depreciation | Domestic currency weaker | Exports may benefit; imports cost more | Foreign investments translate into more domestic-currency units |
| Steep yield curve | Long yields above short yields | Often signals growth/inflation expectations | Not a guarantee of equity gains |
| Inverted yield curve | Short yields above long yields | Often signals tight policy or recession expectations | Interpret with economic context |
Asset-Class Selection Matrix
| Investor need | More likely suitable | Less likely suitable | Key reason |
|---|
| Capital security and short horizon | Cash deposits, money-market instruments, short-dated high-quality debt | Small-cap equities, long-dated bonds, derivatives | Low volatility and liquidity matter most |
| Regular income | Bonds, income funds, dividend-paying equities, annuities | Non-income growth stocks, zero-coupon bonds | Match income timing and reliability |
| Long-term capital growth | Equities, growth funds, diversified portfolios | Cash-only strategy | Inflation erodes cash over long periods |
| Inflation protection | Real assets, inflation-linked bonds, equities with pricing power | Fixed nominal coupons | Real purchasing power is the goal |
| High liquidity | Listed securities, cash, exchange-traded funds | Direct property, private equity, thinly traded bonds | Ability to sell quickly without large price concession |
| Speculation / tactical exposure | Derivatives, leveraged products, high-beta equities | Capital-protected deposits | Higher risk and leverage may be intentional |
| Diversification | Multi-asset funds, index funds, broad ETFs | Single shares, single-sector funds | Reduces unsystematic risk |
| Known future liability | Matching-duration bonds, cash ladder | Volatile assets near liability date | Timing and certainty dominate |
Cash and Money-Market Instruments
| Instrument | Typical issuer/user | Return source | Main risks |
|---|
| Bank deposit | Bank and depositor | Interest | Bank credit risk, inflation risk, reinvestment risk |
| Treasury bill | Government | Issued at discount, redeemed at par | Low yield, inflation risk |
| Certificate of deposit | Bank | Interest or discount | Bank credit risk, liquidity before maturity |
| Commercial paper | Corporate issuer | Discount/interest | Corporate credit risk |
| Money-market fund | Fund vehicle investing in short-term instruments | Pooled short-term income | Not the same as a guaranteed bank deposit unless explicitly stated |
High-yield distinction: cash can be low-volatility but not risk-free. Inflation can produce a negative real return.
Equity Reference
Ordinary Shares
| Feature | Ordinary shareholder position |
|---|
| Ownership | Part-owner of the company |
| Return | Dividends plus capital growth or loss |
| Voting | Usually has voting rights |
| Income certainty | Dividends are discretionary |
| Insolvency ranking | Residual claim after creditors and preference shareholders |
| Risk profile | Higher risk than debt from same issuer, but higher growth potential |
Preference Shares
| Feature | Preference shares |
|---|
| Income | Usually fixed dividend preference over ordinary shares |
| Voting | Often limited or no voting rights |
| Capital | Rank ahead of ordinary shares, behind creditors |
| Cumulative preference | Missed dividends may accumulate if terms allow |
| Participating preference | May share in additional profits if terms allow |
| Convertible preference | Can convert into ordinary shares under stated terms |
Equity Ratios and Calculations
\[
\text{Market capitalisation} = \text{share price} \times \text{number of ordinary shares}
\]\[
\text{EPS} = \frac{\text{profit attributable to ordinary shareholders}}{\text{weighted average ordinary shares}}
\]\[
\text{P/E ratio} = \frac{\text{share price}}{\text{earnings per share}}
\]\[
\text{Dividend yield} = \frac{\text{dividend per share}}{\text{share price}}
\]\[
\text{Dividend cover} = \frac{\text{earnings per share}}{\text{dividend per share}}
\]
| Ratio | Interpretation | Exam trap |
|---|
| EPS | Profit per ordinary share | Use profit attributable to ordinary shareholders |
| P/E | Price investors pay per unit of earnings | High P/E may mean growth expectations or overvaluation |
| Dividend yield | Income return at current price | Yield rises if price falls, all else equal |
| Dividend cover | Ability to pay dividend from earnings | Low cover may signal dividend vulnerability |
| Market cap | Market value of equity | Not the same as book value |
Corporate Actions
| Action | What happens | Investor impact | Exam focus |
|---|
| Cash dividend | Company pays cash to shareholders | Income received; price often adjusts when ex-dividend | Cum-dividend buyer gets dividend; ex-dividend buyer usually does not |
| Scrip dividend | Dividend paid in shares instead of cash | More shares, no immediate cash | May suit reinvestment objective |
| Bonus issue / capitalisation issue | Free shares issued from reserves | More shares, lower price per share theoretically | Total value unchanged before market effects |
| Stock split | Existing shares split into more lower-priced shares | Liquidity may improve | No immediate value creation |
| Rights issue | Existing shareholders offered new shares, usually at discount | Can maintain ownership by subscribing | TERP and nil-paid rights calculations |
| Share buyback | Company repurchases its own shares | Fewer shares outstanding; may boost EPS | Consider motive and price paid |
| Takeover | One company seeks control of another | Cash, shares, or mixed consideration | Distinguish bidder and target |
\[
\text{TERP} = \frac{(\text{old shares} \times \text{old price}) + (\text{new shares} \times \text{subscription price})}{\text{old shares} + \text{new shares}}
\]
Use TERP to estimate the theoretical ex-rights price after the rights issue. Compare the old cum-rights price, subscription price, and TERP to identify the value of rights.
