NISM Series XII: Securities Market Foundation Mock Test (Set 4)

Explanation:

Instruments such as certificates of deposit and commercial paper are categorized as money market securities. Money market instruments are short-term, highly liquid financial instruments that serve as a means for companies and governments to manage their short-term funding needs. These instruments are typically characterized by their short maturity periods and low-risk profiles. The other options—primary market, secondary market, and currency market—refer to different aspects of financial markets but are not specific to the characteristics of certificates of deposit and commercial paper.

Explanation:

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. Clearing corporations play a crucial role in ensuring the smooth settlement of trades in financial markets by managing risks associated with transactions. Margin requirements help mitigate the risk of default by market participants, providing a safety net for potential losses. The other options—SEBI (Securities and Exchange Board of India), issuer, and broker—have distinct roles in the financial markets but are not directly involved in collecting margins to cover transaction risks.

Explanation:

Securities Pay-out is the process of receiving securities from the clearing corporation to complete the securities settlement of a purchase transaction. In this context, it involves the delivery of securities to the buyer after the transaction has been successfully settled. The other options—Securities Pay-in, Funds Pay-in, and Funds Pay-out—refer to different stages of the settlement process, but Securities Pay-out specifically addresses the delivery of securities to complete the purchase transaction settlement.

Explanation:

Earlier, most derivative contracts were settled in cash. This means that the settlement involved the actual exchange of cash between the parties based on the difference in the contract’s value at the time of settlement. The other options—cheques and electronic mode—represent methods of transferring cash but are not specific to the settlement process of derivative contracts. “All the above” is the correct choice, as it encompasses the different forms of cash settlement.

Explanation:

Stockbrokers and depository participants are required to submit quarterly reports to Stock Exchanges and Depositories on cyber-attacks and threats experienced by them. Additionally, they need to outline the measures taken to counteract such threats. Authorized persons may also fall under this requirement. The option “Only 1 & 2” signifies that stock brokers and depository participants are obligated to provide these reports, excluding other entities like authorized persons.

Explanation:

Copies of the contract note are generated for both the broker and the client. These documents provide a detailed record of the transaction, including the terms and conditions of the trade, and are distributed to both parties involved—the broker and the client. The contract note serves as an important confirmation and record-keeping document in financial transactions. The option “Only 1 & 2” indicates that copies are generated for the broker and the client, excluding other entities like banks.

Explanation:

The statement is true. SEBI (Securities and Exchange Board of India) has the authority to register and regulate the functioning of depositories and depository participants. This ensures oversight and compliance within the securities market infrastructure, contributing to the overall regulatory framework.

Explanation:

In order to calculate impact cost, the process involves determining the “ideal” or average price and then calculating the deviations from it. Impact cost is a measure used in financial markets to assess the liquidity of a security, reflecting the cost incurred due to the execution of a trade relative to the prevailing market price. The other options—Securities Transaction Tax (STT), Goods and Services Tax (GST), and Stamp Duty—are different components of transaction costs or taxes in financial markets but are not directly related to the calculation of impact cost.

Explanation:

Both initial and exposure margins are payable in advance by clearing members before they enter into trading positions. Clearing members play a crucial role in the clearing and settlement process in financial markets. They are responsible for ensuring that trading participants adhere to margin requirements to cover potential losses and risks associated with their positions. The other options—arbitrageurs, brokers, and trading members—may engage in trading but are not specifically responsible for ensuring margin payments in advance.

Explanation:

Arbitrageurs are specialists who identify price differentials in two markets and engage in trades to exploit these differences and reduce them. They take advantage of discrepancies in prices between different markets or instruments to make a profit. In this context, they contribute to the efficiency of markets by aligning prices across different venues or securities. Authorized persons, depository participants, and portfolio managers may have different roles in financial markets, but they are not specifically associated with the identification and exploitation of price differentials through arbitrage.

Explanation:

The Key Information Memorandum (KIM) contains all the crucial information that an investor must know before investing in a mutual fund scheme. It provides details about the investment objectives, risk factors, past performance, fees and expenses, and other essential aspects of the mutual fund. While the Scheme Information Document (SID) and Statement of Additional Information (SAI) are also important documents, the KIM specifically serves as a concise and comprehensive guide for investors. The option “Official Point of Acceptance (OPoA)” is not a standard term used in the context of mutual fund documentation.

Explanation:

In the bond markets, it is the price of a bond that is known and quoted. The price represents the current market value at which a bond is bought or sold. The coupon rate, yield, and face value are all important characteristics of a bond, but the quoted and known figure in the market is typically the bond’s price. This price can fluctuate based on various factors, including interest rates, credit quality, and market conditions.

Explanation:

Callable bonds have a call option in the bond contract, granting the issuer the ability to alter the tenor or maturity of the security. This feature allows the issuer to redeem the bonds before their scheduled maturity date. In contrast, zero coupon, floating rate, and puttable bonds have different characteristics and features, but callable bonds specifically provide the issuer with the option to call back or redeem the bonds early.

Explanation:

The primary market for government securities is regulated by the Reserve Bank of India (RBI). The RBI plays a central role in issuing, regulating, and managing government securities in the primary market. While SEBI (Securities and Exchange Board of India) regulates other aspects of the securities market, the primary market for government securities falls under the purview of the RBI. NSE (National Stock Exchange) and BSE (Bombay Stock Exchange) are stock exchanges and are not the primary regulators of the government securities market.

