NISM Series - XII Securities Markets Foundation Cert. Mock Test -3

Debt capital may be raised by issuing various types of debt instruments such as debentures, bonds, commercial papers, certificates of deposit or pass-through certificates. Each of these instruments is defined for its tenor (the time period to maturity) and the rate of interest it would pay.

There are various steps in the public issue of debt securities and some of them are : – Board resolution for issue of debt securities authorized by shareholders’ resolution – Execution of Debenture Trust Deed – Obtaining a credit rating for the issue – Listing of securities on the stock exchanges etc.

Trustees are appointed when the beneficiaries may not be able to directly supervise whether the money they have invested is being managed in their best interest. For eg. – Mutual fund trustees are appointed to supervise the asset managers; debenture trustees are appointed to ensure that the lenders interests are protected.

National Agricultural Market (e-NAM) launched was in 2016. The objective of e-NAM is to provide an online market platform for agricultural produce by creating a unified network of existing mandis. The vision of e-NAM is ‘One Nation, One Market’.

The e-NAM platform provides a bidding platform for farmers and buyers located at distant places away from the local mandi. It also provides an electronic payment facility so that farmers can receive their payment without having to visit a bank.

Banks, Private sector companies and Financial institutions can issue equity and debt instruments in international market.

Depository receipts (DRs) are financial instruments that represent shares of a local company but are listed and traded on a stock exchange outside the country. DRs are issued in foreign currency, usually dollars.

Holding DRs give investors the right to dividends and capital appreciation from the underlying shares, but not the voting rights.

Credit rating agencies evaluate a debt security to provide a professional opinion about the ability of the issuer to meet the obligations for payment of interest and return of principal as indicated in the security. They use rating symbols to rank debt issues, which enable investors to assess the default risk in a security.

There are several major players in the primary market. These include the merchant bankers, mutual funds, financial institutions, foreign portfolio investors (FPIs), insurance companies, individual investors, bankers to the issue, brokers, and depository participants.

A company which wants to raise more capital through an issue of shares must first offer them to the existing shareholders. Such an offer of shares is called a rights issue.

A rights issue is generally made at a price which is a little lower than the current market price so that the current shareholders get the advantage and are rewarded by the price difference. For eg. in the above question, the rights issue can be made around Rs 470 etc.

All the above have to be as per SEBI regulations.

The minimum subscription in a public issue of debt securities should not be less than 75 percent of the base issue size or as specified by SEBI. If the minimum subscription is not received then the entire blocked application monies will be unblocked within 8 working days from the date of the closure of the issue.

However, the issuer issuing tax free bonds as specified by CBDT is exempted from the minimum subscription limit

The debentures issued under a public offer must mandatorily be listed on a stock exchange

An Immediate or Cancel (IOC) order allows the user to buy or sell a security as soon as the order is released into the system, failing which the order is cancelled from the system. If the order is filled only partially on an immediate basis, the unexecuted portion of the order is cancelled immediately.

A consolidated account statement (CAS) across mutual fund holdings is sent to the investor for each calendar month where there have been transactions in a folio.

Folios where no transactions have taken place during a six-month period will receive a statement at the end of such six-month period.

An Authorized Person (AP) is an agent of the broker (previously referred to as sub-brokers) and is registered with the respective stock exchanges.

In the re-investment of Income Distribution cum Capital Withdrawal (IDCW) option, the dividend declared by the fund is not paid out, but is re-invested in the same scheme by buying additional units for the investor.

Period of Subscription for a public issue of shares :

(a) A public issue will be open for a minimum of 3 working days and a maximum of 10 working days.

(b) In case of a revision in the price band, the issuer shall extend the bidding (issue) period disclosed in the red herring prospectus, for a minimum period of 3 working days, subject to the maximum limit stated in (a) above.

Diversification means creating a portfolio of securities such that the overall portfolio is well balanced across multiple sectors and securities, so that the rise or fall in prices of the components is smoothened out.

Current yield simply compares the coupon of a bond with its market price.

Current yield = Coupon rate/ Market price

As per the given data –

Current yield = 9 / 114

= 0.078 (x 100 ) = 7.8 %

An open ended equity scheme investing in a specific sector such as bank, power, pharma etc. is a Sectoral fund.

Its very risky as there is no diversification and all investments are made in shares of a particular sector. Any adverse news will negatively affect all the shares of that sector fund.

Individual investors are categorized based on the amount invested as:

– Retail Individual Investors who invest not more than Rs.2 lakhs in a single issue and;

– Non-Institutional Buyers (NIBs) who invest more than Rs. 2 lakhs in a single issue.

In Deferred interest bonds, the borrower can defer the payment of coupons in the initial 1 to 3 year period.

The issuer ie. the Company appoints the lead manager who will manage the regulatory and operational aspects of the public offer of shares.

The PBV ratio compares the market price of the stock with its book value. It is computed as:

Market price per share divided by the Book Value per share.

Capital Preservation means that the capital should not go down. For this one can keep is money in cash form or invest in bank deposits or ultra short term debt funds.

The market value of a debt security changes inversely proportionate to changes in the market interest rates. If interest rates increase, value of debt instruments fall and if interest rates fall, value of debt instruments rise.

Impact cost is the cost that a buyer or seller of stocks incurs while executing a transaction due to the prevailing liquidity condition on the counter.

If there is more liquidity (ie. more buyers and sellers) the impact cost will be low. If there are few buyers and sellers, than the impact cost will be high. So an investor will surely prefer stocks with low impact costs.

If capital is required to tide over short-term capital requirements, a firm may choose debt capital for such needs. It is common for businesses to borrow from banks or issue debt instruments to fund working capital.

