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CME-1A: Introduction to Securities and Investment (International): free practice test

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Practice test questions with answers and explanations

Try the questions in the test above first, then open each one here to see the correct answer and why every other option is wrong.

01A fund management firm outsources its investment administration to a third-party administrator (TPA). Who retains ultimate responsibility for that work?

Practice question Unit: Introduction to the Financial Services Sector

  1. AThe third-party administrator

    The TPA carries out the work, but outsourcing does not transfer ultimate responsibility to it.

  2. BThe firm that outsourced the work ✓ Correct answer

    Ultimate responsibility stays with the outsourcing firm, even though another firm performs the work.

  3. CThe custodian

    The custodian is responsible for safekeeping and settlement, not for administration that the firm outsources.

  4. DThe investors in the fund

    Investors are the clients. They are not responsible for the outsourced work.

Reference: CISI workbook "International Introduction to Securities & Investment", ch. 1, section 3.14; syllabus v19, 1.1.1

02A government faces weak demand and rising unemployment and wants to stimulate activity through fiscal policy. Which action is consistent with an expansionary fiscal policy?

Practice question Unit: Economic Environment

  1. ACutting government spending and raising taxes

    This is contractionary fiscal policy and reduces demand.

  2. BCutting government spending while leaving taxes unchanged

    Cutting spending alone lowers aggregate demand and does not stimulate activity.

  3. CRaising government spending and lowering taxes ✓ Correct answer

    Higher spending and lower taxes raise disposable income and demand, the core of expansionary fiscal policy.

  4. DRaising taxes while leaving government spending unchanged

    Higher taxes reduce the income households and firms can spend, which weakens demand.

Reference: CISI workbook "International Introduction to Securities & Investment", ch. 2, section 3.3; syllabus v19, 2.1.2

03An investor holds 5,000 of the 50,000 ordinary shares in issue (10%). The company plans to issue 20,000 new shares and respects pre-emption rights. How many new shares are offered to him so that he keeps his 10% holding?

Practice question Unit: Equities/Stocks

  1. A2,000 shares ✓ Correct answer

    Correct. 10% × 20,000 = 2,000, giving him 7,000 of 70,000 shares, which is still 10%.

  2. B1,000 shares

    Incorrect. 1,000 shares is only 5% of the new issue, so his percentage would fall after the issue.

  3. C5,000 shares

    Incorrect. This is his current holding, not his share of the new issue.

  4. D4,000 shares

    Incorrect. 4,000 shares is 20% of the new issue, more than his proportion.

Reference: CISI workbook "International Introduction to Securities & Investment", ch. 3, section 1.4.4; syllabus v19, 3.1.2

04An investor holds bonds with a nominal value of US$250,000. Their price falls from 98 to 94 per 100 nominal. By how much has the value of the holding fallen?

Practice question Unit: Bonds

  1. AUS$1,000

    The fall is larger; the price change must be applied to the whole nominal value.

  2. BUS$4,000

    This treats the 4-point price fall as a dollar amount, not a percentage of the nominal value.

  3. CUS$10,000 ✓ Correct answer

    Correct: fall = 250,000 x (98% - 94%) = 250,000 x 4% = US$10,000.

  4. DUS$235,000

    This is the new value of the holding (250,000 x 94%), not the amount of the fall.

Reference: CISI workbook "International Introduction to Securities & Investment", ch. 4, section 2.1; syllabus v19, 4.1.1

05A dealer quotes GBP/USD at 1.3040/1.3050. How many US dollars does a customer pay to buy £100,000 from the dealer?

Practice question Unit: Other Markets and Investments

  1. A76,628

    Wrong. This divides 100,000 by 1.3050, but sterling is the base currency and is multiplied by the rate.

  2. B130,400

    Wrong. This is the lower price received by someone selling sterling to the dealer.

  3. C130,450

    Wrong. This is the midpoint of the two prices, and a dealer does not trade at the midpoint.

  4. D130,500 ✓ Correct answer

    Correct. A customer buying sterling pays the higher price, 1.3050, so 100,000 × 1.3050.

