Chapter 3(T-8, Capital Markets)[17-24/06/25] Flashcards
(70 cards)
1
Q
What is a “Capital Market”?
A
Capital market are those financial markets where the money is raised for long-term( > 1 ) by the govt, instituions, companies,etc in form of equity and debt. There are two types of CM, Primary and Secondary.
2
Q
Types of Contracts?
A
- On the basis of terms & conditions-Standadized & Customized.
- On the basis of maturity-Short & Long term.
- On the basis of execution-Spot & Future.
- Debt & Equity Contract.
3
Q
What is Capital Market?
Q: Consider the following markets:
- Government Bond Market
- Call Money Market
- Treasury Bill Market
- Stock Market
A
Only 1) Government Bond Market and 4) Stock Market—these are for long-term instruments; the rest belong to the money market.
4
Q
Types of Contracts (Standardized vs Customized)
Q: True or False? – “Futures contracts are standardized, while forward contracts are customized.”
A
rue. Futures are exchange-traded with standardized terms; forwards are OTC and customizable. (Common model/definition question.)
5
Q
Q: Which short-term money instruments are traded in the Money Market?
A
Treasury Bills, Cash Management Bills, Certificates of Deposit, Commercial Paper, Call Money, and WMA. (Basic classification based on maturity <1 year.)
6
Q
Q: What are derivatives
A
Derivatives derive value from an underlying asset.
7
Q
Q: What is meant by a company being “limited by shares”?
A
Shareholders’ liability is capped at their shareholding amount. Personal assets are protected if the company defaults. (Basic definition query.)
8
Q
Q: List the steps involved in the IPO process.
A
- Appointment of Lead Manager and an underwritier.
- Apply to SEBI - DRHP
- Apply for permission in the market.
- Advertisement
- Allocation
9
Q
Q: Define the Secondary Market and name its main functions.
A
The secondary market is where existing securities are traded, providing liquidity, price discovery, and capital formation efficiency. (Essential definitions.)
10
Q
What is an Over-The-Counter (OTC) Contract?
A
➡ Definition: OTC contracts are agreements directly negotiated between two parties, without exchange involvement.
➡ Features:
1. Customised terms (price, quantity, delivery)
2. Higher counterparty risk.
11
Q
Characteristics of Treasury Bills
A
- Issued at zero coupon rate (no periodic interest)
- Sold at discount to face value
- Short-term: Maturity of 91, 182, 364 days
- Issued by: Government of India
Used for: short-term liquidity for government
12
Q
What is Consolidated Fund of India?
A
➡ All government revenues (taxes, loans) + receipts go into this fund
➡ Expenditure requires Parliamentary approval
➡ Government bonds >1 year maturity are backed by it.
13
Q
✅ True/False: Government bonds exceeding 1 year are backed by Consolidated Fund of India.
A
True
14
Q
Characteristics of Commercial Paper
A
- issued by corporate entities for short-term needs
- Issuer must be rated above* investment grade threshold*
- Unsecured, hence creditworthiness matters
- Usually in denominations of ₹5 lakh or multiples
15
Q
➡ CDs are short-term debt instruments issued by ________ (banks/companies).
A
Answer: Banks.
➡ Issued at discount to face value, transferable
➡ Used by banks to manage liquidity
16
Q
Match-the-Pair:
Institution Role
- EXIM Bank Export-Import financing
- SIDBI Small industries development
- NHB Housing sector financing
- NABFID Development finance for infrastructure
- NABARD Rural & agricultural development financing
A
Flash fact: All are classified as AIFI (All India Financial Institutions) and regulated by RBI
17
Q
____are termed as AI FIs by RBI.
A
DFI
18
Q
T/F : Deposits are not insured.
A
False, they are insured by DIC GC
Deposit Insaurance&Credit gurantee cooperation of India.
19
Q
What is ‘Strike’, ‘Underlying’ and ‘Expiry’ in capital markets.
A
Strike-Price at which exchange will take place in future.
Underlying-Item of Interest.
Expiry-time of execution.
20
Q
Authorized Capital is the maximum capital a company is allowed to raise through shares, as mentioned in its ________.
A
✔ Answer: Memorandum of Association
📝 Flash fact: Company cannot issue shares beyond this limit unless it amends its memorandum.
21
Q
💡 Definition + True/False:
➡ Paid-up Capital is the part of authorized capital for which money has been received from shareholders.
✅ True/False: Paid-up capital is always equal to authorized capital.
A
Answer: False
📝 Example: Authorized = ₹10 crore; Paid-up = ₹5 crore (₹5 crore worth of shares actually issued & paid for).
22
Q
ommon stock represents ownership; holders get voting rights and residual profits after obligations.
