NISM Series XII: Securities Market Foundation Mock Test (Set 1)

Explanation:

In the secondary market, investors can enter or exit any listed security by conducting transactions. This market involves the buying and selling of previously issued securities, such as stocks and bonds, among investors. It provides liquidity to investors by allowing them to buy and sell securities easily.

Explanation:

The intrinsic value of a stock represents its true worth based on fundamental factors such as earnings, dividends, growth potential, and risk. It serves as the anchor for stock prices because investors aim to buy stocks when they are trading below their intrinsic value and sell them when they are trading above it. Therefore, stock prices tend to gravitate towards their intrinsic value over the long term.

Explanation:

The Reserve Bank of India (RBI) typically sells securities to investors through periodic auctions. In these auctions, the RBI offers government securities to investors, who bid for them based on their desired yield or price. The securities are then allocated to the highest bidders. This process helps the RBI manage liquidity in the financial system and implement its monetary policy objectives.

Explanation:

In the sale of an option in securities, the seller (also known as the writer) is responsible for receiving the option premium from the purchaser (the buyer of the option). The option premium is the price paid by the purchaser to acquire the option contract. The seller receives this premium as compensation for taking on the obligation associated with the option contract.

Explanation:

The stock market is also referred to as the secondary market. In the secondary market, existing securities are bought and sold among investors. This is distinct from the primary market (option b), where new securities are issued for the first time. Options c and d, the money market and currency market, represent different financial markets with distinct characteristics and instruments.

Explanation:

The company appoints a credit rating agency to assess its ability to service a debt security, including evaluating its capacity to meet interest and principal repayment obligations. Credit rating agencies analyze the financial health and creditworthiness of companies, assigning credit ratings that provide investors with an indication of the risk associated with investing in the company’s debt securities.

Explanation:

In the context of a repurchase agreement (repo), when it is recorded in the books of the borrower, it is termed as a reverse repo in the books of the lender. In a reverse repo, the lender essentially acts as the buyer of securities.

Explanation:

The term “securities” is defined in Section 2 (h) of the Securities Contracts (Regulation) Act, 1956. This section provides the legal definition for the term within the context of the act.

Explanation:

The Insurance Regulatory and Development Authority of India (IRDAI) possesses the authority to register new applicants and alter, suspend, or revoke the registrations of existing insurers or re-insurers. It is the regulatory body overseeing the insurance sector in India, responsible for ensuring compliance with regulations, promoting fair competition, and protecting the interests of policyholders.

Explanation:

According to SEBI rules, investors are required to pay 25 percent of the amount of consideration upfront during warrant issues. Warrants represent a type of financial instrument that gives the holder the right, but not the obligation, to buy or sell the underlying security at a specified price before the expiration date.

Explanation:

A market index tracks market movement by utilizing the prices of a small number of shares chosen as a representative sample. Market indices provide insights into the overall performance and trends of the market based on the movements of these selected representative stocks.

Explanation:

Trading member clearing members (TM-CMs) can both execute (trade) and clear their trades as well as the trades of other trading members. They play a dual role in the trading and clearing processes within the financial markets.

Explanation:

The Statement of Additional Information (SAI) contains statutory information about the mutual fund or Asset Management Company (AMC) offering the scheme. It provides additional details beyond what is covered in the Scheme Information Document (SID) and Key Information Memorandum (KIM).

Explanation:

In the Indian markets, only European options are traded during this time. European options differ from American options in that they can only be exercised at expiration, while American options can be exercised at any time before expiration.

Explanation:

The Securities and Exchange Board of India (SEBI) has been assigned the powers of recognizing and regulating the functions of stock exchanges. SEBI plays a crucial role in overseeing and ensuring the fair and efficient functioning of stock exchanges in India.

Explanation:

The net asset value (NAV) of a mutual fund primarily indicates the current market value of the fund’s portfolio. It is calculated by dividing the total value of all the securities held in the fund’s portfolio, minus any liabilities, by the total number of outstanding units in the fund. The NAV represents the price per unit of the mutual fund and is used to determine the value of an investor’s holdings in the fund.

Explanation:

The primary market is also known as the new issue market. This market is where new securities are issued and sold to investors for the first time. Companies raise capital by issuing new stocks or bonds to the public in the primary market.

Explanation:

A put option is a type of financial contract that grants the buyer the right, but not the obligation, to sell the underlying asset at a specified price (the strike price) within a specified period. Therefore, a put option grants the buyer the right to sell the underlying asset.

