Try 10 focused CISI IRT questions on Asset Classes, with answers and explanations, then continue with Securities Prep.
| Field | Detail |
|---|---|
| Exam route | CISI IRT |
| Issuer | CISI |
| Topic area | Asset Classes |
| Blueprint weight | 14% |
| Page purpose | Focused sample questions before returning to mixed practice |
Use this page to isolate Asset Classes for CISI IRT. 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: 14% 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: Asset Classes
An adviser is comparing two listed retailers. She wants a measure that reflects the total value of each business to both shareholders and lenders, so differences in borrowing are captured. Which valuation measure best matches this description?
Best answer: C
What this tests: Asset Classes
Explanation: Enterprise value is the measure that looks at the value of the whole company to all providers of capital. That makes it more useful than equity-only measures when comparing businesses with different levels of debt.
The core concept is that enterprise value assesses the total value of a business, not just the market value of its shares. In practice, it is used when an adviser or analyst wants to compare companies whose financing structures differ, because higher or lower borrowing changes the value attributable to shareholders alone but does not change the need to consider the whole business.
A price/earnings ratio relates share price to earnings per share, and price to book compares market value with accounting net assets. Gearing measures financial leverage, not company value. The key distinction is that enterprise value adjusts the perspective from equity holders only to all capital providers.
It captures the value of the whole business, not just the equity, by incorporating debt as well as equity.
Topic: Asset Classes
Which type of bond may be written down or converted into equity automatically if the issuer’s capital ratio falls below a stated trigger?
Best answer: B
What this tests: Asset Classes
Explanation: A contingent convertible bond, often called a CoCo, is a loss-absorbing instrument. Its key feature is that conversion to equity or principal write-down happens automatically when a pre-set trigger is met, usually linked to the issuer’s regulatory capital position.
The core concept is the difference between an ordinary convertible bond and a contingent convertible bond. A contingent convertible bond is typically issued by a bank or other financial institution and is built to absorb losses in stress conditions. If the issuer’s capital ratio falls below a stated trigger, the bond can be converted into equity or written down without the holder choosing to do so.
A standard convertible bond also has an equity-conversion feature, but conversion is usually on pre-agreed terms and is not primarily a regulatory loss-absorption mechanism. A subordinated bond is defined mainly by its lower ranking in insolvency, while a perpetual bond is defined mainly by having no fixed maturity date.
The trigger-based loss-absorption feature is what makes the contingent convertible distinct.
A contingent convertible bond is designed to absorb losses if a specified capital trigger is breached.
Topic: Asset Classes
A listed company announces a share buyback funded from surplus cash. Existing shareholders who keep their shares may benefit if the lower number of shares in issue supports earnings per share and the share price. Which main source of equity return does this best illustrate?
Best answer: A
What this tests: Asset Classes
Explanation: A share buyback is a corporate action, and the benefit described for investors who keep their shares is mainly potential capital growth. The return is not coming from a cash dividend, difficulty trading the shares, or insolvency ranking.
The core concept is that a share buyback is a corporate action that can contribute to capital growth. When a company repurchases its own shares, the number of shares in issue falls. If profits are unchanged, earnings per share may rise, and the market may value the remaining shares more highly, so continuing shareholders may benefit through an increase in share price.
This is different from dividend income, where shareholders receive a direct cash distribution. It is also unrelated to liquidity risk, which is about how easily shares can be bought or sold, and liquidation risk, which concerns what ordinary shareholders may recover if the company fails.
A share buyback is a corporate action that may increase return through a higher share price rather than through a direct cash dividend.
Topic: Asset Classes
A retired client is choosing one UK share for the equity-income part of her ISA portfolio. She wants dependable natural income for at least five years and has limited capacity for loss. Which company profile is the best fit?
Best answer: A
What this tests: Asset Classes
Explanation: For an income-focused client with limited capacity for loss, the best choice is not the highest yield but the most sustainable yield. A 4.1% yield backed by 2.3x dividend cover and low gearing is more suitable than higher-yield shares with weaker cover and heavier debt.