Q: Which of these rights is NOT typically given to common stockholders?
a) Voting rights
b) Guaranteed dividend
c) Claim on residual assets
A
Answer: b) Guaranteed dividend
23
Q
Primary Market
A
Primary market: Where securities are issued for the first time to investors — funds go to issuer (e.g., IPO, FPO).
📝 Example: Zeta Ltd issues shares in an IPO — money raised helps Zeta expand.
24
Q
Secondary market: Market where already-issued securities are bought & sold among investors.
➡ Main platform in India: ____________.
A
Answer: Stock exchanges (like NSE, BSE)
25
issue of shares by a company already listed on stock exchange — used to raise additional funds.
Q: FPO is for:
a) New companies
b) Listed companies issuing additional shares
Answer: b) Listed companies issuing additional shares
26
Q: What is a clearing house in capital markets?
An institution that facilitates the settlement of trades between buyers and sellers.
Manages transfer of funds and securities and mitigates counterparty risk. Example: NSE Clearing Ltd (NSCCL).
## Footnote
Sir's example of Amazon.
27
Q: What function does a clearing house serve in the Indian capital market?
It acts as the guarantor of settlement.
Ensures trades are completed even if a party defaults.
28
Q: What is a depository in Indian financial markets?
An institution that holds securities like shares and bonds in electronic (demat) form.
Provides safe, convenient transfer of ownership without physical certificates.
Example: NSDL, CDSL.
29
Who are Depository Participants (DPs)?
Intermediaries between the depository and investors.
Open and manage demat accounts.
Can be banks, brokers, or other SEBI-authorized entities.
30
Name two main depositories in India.
NSDL (National Securities Depository Limited)
CDSL (Central Depository Services Limited)
31
True/False: A clearing house eliminates counterparty risk in capital market trades.
True
32
What is the primary goal of "Operation Twist" as implemented by a central bank?
A. To directly finance government spending.
B. To realign the yield curve towards a more desirable shape.
C. To decrease the demand for government securities.
D. To increase the overall money supply in the economy.
Operation Twist is an open market operation variant.
It involves buying long-term government bonds and selling short-term bonds.
This process is intended to lower long-term bond yields while elevating short-term yields.
The ultimate objective is to adjust or “realign” the yield curve toward a more desirable shape.
33
In the context of an IPO, what is the main purpose of the Draft Red Herring Prospectus (DRHP)?
A. To detail the company's business model, financials, risks, and strategy for SEBI approval.
B. To guarantee the purchase of unsold shares if public demand is inadequate.
C. To facilitate transactions in money market products such as treasury bills and commercial papers
D. To announce the IPO timeframe, price band, and application process to the public.
Correct Answer : a
34
Consider the following statements regarding GSAP (G-Sec Acquisition Programme):
GSAP aims to lower bond prices and increase yields by increasing the demand.
GSAP involves the central bank purchasing government securities.
Which of the statements given above is/are correct?
A. 1 only
B. 2 only
C. Both 1 and 2
D. Neither 1 nor 2
GSAP involves the central bank purchasing government securities.
The primary aim is to influence market liquidity and stabilize borrowing costs.
Increased demand from the central bank pushes bond prices up and correspondingly lowers yields.
The focus is on lowering yields rather than increasing them.
35
Which of the following statements accurately describe Venture Capitalists (VCs)?
They bring structured expertise, mentorship, and industry connections.
They provide early funding, often in smaller amounts.
They typically enter after successful angel funding rounds.
Select the correct answer using the code given below.
A. 1 and 3 only
B. 1, 2 and 3
C. 2 only
D. 1 and 2 only
Correct Answer : a
|
36
Consider the following statements regarding bond yields:
Long-term bonds typically yield more than short-term bonds due to higher risk over a longer period.
Higher demand for bonds leads to higher bond prices and lower yields.
Bond price and yield move in the same direction.
Which of the statements given above is/are correct?
A. 2 and 3 only
B. 1 and 2 only
C. 2 only
D. 1, 2 and 3
B
37
Consider the following statements regarding Digital Banks and Neo Banks:
Digital banks always hold specialized licenses.
Neo Banks are traditional banks with a large network of physical branches.
Digital banks operate almost entirely in the digital space with minimal physical infrastructure.
Which of the statements given above is/are correct?
A. 1, 2 and 3
B. 2 and 3 only
C. 3 only
D. 2 only
Correct Answer : c
|
Your Answer : Not Attempted
Explanation:
Detailed Explanation about Digital Banks and Neo Banks:
Digital banks operate predominantly online with minimal physical presence.
Neo Banks are modern, tech-driven banking platforms rather than traditional banks.