Bond and Fixed-Income Reference
Bond Basics
| Term | Meaning | Exam reminder |
|---|
| Nominal / face value / par | Amount on which coupon is calculated and usually repaid at maturity | Often 100 or 1,000 in examples |
| Coupon | Stated annual interest rate on nominal value | Coupon rate is not the same as yield |
| Maturity / redemption date | Date principal is repaid | Longer maturity usually means higher interest-rate sensitivity |
| Clean price | Quoted price excluding accrued interest | Common market quote |
| Dirty price | Price including accrued interest | Actual invoice amount often uses dirty price |
| Accrued interest | Interest earned since last coupon date | Paid by buyer to seller on settlement |
| Redemption yield / yield to maturity | Annualised return if held to redemption, assuming payments as expected | Incorporates coupon, price, and redemption gain/loss |
| Credit spread | Extra yield over lower-risk benchmark | Compensates for credit/liquidity risk |
\[
\text{Dirty price} = \text{clean price} + \text{accrued interest}
\]\[
\text{Running yield} = \frac{\text{annual coupon}}{\text{clean price}}
\]\[
\text{Approx. YTM} =
\frac{\text{annual coupon} + \frac{\text{redemption value} - \text{price}}{\text{years to maturity}}}
{\frac{\text{redemption value} + \text{price}}{2}}
\]
Price-Yield Relationship
| Yield movement | Existing fixed-coupon bond price | Why |
|---|
| Market yields rise | Price falls | Existing coupon is less attractive |
| Market yields fall | Price rises | Existing coupon is more attractive |
| Bond nears maturity | Price tends toward redemption value | Pull-to-par effect, assuming no default |
Bond Type Matrix
| Bond type | Key feature | Main exam point |
|---|
| Government bond | Issued by sovereign government | Often lower credit risk than corporates in same currency, but not automatically risk-free |
| Corporate bond | Issued by company | Higher credit risk; spread over government benchmark |
| Secured bond | Backed by specified assets | Higher recovery priority than unsecured debt |
| Unsecured bond | General claim on issuer | Depends on issuer creditworthiness |
| Subordinated debt | Ranks below senior debt | Higher risk, usually higher yield |
| Floating-rate note | Coupon resets to reference rate plus margin | Lower interest-rate price sensitivity |
| Zero-coupon bond | No periodic coupon; issued at discount | Return from capital accretion |
| Index-linked bond | Principal and/or coupon linked to inflation index | Helps protect real value |
| Convertible bond | Can convert into equity | Debt plus embedded equity option |
| Callable bond | Issuer can redeem early | Reinvestment risk for investor if called after rates fall |
| Puttable bond | Investor can require early redemption | Valuable protection for investor |
Bond Risk Checklist
| Risk | Affects | Example exam wording |
|---|
| Interest-rate risk | Bond price volatility | “Rates expected to rise” |
| Credit/default risk | Coupon and principal payment | “Issuer financial position deteriorates” |
| Inflation risk | Real value of fixed coupons | “Inflation unexpectedly increases” |
| Reinvestment risk | Ability to reinvest coupons | “Coupons reinvested at lower rates” |
| Liquidity risk | Ability to sell before maturity | “Thinly traded issue” |
| Currency risk | Foreign-currency bonds | “Investor reports in sterling/euros/dollars but bond pays another currency” |
| Call risk | Callable bonds | “Issuer redeems early when rates fall” |
Derivatives Reference
| Derivative | Buyer/holder position | Seller/writer position | Typical use | Main risk |
|---|
| Forward | Obligation to transact at agreed future price | Obligation to transact | Custom hedge | Counterparty risk |
| Future | Standardised exchange-traded obligation | Standardised obligation | Hedging or speculation | Margin calls, leverage |
| Call option | Right to buy underlying | Obligation to sell if exercised | Benefit from price rise, hedge short exposure | Premium loss for buyer; large risk for uncovered writer |
| Put option | Right to sell underlying | Obligation to buy if exercised | Benefit from price fall, hedge long exposure | Premium loss for buyer; large risk for writer |
| Swap | Exchange of cash flows | Exchange of cash flows | Manage rate/currency exposure | Counterparty and valuation risk |
| Warrant | Long-dated option-like security, often issued by company | Issuer obligation under terms | Leveraged equity exposure | Can expire worthless |
Option Payoff Basics
| Position | Market view | Maximum loss | Profit driver |
|---|
| Long call | Bullish | Premium paid | Underlying rises above strike plus premium |
| Short call | Neutral/bearish | Potentially unlimited if uncovered | Premium retained if option expires worthless |
| Long put | Bearish or protective | Premium paid | Underlying falls below strike minus premium |
| Short put | Neutral/bullish | Large if underlying falls sharply | Premium retained if option expires worthless |
Exam trap: an option buyer has a right, not an obligation. An option writer has the potential obligation.