Dividend yield should be assessed alongside dividend cover and gearing. For a client drawing natural income, a very high yield can be a warning sign if profits barely cover the dividend or the company carries high debt, because any earnings setback may force a dividend cut. The profile with a 4.1% yield gives the best balance: 2.3x cover suggests earnings more than adequately support the dividend, and 16% gearing indicates relatively modest financial leverage. The very low-yield profile may look financially strong, but it does not meet the client’s income objective. The two high-yield profiles are less suitable because their dividends are weakly covered and supported by much higher gearing. Sustainable income matters more than the highest headline yield.
This offers usable income, strong dividend cover and low gearing, making the dividend more sustainable for a lower-capacity-for-loss client.
Topic: Asset Classes
Which option best matches a product that gives a retail client indirect exposure to a diversified bond portfolio, with a manager able to alter duration and credit exposure as interest-rate and credit conditions change?
Best answer: D
What this tests: Asset Classes
Explanation: The best match is an actively managed strategic bond OEIC. It gives indirect exposure to many bonds and lets the manager change duration, sector mix and credit quality as market conditions change, which is different from both direct bond holdings and passive trackers.
The core concept is the difference between direct and indirect bond exposure, and between passive and active bond strategies. A strategic bond OEIC is a collective fund, so it can diversify across issuers, maturities and sectors. Because it is actively managed, the manager can shorten or extend duration when interest-rate expectations change, and can raise or lower credit risk as spreads and economic conditions shift.
A passive bond ETF also gives indirect diversified exposure, but its main aim is to track an index rather than make tactical duration or credit decisions. By contrast, an individual gilt or corporate bond is direct exposure to a single security with its own maturity, yield and issuer risk. The correct match is the option that combines diversification with active strategy flexibility.
A strategic bond OEIC provides diversified indirect bond exposure and allows active changes to duration and credit positioning.
Topic: Asset Classes
A UK client will need £50,000 for a house deposit in about three months, but the completion date could move forward. She says she cannot accept any loss of capital and wants the money kept in sterling. Which recommendation best applies the suitability principle?
Best answer: B
What this tests: Asset Classes
Explanation: For a known short-term sterling liability, suitability is driven by capital security and access, not by chasing extra return. An instant-access GBP deposit best matches the client’s need for no capital loss, no currency risk, and quick availability.
The core principle is to match the investment solution to the client’s time horizon, liquidity need, and capacity for loss. Here, the client has a near-term house deposit to pay in sterling, may need the funds earlier than expected, and has said she cannot accept any capital loss. That points to cash on deposit in GBP with immediate access.
A sterling money market fund is generally low risk and liquid, but it is still an investment vehicle rather than a guaranteed cash deposit, so small price fluctuations are possible. Peer-to-peer lending adds credit risk and can limit access before loans mature. Converting to US dollars introduces exchange-rate risk even if the foreign deposit rate looks higher.
A sterling money market fund is the closest alternative, but it is less suitable when the client needs maximum certainty of nominal capital.
This best matches the need for capital security, sterling denomination, and immediate access for a known short-term liability.
Topic: Asset Classes
A UK authorised property fund compares assets using adjusted first-year return = net initial yield + forecast rental growth - year-1 EPC upgrade cost. Assume tenant covenant and lease length are otherwise similar.
Exhibit:
| Property | Net initial yield | Forecast rental growth | Year-1 EPC upgrade cost |
|---|---|---|---|
| Urban logistics warehouse | 4.8% | 3.0% | 0.5% |
| Secondary office | 6.2% | -2.0% | 3.5% |
| Prime supermarket unit | 5.1% | 1.2% | 0.8% |
| Shopping centre unit | 7.0% | -1.5% | 2.0% |
Which property should the fund prefer on this measure?
Best answer: B
What this tests: Asset Classes
Explanation: The urban logistics warehouse gives the highest adjusted first-year return once both sector trend and sustainability cost are included. Its 4.8% yield plus 3.0% rental growth less 0.5% EPC spend equals 7.3%, which is above the other properties.
This tests property selection using both sector trends and ESG considerations. Forecast rental growth reflects expected occupier demand in each property segment, while the EPC upgrade cost captures the near-term sustainability spending needed to improve or maintain environmental standards.
4.8 + 3.0 - 0.5 = 7.3%6.2 - 2.0 - 3.5 = 0.7%5.1 + 1.2 - 0.8 = 5.5%7.0 - 1.5 - 2.0 = 3.5%The logistics asset ranks highest because positive rental momentum more than offsets its lower initial yield, and its EPC cost is modest. A high headline yield is less attractive when weak sector prospects or heavy retrofit costs reduce the true expected return.