If there is a long-term need and if debt investors are unwilling to take the risk, a firm issues equity capital.

Mutual funds have to be registered with SEBI to be able to raise unit capital from the public.

Government securities are issued by RBI on behalf of the government and are subsequently listed on stock exchanges. The primary issue of government securities is governed by the Government Securities Act, 2006 and the Government Securities Regulations, 2007.

A trading member has to complete know your customer (KYC) formalities and in-person verification (IPV) before opening client accounts. The account opening form contains a KYC form that captures basic details about the investor such as: Personal details: Name, gender, marital status, permanent account number (PAN), residential status, UID number; along with proof of identity. ;

Address details: Postal address, phone number, e-mail, other permanent address; along with proof of address.

Other details: Income, occupation, net worth. ; Details of bank accounts and depository accounts. ; Details of action taken on the client by any regulatory authority in the last three years.

A European option can be exercised only on expiry date but an American option can be exercised any time before or on the expiry date.

Government securities (G-secs), also called treasury bonds, are predominantly issued to fund the fiscal deficit of the government.

G-secs are issued through an electronic auction system managed by the Reserve Bank of India (RBI).

There are corporate actions such as bonus, rights, split, merger, dividends or warrants that impact the price of the equity share. These actions can be divided into two categories: stock benefits and cash benefits.

Apart from cash dividends, all other corporate actions are categorised as stock benefits.

Red Herring Prospectus is the document of information made according to SEBI guidelines for a public issue of shares made through a book building exercise. The upper and lower band of the price and the number of shares may be disclosed or the issue size may be mentioned. It should also clearly mention the usage of the issue proceeds.

Exchange traded funds (ETF) combine features of an open-ended fund and a stock. Units are issued directly to investors when the scheme is launched. Post this period, units are listed on a stock exchange like a stock and traded.

The prices of the ETF units on the stock exchange are linked to the NAV of the fund.

Passive mutual funds like Index Funds do not seek to beat or outperform their benchmark but aim at generating returns that are in line with the benchmark returns. They achieve this by simply replicating the index.

The returns of the passive fund can differ marginally from that of its benchmark. This difference is known as the ‘tracking error’ and ideally should be as close to zero as possible.

Interval Funds – These funds have features of both open-ended and closed-ended fund

Open-Ended Funds – Existing investors can sell (Redeem) their units back to the fund at current NAV-linked prices on any working day

Open-Ended Funds – An open-ended mutual fund does not have a fixed maturity date.

The market in which securities are issued, purchased by investors, and subsequently transferred among investors is called the securities market. The securities market has two interdependent and inseparable segments, viz., the primary market and the secondary market.

Investment in mutual funds can be made in the offline or online mode. In the offline mode, the investor can contact a representative of the AMC or its approved distributor and can fill up the application form etc. and buy the units.

Online investment can be done through the website of the AMC or through the websites of the RTA. Stock exchanges also provide platforms to investors for investing in mutual funds.

if a business borrows funds at 10 percent and is able to earn a return of 15 percent on the assets created by such borrowing, the debt investor receives only 10 percent as promised. But the excess 5 percent earned by the assets, benefits the equity investor as all residual benefits of deploying capital in a profitable business go to the equity investor.

Offer for Sale (OFS) – Existing shareholders such as promoters or financial institutions offer a part of their holdings to the public investors. The share capital of the company does not change since the company is not issuing new shares.

Mutual funds offer investors an alternate investment route to invest in asset classes such as equity, debt, real estate securities with the benefit of a diversified portfolio managed by professional investment managers. The benefits of investing in mutual funds include – Flexibility, Diversification, Professional Management, Tax efficiency , Liquidity etc.

Mutual funds do not offer any financial planning. However they can be used as a tool for financial planning as per the goals and risk profile of an individual.

Units are allotted to the investor based on the purchase price applicable to the transaction, which in turn is based on the applicable NAV at the time of the transaction.

Investors submit the completed application form or transaction slip along with the payment instrument at an Official Point of Acceptance. As per SEBI rules, the NAV is determined according to the cut-off timings for that fund, the category of the fund and the amount of investment/redemption.

Systematic Withdrawal Plans (SWP) allow investors to make periodic redemptions from their existing mutual fund investments at the prevailing NAV related price.

SWP enables investors to periodically book their profits in an investment. Investors are also able to generate a regular income by redeeming few units periodically.

The details of the investor’s holding and transactions are maintained under unique folio numbers created for each investor. Registrar and transfer agents (R&T agents) facilitate investor services for most funds.

Creditor – A person or company which owes money.

In the Indian securities markets, a debt instrument denoting the borrowing of the private corporate sector is called debenture. So a debenture holder gives money to the company for a period in return of interest. So he is a creditor of the company.

Diversification means creating a portfolio of securities such that the overall portfolio is well balanced across multiple sectors and securities, so that the rise or fall in prices of the components is smoothened out. It can also mean have various asset classes in ones portfolio like equity, debt, gold etc.

Diversification is a good example of not putting all eggs in one basket. It cannot achieve the highest rate of return but its a very safe technique of investing and so it has limited upside or downside potential.

A margin is the amount of funds that one has to deposit with the clearing corporation in order to cover the risk of non-payment of dues or non-delivery of securities.

In order to minimise this default risk, both buyers and sellers of equity are required to pay a percentage of their dues upfront at the time of placing their order. This payment is known as margin.

Open interest is compared with the volume of trading in the derivatives market.The larger the open interest as a percentage of traded volume, the greater is the liquidity in the market. An increase in open interest is seen as an indicator of liquidity as it means fresh money is flowing into those contracts.