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CISI Exams - Chapter 1 Questions and Answers
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CISI Exams - Chapter 1 Questions and Answers
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CISI Exams - Chapter 1 Questions andAnswers
Benefit of cash deposits - Answer -1. Liquidity and security
Compound interest formula - Answer -T = C x (1 + (1/N))NY, where
T = the terminal wealth of initial deposit at the end of the period
C = the initial capital deposited in the account
I = the annual rate of interest paid
N = the number of times in the year interest will be paid
Y = the number of years over which interest will be paid
Real rate of return equation - Answer -nominal interest rate - inflation rate.
Risks of money market products - Answer -1. Default risk - capital may be lost if the
deposit taker becomes insolvent and defaults (i.e. cannot repay its debts).
2. Inflation and Deflation risk - the risk that inflation will reduce the value of an
investment, an asset or stream of income.
3. Interest rate risk - risk that the rate of interest paid on the deposit is less than could
be obtained on other low risk products
3. Operational Risk - This is the risk that the deposit taker gives poor service to the
saver, and consequently the saver suffers some form of loss. For example, deposit
taker does not move the money on to a fixed rare account when the saver has
requested this.
Reasons individuals choose to hold accounts in foreign currencies - Answer -1.
transactional needs in foreign currencies
2. the interest rates earned on that currency exceed those which they can obtain on
sterling. They run the risk, however, that the currency depreciates against sterling and
that the additional income they earn is more than outweighed by a loss in capital value
when the deposit is converted back to the home currency.
3. Speculative reasons
Financial Services Compensation Sheme (FSCS) - Answer -If a UK deposit taker fails,
the customer will have recourse to the Financial Services Compensation Scheme
(FSCS).
The FSCS will pay maximum compensation of £85,000 for each account holder who is
an eligible claimant (ie, up to £170,000 for joint accounts), per authorised firm, following
default by a UK-regulated bank or building society.
,What are money market accounts - Answer -Money market accounts are basically
premium accounts, or high-interest savings accounts. Your deposit is insured.
They can be opened very simply at almost any financial institution, who then invests the
money in such an account, usually into low-risk, short-term investments, called money
markets (eg, certificates of deposit (CDs) and Treasury bills (T-bills)), and collects the
return.
What is national savings and investments (NS&I) - Answer -It provides deposit and
savings products to the investing public, and in doing so, raises funds on behalf of the
UK government - in other words, an investor holding an NS&I product is in essence
lending to the UK government.
NS&I offers a wide range of products, from easy-access savings accounts to longer-
term investments and, of course, premium bonds. As the products are underwritten by
the UK government, they are regarded as effectively free from the risk of default, and
there is no overall limit on how much is guaranteed.
none of NS&I products are subject to CGT, but some are subject to income tax.
What are money market funds - Answer -Money market funds are collective investment
funds that invest in cash assets (eg, short-term bank deposits) or near-cash assets (eg,
short-term debt instruments, such as commercial paper (CP) and government bonds
close to expiry), which are generally viewed as low-risk and highly liquid.
An advantage of MMFs is that if a bank goes bust, you money is more protected, as it is
held as a different "entity" from the bank.
i.e. Golman Sachs Liquidity fund
Constant net asset value (CNAV) - Answer -unchanging face value (such as £1, 1 euro
or $1 per share);
Price of a share in the fund is always £1, and income earned is paid to investor in
dividend.
Accumulating net asset value funds (ANAV) - Answer -operate similar to CNAV funds,
income is accrued daily. Unlike CNAV funds, income is not distributed in dividends and
instead shares/unit values increase.
Low volatility net asset value (LVNAV) - Answer -Funds are primarily invested in money
market instruments, deposits and other short-term assets.
Variable net asset value (VNAV) - Answer -refers to funds which use mark-to-market
(most recent market price) account to value some of their assets. The NAV of these
funds will vary by a slight amount, due to the changing value of the assets and, in the
case of an accumulating fund, by the amount of income received.
, What is P2P lending? - Answer -involves lending money to individuals without using a
financial intermediary, such as a bank.
Risk of P2P lending - Answer -Default & liquidity issues
One of the main risks with P2P lending is the potential for an individual to default on
repayment. To mitigate this risk, the company acting as the intermediary 'underwrites'
each borrower by reviewing their credit history and verifying their identity.
Another risk of P2P lending is illiquidity, as highlighted during the COVID-19 pandemic.
As lockdowns were imposed around the world to bring the virus under control,
increasingly nervous investors rushed to withdraw their funds from P2P lending
platforms. Consequently, platforms froze withdrawals, leaving investors unable to
access their cash for several months.
Returns of P2P lending - Answer -The returns of P2P lending are typically higher than
those offered by high street lenders, reflecting the higher risk of lending directly to
individuals.
the interest received is paid without tax deducted at source and must, therefore, be
declared in full to the tax authorities (eg, HMRC in the UK), who will calculate the
liability. In the UK, P2P ISAs (also known as innovative finance ISAs) are also available,
meaning that all lending interest earned is tax-free regardless of the size of the account.
Main institutions for issuing fixed income securities - Answer -- government bonds (also
called sovereign debt) used to raise money for day to day operations
- corporate bonds are issued by companies, as debentures or convertibles
- supranational bonds (two or more central governments)
- public authorities bonds
- mortgage-backed securities (MBSs) and other asset-backed bonds (ABSs)
Eurobond vs global bond - Answer -Eurobonds are denominated in a currency other
than the home currency of the country or market the bond is issued. Nothing to do with
the euro.
Global bonds can be simultaneously traded and issued in the country whose currency
they are issued in.
Clean vs dirty price - Answer -The quoted price of a bond is called the "clean" price, and
this excludes the accrued interest that is due to the seller of the bond. The "dirty" price
of the same bond is the total price payable by the buyer and is the clean price plus the
accrued interest.
Floating rate notes - Answer -A floating-rate note (FRN) is a debt instrument with a
variable interest rate that is adjusted regularly.
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