Chapter 2 : Introduction to securities market Flashcards
Treasury Bills are issued by the________
A) Banks
B) Government
C) Insurance Companies
D) All of the above
B) Government
Reason: Treasury Bills are issued by the government as short-term instruments to raise funds.
A close-ended mutual fund scheme allows investors to purchase units from the fund and subsequently sell those units back to the fund at any time.
A) False
B) True
A) False
Reason: Close-ended mutual fund schemes have a fixed maturity and usually don’t allow investors to buy or sell units directly to the fund after the initial offer period. Instead, units are traded on secondary markets among investors.
When a large number of shares are offered to a specific set of individuals, it is known as
A) Private Placement
B) None of the Above
C) Equity Shares
D) Private Equity
A) Private Placement
Reason: Private Placement refers to the sale of securities directly to a select group of investors rather than through a public offering.
The major uses of indices are_______
A) The performance of the economy is indicated by the index
B) Indices indicate real-time market sentiments
C) Indices act as an underlying for the Index
D) All of the above
D) All of the above
Reason: All of the above are the uses of indices.
While raising capital, If capital is raised from investors outside the country, it is called
A) Onshore offering
B) Offshore offering
B) Offshore offering
Reason: Offshore offering refers to raising capital from investors located outside the country where the issuing entity operates.
What is the process of converting securities held in physical form into electronic form?
A) None of the Above
B) Rematerialization
C) Book Keeping
D) Dematerialization
D) Dematerialization
Reason: Dematerialization is the process of converting physical securities, such as share certificates or bonds, into electronic or digital form.
When a trader buys an asset at a lower price in one market and sells it at a higher price in another market to exploit the price difference, it is known as:
A) Speculation
B) Arbitrage
C) Trading
D) Hedging
B) Arbitrage
Reason: Arbitrage refers to the practice of buying an asset or security at a lower price in one market and simultaneously selling it at a higher price in another market to profit from the difference in prices.
A pledge is an act of taking a loan against securities by the investor. Then the entity that is giving the loan against the securities is called as
A) Pledgee
B) Pledgor
A) Pledgee
Reason: When an investor offers securities as collateral to secure a loan, the party providing the loan against those securities is known as the “pledgee.”
An agreement between two parties to exchange future cash flows based on a predetermined formula is known as:
A) Options
B) Contracts
C) Swaps
D) None of the Above
C) Swaps
Reason: Swaps are financial agreements between two parties to exchange future cash flows according to a predetermined formula. These agreements involve the exchange of financial instruments or cash flows, such as interest rates, currencies, or other variables, typically over a specified period.
Which option gives the buyer the right, but not the obligation, to sell a given quantity of the underlying asset at a given price on or before a given date?
A) Put Option
B) Call Option
C) Forward Contract
D) Future Contract
A) Put Option
Reason: A put option is a financial contract that grants the buyer the right, but not the obligation, to sell a specified quantity of the underlying asset at a predetermined price (also known as the strike price) on or before the expiration date of the option.
Debt instruments issued by institutions against financial assets such as home loans, auto loans, rent receivable, credit card receivables, etc. known as
A) Mortgage Backed Securities
B) Commodity Linked Debentures
C) Currency-linked Debentures
D) Equity Linked Debentures
A) Mortgage Backed Securities
Reason: Mortgage-backed Securities (MBS) are debt instruments issued by institutions. They’re backed by assets like home loans, auto loans, or credit card receivables. Investors receive payments based on the interest and principal from the underlying loans.
What is an entity established or incorporated outside India that proposes to make investments in India?
A) Domestic Portfolio Investors
B) Insurance Companies
C) Foreign Portfolio Investor
D) Mutual Funds
C) Foreign Portfolio Investor
Reason: A Foreign Portfolio Investor (FPI) refers to an entity established or incorporated outside India that aims to invest in the Indian financial markets.
Which of the following statements accurately describes Global Depositary Receipts (GDRs)?
A) GDRs are depositary receipts that can be traded in various countries.
B) GDRs are exclusively used by domestic investors.
C) GDRs are not related to international trading.
D) GDRs are depositary receipts limited to trading in a single country.
A) GDRs are depositary receipts that can be traded in various countries.
Reason: GDRs are certificates representing shares in a foreign company. They are issued by international banks outside the company’s home country.
Which agency acts as a legal counterparty to all trades and guarantees settlement of all transactions on the Stock Exchanges?
A) Clearing Corporation
B) Clearing banks
C) Merchant Bankers
D) All of the above
A) Clearing Corporation
Reason: A Clearing Corporation serves as a central counterparty in financial markets, guaranteeing the settlement of all trades executed on stock exchanges. It ensures the smooth and efficient functioning of the market by acting as an intermediary between buyers and sellers.
TOM Trades are settled on_________
A) T+2 day
B) Previous day
C) Same day
D) T+1 day
D) T+1 day
Reason: In TOM trades, settlement occurs on the day after the trading day (T+1), which means there is a one-day gap between the trade and the settlement.
Treasury bills, commercial papers, and certificates of deposits are long-term debt instruments?
A) True
B) False
B) False
Reason: Treasury bills, commercial papers, and certificates of deposits are short-term debt instruments issued for a period not exceeding one year.
_______ market facilitates buying and selling for the investors.
A) Primary
B) Secondary
C) Both Primary and Secondary
D) Neither Primary nor Secondary
B) Secondary
Reason: In the secondary market, investors trade previously issued securities such as stocks, bonds, or derivatives among themselves, without the involvement of the original issuing company.
