Investment Management Certificate (IMC) Asset Classes and Financial Instruments Syllabus

Asset Classes and Financial Instruments syllabus — full chapter and topic list

Expand any chapter to see its topics and sub-topics. This is the whole examinable outline for Asset Classes and Financial Instruments in Investment Management Certificate (IMC), not a summary of it.

1. 1

   Cash and the Money Market

   3 topics

   • Money market instruments
     • Treasury bills and certificates of deposit
     • Commercial paper and repos
   • Characteristics of cash investments
     • Liquidity, credit and reinvestment risk
     • Role of cash in a portfolio
   • Foreign exchange
     • Spot and forward FX
     • Currency risk in international portfolios
2. 2

   Fixed Income Securities

   4 topics

   • Bond characteristics
     • Coupon, maturity, par and accrued interest
     • Government, corporate and supranational issuers
   • Bond pricing and yields
     • Clean and dirty price
     • Running yield, redemption yield and the yield curve
   • Bond risks
     • Interest rate, credit and inflation risk
     • Duration and convexity
   • Specialist bond types
     • Index-linked gilts
     • Convertible and asset-backed securities
     • Credit ratings and high yield
3. 3

   Equities

   4 topics

   • Types of equity
     • Ordinary and preference shares
     • Rights and shareholder benefits
   • Corporate actions
     • Dividends, bonus and rights issues
     • Share splits and buybacks
   • Equity valuation
     • Dividend discount models
     • Price multiples and free cash flow
   • Equity markets and trading
     • Listing, IPOs and indices
     • Settlement and the role of CREST
4. 4

   Derivatives

   4 topics

   • Forwards and futures
     • Contract specifications and margining
     • Pricing and basis
   • Options
     • Calls, puts and payoff profiles
     • Intrinsic and time value
   • Swaps
     • Interest rate and currency swaps
     • Credit default swaps
   • Uses of derivatives
     • Hedging, speculation and arbitrage
     • Counterparty and leverage risk
5. 5

   Alternative Investments and Property

   3 topics

   • Real estate
     • Direct property and REITs
     • Valuation and liquidity considerations
   • Commodities
     • Physical versus financial exposure
     • Roll yield and contango
   • Private markets and hedge funds
     • Private equity and venture capital
     • Hedge fund strategies and fee structures
6. 6

   Pooled and Packaged Investments

   3 topics

   • Open-ended funds
     • OEICs and unit trusts
     • Pricing, dilution and dealing
   • Closed-ended funds
     • Investment trusts and gearing
     • Discounts and premiums to NAV
   • Exchange-traded products
     • ETFs, ETCs and ETNs
     • Physical versus synthetic replication

Asset Classes and Financial Instruments flashcards for Investment Management Certificate (IMC)

21 of 59 cards from the Asset Classes and Financial Instruments deck — real questions with worked answers.

1. What is the money market and what is the typical maturity of instruments traded in it?

   The money market is the market for short-term debt instruments, where securities have an original maturity of one year or less. It provides liquidity and short-term financing for governments, banks and corporations.

2. What is a Treasury bill (T-bill) and how does it pay a return to investors?

   A T-bill is a short-term government debt instrument (typically 1, 3 or 6 months in the UK). It is a zero-coupon, discount instrument: issued at a discount to face value and redeemed at par, so the return is the difference between purchase price and the face value received at maturity.

3. What is a certificate of deposit (CD)?

   A CD is a negotiable receipt issued by a bank for a time deposit. It states the deposit amount, maturity date and interest rate. Unlike an ordinary deposit it is tradable in the secondary market, giving the holder liquidity.

4. What is commercial paper (CP)?

   Commercial paper is short-term, unsecured promissory notes issued by large corporations (and some financial institutions) to finance short-term needs. It is usually issued at a discount, has maturity up to about 270 days, and is unsecured so credit quality of the issuer is key.

5. What is a repurchase agreement (repo)?

   A repo is the sale of a security with an agreement to buy it back at a fixed price on a future date. Economically it is a collateralised short-term loan: the difference between sale and repurchase price is the interest (the repo rate). To the lender of cash it is a reverse repo.

6. What is a bill of exchange (and an acceptance)?

   A bill of exchange is a written order requiring one party to pay a fixed sum to another at a set future date. When a bank guarantees payment it becomes a banker's acceptance, improving its creditworthiness and tradability in the money market.