Explanation:

Explanation:

Alerts about position limits are sent to members in a derivative market. Position limits are restrictions set on the maximum number of derivative contracts that a trader or a group of related traders can hold. These limits help maintain market integrity, prevent excessive speculation, and manage risk.

Explanation:

In a mutual fund, direct expenses incurred in managing the investment portfolio are charged to investors. These expenses, often referred to as the expense ratio, cover the costs associated with portfolio management, administrative services, and other direct fund-related activities.

Explanation:

In debt markets, the term used for the rate at which future cash flows are discounted is “yield.” Yield represents the return on investment for a bond or other fixed-income security and is often expressed as a percentage. It reflects the interest income generated by the security relative to its current market price.

Explanation:

A swap is a contract in which two parties agree to exchange cash flows or other financial instruments over a specified period. Swaps can involve the exchange of interest rates, currencies, commodities, or other financial assets. These agreements often allow parties to manage risk, speculate on future market conditions, or adjust their asset/liability profile. Thank you for pointing out the error.

Explanation:

The Reserve Bank of India (RBI) indeed regulates the money market and foreign exchange market segments. The RBI plays a crucial role in overseeing and regulating various aspects of India’s financial markets, including monetary policy, money market operations, and foreign exchange activities.

Explanation:

Investors have the obligation to read Risk Disclosure Documents, pay margins, and verify details of trades. These responsibilities are essential for informed and responsible participation in financial markets. Each option represents a specific obligation that investors should fulfill to ensure a clear understanding of risks, financial commitments, and the accuracy of their trades.

Explanation:

The term for the amount collected by the clearing corporation from its members to ensure the settlement of trades without default is “Margins.” These margins act as a form of collateral to cover potential losses in case of adverse price movements or default by a member. They help ensure the integrity and stability of the financial markets by reducing counterparty risk. Cross-margins may refer to the practice of using margin from one account to meet margin requirements in another account, but it is not the term specifically used for this purpose in the context of clearing corporations.

Explanation:

The objective of strategies that seek to exploit the price differential between the cash and derivatives markets is typically associated with Arbitrage Funds. These funds aim to capitalize on price inefficiencies between different markets or securities by simultaneously buying and selling equivalent assets to lock in profits. This process helps to keep the prices aligned across markets and ensures efficient pricing mechanisms.

Explanation:

Credit risk is the term for the risk associated with the possibility that debt issuers may fail to make interest and/or principal payments. It is also known as default risk. This risk arises when borrowers are unable or unwilling to fulfill their debt obligations, leading to financial losses for investors holding the debt securities.

Explanation:

In the dividend reinvestment option, the dividend declared by the fund is not paid out to the investor in cash; instead, it is reinvested in the same scheme by buying additional units for the investor. This allows investors to automatically reinvest their earnings and potentially benefit from the power of compounding.

Explanation:

SEBI has mandated physical settlement for all stock derivatives. In physical settlement, actual delivery of the underlying asset (stocks in this case) occurs on the settlement date.

Explanation:

The statement is true. Equity capital provides a company with funds that can be used for an indefinite period, whereas debt capital must be repaid within a specified timeframe. In equity financing, investors become partial owners and do not expect the return of their investment unless the company distributes profits or is sold. On the other hand, debt financing involves borrowing funds with an obligation to repay the principal amount along with interest within a predetermined period.

Explanation:

In the futures market segment, exposure margin is collected as a percentage of the notional value of an open position. This margin is required to cover potential losses that may arise from adverse price movements in the futures contracts. It is distinct from the initial margin, which is a standard requirement to open a position, and cross-margin, which involves offsetting positions within the same account. Exposure margin specifically addresses the risk associated with the market exposure of an open position.

Explanation:

The yield to maturity (YTM) of a bond is the rate that makes the present value of its future cash flows equal to its current market price. It takes into account interest payments, the bond’s face value at maturity, and the current market price. YTM represents the annual rate of return an investor can expect to receive if the bond is held until maturity, considering all future interest payments and the return of the principal. It is a crucial metric for evaluating and comparing bond investments. The other options—interest, face value, and current yield—are related concepts but do not directly represent the rate equating present and future values as YTM does.