It has the highest adjusted first-year return at 7.3% after allowing for rental growth and EPC upgrade cost.
Topic: Asset Classes
A retail client is considering a 6% corporate bond priced at £105. It will redeem at £100 in five years, and he expects to hold it until maturity. To treat the client fairly, which explanation best reflects the bond’s likely overall return?
Best answer: C
What this tests: Asset Classes
Explanation: Because the bond is bought above par and held to maturity, the investor will receive both coupon income and a capital loss when it redeems at £100. Gross redemption yield is the most complete single measure because it reflects both parts of fixed-income return.
The key principle is to explain bond returns using the measure that matches the client’s intended holding period and gives a fair view of likely outcomes. Here, the client expects to hold the bond until redemption, so total return comes from two main sources: the 6% coupon income and the capital loss from paying £105 now but receiving only £100 at maturity. Gross redemption yield captures both elements in one annualised measure.
Running yield is useful for current income because it compares coupon with market price, but it ignores the pull to par at redemption. The coupon rate shows income based on nominal value only, and capital return on its own ignores the coupon stream. The closest distractor is running yield, but it is incomplete when redemption value will clearly affect the outcome.
Gross redemption yield is the best single measure here because the client will receive coupons but also lose £5 of capital by redemption.
Topic: Asset Classes
Sonia is investing £12,000 into a Stocks and Shares ISA for at least 10 years. She wants broad exposure to the UK equity market, is very sensitive to ongoing charges, and does not want to depend on an active manager outperforming. Which investment is the single best recommendation?
Best answer: A
What this tests: Asset Classes
Explanation: A low-cost UK index-tracking OEIC best matches Sonia’s objectives. It gives broad diversification across the market and aims to replicate benchmark returns, fitting her wish to avoid active-manager and stock-selection risk.
The key issue is choosing between passive and active equity exposure, and between direct shares and a pooled fund. Sonia wants broad UK market exposure, low ongoing charges, and no reliance on a manager’s ability to outperform. A FTSE All-Share tracker fits all three aims: it spreads risk across many UK shares, usually keeps charges low, and is intended to follow the index rather than beat it.
For a £12,000 investment, a pooled fund is also more practical than building a small direct-share portfolio, which would be relatively concentrated and incur dealing costs. The ISA wrapper removes most tax differences between the options, so the deciding factors are diversification, strategy, and cost. A geared structure would add risk she has not asked for.
It offers broad UK market diversification at low cost and is designed to track the benchmark rather than rely on manager skill.
Topic: Asset Classes
An adviser compares two 5-year bonds issued by the same company. Both are in GBP and have the same maturity.
| Bond | Issuer rating | Bond feature | Bond issue rating | Gross redemption yield |
|---|---|---|---|---|
| Alpha | BBB | Unsecured | BBB | 5.8% |
| Beta | BBB | Fully guaranteed by the parent | A | 5.1% |
Based on the exhibit, which statement is correct?
Best answer: B
What this tests: Asset Classes
Explanation: The yield difference is 0.7%, which is 70 basis points. Beta’s parent guarantee is a credit enhancement, while the A rating is the agency’s assessment of that enhanced bond issue; the issuer itself still has a BBB rating.
The key distinction is between a credit rating and a credit enhancement. A credit rating is an agency’s opinion on creditworthiness, while a credit enhancement is a structural feature, such as a guarantee, that can improve the risk profile of a specific bond.
Here, the issuer remains rated BBB for both bonds, but Beta has a parent guarantee. That enhancement supports the bond issue, so the issue rating is higher at A. The yield difference is:
\[ \begin{aligned} 5.8\% - 5.1\% = 0.7\% = 70\text{ bp} \end{aligned} \]Investors therefore accept a lower yield on Beta because the guaranteed bond is assessed as having lower credit risk than the unsecured bond. The closest trap is assuming the issuer itself was upgraded, but only the guaranteed issue has the higher rating.
The yield gap is 0.7%, or 70 basis points, and the guarantee improves the bond’s issue-specific credit profile without changing the issuer rating.
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