7. List the key characteristics that make cash and money-market investments attractive.

   High liquidity, high capital security (low default risk on quality instruments), low volatility, and a relatively low/stable return. They are used for capital preservation and as a 'safe haven' rather than for growth.

8. What are the main risks of holding cash/money-market investments despite their safety?

   Inflation (purchasing power) risk — returns may fail to keep pace with inflation, eroding real value; reinvestment risk — proceeds may have to be reinvested at lower rates; and credit/default risk on the issuing institution.

9. In a foreign exchange quote such as GBP/USD = 1.2500, which is the base currency and which is the quote (counter) currency?

   In GBP/USD, GBP is the base currency and USD is the quote (counter/terms) currency. The rate gives the number of units of the quote currency (1.25 USD) per one unit of the base currency (1 GBP).

10. What is the difference between the spot FX rate and the forward FX rate?

    The spot rate is the exchange rate for immediate delivery (typically settling in two business days, T+2). The forward rate is an agreed rate today for exchange of currencies at a specified future date; the forward differs from spot by forward points reflecting the interest-rate differential between the two currencies.

11. What does the bid-offer (bid-ask) spread represent in an FX quote?

    The bid is the price at which the market maker will buy the base currency; the offer (ask) is the price at which it will sell. The spread between them is the dealer's profit margin and reflects liquidity and transaction cost.

12. Define a bond's coupon, face (par/nominal) value, and maturity.

    The face/par value is the principal amount repaid at maturity (e.g. £100). The coupon is the periodic interest payment, usually a fixed percentage of par. Maturity is the date on which the principal is repaid and the bond is redeemed.

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

    Bond prices and yields move in opposite directions. When market yields rise, the price of an existing fixed-coupon bond falls; when yields fall, its price rises. This is because the fixed cash flows are discounted at the prevailing market rate.

14. Write the formula for the price of a fixed-coupon bond in terms of its cash flows.

    The price is the present value of all future cash flows: $$P = \sum_{t=1}^{n} \frac{C}{(1+y)^{t}} + \frac{F}{(1+y)^{n}}$$ where $C$ is the coupon, $F$ the face value, $y$ the yield per period and $n$ the number of periods.

15. What is the current yield (running yield) of a bond and its formula?

    The current (running) yield measures annual income relative to price, ignoring capital gain/loss: $$\text{Current yield} = \frac{\text{Annual coupon}}{\text{Clean price}} \times 100\%$$ It does not account for the time value of money or redemption value.

16. What is the yield to maturity (redemption yield) of a bond?

    The yield to maturity (YTM) is the single discount rate that equates the present value of all the bond's future cash flows to its current market price. It is the total return an investor earns if the bond is held to maturity and all coupons are reinvested at that same rate.

17. How does a bond's price compare to par when it trades at a premium, at a discount, and at par?

    A bond trades at a premium (price > par) when its coupon exceeds the market yield; at a discount (price < par) when its coupon is below the market yield; and at par when its coupon equals the market yield (YTM = coupon rate).

18. What is the difference between the clean price and the dirty price of a bond?

    The dirty (full) price is the total amount paid, including accrued interest since the last coupon. The clean price excludes accrued interest. $$\text{Dirty price} = \text{Clean price} + \text{Accrued interest}$$ Bonds are usually quoted on a clean-price basis.

19. Define Macaulay duration and what it measures.

    Macaulay duration is the weighted-average time (in years) until a bond's cash flows are received, with weights equal to the present value of each cash flow as a proportion of price. It measures the bond's effective maturity and its sensitivity to interest-rate changes.

20. What is modified duration and how does it relate to price sensitivity?

    Modified duration estimates the percentage change in a bond's price for a 1% change in yield: $$\text{Modified duration} = \frac{\text{Macaulay duration}}{1+y}$$ and approximately $\frac{\Delta P}{P} \approx -\text{Modified duration} \times \Delta y$.

21. What is convexity and why does it matter for bond price estimates?

    Convexity measures the curvature of the price-yield relationship. Because duration assumes a linear relationship, it underestimates price rises and overestimates price falls for large yield moves. Positive convexity means actual prices are better than duration predicts; it is a second-order correction to the duration estimate.

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