HKSI Licensing Examination Paper 8 (Securities) — All Questions

A cash dividend is:

• a.a tax paid by the company to the government
• b.a distribution of a company's profits to its shareholders✓
• c.a reduction in the number of shares in issue
• d.a loan from shareholders to the company

A cash dividend is a payment of part of a company's distributable profits to shareholders as a return on their investment. It is declared by the company and normally paid out of accumulated profits or reserves.

An investor who buys a share on or after its ex-dividend date:

• a.must pay the dividend to the seller
• b.receives double the declared dividend as compensation for having bought after the cut-off date
• c.is always entitled to the recently declared dividend
• d.is not entitled to the recently declared dividend, which goes to the seller✓

On and after the ex-dividend date, the share trades without the right to the declared dividend, so the buyer does not receive it; the entitlement remains with the seller who held the share cum-dividend. This is why the price typically drops on the ex-date.

On the ex-dividend date, all else being equal, a share's price would be expected to:

• a.rise by twice the dividend
• b.fall by approximately the amount of the dividend✓
• c.double
• d.be completely unaffected

Because a buyer on the ex-date no longer receives the declared dividend, the theoretical price adjusts downward by roughly the dividend amount. The dividend value effectively leaves the share price on the ex-dividend date.

The record date of a dividend is the date on which:

• a.the share is automatically delisted
• b.trading in the share is suspended for a month
• c.the shareholder is required to reinvest the whole of the dividend into newly issued shares of the company
• d.the company checks its register to determine who is entitled to the dividend✓

On the record date the company examines its register of members to identify the shareholders entitled to the declared dividend. It follows the ex-dividend date under the standard settlement cycle.

A company whose shares trade at HK$12 makes a one-for-two bonus issue (one new share for every two held). All else equal, the theoretical ex-bonus price is:

• a.HK$8✓
• b.HK$12
• c.HK$6
• d.HK$18

A holder of two shares worth 2 x HK$12 = HK$24 receives one free share, giving three shares in total. The value is unchanged, so the theoretical price is HK$24 / 3 = HK$8. A bonus issue raises no new cash; it merely subdivides existing value.

A bonus (scrip) issue:

• a.capitalises reserves into new shares given free to shareholders, raising no new cash✓
• b.raises new cash for the company
• c.is a repayment of the company's debt
• d.reduces the number of shares in issue

A bonus issue converts distributable reserves into share capital and allots the resulting new shares free to existing shareholders. It increases the share count and lowers the price proportionally but brings in no new money.

Shares currently trade at HK$10 cum-rights. The company announces a one-for-four rights issue at a subscription price of HK$8. The theoretical ex-rights price (TERP) is:

• a.HK$10.00
• b.HK$9.60✓
• c.HK$9.00
• d.HK$8.00

TERP = (existing shares x price + new shares x subscription) / total shares = (4 x HK$10 + 1 x HK$8) / 5 = HK$48 / 5 = HK$9.60. The TERP is the weighted-average price of old and new shares after the rights issue.

A rights issue:

• a.offers existing shareholders new shares pro rata, usually at a discount, to raise fresh capital✓
• b.gives newly created shares away free to the general investing public rather than to existing holders
• c.reduces the company's share capital
• d.is a form of dividend paid in cash

A rights issue raises new capital by inviting existing shareholders to buy additional shares in proportion to their holdings, typically at a discount to the market price. Unlike a bonus issue, it brings new cash into the company.

A company splits its HK$60 shares two-for-one (each share becomes two). The theoretical post-split price is:

• a.HK$30✓
• b.HK$60
• c.HK$15
• d.HK$120

In a two-for-one split each share is divided into two, doubling the share count while total value is unchanged, so the price halves: HK$60 / 2 = HK$30. A split improves marketability without altering total value.

A stock split:

• a.materially changes total shareholder value
• b.raises new capital for the company
• c.increases the share count and lowers the price proportionally, leaving total value unchanged✓
• d.increases the company's total market value because the larger number of shares is worth more in aggregate

A stock split subdivides existing shares into more shares at a proportionally lower price. It changes neither the company's total market capitalisation nor a holder's total value; it only affects the number and price of shares.

A scrip dividend allows a shareholder to:

• a.elect to receive new shares instead of a cash dividend✓
• b.receive a guaranteed capital gain
• c.sell their shares back to the company at par
• d.avoid all taxes on the investment

A scrip dividend gives shareholders the option to take new shares in lieu of cash. It lets the company conserve cash while offering investors a way to increase their holding without a market purchase.

A share consolidation (reverse split) of five-into-one will, all else equal:

• a.raise new capital for the company
• b.double the number of shares in issue
• c.reduce the share count and raise the price per share proportionally✓
• d.pay a cash dividend to shareholders

A consolidation combines several shares into one, reducing the number of shares and raising the price per share in proportion (a five-into-one consolidation multiplies the price by five). Total value is unchanged; it is the opposite of a split.

