Chartered Institute for Securities & Investment (CISI) Qualifications Securities, Asset Classes and Investment Products Syllabus

What is an index-linked gilt and what does it protect against?

A gilt whose coupon payments and final redemption value are adjusted in line with a measure of inflation (the Retail Prices Index, RPI, in the UK). It protects the holder against inflation risk by preserving real purchasing power.

Classify gilts as short, medium and long-dated.

By time to redemption: shorts (or 'shorts') have up to about 7 years to maturity, mediums roughly 7 to 15 years, and longs more than 15 years. Undated/irredeemable gilts have no fixed redemption date (now largely redeemed).

What is a corporate bond and how does it differ from a gilt?

A debt security issued by a company to raise capital, paying a fixed or floating coupon and repaying principal at maturity. Unlike gilts, corporate bonds carry credit (default) risk, so they offer a higher yield (a credit spread over equivalent gilts) to compensate.

What is the relationship between a bond's price and its yield?

They move inversely. When market interest rates rise, existing fixed-coupon bond prices fall (so yields rise); when rates fall, prices rise (yields fall). This is because the fixed coupons become relatively more or less attractive compared with new issues.

Define a bond's flat (running/current) yield and give its formula.

The annual income return ignoring any capital gain or loss to redemption. $$\text{Flat yield} = \frac{\text{Annual coupon}}{\text{Clean price}} \times 100\%$$ For example, a 5% coupon bond priced at 80 has a flat yield of $\frac{5}{80} \times 100 = 6.25\%$.

What does the gross redemption yield (yield to maturity) measure?

The total annualised return an investor earns if a bond is held to maturity, combining the income from coupons and any capital gain or loss between the purchase price and the redemption value (par). It is the internal rate of return that discounts all future cash flows to the current price.

How does the coupon compare with the redemption yield when a bond trades at a discount, at par, and at a premium?

At a discount (price below par): redemption yield > flat yield > coupon. At par: coupon = flat yield = redemption yield. At a premium (price above par): coupon > flat yield > redemption yield, because there is a capital loss to redemption.

What is the difference between a bond's clean price and its dirty price?

The clean price excludes accrued interest and is the quoted price. The dirty price (settlement/invoice price) is the clean price plus accrued interest since the last coupon, i.e. the amount the buyer actually pays.

What do credit ratings measure, and name the main agencies?

They measure the creditworthiness of a borrower/issue, i.e. the relative likelihood of default. The three main global agencies are Standard & Poor's (S&P), Moody's and Fitch.

Where is the boundary between 'investment grade' and 'sub-investment grade' (high-yield/junk) on the S&P scale?

Investment grade ranges from AAA down to BBB- inclusive. Anything rated BB+ or below (BB, B, CCC, etc.) is sub-investment grade, known as high-yield or 'junk', carrying higher default risk and higher yields.

What is the difference between a future and a forward contract?

A future is an exchange-traded, standardised contract to buy/sell an asset at a set price on a future date, with daily margining through a clearing house. A forward is a customised, over-the-counter (OTC) bilateral agreement, not exchange-traded, with greater flexibility but more counterparty risk and less liquidity.

Define a futures contract and state the obligation of each party.

A legally binding agreement to buy or sell a standardised quantity of an asset at a fixed price (the futures price) on a specified future date. The buyer (long) is obliged to take delivery/pay; the seller (short) is obliged to deliver/receive payment. Both have a firm obligation, unlike option holders.

What is initial margin and variation margin on a futures position?

Initial margin is a good-faith deposit lodged with the clearing house when a position is opened, to cover potential losses. Variation margin is the daily cash flow (mark-to-market) paid or received as the position's value changes, settling profits and losses each day.

Distinguish a call option from a put option.

A call option gives the holder the right (not the obligation) to BUY the underlying asset at the strike price. A put option gives the holder the right to SELL the underlying at the strike price. Both are exercised only if it is favourable to the holder.

What is the difference between an option holder and an option writer?