How are exchange-traded funds comparable to other investment choices available to investors?
A) Bonds
B) Index Funds
C) Active Mutual Funds
D) Debt Funds
B) Index Funds
Reason: ETFs and index funds share similarities as both aim to replicate the performance of a specific market index. They are passively managed investment options that offer diversification to investors.
Net asset value is the per-unit market value of all the securities held by a mutual fund scheme. True or False?
A) True
B) False
A) True
Reason: Mutual funds collect money from investors and invest it on their behalf in the securities market. The net asset value (NAV) represents the per-unit market value of all the securities held within a mutual fund scheme.
What statements accurately describe Swap contracts?
A) The notional amount, on which interest is calculated, is mutually agreed upon by the counterparties.
B) Involves an agreement between two parties to exchange future cash flows based on a predetermined formula: one pays a fixed rate and receives a floating rate.
C) Exchange of interest rates on the agreed notional amount occurs at settlement dates (e.g., quarterly) between the parties.
D) All of the above statements are correct.
D) All of the above statements are correct.
Reason: Swaps involve agreements between two parties to exchange future cash flows based on a predetermined formula, such as paying a fixed rate and receiving a floating rate, with settlement occurring at agreed dates.
In the rights issue, shares are offered to existing shareholders at a price ______ current market price.
A) Below
B) Above
C) Equal
D) Any of the above
A) Below
Reason: In a rights issue, shares are typically offered to existing shareholders at a price that is below the current market price to incentivize participation in the new issuance.
Depository Receipts are another form of financial instrument that represents ______ of a local company and is traded on a stock exchange _____ of its home country.
A) Bonds, Inside
B) Convertible, Inside
C) Shares, Outside
D) Debenture, Outside
C) Shares, Outside
Reason: Depository Receipts represent shares of a foreign company and are traded on a stock exchange outside the country of its origin, making it easier for investors to invest in foreign companies.
Which of the following statements is false?
A) Forwards are agreements to sell an asset at a future date.
B) Forwards are over-the-counter contracts.
C) Futures are exchange-traded contracts.
D) Forwards have no default risk while futures face the risk of counterparties defaulting.
D) Forwards have no default risk while futures face the risk of counterparties defaulting.
Reason: Forward contracts carry counterparty default risk, as they are private agreements. Futures contracts are exchange-traded with clearing houses, which reduce the risk of default.
Which mutual fund scheme does not have any fixed maturity and can be bought and sold at any time?
A) Open-ended
B) Close-ended
C) Interval
D) None of the above
A) Open-ended
Reason: Open-ended mutual fund schemes do not have a fixed maturity date and can be bought or sold by investors at any time.
Bonds issued ______ India and denominated in ______ are known as Masala bonds.
A) Inside; INR
B) Outside; INR
C) Inside; USD
D) Outside; USD
B) Outside; INR
Reason: Masala bonds are issued by Indian entities outside of India but are denominated in Indian Rupees (INR), enabling Indian issuers to raise funds internationally while using their home currency.
Securities market provides a platform to mutually satisfy the goals of _____ and _____.
A) Borrowers, Seekers of funds
B) Government, Issuers
C) Issuers, Investors
D) Liquidity, Raising capital
C) Issuers, Investors
Reason: The securities market serves both issuers and investors by offering a platform for issuers to raise capital and for investors to select from various available instruments.
Depository receipts have the underlying of the shares of the issuer company. True or False?
A) True
B) False
A) True
Reason: Depository receipts are backed by a specific quantity of underlying company shares. The shares offered for conversion into depository receipts are called sponsors of the issue.
The payment of interest and repayment of principal on FCCBs is in foreign currency.
A) True
B) False
A) True
Reason: FCCBs (Foreign Currency Convertible Bonds) involve payments of interest and repayment of principal in a foreign currency, which is a key characteristic of these bonds.
As compared to non-convertible bonds, the yield on the convertible bond is _______.
A) Relatively Higher
B) Relatively Lower
B) Relatively Lower
Reason: Convertible bonds typically have a lower yield compared to non-convertible bonds because they provide the option for investors to convert the bonds into equity shares, potentially offering higher returns from the equity conversion.
What features does a convertible debenture have?
A) Debt, Price of the equity
B) Income, Repayment
C) Debt, Confirmed Interest payment
D) Debt, Equity
D) Debt, Equity
Reason: Convertible debentures combine characteristics of both debt and equity. They act as debt instruments providing regular interest payments, but also allow the option to convert into equity shares at a predetermined price within a specified period.
As per SCRA, the term securities include which of the following?
A) Government Securities
B) Derivatives
C) Shares, scrips, or bonds
D) All of the above
D) All of the above
Reason: According to SCRA (Securities Contracts (Regulation) Act), the term “securities” includes Government Securities, Derivatives, Shares, Bonds, Scrips, Debentures, etc.
Along with SEBI and other regulators under the Companies Act, RBI also regulates the Equity Shares Market. State whether True or False.
A) True
B) False
B) False
Reason: The statement is false because the Reserve Bank of India (RBI) primarily regulates and supervises banks and financial institutions, not the equity shares market, which is regulated by SEBI.
How are exchange-traded funds comparable to other investment choices available to investors?
A) Index funds
B) Bonds
C) Active Mutual Funds
D) Debt Funds
A) Index funds
Reason: ETFs and index funds share similarities because both aim to replicate the performance of a specific market index. They are passively managed investment options and offer diversification to investors.
