Free CISI mock exam taster

Not quite. The answer is D.

A firm may describe its advice as independent only where its recommendations rest on a comprehensive and fair analysis of the products available in the market and are unbiased and unrestricted. Recommendations drawn from a chosen range of providers are restricted advice, whatever the quality of the research behind them. Taking the investment decisions under an agreed mandate is discretionary management, and dealing on the client's own choice with no recommendation at all is execution-only.

Not quite. The answer is D.

Providing a depositors' protection scheme for bank deposits is a typical central bank function, but in the UK it is operated by the Financial Services Compensation Scheme (FSCS) rather than by the Bank of England. The Bank has a monopoly on the issue of banknotes in England and Wales. As the bankers' bank, it accepts deposits from and lends to commercial banks. It supervises banks through the Prudential Regulation Authority, which is part of the Bank.

Not quite. The answer is A.

The rate a deposit-taker pays rises with the size of the sum placed with it, because one large deposit is more economical to process than many small ones, so the smallest depositors are offered the least. Retail investors place the smallest amounts of the four and sit at the bottom of that ladder. Banks and other financial institutions deal in wholesale sums and command the best terms on offer. Governments and companies also place amounts far beyond anything a personal saver holds, so neither of them is the one left with the lowest rate.

Not quite. The answer is B.

A float-adjusted calculation strips out holdings that are not readily available for trading, and a government stake in a listed company is the clearest example of one. Custodians hold shares for clients rather than owning them, and underwriters are left with shares only when an offer is undersubscribed, so neither is a strategic holder whose stake sits outside the market. Small shareholders are precisely the holders whose shares trade freely, so their holdings stay in the calculation.

Not quite. The answer is D.

The coupon and the redemption amount of an index-linked gilt are both uplifted by the inflation recorded over the life of the stock, so the holder is repaid a sum that has kept its buying power. Treasury bills are short-dated government borrowing repaid at their face value, with no adjustment for inflation. A conventional gilt carries a fixed coupon and repays its nominal value on a single stated date, whatever inflation has done in the meantime, and a dual-dated gilt differs only in showing two dates between which the government may repay that same fixed amount.

Not quite. The answer is B.

The exchange sets the quality of the underlying asset, the quantity covered by each contract, the future date and the delivery location, which is what makes one contract interchangeable with another and allows it to be traded on. That standardisation leaves the price as the single term the two parties settle between themselves. Quality, quantity and delivery location are all written into the contract specification by the exchange before any trading begins.

Not quite. The answer is C.

A unit trust is open-ended, so when money comes in the fund creates new units and issues them to the investors paying that money in, and the trust grows. Cancelling units is the opposite movement, and it happens when unitholders sell units back to the fund. Exchange trading is how an investor buys into an investment trust or an exchange-traded fund, and only the investment trust is closed-ended, with its shares in issue fixed for many years. Gearing raises money by borrowing, which changes what the fund can invest but gives a new investor no holding in it.

Not quite. The answer is A.

One of the Fundamental Rules requires a firm to deal with its regulators in an open and cooperative way and to disclose anything the Prudential Regulation Authority would reasonably expect notice of, so openness with regulators is what the disclosure falls under. Effective risk strategies and management systems concern how a firm identifies and controls the risks it runs. Due diligence concerns the skill and care with which business is carried on, and prudent conduct concerns the firm taking on no more than it can safely carry.

Not quite. The answer is C.

Everything held inside a stocks and shares ISA grows free of capital gains tax, and the dividends and interest it produces bear no further income tax. Money paid into an ISA carries no tax relief on the way in, which is what separates the wrapper from a pension. Withdrawals may be taken at any age and are free of tax whenever they are made. Nothing is added to the account by the government, and the only return is the one the investments themselves produce.

Not quite. The answer is A.

Provided every monthly payment of interest and capital is met, a repayment mortgage is certain to clear the loan by the end of the term, and that is its advantage over other forms of mortgage. A tax-efficient use of savings and greater flexibility in managing finances are the benefits of an offset mortgage, where savings are set against the loan when interest is calculated. The chance of surplus cash belongs to an interest-only mortgage, whose separate investment may grow to more than the capital owed, although nothing guarantees it.