Funds and Collective Investments
Open-Ended vs Closed-Ended
| Feature | Open-ended fund | Closed-ended fund |
|---|
| Capital structure | Units/shares expand or contract with investor flows | Fixed number of shares unless corporate action |
| Pricing anchor | Net asset value of underlying portfolio | Market price can trade at premium or discount to NAV |
| Liquidity | Usually dealt with fund manager/platform | Traded on exchange if listed |
| Portfolio management | May need to meet redemptions | No routine redemption pressure from investors |
| Examples | Unit trust, OEIC/ICVC, mutual fund depending on jurisdiction | Investment trust/company, listed closed-end fund |
Common Fund Types
| Fund type | Purpose | Key risk/point |
|---|
| Index tracker | Replicate index performance | Tracking error and market risk |
| Actively managed fund | Manager aims to outperform benchmark | Manager risk and higher charges |
| ETF | Exchange-traded portfolio exposure | Market price can differ from NAV; trading spread |
| Money-market fund | Short-term instruments | Low risk relative to equities, not automatically guaranteed |
| Bond fund | Diversified fixed-income exposure | Interest-rate and credit risk remain |
| Equity fund | Diversified share exposure | Market and sector risk |
| Multi-asset fund | Mix of asset classes | Asset allocation drives risk |
| Property fund | Real estate exposure | Liquidity and valuation risk |
| Fund of funds | Invests in other funds | Additional layer of charges possible |
Fund Selection Exam Checklist
| Question | Why it matters |
|---|
| Is the investor seeking income, growth, or both? | Determines asset mix and share/unit class |
| Does the investor need daily liquidity? | Property/private assets may be unsuitable |
| Is the investor cost-sensitive? | Index funds may be cheaper than active funds |
| Is diversification required? | Collective funds reduce single-security risk |
| Is the fund leveraged or derivative-heavy? | Risk may exceed investor understanding |
| Is income accumulated or distributed? | Affects cash flow and tax treatment |
| Does market price equal NAV? | Closed-ended funds and ETFs may trade away from NAV |
Portfolio and Risk Reference
Return Calculations
\[
\text{Total return} =
\frac{\text{ending value} - \text{beginning value} + \text{income}}{\text{beginning value}}
\]\[
\text{Real return} \approx \text{nominal return} - \text{inflation}
\]\[
R_p = \sum_{i=1}^{n} w_i R_i
\]
| Concept | Meaning | Exam trap |
|---|
| Nominal return | Return before inflation adjustment | Can look positive while real return is negative |
| Real return | Inflation-adjusted return | Better measure of purchasing power |
| Total return | Income plus capital gain/loss | Do not ignore dividends/coupons |
| Arithmetic average | Simple average of returns | Can overstate multi-period compounded return |
| Volatility | Degree of return variability | Risk is not only downside, but exams often link it to uncertainty |
| Correlation | How assets move relative to each other | Diversification works best with low or negative correlation |
| Beta | Sensitivity to market movements | Beta above 1 means more market-sensitive than benchmark |
Time Value of Money
\[
FV = PV(1+r)^n
\]\[
PV = \frac{FV}{(1+r)^n}
\]
| Input | Meaning | Common mistake |
|---|
| PV | Present value | Today’s value of future cash flow |
| FV | Future value | Value after compounding |
| r | Periodic rate | Match rate period to number of periods |
| n | Number of periods | Annual rate with monthly periods needs adjustment if required |
Risk Taxonomy
| Risk | Description | Product examples | Mitigation |
|---|
| Market risk | Whole market falls | Equities, funds, derivatives | Diversification, hedging, time horizon |
| Specific / unsystematic risk | Single issuer or sector suffers | Single shares, corporate bonds | Diversify |
| Credit risk | Borrower fails to pay | Bonds, deposits, OTC derivatives | Credit analysis, ratings, collateral |
| Interest-rate risk | Rate changes affect value | Fixed-rate bonds | Shorter duration, floating-rate assets |
