Try 10 focused CISI IM questions on Securities Valuation, with answers and explanations, then continue with Securities Prep.
| Field | Detail |
|---|---|
| Exam route | CISI IM |
| Issuer | CISI |
| Topic area | Securities Valuation |
| Blueprint weight | 21% |
| Page purpose | Focused sample questions before returning to mixed practice |
Use this page to isolate Securities Valuation for CISI IM. Work through the 10 questions first, then review the explanations and return to mixed practice in Securities Prep.
| Pass | What to do | What to record |
|---|---|---|
| First attempt | Answer without checking the explanation first. | The fact, rule, calculation, or judgment point that controlled your answer. |
| Review | Read the explanation even when you were correct. | Why the best answer is stronger than the closest distractor. |
| Repair | Repeat only missed or uncertain items after a short break. | The pattern behind misses, not the answer letter. |
| Transfer | Return to mixed practice once the topic feels stable. | Whether the same skill holds up when the topic is no longer obvious. |
Blueprint context: 21% of the practice outline. A focused topic score can overstate readiness if you recognize the pattern too quickly, so use it as repair work before timed mixed sets.
These questions are original Securities Prep practice items aligned to this topic area. They are designed for self-assessment and are not official exam questions.
Topic: Securities Valuation
An investment manager holds a conventional gilt that she wants to keep as a strategic holding, but she needs £8 million for 14 days. Separately, she must match a client’s single lump-sum liability payable exactly in six years. Which action best applies fixed-income principles?
Best answer: A
What this tests: Securities Valuation
Explanation: A redemption strip is the cleanest match for a single known liability date because it pays one amount at maturity. A repo is the standard secured way to raise short-term liquidity from an existing bond holding, whereas a reverse repo uses cash rather than raises it.
Two principles apply here. First, a strip created from the gilt’s redemption cash flow is appropriate for a single lump-sum liability on a known future date, because it is a zero-coupon instrument paying only at maturity. Coupon strips represent separated coupon payments, so they are suited to matching interim income dates rather than one final liability. Second, a repo is a short-term secured financing transaction that raises cash against the gilt while allowing the manager to retain the holding for strategic purposes after the repo ends. A reverse repo is the opposite cash direction: it places cash rather than obtains it.
The closest alternatives either use the wrong strip for the liability, or they raise cash in a way that conflicts with retaining the gilt exposure.
A redemption strip matches one payment on one date, and a repo raises short-term cash against the gilt without permanently selling it.
Topic: Securities Valuation
A cautious portfolio manager needs to place a client’s GBP liquidity reserve for the next 180 days.
| Instrument | Annualised yield | Maturity | Credit quality |
|---|---|---|---|
| UK Treasury bill | 4.55% | 180 days | UK sovereign |
| Bank CD | 4.80% | 90 days | A-1/P-1 |
| Commercial paper | 5.00% | 30 days | A-2/P-2 |
Assume any instrument maturing before day 180 must be rolled over at unknown future rates. Which interpretation is best supported?
Best answer: B
What this tests: Securities Valuation
Explanation: For a 180-day liquidity reserve, attractiveness depends on more than the highest quoted annualised yield. The Treasury bill matches the full holding period, avoids rollover uncertainty, and has the strongest credit quality, so it is the best-supported choice.
The key concept is that money-market attractiveness depends on both credit quality and rollover assumptions. A quoted yield on a 30-day or 90-day instrument is only the first-period yield; if the cash must stay invested for 180 days, the realised return depends on the unknown rates available when the instrument matures and is reinvested. The 180-day Treasury bill avoids that uncertainty because it covers the full horizon from the outset.
Credit quality also matters. The Treasury bill has sovereign credit exposure, the bank CD has high but lower bank credit exposure, and the commercial paper has weaker short-term credit quality at A-2/P-2. For a cautious liquidity reserve, locking in the period and reducing credit risk can outweigh a modest headline yield pickup. The bank CD is the closest alternative, but it still leaves one reinvestment decision after 90 days.
It locks in the return for the full 180 days and offers the strongest credit quality, unlike the shorter instruments that add rollover uncertainty and weaker credit.
Topic: Securities Valuation
A portfolio manager reviews a convertible bond position. Assume each £100 nominal converts into ordinary shares at the stated conversion price.
| Item | Value |
|---|---|
| Ordinary share price | £24 |
| Convertible bond price per £100 nominal | £122 |
| Straight bond value per £100 nominal | £92 |
| Conversion price | £20 |
| Time to maturity | 4 years |
Which interpretation is best supported by the exhibit?
