العربية

CME-3A · CISI Securities Level 3

CME-3A – Securities: free practice test

Start with 10 free questions to see what needs more practice. Finish to see your score, weakest units and every option explained.

Back to CME-3A – Securities

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 client telephones a firm and instructs it to buy 5,000 listed shares. The firm executes the trade on the exchange for the client, never holds the shares in its own inventory, and charges a commission. In what capacity is the firm acting?

Practice question Unit: The Financial Services Industry

  1. AAs a market maker

    Incorrect. A market maker deals as principal: it quotes two-way prices and buys or sells from its own inventory, earning the spread rather than a commission.

  2. BAs a discretionary fund manager

    Incorrect. A discretionary fund manager decides what to buy under a mandate. Here the client made the decision and the firm only executed it.

  3. CAs an agency broker ✓ Correct answer

    Correct. An agency broker arranges and executes trades on behalf of clients as their agent, takes no position itself, and is paid by commission. This is the broker (agent) capacity, as opposed to dealing as principal.

  4. DAs a custodian

    Incorrect. A custodian safeguards assets and settles trades after execution. It does not take the client's order to the market for a commission.

Reference: CISI Securities workbook, Edition 21 (syllabus V25), Chapter 1 teaching text, physical PDF p16 (brokers as agents vs dealers as principals); official text adopted by the Financial Academy for CME-3A

02A bond with a nominal value of 1,000 pays an annual coupon of 6% and is redeemed at par in exactly two years. If the appropriate discount rate is 8% a year, the present value of the bond is closest to:

Practice question Unit: Asset Classes

  1. A908.78

    908.78 is only the PV of the final payment (1,060 / 1.08²). It leaves out the PV of the year-one coupon of 60.

  2. B964.33 ✓ Correct answer

    Correct. Discount each cash flow: 60 / 1.08 + 1,060 / 1.08² = 55.56 + 908.78 = 964.33. The price is below par because the 8% required yield exceeds the 6% coupon.

  3. C1,000.00

    A bond is priced at par only when the discount rate equals the coupon rate. Here 8% > 6%, so the price must be below 1,000.

  4. D1,037.04

    1,037.04 discounts the total 1,120 of cash flows by one year only (1,120 / 1.08), ignoring that the final 1,060 is received in year two.

Reference: CISI Securities workbook, Edition 21 (syllabus V25), physical PDF p38, LO 2.3.7; official text adopted by the Financial Academy for CME-3A

03An ETF trades materially above the value of its creation basket, and transaction costs are negligible. Which transaction by an authorised participant would reduce the premium?

Practice question Unit: Asset Classes

  1. ABuy ETF shares on the exchange and redeem them for the basket

    Buying ETF shares on the exchange adds demand and pushes the premium higher. Buy-and-redeem is the arbitrage used when the ETF trades at a discount.

  2. BAcquire the basket, create ETF shares and sell those shares ✓ Correct answer

    Correct. The AP buys the cheaper basket, delivers it to the fund in exchange for new ETF shares (creation) and sells those shares on the exchange. The extra supply pulls the ETF price back towards NAV, and the AP keeps the difference.

  3. CSell the underlying securities short and hold the position

    Short-selling the underlying lowers the basket value while adding no ETF supply, so the gap between the ETF price and the basket widens rather than closes.

  4. DWait for the fund's end-of-day NAV recalculation

    Recalculating NAV only re-measures the basket. It does nothing to the ETF's market price, which is brought back in line by creation and redemption arbitrage.

Reference: CISI Securities workbook, Edition 21 (syllabus V25), physical PDF p91, LO 2.9.3; official text adopted by the Financial Academy for CME-3A

04Why does an active, liquid secondary market make it easier for companies to raise capital in the primary market?

Practice question Unit: Markets

  1. ASubscribers know they can sell their shares later if they wish ✓ Correct answer

    Correct. A liquid secondary market lets investors exit when they choose, so they are more willing to subscribe to new issues and may accept a lower return. That lowers the issuer's cost of raising capital in the primary market.

  2. BSecondary-market trades pay additional proceeds to the issuer

    Incorrect. Secondary trades transfer existing securities between investors. The issuer receives money only when it sells new securities in the primary market.

  3. CAn active secondary market removes the need for a listing authority

    Incorrect. Listed companies remain subject to listing rules and continuing obligations set by the listing authority, however active trading is.

  4. DThe issuer can fix its share price in the secondary market

    Incorrect. Secondary-market prices are set by supply and demand among investors. An issuer cannot fix them, and attempting to do so would be market manipulation.

Reference: CISI Securities workbook, Edition 21 (syllabus V25), Chapter 3 teaching text, physical PDF p103 (role of primary and secondary markets); official text adopted by the Financial Academy for CME-3A

05In an IPO of 400,000 shares, the stabilising bank has a greenshoe option over a further 15% and sells 460,000 shares to investors. After listing, the share price falls below the offer price. What does the bank do?

Practice question Unit: Primary Markets

  1. AExercises the option and buys 60,000 new shares from the issuer

    Exercising at the offer price makes sense only if the price holds or rises. With the market below the offer price, buying from the issuer would cost the bank more than buying in the market.

  2. BExercises half the option and buys 30,000 shares in the market

    Once the price is below the offer price, the market purchase is cheaper for the whole 60,000. There is no reason to exercise any part of the option.

  3. CSells another 60,000 shares into the market

    Selling more shares would deepen the bank's short position and push the price further down, which is the opposite of stabilisation.

  4. DBuys back 60,000 shares to support the price; no exercise ✓ Correct answer

    Correct. The greenshoe covers 15% × 400,000 = 60,000 over-allotted shares. When the price falls, the bank buys 60,000 shares in the market to close its short position, which supports the price, and lets the option lapse.