Shares trade at HK$18. The company announces a one-for-five rights issue at a subscription price of HK$12. The theoretical ex-rights price (TERP) is:

• a.HK$15
• b.HK$12
• c.HK$18
• d.HK$17✓

TERP = (5 x HK$18 + 1 x HK$12) / 6 = (HK$90 + HK$12) / 6 = HK$102 / 6 = HK$17. The TERP blends the five existing shares at HK$18 with the one new share at HK$12.

A share trading 'cum-dividend' means the buyer:

• a.must pay extra stamp duty
• b.is entitled to the forthcoming declared dividend✓
• c.forgoes the declared dividend
• d.cannot resell the share until it is paid

'Cum-dividend' (with dividend) means the buyer acquires the right to the next declared dividend. Once the share goes ex-dividend, that entitlement is stripped out and the price adjusts down accordingly.

Ad valorem stamp duty on a Hong Kong share transaction is charged:

• a.on the buyer only
• b.on the seller only
• c.on both the buyer and the seller✓
• d.by the broker as part of its commission

Stamp duty on Hong Kong stock is an ad valorem government levy payable by each side of the transaction, so both the buyer and the seller are charged. It is separate from brokerage commission and exchange fees.

Exchange trades in Hong Kong shares are cleared and settled in CCASS on a cycle of:

• a.T+10
• b.same day (T+0) with paper certificates
• c.T+30
• d.T+2✓

The standard settlement cycle for SEHK-traded shares is T+2, meaning transactions settle two business days after the trade date, largely by electronic book entry within CCASS.

A 'board lot' is:

• a.a type of stock-market index
• b.the standard trading unit in which a stock is normally quoted and traded✓
• c.the maximum number of shares one investor may own
• d.a government tax on large trades

A board lot is the standard quantity of shares in which a stock is ordinarily bought and sold on the Exchange. Different stocks have different board-lot sizes set by the issuer.

Shares held or traded in a quantity smaller than one board lot are known as:

• a.a block trade
• b.a short position
• c.a rights issue
• d.an odd lot✓

An odd lot is a holding smaller than one board lot, which typically trades in a separate odd-lot market and may attract a less favourable price. It commonly arises after bonus issues or consolidations.

A limit order instructs the broker to trade:

• a.only at the closing auction
• b.at any price available immediately
• c.at a specified price or better✓
• d.only after the next dividend is paid

A limit order sets a maximum price to pay (for a buy) or a minimum price to accept (for a sell); it executes only at that limit or a better price. It controls price but does not guarantee execution.

Compared with a limit order, a market (at-best) order:

• a.seeks immediate execution at the best available price, without a price guarantee✓
• b.guarantees a specific execution price
• c.can only be placed by institutional investors
• d.can never actually be executed under any market conditions, however urgent the client's instruction

A market or at-best order prioritises speed of execution over price certainty: it fills against the best available prices in the market, so the trade completes quickly but the exact price is not guaranteed.

On SEHK, the minimum tick (the smallest permitted spread between quoted prices):

• a.varies according to the price band of the security✓
• b.is set daily by each individual broker
• c.is a flat HK$1 for all stocks
• d.does not exist

The minimum spread (tick size) is set by a tiered schedule that depends on the price of the security: lower-priced shares have smaller ticks and higher-priced shares larger ticks. It standardises the increments at which prices can change.

When shares are held in CCASS through a broker's account, the investor typically holds them:

• a.beneficially, with the shares registered via HKSCC Nominees✓
• b.as physical paper share certificates that are locked away for safekeeping in the investor's own bank vault
• c.directly on the issuer's register in their own name
• d.on deposit with the SFC

Shares immobilised in CCASS are usually registered in the name of HKSCC Nominees, while the investor holds a beneficial interest through their broker or custodian. This book-entry arrangement replaces the physical movement of certificates.

A prolonged suspension of trading in a listed company's shares would most likely arise because:

• a.an ordinary dividend was paid
• b.the market closed for the midday break
• c.the share price rose by 1%
• d.there is undisclosed price-sensitive information or a major corporate event pending✓

A long suspension is used to preserve a fair and orderly market when there is material information not yet disclosed, a major transaction, or an issue over the company's ability to meet listing requirements. Routine events do not warrant suspension.

Holders of significant short positions in specified shares must report them:

• a.only to the issuer of the shares
• b.never, as short positions are private
• c.to the SFC on a weekly basis once the position exceeds the reporting threshold✓
• d.to the public daily on television

The short-position reporting regime requires holders of reportable short positions in specified shares to report to the SFC weekly, giving the regulator visibility of large short exposures. This is separate from the tick and covered-short rules.