Reference: CISI workbook "International Introduction to Securities & Investment", ch. 5, section 3.1; syllabus v19, 5.4.1

06An investor buys a futures contract at US$50 per barrel, and at delivery the market price is US$58. What is the effect of the contract on him per barrel?

Practice question Unit: Derivatives

  1. AA gain of US$8 ✓ Correct answer

    He pays US$50 for oil worth US$58 in the market, so he gains US$8 per barrel.

  2. BA loss of US$8

    A loss would arise if the market price fell below US$50, but here it is higher.

  3. CA gain of US$4

    The figure 4 does not come from any calculation here, since the difference between 58 and 50 is 8.

  4. DNeither a gain nor a loss

    The contract has an effect, because the buyer is bound to the agreed price, which differs from the market price at delivery.

Reference: CISI workbook "International Introduction to Securities & Investment", ch. 6, section 2.2; syllabus v19, 6.3.1

07In an index fund that is run as intended, which factor is a recognised cause of tracking error?

Practice question Unit: Investment Funds

  1. AThe manager's forecasts of how company profits will move

    Forecasting profits belongs to active management; an index fund does not attempt it.

  2. BRebalancing for index changes and investor cash flows ✓ Correct answer

    When constituents enter, leave or change weight, the fund must rebalance and manage cash flows, so its return drifts slightly from the index.

  3. CHigher research costs for each share the manager selects

    An index fund does not research individual shares, so research costs are not the cause.

  4. DHolding shares outside the index to seek extra return

    Holding shares outside the index goes against passive management as intended.

Reference: CISI workbook "International Introduction to Securities & Investment", ch. 7, section 1.2.1; syllabus v19, 7.1.2

08A product provider offers an adviser a higher bonus for selling its product, but another product suits the client better. What is the best course of action?

Practice question Unit: Financial Services Regulation

  1. ASell the bonus product, since the client is unlikely to notice the difference

    Wrong: putting personal gain ahead of the client breaches integrity and client focus.

  2. BSell the bonus product but say nothing to the client about the bonus

    Wrong: hiding the conflict goes against openness and transparency.

  3. CRefuse to serve this client and refer them to a competing adviser

    Wrong: the conflict should be managed, not used as a reason to deny the client service.

  4. DManage the conflict fairly and recommend the product that suits the client ✓ Correct answer

    Correct: conflicts must be managed fairly and the client’s interest comes first.

Reference: CISI workbook "International Introduction to Securities & Investment", ch. 8, section 4; syllabus v19, 8.1.4

09A borrower pays a quoted rate of 8% a year, charged quarterly. What is the approximate effective annual rate (EAR)?

Practice question Unit: Other Financial Products

  1. A8.24% ✓ Correct answer

    The quarterly rate is 8% ÷ 4 = 2% = 0.02. Then 1.02 to the power of 4 = 1.0824, minus 1 gives 8.24%.

  2. B8.00%

    This is the quoted rate itself. It ignores interest being added to the balance every quarter.

  3. C8.16%

    This is the result of half-yearly charging (1.04 × 1.04 = 1.0816), which has fewer charging periods than the question states.

  4. D8.30%

    This is the result of monthly charging, 12 times a year rather than 4.

Reference: CISI workbook "International Introduction to Securities & Investment", ch. 9, section 2.2; syllabus v19, 9.2.3

10A client wants a retirement income of $30,000 a year from a fund assumed to return 5% a year. Using the simple method, what size of fund is needed?

Practice question Unit: Financial Advice

  1. A$150,000

    This comes from multiplying the income by 5 instead of dividing it by the rate of return.

  2. B$600,000 ✓ Correct answer

    The income is 5% of the fund, so the fund = 30,000 ÷ 0.05 = $600,000.

  3. C$1,500,000

    This assumes a return of only 2% (30,000 ÷ 0.02), which does not match the data.

  4. D$6,000,000

    This assumes a 0.5% return (30,000 ÷ 0.005) because of a misplaced decimal point.

Reference: CISI workbook "International Introduction to Securities & Investment", ch. 10, section 1.5; syllabus v19, 10.1.1

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