Reference: CISI Securities workbook, Edition 21 (syllabus V25), physical PDF p115, LO 4.2.5; official text adopted by the Financial Academy for CME-3A

06A market order to buy 4,000 shares is filled against sell orders of 1,500 at $12.40, 2,000 at $12.42 and 500 at $12.45. What is this called and what is the weighted average price paid?

Practice question Unit: Secondary Markets

  1. AA multiple fill; $12.416 ✓ Correct answer

    Correct. The order is matched against three resting sell orders, which is a multiple fill. Weighted average = (1,500 × 12.40 + 2,000 × 12.42 + 500 × 12.45) / 4,000 = (18,600 + 24,840 + 6,225) / 4,000 = $12.416.

  2. BA multiple fill; $12.423

    $12.423 is the simple average of the three prices. It ignores that most shares were bought at the two lower prices.

  3. CAn all-or-none fill; $12.45

    An all-or-none order must be filled in one go or not at all, so it is not this execution. $12.45 is only the highest price paid.

  4. DAn iceberg order; $12.40

    An iceberg is a large limit order showing only part of its size. This was a market buy order, and $12.40 is only the best price paid.

Reference: CISI Securities workbook, Edition 21 (syllabus V25), physical PDF p147, LO 5.3.2; official text adopted by the Financial Academy for CME-3A

07Shares trade at 240p cum-rights. The company announces a 1-for-3 rights issue at 160p. Each nil-paid right entitles the holder to subscribe for one new share. What is the theoretical value of one such nil-paid right?

Practice question Unit: Corporate Actions

  1. A80p

    80p is the cum-rights price minus the issue price (240 − 160). It ignores the dilution that brings the share price down to the TERP once the cheap new shares are issued.

  2. B60p ✓ Correct answer

    Correct. TERP = (3 × 240 + 1 × 160) / 4 = 880 / 4 = 220p. A nil-paid right to buy one new share at 160p is worth TERP − subscription price = 220 − 160 = 60p.

  3. C220p

    220p is the theoretical ex-rights price, the expected value of each share after the issue, not the value of the right.

  4. D40p

    40p uses a simple average of 240p and 160p (200p) as the ex-rights price, ignoring that there are three old shares for every new one.

Reference: CISI Securities workbook, Edition 21 (syllabus V25), physical PDF p184, LO 6.3.2; official text adopted by the Financial Academy for CME-3A

08During a repo, the market value of the collateral moves outside a pre-agreed band around the cash lent. What is this band called, and what follows?

Practice question Unit: Clearing and Settlement

  1. AThe haircut; the repo is terminated and the collateral is returned to the borrower

    The haircut is the agreed excess of collateral value over the cash lent, set at the start. It is not a trigger for terminating the repo.

  2. BThe variation margin; a margin call adjusts the collateral held ✓ Correct answer

    Correct. Repo collateral is marked to market daily. If its value moves outside the variation margin band, a margin call is made: more collateral or cash is delivered, or excess collateral is returned, to realign it with the cash lent.

  3. CThe default fund; the clearing house absorbs the shortfall from it

    A CCP default fund is a mutualised resource used only after a clearing member defaults. It is not the band that triggers routine collateral adjustment in a repo.

  4. DThe rebate; the lender refunds part of the repo interest

    A rebate is the interest paid back on cash collateral in stock lending. It has nothing to do with marking repo collateral to market.

Reference: CISI Securities workbook, Edition 21 (syllabus V25), physical PDF p214, LO 7.2.1; official text adopted by the Financial Academy for CME-3A

09When return on assets (ROA) is calculated on total net assets, it gives exactly the same result as return on capital employed (ROCE). Why?

Practice question Unit: Accounting Analysis

  1. Aboth use net income after tax as the numerator

    Both ratios use operating profit (profit before interest and tax) as the numerator. Net income after tax is the numerator of return on equity.

  2. Bnet assets equal equity plus non-current liabilities ✓ Correct answer

    Correct. Both use operating profit. Net assets (total assets − current liabilities) equal capital employed (equity + non-current liabilities), so the two denominators are identical and the ratios match.

  3. Cboth divide operating profit by year-end total assets

    Dividing by total assets would give a lower figure than ROCE, because total assets include the part financed by current liabilities. The match exists only on net assets.

  4. Dboth exclude depreciation and amortisation from profit

    Operating profit is stated after depreciation and amortisation. Adding them back gives EBITDA, which neither ratio uses.

Reference: CISI Securities workbook, Edition 21 (syllabus V25), physical PDF p243, LO 8.6.5; official text adopted by the Financial Academy for CME-3A

10A Saudi investor buys a US share. Over the year the share rises 10% in US dollars, while the dollar falls 10% against the riyal. Ignoring income and costs, what is the investor's return in riyals?

Practice question Unit: Investment Management

  1. A−1.0% ✓ Correct answer

    Correct. Combine the returns multiplicatively: (1 + 0.10) × (1 − 0.10) − 1 = 1.10 × 0.90 − 1 = −0.01, a 1% loss in riyals. The 10% currency fall applies to the larger, grown dollar value, so it slightly outweighs the 10% price gain.

  2. B0.0%

    0% comes from adding +10% and −10%. Returns compound, so the currency loss is taken on the grown value and the net result is not zero.

  3. C+10.0%

    +10% is the return in US dollars only. It ignores the exchange-rate risk that a riyal-based investor bears.

  4. D+1.0%

    +1% has the right size but the wrong sign: 1.10 × 0.90 = 0.99, which is below 1, so the investor loses.

Reference: CISI Securities workbook, Edition 21 (syllabus V25), physical PDF p264, LO 9.1.5; official text adopted by the Financial Academy for CME-3A

Keep preparing for CME-3A – Securities

See also: Finance & Insurance Exams