| Inflation risk | Purchasing power declines | Cash, fixed coupons | Inflation-linked assets, growth assets |
| Liquidity risk | Cannot sell quickly at fair price | Property, small-cap shares, thin bonds | Liquidity buffer, listed assets |
| Currency risk | Exchange rate changes affect return | Overseas securities | Currency hedging, matching liabilities |
| Reinvestment risk | Cash flows reinvested at lower rates | Coupon bonds, callable bonds | Laddering, zero-coupon bonds |
| Counterparty risk | Other party fails before settlement/performance | OTC derivatives, unsettled trades | Clearing, collateral, limits |
| Operational risk | Process, system, or human failure | All financial firms | Controls, segregation of duties |
| Political/regulatory risk | Law or policy change affects investment | Emerging markets, regulated sectors | Diversification, due diligence |
| Concentration risk | Too much exposure to one holding/theme | Employer shares, single-sector funds | Asset allocation limits |
| Longevity risk | Investor outlives assets | Retirement planning | Pensions, annuities, sustainable withdrawal planning |
Investor Objectives and Suitability
| Factor | Ask | Investment implication |
|---|
| Objective | Income, growth, preservation, speculation? | Determines asset class mix |
| Time horizon | When is money needed? | Longer horizon can tolerate more volatility |
| Liquidity need | How quickly must funds be available? | Avoid illiquid assets for emergency funds |
| Capacity for loss | Can the investor financially absorb losses? | Different from willingness to take risk |
| Attitude to risk | How comfortable is the investor with volatility? | Must align with recommendation |
| Knowledge and experience | Does the investor understand the product? | Complex products may be unsuitable |
| Tax position | Income vs gains, wrapper eligibility | Changes after-tax return |
| Existing portfolio | Current concentration and diversification | Recommendation should fit total portfolio |
| Currency of liabilities | What currency are future needs in? | Avoid unmatched FX exposure |
| Ethical/ESG preferences | Any restrictions or preferences? | May constrain investment universe |
Service-Level Distinctions
| Service | Firm role | Suitability requirement logic | Candidate trap |
|---|
| Execution-only | Client decides; firm executes | Firm is not recommending | Do not treat as advice merely because trade is processed |
| Advisory | Firm recommends; client decides | Recommendation must be suitable | Client can reject advice |
| Discretionary management | Firm makes decisions under mandate | Portfolio must fit mandate and client profile | Authority must be agreed in advance |
| Custody | Firm safeguards assets | Asset protection and records focus | Not the same as portfolio management |
| Research | Provides analysis or opinion | May influence decisions | Distinguish general research from personal recommendation |
Trading, Orders, and Settlement
| Term | Meaning | Exam point |
|---|
| Bid price | Price dealer is willing to buy at | Investor selling usually receives bid |
| Offer / ask price | Price dealer is willing to sell at | Investor buying usually pays offer |
| Bid-offer spread | Difference between bid and offer | Cost of immediate liquidity |
| Market order | Execute promptly at best available price | Execution certainty, not price certainty |
| Limit order | Execute only at specified price or better | Price control, not execution certainty |
| Stop order | Triggered when price reaches stop level | May execute at worse price in fast markets |
| Order-driven market | Buyers and sellers interact through order book | Price from matched orders |
| Quote-driven market | Market makers quote bid/offer prices | Liquidity from dealers |
| Settlement date | Date cash and securities exchange | Use the convention stated in the question |
| Failed settlement | Party does not deliver cash/securities | Operational/counterparty issue |
Exam trap: buying at the offer and selling at the bid means an investor starts with a spread cost.