Not quite. The answer is D.

Capacity for loss measures what the client could afford to give up before their plans were affected, so it rests on the money behind them rather than on how they feel. Risk tolerance is the willingness to sit through a fluctuation in value without an immediate wish to sell, and attitude to risk is the opinion the client holds about the risks that investing brings. Knowledge and experience covers what the client has understood and dealt in before, which governs what may be recommended rather than what a fall would cost them.

Not quite. The answer is C.

A firm dealing on an execution-only basis has to hold written evidence that it gave no advice and that it made clear it was not responsible for assessing whether the product suited the customer. A suitability report belongs to an advised sale, where the firm sets out why the transaction it recommended suits that particular client. A fact-find is the detailed survey of a client's position, preferences and objectives that precedes a recommendation. A risk profile records the risk a client is able and willing to take so that an adviser can match investments to it, and matching investments to a client is the very work an execution-only firm records that it did not do.

Not quite. The answer is A.

A target zone manages the exchange rate within a band with an upper and a lower limit, so the rate can move inside the band and the central bank intervenes only if a limit is breached. A floating-rate system has no band at all, and the rate is set by demand and supply without central bank intervention. A crawling peg also has upper and lower limits, but the band is gradually widened, often as a way of moving away from a fixed rate. A managed float, or dirty float, is largely a floating rate with occasional intervention to change its direction or speed, rather than intervention at set limits.

Not quite. The answer is B.

A certificate of deposit is what a bank issues in return for money deposited with it, and it is negotiable, so the depositor can sell it on the money markets before maturity. Commercial paper runs the other way round, since it is issued by a large company to raise money rather than given to a company that has placed money. A Treasury bill is issued by the Debt Management Office for government borrowing and carries no interest at all. A money market fund gives units in a pooled portfolio rather than an instrument issued by the institution holding the money.

Not quite. The answer is D.

Trading away from a recognised stock exchange is over-the-counter trading, and what marks it out is that the two market counterparties deal with each other directly and agree the terms between themselves rather than sending the business to a venue. Continuous two-way prices quoted by market makers describe a quote-driven system, which is found on exchanges as well as away from them and so separates nothing. A venue that matches the counterparties is an exchange or a multilateral trading facility rather than a bilateral bargain, and an over-the-counter trade is reported to the market after it has been struck.

Not quite. The answer is A.

A bond trading below its nominal value costs less than £100 for every £100 nominal, so dividing the annual coupon by that lower price gives a percentage above the coupon rate itself. The redemption yield on such a bond is higher still, since it adds the gain on repayment at nominal value to the income. The running yield is another name for the flat yield, and the dividend yield belongs to shares rather than to bonds.

Not quite. The answer is A.

A call writer that holds the shares it would have to deliver on exercise is covered, but once ABC plc sells those shares it no longer has them and its position is naked, with a theoretically unlimited risk if the price rises. It was covered only while it owned the 50,000 shares. Holder describes the buyer of an option and long describes the buyer of a future, and ABC plc wrote the options.

Not quite. The answer is A.

A price of nine-tenths of net asset value sits one-tenth below it, so the shares trade at a discount of 10% of the net asset value. A premium arises only where the price is above net asset value, and par is the standing where the two are the same. The figure of 90% is the price expressed as a proportion of net asset value rather than the shortfall that the discount measures.

Not quite. The answer is B.

The scheme pays the less knowledgeable clients of an authorised firm declared in default, and those private customers are broadly individuals and small organisations. Professional customers are the more knowledgeable clients and are excluded, even where the stockbroker holding their business collapses. A client of an unauthorised firm falls outside the scheme altogether, and shareholders in a failed firm are its owners rather than its customers.

Not quite. The answer is C.

Under a discretionary trust the trustees decide, within the criteria the settlor set, to whom income and capital are paid, so no beneficiary has a share that can be pointed to in advance. A right to the income of the fund for life belongs to the beneficiary of an interest in possession trust, whose entitlement is fixed by the deed rather than by anyone's choice. Holding the whole of the property as an absolute owner is what a bare trust gives the person it is held for. Taking the capital once the life tenant has died is the position of the remainderman under a life interest trust.