HKSI Licensing Examination Paper 8 (Securities) — All Questions

A preference share typically differs from an ordinary share in that a preference share:

• a.Always carries full voting rights at company meetings, ranking equally with ordinary shares in every respect
• b.Usually pays a fixed dividend and ranks ahead of ordinary shares for dividends and on winding up✓
• c.Ranks behind ordinary shares for dividends
• d.Gives its holder an unlimited share of residual profits

Preference shares usually carry a fixed dividend and rank ahead of ordinary shares for dividends and for capital on a winding up, but they generally have limited or no voting rights and no share in surplus profits.

An equity warrant gives the holder:

• a.Direct ownership of the company's assets
• b.A fixed interest coupon
• c.An obligation to buy the underlying shares at a fixed price on the maturity date, whatever the market price
• d.The right, but not the obligation, to buy shares at a set price before expiry✓

A warrant confers the right, not the obligation, to subscribe for shares at a specified exercise price within a set period. It is not a debt instrument and confers no ownership until it is exercised.

An exchange-traded fund (ETF) is best described as:

• a.A single company's ordinary shares that happen to be included within a widely followed stock-market index and benchmark
• b.A bilateral forward contract
• c.A short-term bank deposit
• d.A pooled fund, traded on an exchange like a share, that typically tracks an index or basket of assets✓

An ETF is a pooled investment fund listed and traded on an exchange, usually designed to track the performance of an index, commodity or basket of securities, combining diversification with intraday tradability.

A Real Estate Investment Trust (REIT) listed on SEHK primarily:

• a.Holds income-producing real estate and distributes most of its rental income to unit holders✓
• b.Trades foreign currencies
• c.Provides mortgage insurance
• d.Lends money to property developers and construction firms at fixed rates of interest secured on the land

A REIT is a listed collective investment scheme that invests in income-generating property and must distribute the bulk of its net income to unit holders, giving investors exposure to real-estate returns without owning property directly.

If market interest rates rise, the price of an existing fixed-coupon bond will generally:

• a.Fall, because its fixed coupon is now less attractive than new issues✓
• b.Rise to par immediately
• c.Rise, because the bond's fixed coupon becomes relatively more attractive than the coupons on newer issues
• d.Stay exactly the same

Bond prices move inversely to yields: when market rates rise, an existing bond's fixed coupon is worth less than newer higher-yielding issues, so its price falls. Longer-duration bonds are more sensitive to this effect.

An investor buys shares using securities margin financing. The main additional risk compared with an unleveraged purchase is that:

• a.Dividends are forfeited to the lender
• b.The shares cannot be sold until the loan matures
• c.Losses (and gains) are magnified, and a margin call may force the sale of collateral✓
• d.The investor loses all of the voting rights attached to the shares while the margin loan remains outstanding

Margin financing leverages the position, so both gains and losses are amplified. If the collateral value falls, the broker can issue a margin call and, if it is unmet, sell the pledged securities, potentially crystallising losses.

Commercial paper is best described as:

• a.A short-term unsecured debt instrument issued by a company to raise working capital✓
• b.A long-dated government bond issued to finance public spending over a period of many years
• c.An equity security
• d.A type of exchange-traded fund

Commercial paper is a short-term (typically up to one year) unsecured promissory note issued by companies at a discount to raise working capital. It is a money-market instrument, not equity or a fund.

The buyer of a call option on a share profits when:

• a.Interest rates fall to zero
• b.The option expires unexercised
• c.The share price rises sufficiently above the strike price plus the premium paid✓
• d.The share price falls well below the strike price before the option reaches its expiry date

A call option gives the right to buy at the strike price; the holder profits once the share rises above the strike by more than the premium paid. If the price stays below the strike, the option expires worthless and the loss is limited to the premium.