The main function of CCASS is to:

• a.set Hong Kong interest rates
• b.publish independent equity research
• c.regulate the day-to-day conduct and disclosure obligations of every company listed on the Exchange
• d.clear and settle securities transactions by electronic book entry✓

The Central Clearing and Settlement System (CCASS), operated by HKSCC, is the market infrastructure that clears and settles exchange trades through electronic book entry, largely eliminating the need to move paper certificates.

A company may generally pay a cash dividend only out of:

• a.borrowed money it must repay to shareholders
• b.distributable profits or reserves✓
• c.its share capital paid directly to holders
• d.the stamp duty it has collected

Dividends are normally payable only out of a company's distributable profits or reserves, protecting creditors by preventing an unlawful return of capital. Paying dividends out of capital is generally not permitted.

A 'special dividend' is:

• a.interest paid on a corporate bond
• b.a payment made only to the company's directors
• c.a one-off distribution outside the normal dividend pattern, often after an exceptional gain✓
• d.a regularly scheduled quarterly payment

A special dividend is a non-recurring distribution declared in addition to (or instead of) the ordinary dividend, commonly following a large asset sale or unusually strong profit. It is not part of the regular dividend cycle.

For major index futures, the VCM cooling-off is triggered by a price move beyond a band of about:

• a.5%✓
• b.40%
• c.100%
• d.0.1%

The VCM band for major index futures is tighter than for stocks, at roughly 5% from the reference price, reflecting the leverage and speed of the derivatives market. Eligible stocks use a wider band of about 10%.

The Hang Seng TECH Index (HSTECH) tracks:

• a.Hong Kong government bonds
• b.global oil and gas companies
• c.Hong Kong retail and commercial banks only, together with their principal deposit-taking subsidiaries
• d.the largest technology-themed companies listed in Hong Kong✓

The HSTECH Index represents the largest technology-related companies listed in Hong Kong, giving investors a focused benchmark for the tech sector. It complements the broad HSI and the Mainland-focused HSCEI.

The 'free float' of a listed company refers to:

• a.the company's total cash balance
• b.the number of directors on the board
• c.the proportion of shares available for public trading, excluding locked-in strategic holdings✓
• d.the company's dividend yield

Free float is the portion of a company's shares that is freely available to be traded by the public, excluding strategic or restricted stakes. Index providers use it to weight constituents by their investable value.

Indices such as the HSI adjust their constituent weights for free float in order to:

• a.favour state-owned firms
• b.increase index turnover fees
• c.reflect only the shares actually available to investors✓
• d.reduce the number of constituents to ten

Free-float adjustment ensures each constituent's index weight is based on the shares genuinely available for trading, giving a more investable and representative benchmark. Closely held, restricted shares are excluded from the weighting.

The opening price set in the Pre-opening Session is determined by:

• a.the broker submitting the largest single order
• b.an auction algorithm that maximises the number of shares that can be matched✓
• c.the previous trading day's official closing price, which is simply carried over automatically each morning
• d.a price fixed by the SFC each morning

In the Pre-opening auction, the system calculates the single price at which the greatest volume of orders can be matched, and that becomes the opening price. This concentrates opening liquidity at one fair price.

Between the morning and afternoon continuous sessions, SEHK:

• a.runs its closing auction
• b.trades only government bonds
• c.has an extended midday (lunch) break with no continuous trading✓
• d.distributes dividends to shareholders

There is a midday break between the morning session (ending at noon) and the afternoon session (starting at 1:00 p.m.), during which continuous auction trading does not take place. The closing auction occurs after the afternoon session, not at midday.

A liquidity provider (market maker) for a listed structured product or ETF chiefly:

• a.independently audits the product issuer's annual accounts and reports its findings to investors
• b.continuously quotes bid and offer prices to support tradability✓
• c.sets the territory's monetary policy
• d.collects stamp duty on behalf of the government

A liquidity provider stands ready to quote both buy (bid) and sell (offer) prices, so investors can trade the product even when natural counterparties are scarce. This continuous quoting underpins an orderly secondary market for ETFs and structured products.

A share trades at HK$40 with earnings per share of HK$2.50. Its price-to-earnings (P/E) ratio is:

• a.25 times
• b.100 times
• c.10 times
• d.16 times✓

P/E = price / earnings per share = HK$40 / HK$2.50 = 16 times. The P/E shows how many dollars investors pay for each dollar of the company's annual earnings.

A company earns HK$200 million attributable profit with 50 million shares in issue. Earnings per share (EPS) is:

• a.HK$0.25
• b.HK$10.00
• c.HK$4.00✓
• d.HK$40.00

EPS = profit attributable to shareholders / number of shares = HK$200m / 50m = HK$4.00. EPS is the earnings generated for each ordinary share and is a building block of the P/E ratio.