The holder (buyer) pays a premium and has the right but not the obligation to exercise; maximum loss is the premium. The writer (seller) receives the premium and takes on the obligation to deliver/buy if the holder exercises; the writer's risk can be large (potentially unlimited for an uncovered call).

Define intrinsic value and time value of an option.

Intrinsic value is the amount by which an option is in-the-money (e.g. for a call, underlying price minus strike, if positive; otherwise zero). Time value is the remainder of the premium, reflecting the chance the option moves further into the money before expiry. Premium = intrinsic value + time value.

What is the difference between an American-style and a European-style option?

An American-style option can be exercised at any time up to and including the expiry date. A European-style option can be exercised only on the expiry date itself. The style refers to timing of exercise, not geography.

What is a swap, and what is an interest rate swap?

A swap is an OTC agreement to exchange streams of cash flows over time. A plain vanilla interest rate swap exchanges a fixed interest rate for a floating rate (e.g. SONIA-linked) on an agreed notional principal. The notional is not exchanged; only the net interest difference is settled.

What is a credit default swap (CDS)?

A derivative acting like insurance on a borrower's credit: the protection buyer pays regular premiums to the protection seller, who agrees to compensate the buyer if a defined credit event (e.g. default) occurs on a reference entity. It transfers credit risk without transferring the underlying bond.

What is a clearing house / central counterparty (CCP) and what is novation?

A CCP interposes itself between the buyer and seller of a trade, becoming buyer to every seller and seller to every buyer (novation). This guarantees performance, removes bilateral counterparty risk, and manages margin. Examples include LCH and ICE Clear.

What is the main aim of EMIR (European Market Infrastructure Regulation)?

To reduce systemic risk in OTC derivatives markets by requiring central clearing of standardised OTC derivatives through CCPs, reporting of all derivative trades to trade repositories, and risk-mitigation/margining for non-cleared trades.

What is an open-ended fund and how does its size change?

A pooled collective investment scheme (e.g. an OEIC or unit trust) whose number of units/shares expands when investors buy in and contracts when they redeem. New money creates new units; redemptions cancel units, so the fund 'breathes' with demand.

How is the price of an open-ended fund determined?

Directly from the net asset value (NAV) of the underlying portfolio: price = (total assets − liabilities) ÷ number of units. Investors deal at (or close to) NAV, so units cannot trade at a significant premium or discount to NAV.

What is a closed-ended fund (investment trust) and how can its shares be priced relative to NAV?

A closed-ended fund is a company with a fixed number of shares listed and traded on a stock exchange. Because supply is fixed, the share price is set by market supply and demand and can trade at a discount or premium to the underlying net asset value (NAV).

What is 'gearing' in a closed-ended investment trust and what is its effect?

Gearing is the trust's ability to borrow money to invest alongside shareholders' capital. It magnifies returns: it amplifies gains when assets rise but also amplifies losses when assets fall, increasing the volatility and risk of the shares.

What is an exchange-traded fund (ETF)?

An open-ended collective investment fund, usually tracking an index, whose shares are listed and traded on an exchange throughout the day like a share. It combines fund diversification with intraday tradability, typically with low charges. An authorised participant creation/redemption mechanism keeps the price close to NAV.

What is a tracker (index) fund and what are the two main replication methods?

A passively managed fund that aims to match the performance of a chosen index. Physical replication: it buys the actual constituent securities (full replication or representative sampling). Synthetic replication: it uses derivatives (e.g. total return swaps) to deliver the index return, introducing counterparty risk.

Give examples of alternative investments and their typical characteristics.

Examples include hedge funds, private equity, commodities, property (real estate) and infrastructure. They typically offer diversification (low correlation with mainstream equities/bonds) but tend to be less liquid, less transparent, and more complex, often with higher fees.

What is a structured product and what two components does it typically combine?

A pre-packaged investment whose return is linked to an underlying asset or index. It usually combines a fixed-income element (e.g. a zero-coupon bond, providing capital protection) with a derivative (e.g. an option, providing the upside linked to the index), giving a tailored risk/return profile that depends on the issuer's creditworthiness.