Explanation:

In a futures contract, the trading member is obligated to confirm to the exchange that there was no error and that the order was a legitimate one. Trading members are individuals or entities authorized to trade on the exchange, and they play a crucial role in ensuring the integrity and authenticity of transactions. Clearing members, on the other hand, handle the financial aspects of the trade settlement and may not necessarily confirm the legitimacy of the order directly with the exchange. Arbitrageurs and brokers are involved in trading activities but may not have the specific obligation to confirm order legitimacy as outlined in the question.

Explanation:

Cumulative preference shares allow the unpaid dividends of preference shareholders to be carried forward to subsequent years. These accumulated dividends can be paid in the future when the company has profits available to cover the dividends. This feature ensures that preference shareholders receive their dividends, even if they are not declared or paid in certain years. Participatory preference shares, callable preference shares, and convertible preference shares have different characteristics and do not specifically involve the concept of carrying forward unpaid dividends.

Explanation:

The IPO (Initial Public Offering) market is operated from 10 am to 5 pm during the IPO period. This timeframe represents the operating hours during which investors can participate in the IPO process, including placing bids for shares.

Explanation:

By using the swap market, the borrower has converted their floating-rate borrowing into a fixed-rate obligation. In an interest rate swap, parties exchange cash flows based on different interest rate terms. In this context, a borrower with a floating-rate loan can enter into a swap to exchange their variable interest payments for fixed-rate payments, thereby managing interest rate risk and creating a fixed-rate obligation. Options, forwards, and futures are financial instruments with different characteristics and purposes than interest rate swaps in the context of converting floating-rate to fixed-rate obligations.

Explanation:

The pre-open session before trading starts for the day includes order placing, order matching, trade confirmation, and the transition to the regular trading session. During this session, market participants can place orders, and the system matches these orders to determine the opening price. Trade confirmations are provided, and the market transitions to the regular trading session based on the outcomes of the pre-open session.

Explanation:

Mutual Fund Scheme-related documents are available free of cost at both Investor Service Centers (ISCs) and Asset Management Company (AMC) offices. Investors can access these documents at these locations without incurring any charges. ISC and AMC offices serve as points where investors can obtain information, assistance, and documentation related to mutual fund schemes.

Explanation:

The process of converting share certificates into electronic form is called Dematerialisation. This involves the conversion of physical share certificates into electronic or digital format, making them easier to manage and trade in electronic systems. The investor’s holdings are then credited to their demat account, eliminating the need for physical share certificates. The other options—E-materialisation, Materialisation, and Trading—do not specifically refer to the process of converting share certificates into electronic form.

Explanation:

Credit rating agencies use rating symbols to rank debt issues, providing investors with a means to evaluate the default risk associated with a security. These agencies assess the creditworthiness of issuers and assign ratings based on the likelihood of default.

Explanation:

A puttable bond is a type of bond that allows the bondholder to sell the bond back to the issuer before its maturity date at a predetermined price, providing the investor with the flexibility to exit the investment under certain conditions.

Explanation:

The coupon rate of a bond merely helps in computing the cash flows that would accrue periodically to the investor. The coupon rate represents the annual interest payment as a percentage of the bond’s face value, and it is used to calculate the periodic interest income that the investor will receive.

Explanation:

SEBI (Securities and Exchange Board of India) has codified and notified regulations that cover all activities and intermediaries in the securities markets. SEBI is the regulatory authority in India overseeing the securities and capital markets. It formulates regulations to ensure the fair and transparent functioning of the markets, protect investor interests, and promote the development and regulation of the securities market in the country.

Explanation:

Explanation:

The maximum brokerage that can be charged by a broker has been specified in Stock Exchange Regulations. These regulations outline the rules and limits regarding brokerage charges to ensure fair and transparent practices in the securities market.

Explanation:

Registrar and Transfer Agents handle matters related to the transfer and redemption of securities and act as DPs (Depository Participants). They play a crucial role in maintaining accurate records of securities ownership, facilitating the transfer of securities, and managing the redemption process.

Explanation:

Contract notes for the purchase and sale of securities during each trading day are sent digitally within 24 hours. This practice ensures prompt communication and transparency in trading activities, allowing investors to receive timely documentation of their transactions.

Explanation:

Profits of equity shareholders may not be fixed or remain unchanged over time. Equity shareholders are entitled to a share in the profits of the company, but the amount they receive as dividends is contingent on the company’s financial performance and the decisions of the board of directors.

Explanation:

Stamp Duty is levied on the value of shares transferred. This is a charge imposed by the state government on the transfer of securities, and it varies from state to state.