HKSI Licensing Examination Paper 8 (Securities) — All Questions

The best-known benchmark index of the largest companies listed on the Stock Exchange of Hong Kong is:

• a.The S&P 500
• b.The Hang Seng Index✓
• c.The FTSE 100
• d.The Nikkei 225

The Hang Seng Index (HSI) is the principal benchmark tracking the largest and most liquid companies listed on SEHK. The S&P 500, Nikkei 225 and FTSE 100 are the US, Japanese and UK benchmark indices.

Which macroeconomic change would most directly tend to reduce equity valuations, all else being equal?

• a.A sharp rise in market interest rates✓
• b.A fall in market interest rates
• c.Lower inflation expectations
• d.Stronger corporate earnings

Rising interest rates increase the discount rate applied to future cash flows and raise the cost of capital, tending to lower equity valuations. Falling rates, lower inflation and stronger earnings are generally supportive. Interest rates, inflation and economic cycles are the key market drivers in Topic 1.

An ordinary share differs from a corporate bond in that the ordinary share:

• a.Pays a fixed coupon set at issue
• b.Represents an ownership interest with no fixed maturity or guaranteed income✓
• c.Ranks ahead of all of the company's creditors and lenders in the event of a winding up or liquidation
• d.Must be repaid by the company on a set date

An ordinary share is an equity interest conferring ownership, voting rights and variable dividends with no maturity date, and it ranks last on a winding up. A bond is debt with a fixed coupon and redemption date that ranks ahead of shareholders.

Which instrument would normally trade in the money market rather than the capital market?

• a.A 3-month certificate of deposit✓
• b.A 10-year government bond
• c.A 20-year corporate debenture
• d.An ordinary share

The money market deals in short-term instruments (typically maturing within one year), such as certificates of deposit, commercial paper and Exchange Fund Bills. Long-dated bonds and equities are capital-market instruments.

In Hong Kong, GEM (formerly the Growth Enterprise Market) is best described as:

• a.A derivatives clearing house that settles the futures and options traded on the Hong Kong Futures Exchange each day
• b.The bond-trading platform of HKEX
• c.A market board for smaller and emerging companies with lower entry requirements than the Main Board✓
• d.A regulator of listed companies

GEM is a board of SEHK designed for smaller or emerging companies that do not yet meet Main Board requirements; it applies lower entry thresholds and carries higher risk. It is a market segment, not a clearing house or regulator.