CeMAP 1 Practice Test

CeMAP 1 Financial Markets & the Economy Practice Questions

Financial Markets & the Economy makes up 4 of every 40 questions on a Tigertest CeMAP 1 practice test. Here are 10 of the 20 questions on it, each with the answer and the reason.

Updated 2026-11-10 by the Tigertest team. Based on LIBF's FSRE (CeMAP Module 1) syllabus for FRE1 and FRE2. Original questions; case studies written as single questions. Not affiliated with LIBF or Walbrook Institute London.

1. 1. Which three functions does money perform in an economy?

   • A.Investment, interest payments and economic growth
   • B.Exchange, store of value, unit of account
   • C.Exchange, credit and taxation of income
   • D.Saving, lending and spending power

   Answer: B. Money is a medium of exchange, a store of value and a unit of account. Credit and taxation use money but are not its functions.

2. 2. In which market are new shares first sold to investors by the company issuing them?

   • A.The money market
   • B.The foreign exchange market
   • C.The secondary market
   • D.The primary market

   Answer: D. New issues raise capital in the primary market. Later trading between investors happens in the secondary market, where the company receives nothing.

3. 3. The money markets mainly deal in:

   • A.Short-term lending and borrowing
   • B.Trading in physical commodities
   • C.Long-term lending through company shares
   • D.Buying and selling commercial property

   Answer: A. Money markets handle wholesale lending and borrowing for periods of up to about a year, such as Treasury bills and interbank loans. Shares and property belong to capital markets.

4. 4. Which body issues gilts on behalf of HM Treasury?

   • A.The Financial Conduct Authority
   • B.The London Stock Exchange
   • C.The UK Debt Management Office
   • D.The Prudential Regulation Authority

   Answer: C. The UK Debt Management Office, an executive agency of HM Treasury, issues gilts and Treasury bills. The Stock Exchange is where gilts are later traded.

5. 5. When market interest rates rise, the price of an existing fixed-coupon bond usually:

   • A.Stays the same
   • B.Doubles its coupon
   • C.Falls
   • D.Rises

   Answer: C. A fixed coupon becomes less attractive when new bonds pay more, so the price of existing bonds falls until their yield matches the market. Prices and yields move in opposite directions.

6. 6. Which feature is typical of preference shares compared with ordinary shares?

   • A.A fixed dividend paid first
   • B.Dividends that rise with profits
   • C.Last claim on a winding up
   • D.Full voting rights at every meeting

   Answer: A. Preference shareholders usually receive a fixed dividend before ordinary shareholders and rank ahead of them on a winding up, but normally have no vote.

7. 7. Which asset class is generally the least liquid?

   • A.Conventional gilts
   • B.Cash in a deposit account
   • C.Shares listed on the exchange
   • D.Commercial property

   Answer: D. Selling a building can take months and costs are high, so property is illiquid. Cash is the most liquid, and listed shares and gilts trade daily.

8. 8. Over long periods, which asset class has historically given the highest returns but with the greatest volatility?

   • A.Corporate bonds
   • B.Equities
   • C.Cash
   • D.Gilts

   Answer: B. Shares have tended to outperform cash and bonds over the long term because investors are paid for bearing more risk, which shows up as larger swings in value.

9. 9. The main risk to the real value of money held in a deposit account over many years is:

   • A.Share price volatility
   • B.Inflation
   • C.Default of the gilt market
   • D.Currency hedging

   Answer: B. If interest earned is below inflation, the money buys less each year even though the balance never falls. Deposits are not exposed to share price swings.

10. 10. Who sets the inflation target that the Bank of England must aim for?

    • A.The Financial Conduct Authority
    • B.The Prudential Regulation Authority
    • C.The Monetary Policy Committee
    • D.The Chancellor of the Exchequer

    Answer: D. The Chancellor sets the inflation target each year in the remit letter to the Bank of England. The Monetary Policy Committee then sets Bank Rate to meet it.