Best answer: B
What this tests: Securities Valuation
Explanation: The conversion value is £120 because £100 nominal converts at £20 into 5 shares, and 5 × £24 = £120. Since the convertible trades at £122, very close to conversion value and well above the straight bond value of £92, it is currently behaving more like equity than debt.
The key concept is that a convertible bond can shift between debt-like and equity-like behaviour depending on how valuable the conversion feature is. Here, the share price is above the conversion price, so the option to convert is in the money.
Because the convertible’s market price is close to £120 and far above the £92 bond floor, investors are valuing it mainly for its equity participation. If the share price fell materially below the conversion price, the instrument would tend to behave more like a conventional bond and draw support from its bond floor instead. A fixed coupon still exists, but it is not the main driver of price behaviour in this case.
At £24, the conversion value is £120, so a £122 price is being driven more by equity upside than by the £92 bond floor.
Topic: Securities Valuation
A GBP gilt portfolio has a benchmark duration of 5 years and may deviate by up to 2 years. The yield curve is flat: 2-year gilt yield 4.00% and 10-year gilt yield 4.05%. If the manager is considering moving the portfolio to 7 years’ duration solely to increase yield, which action best applies duration logic?
Best answer: D
What this tests: Securities Valuation
Explanation: A flat yield curve means longer-dated gilts offer little more yield than shorter-dated gilts. If the only reason to extend duration is to add yield, the trade-off is unattractive because interest-rate risk rises much more than income.
The key principle is compensation for duration risk. Here, extending from benchmark duration is being considered only to gain yield, but the curve is almost flat: 10-year gilts yield just 0.05% more than 2-year gilts. That tiny pickup does not usually justify materially higher price sensitivity to rate changes, so keeping duration close to benchmark is the most disciplined choice.
A normal curve can make some maturity extension more defensible because longer bonds offer a clearer yield premium. A flat curve does not. An inverted curve raises a different discussion about locking in yields and views on future rates, but it still would not justify ignoring mandate discipline. The closest trap is extending anyway on the basis that similar yields mean similar risk; duration risk still rises sharply with maturity.
A flat curve offers very little extra yield from longer maturities but materially more interest-rate sensitivity.
Topic: Securities Valuation
A manager runs a GBP investment-grade corporate bond fund benchmarked to a sterling corporate bond index. She uses long-dated gilt futures to increase the fund’s duration to the benchmark instead of buying more corporate bonds. The futures are exchange-traded, highly liquid, and the position size matches the required duration change. Which derivative risk is most likely to remain?
Best answer: B
What this tests: Securities Valuation
Explanation: The best answer is basis risk. Even with a correctly sized and liquid futures position, gilt futures will not track a corporate bond portfolio perfectly because corporate bonds are affected by credit spreads as well as government yield movements.
Basis risk arises when the derivative used for a hedge or overlay does not move closely enough with the asset or benchmark being managed. In this case, the manager uses gilt futures to adjust the duration of a sterling corporate bond fund. That can align the portfolio’s interest-rate exposure more quickly than trading cash bonds, but corporate bonds contain credit-spread risk that gilt futures do not. If gilt yields and corporate spreads move differently, the futures overlay will not replicate the benchmark perfectly, even when the duration change is correctly sized.
Leverage exists in futures because only margin is posted, but that is not the main reason the duration overlay may be imperfect here.
Gilt futures can match interest-rate duration, but they do not fully capture the credit-spread behaviour of corporate bonds.
Topic: Securities Valuation
A manager of a GBP income fund needs to meet a liability in one year and expects to hold any purchase to redemption. The fund targets a 6% running income yield. She is considering a corporate bond that pays a 7% annual coupon, trades at £112 clean just after a coupon date, and redeems at par in one year. Which assessment is the single best answer?
Best answer: B
What this tests: Securities Valuation
Explanation: Running yield considers coupon income relative to the current price, so this bond meets the 6% income target at 6.25%. But because the manager will hold to redemption, the £12 fall from £112 to £100 must also be recognised, making the gross redemption yield unattractive.
The key distinction is that running yield looks only at coupon income relative to current price, while gross redemption yield reflects both coupon income and the gain or loss between purchase and redemption. Here, running yield is 7/112 = 6.25%, so it clears the fund’s 6% income target. However, the bond is bought at a premium and will redeem at only £100 in one year, creating a £12 capital loss. Total cash received over the year is £107, which is less than the £112 paid, so the redemption-based return is negative. This is a classic case where a premium bond can look attractive on an income measure but unattractive on a total-return-to-redemption measure.
Its running yield is 7/112 = 6.25%, but holding to redemption locks in a £12 loss to par, so the gross redemption yield is negative.
