HKSI Licensing Examination Paper 8 (Securities) — All Questions

A call warrant trades at HK$1.00 with a conversion (entitlement) ratio of 5 (five warrants convert into one share) and an exercise price of HK$40. The underlying share trades at HK$38. The warrant's premium is approximately:

• a.18.4%✓
• b.2.6%
• c.5.0%
• d.50.0%

Premium = (exercise price + warrant price x conversion ratio - share price) / share price = (40 + 1x5 - 38) / 38 = 7 / 38 = 18.4%. It shows how far the share must rise, in percentage terms, for a buyer exercising through the warrant to break even.

The Hong Kong SAR Government's retail 'iBond' pays interest that is linked mainly to:

• a.The local rate of inflation (the Composite Consumer Price Index)✓
• b.The US federal funds rate
• c.The issuer's share price
• d.The level of the Hang Seng Index

iBond is an inflation-linked retail government bond: its floating interest is tied to Hong Kong's Composite CPI (subject to a stated minimum rate), helping protect holders' purchasing power. It is a debt security, not an equity-linked product.

Using the Capital Asset Pricing Model (CAPM), a share has a beta of 1.5 when the risk-free rate is 3% and the expected market return is 9%. The required rate of return is:

• a.18%
• b.12%✓
• c.13.5%
• d.9%

CAPM: required return = risk-free rate + beta x (market return - risk-free rate) = 3% + 1.5 x (9% - 3%) = 3% + 9% = 12%. Beta scales the market risk premium, so a beta above 1 demands a higher return than the market as a whole.

A company has an enterprise value of HK$1,200 million and EBITDA of HK$150 million. Its EV/EBITDA multiple is:

• a.6 times
• b.0.125 times
• c.12.5 times
• d.8 times✓

EV/EBITDA = enterprise value / EBITDA = 1,200 / 150 = 8 times. It is a capital-structure-neutral valuation multiple, letting firms be compared independently of their differing debt levels and tax positions.

A company retains 60% of its earnings and generates a return on equity (ROE) of 15%. Its sustainable (internal) growth rate is approximately:

• a.25%
• b.9%✓
• c.6%
• d.15%

Sustainable growth rate = retention ratio x ROE = 0.60 x 15% = 9%. It estimates how fast a firm can grow from reinvested earnings alone, without raising new equity or increasing its financial leverage.

Bollinger Bands are plotted a set number of standard deviations above and below a moving average. The bands therefore tend to widen when:

• a.The company pays its dividend
• b.The share is suspended from trading
• c.Price volatility increases✓
• d.Trading volume falls to zero

Bollinger Bands use standard deviation, a measure of dispersion, so the bands widen as price volatility rises and narrow as it falls. Technicians read a narrow 'squeeze' as low volatility that may precede a large directional move.

Ad valorem stamp duty on an ordinary Hong Kong share transaction is currently charged at a rate of:

• a.0.1% of the consideration on each of the buyer and the seller✓
• b.0.1% on the buyer only, with the seller exempt
• c.1% of the consideration on the buyer only
• d.A flat HK$5 per trade regardless of size

Stamp duty is an ad valorem government charge levied on both sides of a share transfer at 0.1% of the consideration each (about 0.2% round-trip). It is a transaction tax proportional to value, not a flat fee, and both buyer and seller pay.

A share trades at HK$20 cum-rights. The company launches a one-for-three rights issue at a subscription price of HK$14. The theoretical ex-rights price (TERP) is:

• a.HK$19.00
• b.HK$18.50✓
• c.HK$16.00
• d.HK$17.00

TERP = (existing shares x cum-price + new shares x subscription price) / total shares = (3 x 20 + 1 x 14) / 4 = 74 / 4 = HK$18.50. The ex-rights price settles between the cum-price and the discounted subscription price.

A share trades at HK$9.00. The company makes a one-for-three bonus (scrip) issue. The theoretical ex-bonus price is:

• a.HK$4.50
• b.HK$3.00
• c.HK$6.75✓
• d.HK$12.00

A bonus issue spreads the same total value over more shares and raises no new money. Three shares worth HK$27 become four shares, so the ex-bonus price = 27 / 4 = HK$6.75; each holder's total value is unchanged.

Under SEHK's HKD-RMB Dual Counter Model, an eligible listed stock can be:

• a.Bought but never sold in renminbi
• b.Traded in either a Hong Kong dollar counter or a renminbi counter, with the shares interchangeable between the two✓
• c.Traded only in US dollars
• d.Listed only on a Mainland exchange

The Dual Counter Model lets the same listed shares trade in parallel HKD and RMB counters. The counters are fungible (interchangeable), and a Dual Counter Market Maker helps keep the two prices aligned, broadening RMB investment channels for investors.

In a typical Hong Kong retail IPO, if the public (retail) tranche is oversubscribed by 100 times or more, the clawback mechanism increases the public tranche to about:

• a.100%
• b.5%
• c.10%
• d.50%✓

Clawback reallocates shares from the placing tranche to the retail tranche as retail demand rises: broadly 30% at 15x or more, 40% at 50x or more, and 50% at 100x or more oversubscription, so heavy retail interest is met with more shares.

The statutory body responsible for regulating and inspecting the auditors of Hong Kong listed entities is the:

• a.Mandatory Provident Fund Schemes Authority (MPFA)
• b.Hong Kong Monetary Authority (HKMA)
• c.Accounting and Financial Reporting Council (AFRC)✓
• d.Listing Division of the Stock Exchange

The AFRC is the independent regulator that registers, inspects and disciplines the auditors of public-interest (listed) entities in Hong Kong. The HKMA supervises banks, while the MPFA oversees retirement schemes.

Under Hong Kong's Linked Exchange Rate System, the Hong Kong dollar is kept stable against the:

• a.Euro, on a free-floating basis
• b.Renminbi, at a fixed rate of 1:1
• c.Price of gold
• d.US dollar, within a band of about HK$7.75-7.85 per US$1✓

Since 1983 the HKMA has operated a currency-board peg linking the Hong Kong dollar to the US dollar, holding the rate within the HK$7.75-7.85 convertibility band. This anchors local monetary conditions and effectively imports US interest-rate policy.