Financial Statements and Ratios
Statement Map
| Statement | Shows | Investment use |
|---|
| Statement of financial position / balance sheet | Assets, liabilities, equity at a point in time | Solvency, gearing, asset base |
| Income statement / profit and loss | Revenue, costs, profit over period | Earnings quality and profitability |
| Cash flow statement | Cash generated and used | Ability to fund dividends, debt, investment |
| Notes to accounts | Accounting policies and detail | Hidden obligations, segment data, contingencies |
\[
\text{Assets} = \text{Liabilities} + \text{Equity}
\]
Ratio Categories
| Category | Example ratio | What it tests |
|---|
| Profitability | Gross margin, operating margin, return on equity | Ability to generate profit |
| Liquidity | Current ratio, quick ratio | Ability to meet short-term obligations |
| Gearing / leverage | Debt-to-equity, interest cover | Financial risk from borrowing |
| Efficiency | Asset turnover, inventory turnover | Use of assets and working capital |
| Investor ratios | EPS, P/E, dividend yield | Market valuation and shareholder return |
Tax and Investment Wrappers
| Concept | Practical meaning | Exam focus |
|---|
| Income tax | Tax on interest, dividends, or other income | Distinguish income return from capital gain |
| Capital gains tax | Tax on realised gains | Sale/disposal usually matters |
| Withholding tax | Tax deducted at source, often cross-border | Affects net income received |
| Tax wrapper | Account or product with special tax treatment | Wrapper does not remove underlying investment risk |
| Pension wrapper | Long-term retirement vehicle | Access and tax rules depend on jurisdiction and product terms |
| Life assurance investment bond | Insurance-based investment wrapper | Charges, tax treatment, and access terms matter |
| Tax relief | Reduces effective cost or tax due | Do not invent rates; use rates given in question |
| Tax deferral | Tax paid later rather than now | Not the same as tax exemption |
High-yield distinction: tax treatment can change suitability, but it should not override risk tolerance, time horizon, or liquidity needs.
Regulation, Conduct, and Financial Crime
| Topic | Core principle | Exam-style trigger |
|---|
| Client classification | Different protections may apply to different client types | Retail client usually receives highest conduct protection |
| Know your customer | Gather relevant client information | Inadequate fact-find before recommendation |
| Suitability | Personal recommendation must fit client profile | Product risk exceeds capacity for loss |
| Appropriateness | Assess understanding for certain non-advised complex products | Client wants complex derivative without experience |
| Best execution | Take sufficient steps to obtain best result | Price is important but not always the only factor |
| Conflicts of interest | Identify, manage, disclose where required | Firm benefits from recommending one product |
| Client money/assets | Segregation, records, safeguarding | Firm failure or custody question |
| Complaints | Fair handling and escalation | Client alleges unsuitable advice |
| Market abuse | Insider dealing, manipulation, improper disclosure | Trading on non-public price-sensitive information |
| AML / CTF | Identify customer, monitor, report suspicion | Unusual transactions or source-of-funds concerns |
| Sanctions | Do not deal with prohibited persons/entities | Name or jurisdiction screening issue |
| Data protection / confidentiality | Protect client information | Sharing data without proper basis |
| Whistleblowing | Escalate serious misconduct | Internal misconduct ignored |
Market Abuse Traps
| Scenario | Likely issue |
|---|
| Director trades before unpublished profit warning | Insider dealing concern |
| Analyst selectively discloses unpublished takeover news | Improper disclosure concern |
| Trader places orders to create false market impression | Market manipulation concern |
| Client asks adviser to ignore source-of-funds questions | AML red flag |
| Employee accepts gift that may influence recommendation | Conflict of interest |
Product Comparison: Rights, Ranking, and Return
| Product | Legal/economic position | Income certainty | Upside | Downside priority |
|---|
| Cash deposit | Creditor of bank | Interest usually stated | Low | Depends on bank and protection regime |
| Senior secured bond | Creditor with security | Contractual coupon | Limited to coupon/redemption | Higher ranking than unsecured |
| Senior unsecured bond | Creditor | Contractual coupon | Limited | Above subordinated debt and equity |
| Subordinated bond | Junior creditor | Contractual coupon | Limited, usually higher yield | Below senior debt |
| Preference share | Hybrid-like equity | Preferential dividend, usually fixed | Limited unless participating/convertible | Above ordinary shares |
| Ordinary share | Owner/residual claimant | Dividends discretionary | High potential | Last in insolvency |
| Fund unit/share | Interest in pooled portfolio | Depends on holdings/share class | Depends on strategy | Depends on underlying assets |