Regulatory arrangements for digital banks can vary and do not always require specialized licenses.
38
Consider the following statements about the impact of issuing new shares:
Issuing new shares always decreases the overall valuation of the company.
The price of each existing share can rise if the business valuation increases despite dilution.
Existing shareholders experience dilution of ownership when new shares are issued.
The face value of existing shares changes when new shares are issued.
Which of the statements given above is/are correct?
A. 1, 3 and 4 only
B. 3 only
C. 2 and 3 only
D. 1, 2 and 4 only
c
39
Which of the following statements are true regarding ESOPs (Employee Stock Option Plans)?
ESOPs dilute existing ownership.
ESOPs are shares reserved for employees.
An employee's labor contribution can substitute for monetary contribution.
ESOPs are often issued at favorable prices or vested over time.
Select the correct answer using the code given below.
A. 1 and 3 only
B. 1, 2, 3 and 4
C. 1 only
D. 2, 3 and 4 only
Correct Answer : d
|
Your Answer : Not Attempted
Explanation:
Detailed Explanation about Employee Stock Option Plans (ESOPs):
ESOPs are shares reserved specifically for employees.
They are often issued at favorable prices or with vesting conditions.
Employee labor contributions may substitute for monetary investment in some cases.
Although dilution of existing ownership can occur, it is not the central focus of ESOPs.
40
Which of the following accounts is used to place orders on the stock exchange?
A. Trading Account.
B. Bank Account.
C. ASBA Account.
D. Demat Account.
Your Answer : d (Incorrect)
Explanation:
Trading Account
A Trading Account is used by investors to execute orders on the stock exchange.
Interfaces with the bank account to access funds and with the Demat account to hold purchased securities.
Distinct from both the Bank and Demat accounts in its functionality.
Analysis of Options:
Option (a): Correct - A Trading Account is specifically designed for placing orders on the stock exchange.
Option (b): Incorrect - A Bank Account holds funds but is not used for executing trades on the stock exchange.
Option (c): Incorrect - An ASBA Account is used for blocking funds during an IPO application, not for order placement.
Option (d): Incorrect - A Demat Account is used for holding securities, not for placing orders.
Hence, the correct answer is (a) Trading Account..
41
Consider the following statements regarding Underwriters (UW) in an IPO:
Underwriter agreements formalize responsibilities and compensation structures.
An UW can guarantee the purchase of any unsold shares, ensuring the issuing company successfully raises capital.
Which of the statements given above is/are correct?
A. 1 only
B. 2 only
C. Both 1 and 2
D. Neither 1 nor 2
Correct Answer : c
|
Your Answer : b (Incorrect)
Explanation:
Underwriters in an IPO
Underwriters play a dual role by guaranteeing the purchase of unsold shares and working under formal agreements that specify their responsibilities and compensation. This dual function helps ensure the success of the capital raising process.
Analysis of Statements:
Statement (1): Correct - This statement accurately reflects that formal agreements outline the responsibilities and compensation for underwriters.
42
Consider the following statements regarding Non-Convertible Debentures (NCDs):
NCDs can be converted into equity under predetermined conditions.
NCDs are often used by companies that do not want to dilute shares.
Which of the statements given above is/are correct?
A. 1 only
B. 2 only
C. Both 1 and 2
D. Neither 1 nor 2
Your Answer : c (Incorrect)
Explanation:
Non-Convertible Debentures (NCDs)
NCDs are debt instruments used by companies to raise funds without diluting share ownership, as they are not convertible into equity.
43
Consider the following statements regarding Anchor Investors:
Anchor investors are typically large entities like banks, mutual funds, and insurance companies.
Anchor investors commit capital before the IPO opens to the public.
Anchor investors are not subject to a lock-in period, allowing them to sell their shares immediately after listing.
Which of the statements given above is/are correct?
A. 2 and 3 only
B. 3 only
C. 1 and 3 only
D. 1 and 2 only
Your Answer : Not Attempted
Explanation:
Anchor Investors
Anchor investors, usually large financial entities, commit funds before the IPO opens but are generally subject to a lock-in period post-listing.
44
Consider the following statements regarding Qualified Institutional Placement (QIP):
The money raised through QIP goes directly to the company from the investors.
QIP is a fundraising mechanism targeting large institutional investors.
QIP avoids the complexity of a full public issue.
Which of the statements given above are correct?
A. 1 and 2 only
B. 1, 2 and 3
C. 2 and 3 only
D. 1 and 3 only
Qualified Institutional Placement (QIP)
QIP is a method for companies to raise capital from large institutional investors in a more streamlined process, with funds flowing directly to the company.