Topic: Securities Valuation
A sterling-based manager must post USD 5,000,000 of collateral today and will receive the same USD amount back in 3 months.
Quotes
Ignoring transaction costs, which FX swap best meets this temporary funding need?
Best answer: D
What this tests: Securities Valuation
Explanation: An FX swap combines a spot trade with an opposite forward trade. Here the manager needs USD now but expects the same USD back in 3 months, so it should buy USD spot and simultaneously sell that USD amount forward, locking in about £4.05m on the return leg.
The core concept is that an FX swap is used for temporary currency funding or hedging when cash is needed now and reversed later. The manager needs USD today, so it must buy USD in the spot market using GBP. Because the same USD amount will be received back in 3 months, it can lock the reverse exchange by selling USD forward for GBP.
This structure provides the USD funding immediately and removes open currency exposure over the 3-month period. A forward-only trade would fix a future rate, but it would not deliver the USD needed today.
An FX swap provides USD immediately via the spot leg and locks the reverse conversion in 3 months at \(5,000,000 / 1.2350 \approx £4.05\text{m}\).
Topic: Securities Valuation
A discretionary manager has set aside £6 million for a private-market capital call due in 12 weeks. The mandate says this cash sleeve should preserve capital, provide same-day liquidity if needed, and avoid adding meaningful duration or credit-spread risk relative to its cash benchmark. Which holding is the single best temporary allocation?
Best answer: D
What this tests: Securities Valuation
Explanation: Money-market securities are mainly used to park cash when liquidity and capital preservation matter more than return enhancement. A 3-month UK Treasury bill fits the 12-week horizon closely and adds minimal duration and credit risk, so it is the best temporary allocation.
The core concept is the use of money-market securities as a low-risk liquidity sleeve within a wider portfolio. Here, the manager has a known short-term cash need, so the best instrument is the one that preserves capital, remains readily saleable, and does not introduce extra spread or duration risk. A 3-month UK Treasury bill matches the time horizon closely, has very high liquidity, and carries negligible default risk compared with bank or corporate paper.
Higher-yielding alternatives may look attractive, but they do so by taking extra credit, spread, or maturity risk that the mandate does not require.
A 3-month Treasury bill best matches the cash horizon while offering very high liquidity, minimal duration, and the strongest capital-preservation profile.
Topic: Securities Valuation
A portfolio manager wants to know by how much a convertible bond trades above its immediate conversion value, expressed as a percentage of that conversion value.
Exhibit:
| Item | Value |
|---|---|
| Bond clean price | £118 per £100 nominal |
| Conversion ratio | 5 ordinary shares |
| Current share price | £20 |
Which interpretation is best supported by the exhibit?
Best answer: B
What this tests: Securities Valuation
Explanation: Immediate conversion value is the value of the shares received on conversion: 5 × £20 = £100 per £100 nominal. The bond’s clean price is £118, so it trades £18 above conversion value. Expressed as a percentage of £100, the conversion premium is 18%.
For a convertible bond, the immediate conversion value equals the conversion ratio multiplied by the current share price. Here, that is 5 × £20 = £100 per £100 nominal. The conversion premium is the amount by which the bond price exceeds that immediate equity value, measured against the conversion value:
A positive premium is common because the convertible still has bond characteristics and embedded option value. The closest trap is using the bond price as the denominator, which gives about 15.3%, but that is not the premium over conversion value requested in the question.
Conversion value is 5 × £20 = £100, so the bond trades £18 above it, giving an 18% conversion premium.
Topic: Securities Valuation
A sterling-based portfolio manager has two currency tasks:
Which choice best applies suitable use of foreign-exchange instruments?
Best answer: C
What this tests: Securities Valuation
Explanation: The correct pairing matches each instrument to its main purpose. An FX forward hedges a known future receipt by locking the exchange rate, while an FX swap is used for short-term currency funding because it combines a spot exchange with a forward reversal.
The key principle is to match the instrument’s cash-flow pattern to the portfolio objective. An FX forward is a single agreement to exchange currencies at a future date, so it suits a known future exposure such as a dividend receipt in three months and can also be used for tactical currency exposure without trading the underlying asset today. An FX swap combines a spot exchange with an offsetting forward, so it is mainly used for temporary funding, liquidity management, or rolling an existing hedge. In this scenario, the dividend needs only a future rate lock, but the EUR funding requirement needs currency immediately and then reversal after one week. Using a forward for funding would not deliver EUR today, and using a swap for the dividend would add an unnecessary spot leg. The best choice is the one that separates pure hedging from short-term funding.
A forward fixes the rate for a known future cash flow, while an FX swap provides currency now and reverses it later.
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