A share trades at HK$24 and its net asset (book) value per share is HK$8. The price-to-book (P/B) ratio is:

• a.8.0
• b.2.0
• c.3.0✓
• d.1.0

P/B = price / book value per share = HK$24 / HK$8 = 3.0. The P/B ratio compares the market price with the accounting net worth per share; a value above 1 means the market values the firm above its book equity.

A share priced at HK$30 pays an annual dividend of HK$1.50 per share. The dividend yield is:

• a.5.0%✓
• b.2.0%
• c.0.5%
• d.20%

Dividend yield = dividend per share / price = HK$1.50 / HK$30 = 5.0%. It expresses the annual cash return from dividends as a percentage of the current share price.

A company reports net income of HK$120 million on shareholders' equity of HK$800 million. Its return on equity (ROE) is:

• a.6.7%
• b.8.0%
• c.12%
• d.15%✓

ROE = net income / shareholders' equity = HK$120m / HK$800m = 15%. ROE measures how efficiently the company generates profit from the capital its shareholders have invested.

Net income is HK$90 million and total assets are HK$1,500 million. Return on assets (ROA) is:

• a.15%
• b.60%
• c.1.7%
• d.6.0%✓

ROA = net income / total assets = HK$90m / HK$1,500m = 6.0%. ROA shows how efficiently a company uses all of its assets, regardless of how they are financed, to generate profit.

Current assets are HK$600 million and current liabilities are HK$300 million. The current ratio is:

• a.0.5
• b.2.0✓
• c.3.0
• d.1.5

Current ratio = current assets / current liabilities = HK$600m / HK$300m = 2.0. This liquidity ratio indicates whether short-term assets are sufficient to cover short-term obligations.

Current assets are HK$600 million, of which inventory is HK$200 million; current liabilities are HK$250 million. The quick (acid-test) ratio is:

• a.2.0
• b.2.4
• c.1.6✓
• d.0.6

Quick ratio = (current assets - inventory) / current liabilities = (HK$600m - HK$200m) / HK$250m = HK$400m / HK$250m = 1.6. It is a stricter liquidity test that excludes less-liquid inventory.

Revenue is HK$1,000 million and gross profit is HK$300 million. The gross profit margin is:

• a.3.0%
• b.30%✓
• c.70%
• d.300%

Gross profit margin = gross profit / revenue = HK$300m / HK$1,000m = 30%. It shows the proportion of sales left after the direct cost of goods sold, before other expenses.

Revenue is HK$1,000 million and net profit is HK$80 million. The net profit margin is:

• a.8.0%✓
• b.12.5%
• c.18%
• d.80%

Net profit margin = net profit / revenue = HK$80m / HK$1,000m = 8.0%. It measures the percentage of each dollar of sales that remains as profit after all costs, interest and tax.

Total debt is HK$600 million and shareholders' equity is HK$400 million. The debt-to-equity ratio is:

• a.0.67
• b.0.4
• c.2.5
• d.1.5✓

Debt-to-equity = total debt / shareholders' equity = HK$600m / HK$400m = 1.5. This gearing (leverage) ratio shows how much debt the company uses relative to its equity base; higher values imply greater financial risk.

Operating profit (EBIT) is HK$500 million and interest expense is HK$100 million. The interest cover is:

• a.50 times
• b.2 times
• c.0.2 times
• d.5 times✓

Interest cover = EBIT / interest expense = HK$500m / HK$100m = 5 times. It shows how comfortably operating profit can meet interest payments; a higher figure signals lower risk of default.

Earnings per share are HK$3.00 and the dividend per share is HK$1.20. The dividend payout ratio is:

• a.2.5%
• b.250%
• c.40%✓
• d.60%

Dividend payout ratio = dividend per share / earnings per share = HK$1.20 / HK$3.00 = 40%. It is the proportion of earnings distributed as dividends; the remaining 60% is retained in the business.

Using EPS of HK$3.00 and a dividend per share of HK$1.20, dividend cover is:

• a.0.4 times
• b.2.5 times✓
• c.1.2 times
• d.3.0 times

Dividend cover = earnings per share / dividend per share = HK$3.00 / HK$1.20 = 2.5 times. It is the inverse of the payout ratio and shows how many times the dividend is covered by earnings.

A share has a P/E of 20 and an expected earnings growth rate of 10% per year. Its PEG ratio is:

• a.200
• b.2.0✓
• c.10
• d.0.5

PEG = P/E / earnings growth rate (in percent) = 20 / 10 = 2.0. The PEG ratio relates the P/E to expected growth; the higher the PEG, the more expensive the share looks relative to its growth.

A PEG ratio well below 1.0 is often interpreted to mean a share is:

• a.a debt security rather than equity
• b.relatively cheap given its expected earnings growth✓
• c.paying no dividend
• d.certain to fall in price

A PEG below 1.0 suggests the P/E is low relative to the expected growth rate, so the share may be attractively valued for its growth. PEG standardises the P/E by earnings growth.