Analysis of Statements:
Statement (1): Correct - This statement rightly indicates that funds raised via QIP are received directly by the company.
Statement (2): Correct - This statement correctly identifies large institutional investors as the target group for QIP.
Statement (3): Correct - This statement highlights the streamlined approach of QIP compared to a full public issue.
Hence, the correct answer is (b) 1, 2 and 3.
45
What accounts must an investor open to trade in India’s secondary market?
👉 Demat account (with a depository participant — NSDL/CDSL)
👉 Trading account (with a broker)
👉 Link to bank account
46
Who clears and settles trades in the secondary market?
👉 The clearing corporation of the stock exchange (e.g., NSCCL for NSE)
👉 NOT the broker’s own clearing house
47
What is T+1 settlement in India’s secondary market?
👉 Trade is settled one working day after the trade date
👉 Buyer gets securities; seller gets funds
48
What is Absolute Return in capital markets?
The total percentage gain or loss on an investment over a period.
It does not consider how long the investment was held.
49
What is Annualized Return?
The return % per year, assuming returns are distributed evenly each year.
Helps compare investments of different durations.
50
How is Annualized Return different from Absolute Return?
Absolute return ignores time; annualized adjusts for time and shows per-year performance.
51
What is Internal Rate of Return (IRR)?
The discount rate at which present value of cash inflows = cash outflows.
Accounts for multiple cash flows at different times.
52
When is IRR preferred over Absolute/Annualized Return?
When investments have staggered cash flows (e.g. SIP, PPP, project finance).
53
What is Benchmarking in Capital Markets?
👉 Benchmarking means comparing your investment’s performance to a standard index (like Nifty 50, Sensex).
👉 It helps assess whether your investment did better or worse than the market.
📝 Memory hook:
👉 Benchmark = "the measuring stick of the market"
54
What does Alpha represent in benchmarking?
👉 Alpha tells you how much extra return your investment gave beyond what the market (benchmark) explains.
👉 Positive alpha → you beat the market; Negative alpha → you underperformed.
📝 Memory hook:
👉 Alpha = “Above or below market performance?”
55
What does Beta represent in benchmarking?
👉 Beta shows how sensitive your investment is to market movements.
👉 Beta = 1 → moves like market
👉 Beta >1 → more volatile than market
👉 Beta <1 → less volatile than market
📝 Memory hook:
👉 Beta = “Bounce with the market?”
56
What is NIFTY 50?
👉 NIFTY 50 is an index of the top 50 large-cap companies listed on NSE.
👉 Often used as a benchmark for equity mutual funds and portfolio performance.
57
What is SENSEX?
👉 SENSEX tracks the performance of 30 major companies listed on BSE.
👉 Used to benchmark large-cap equity returns.
58
On what basis are the companies weighted in most major indices (e.g., NIFTY 50, SENSEX)?
Companies are weighted based on free-float market capitalization.
59
What is the purpose of linking an index to a base value?
It allows tracking of relative changes in the market over time by comparing current total market cap to a base market cap at the base date.
60
Why are market indices rebalanced periodically?
To reflect changes in company size, liquidity, or market relevance and ensure the index continues to meet its objective.
61
What is a common base value assigned when creating a market index?
Typically 100 or 1000 (e.g., SENSEX base year 1978–79 = 100),
NIFTY 50 Index :
Base Year: 1995
Base Value: 1000
62
What is the first step in constructing a market index?
Selecting relevant companies or sectors that represent the market segment or objective of the index.
63
64
What is a mutual fund?
A mutual fund is a pooled investment vehicle, set up as a trust under the Indian Trusts Act, 1882, which collects money from investors and invests in securities, managed by an AMC, and regulated by SEBI.
65
Who are the key participants in a mutual fund structure?
Trustees: Legal owners, safeguard investor interest
AMC: Fund manager (e.g. Axis Mutual Fund)
Fund Manager: Professional managing investments
Investors: Contribute voluntarily
Custodian: Holds assets securely
66
What does Asset Under Management (AUM) represent?
AUM is the total market value of assets held by the mutual fund on behalf of its investors.
67
NAV = (Total value of fund’s assets – liabilities) / number of outstanding units
➡ NAV represents per unit value of the fund.
68
Are mutual fund units tradable on the stock exchange?
No, except for Exchange Traded Funds (ETFs) which are passively managed and traded like stocks.
69
Does buying/selling by mutual fund manager result in tax for investors?
No, tax applies only when investor sells units and gains are realised.
70
What is a key difference between a mutual fund and an ETF?
Mutual fund units are bought/redeemed from AMC, not traded intraday.
ETF units are traded on stock exchanges like shares.