| Option | Contract right/obligation | No income unless strategy produces it | Leveraged | Buyer can lose premium; writer may lose much more |
High-Yield Distinctions
| Distinction | Do not confuse |
|---|
| Coupon vs yield | Coupon is stated interest on nominal; yield depends on price and cash flows |
| Clean vs dirty price | Clean excludes accrued interest; dirty includes it |
| Nominal vs real return | Real return adjusts for inflation |
| Primary vs secondary market | New issue vs trading existing securities |
| Broker vs dealer | Agent vs principal |
| Market risk vs credit risk | Market-wide price movement vs issuer default |
| Diversification vs hedging | Spread risk vs offset a specific exposure |
| Open-ended vs closed-ended fund | Units created/redeemed vs fixed capital traded in market |
| Advice vs execution-only | Personal recommendation vs client-directed order |
| Suitability vs appropriateness | Recommendation fit vs understanding of certain non-advised complex products |
| Option buyer vs writer | Right vs obligation |
| Futures vs forwards | Standardised exchange-traded vs customised OTC |
| Income yield vs total return | Income only vs income plus capital movement |
| Tax wrapper vs investment | Account/product tax treatment vs underlying asset risk |
| Calculation | Plain-text formula | Use when |
|---|
| Future value | FV = PV x (1 + r)^n | Compounding a lump sum |
| Present value | PV = FV / (1 + r)^n | Discounting future cash flow |
| Total return | (ending value - beginning value + income) / beginning value | Include both income and price change |
| Real return approximation | nominal return - inflation | Quick purchasing-power check |
| Market capitalisation | share price x shares in issue | Company equity market value |
| EPS | profit attributable to ordinary shareholders / weighted average ordinary shares | Equity valuation |
| P/E | share price / EPS | Price relative to earnings |
| Dividend yield | dividend per share / share price | Income yield on shares |
| Dividend cover | EPS / dividend per share | Dividend sustainability |
| Running yield | annual coupon / clean price | Bond income yield |
| Dirty price | clean price + accrued interest | Bond settlement/invoice price |
| Approximate YTM | annualised coupon plus annualised capital gain/loss, divided by average of price and redemption value | Bond return estimate |
| TERP | total value of old and new shares / total shares after rights issue | Rights issue adjustment |
| Portfolio return | sum of each weight x each return | Weighted portfolio performance |
Scenario Shortcuts
| If the question says… | Think first |
|---|
| “Investor needs money in six months” | Liquidity and capital preservation |
| “Worried about inflation over 20 years” | Real return, growth assets, inflation-linked securities |
| “Needs fixed income and cannot tolerate capital loss” | Shorter duration/high-quality bonds or cash; avoid long-duration volatility |
| “Wants to protect an equity holding from a fall” | Put option or diversification/hedge |
| “Believes market will rise and wants leveraged exposure” | Long call or futures, but risk disclosure matters |
| “Company may default” | Credit risk, ranking, secured vs unsecured |
| “Rates expected to rise” | Bond prices down; floating-rate and short-duration less affected |
| “Client has no investment experience” | Suitability/appropriateness and product complexity |
| “Unusual cash movements with unclear source” | AML escalation |
| “Non-public takeover information” | Insider information; do not trade or disclose improperly |
| “Fund trades below NAV” | Closed-ended fund or ETF market-price issue |
| “Existing shareholder offered discounted new shares” | Rights issue and dilution |
Final Review Checklist
Before sitting CISI Introduction to Investment (CISI Intro), be able to:
- Explain what happens when interest rates, inflation, or exchange rates change.
- Distinguish ordinary shares, preference shares, bonds, funds, cash, and derivatives.
- Calculate basic equity ratios, bond yields, total return, present value, and rights issue TERP.
- Apply the bond price-yield relationship without hesitation.
- Identify the investor objective, time horizon, liquidity need, capacity for loss, and tax context.
- Separate market risk, credit risk, liquidity risk, inflation risk, and currency risk.
- Recognise rights vs obligations in options, futures, forwards, and swaps.
- Distinguish open-ended and closed-ended funds, including NAV premium/discount issues.
- Apply conduct principles: KYC, suitability, conflicts, best execution, client asset protection, AML, and market abuse.
- Avoid assuming tax rates, settlement cycles, or product guarantees unless the question provides them.
Next Step
Use this Quick Reference as a last-pass checklist, then complete a timed mixed-question set. After marking it, rewrite every missed question as a one-line rule, such as “rising yields mean falling fixed-rate bond prices” or “an option buyer has a right, not an obligation,” and drill those rules before your next practice attempt.