Explanation:

Banks and institutional investors are the main buyers of government securities. Banks, including central banks, invest in government securities as part of their investment portfolio and liquidity management. Institutional investors, such as mutual funds, insurance companies, and pension funds, also actively participate in the government securities market. Individual investors can buy government securities, but they are not typically the main buyers in comparison to banks and institutional investors.

Explanation:

The difference in yields between corporate and government bonds with the same maturity is known as the credit spread. It reflects the additional yield that investors demand to hold corporate bonds instead of safer government bonds, compensating for the higher perceived credit risk associated with corporate issuers. A credit spread is a crucial indicator of market sentiment regarding creditworthiness and risk in the fixed-income markets. The other options—debit spread, deficit, and surplus—are not directly related to the concept of yield differences between corporate and government bonds.

Explanation:

Explanation:

Treasury Bills (T-Bills) are issued for maturities of 91 days, 182 days, and 364 days. T-Bills are short-term debt instruments issued by governments to raise funds, and their maturity periods can vary. Certificates of Deposits (CDs) and Commercial Papers are also short-term debt instruments, but they are typically issued by banks and corporations, respectively, and not by governments. Therefore, the correct answer is option (b) Treasury Bills.

Explanation:

Investment advisers are professionals who create financial plans for investors. They provide advice on investment strategies, asset allocation, and financial goals based on the individual needs and risk tolerance of investors. Custodians, trustees, and depository participants have different roles in financial markets but are not typically responsible for crafting comprehensive financial plans for investors.

Explanation:

At the end of the trading day, all unmatched orders are canceled. Unmatched orders are those that have not been executed by finding a corresponding counterparty during the trading session. This includes limit orders, market orders, or other order types that were not matched with a corresponding trade. Matched orders, stop-loss orders, and immediate or cancel orders may or may not be executed during the trading day, but unmatched orders are specifically canceled at the day’s end.

Explanation:

Incomplete or outstanding positions in the derivative markets are referred to as open interest. Open interest represents the total number of contracts that have not been offset by closing transactions. It is a key indicator of market activity and reflects the total number of contracts held by market participants who have not yet closed or liquidated their positions. The other options—closed interest, incomplete interest, and outstanding interest—are not standard terms used in the context of open interest in derivatives.

Explanation:

The market for long-term corporate debt is made up of bonds issued by public sector units and bonds issued by the private corporate sector. These bonds represent the debt instruments issued by both government-owned entities (public sector units) and private corporations. Government bonds (option c) are generally considered a separate category and are not part of the long-term corporate debt market.

Explanation:

SEBI (Securities and Exchange Board of India) has mandated that investors provide their bank account details to the mutual fund in the application form at the time of buying units. This requirement ensures proper processing of financial transactions related to mutual fund investments and facilitates seamless transactions between investors and mutual fund entities. The other options—demat account, brokerage account, and savings account—are not specifically mandated by SEBI for inclusion in the application form for mutual fund investments.

Explanation:

A derivative market is formed when different players with different risk management needs collaborate to secure themselves from potential risky events in the future. Derivatives are financial instruments whose value is derived from the underlying assets, and they are commonly used for risk management and hedging purposes by various market participants. The primary market, secondary market, and money market have different functions and characteristics but are not specifically centered around the collaborative risk management described in the question.

Explanation:

Investors who hold Equity are considered owners of the business. Equity represents ownership in a company, and equity investors are entitled to a share in the company’s profits and have voting rights in corporate decisions. This distinguishes them from debt holders, preference shareholders, and options holders, who have different financial arrangements with the business.

Explanation:

SEBI (Securities and Exchange Board of India) regulations require companies to have a comprehensive code of conduct to prevent insider trading. SEBI, as the regulatory authority overseeing securities markets in India, mandates measures to ensure fair practices and prevent unauthorized trading based on non-public information. The other options—RBI (Reserve Bank of India), Stock exchanges, and MCA (Ministry of Corporate Affairs)—are not the primary regulatory bodies responsible for insider trading regulations in the securities market.

Explanation:

The issuer of the security provides the terms on which the capital is being raised. The issuer is the entity (such as a company or government) that offers and sells the security to raise capital. The terms, conditions, and details of the security, including its features and obligations, are outlined in the documentation provided by the issuer. The other options—investor, intermediary, and underwriter—represent different roles in the securities issuance process but are not responsible for defining the terms of the security being raised.

Explanation:

Explanation:

A part of the net worth and margin requirements that must be held in liquid assets, including cash and cash equivalents, is referred to as “liquid net worth.” This requirement ensures that a portion of the financial resources of an entity is readily available in a liquid form, providing a buffer for meeting obligations and margin calls.

Explanation:

During recessionary phases, it is advisable to keep investments in credit risk funds to a minimum. Credit risk funds are mutual funds that invest in debt instruments with varying levels of credit risk. In economic downturns, there is an increased likelihood of credit defaults, making investments in funds with significant credit risk more susceptible to losses.

Explanation:

Secondary market trading data is used to generate benchmark indices that are widely tracked in the country. Benchmark indices, such as stock market indices, are typically derived from the trading activity in the secondary market, reflecting the performance of a representative basket of securities. The secondary market is where previously issued securities are bought and sold among investors, providing valuable information for index calculations. Primary market, currency market, and money market, on the other hand, involve different types of financial instruments and are not directly related to benchmark index calculations.

Explanation:

If a broking firm offers a 3-in-1 account, both the broking and depository services are provided by the broking firm. In a 3-in-1 account, the broking firm typically integrates trading (broking) and demat (depository) accounts with a linked bank account, offering a comprehensive platform for investors to manage their securities and conduct transactions seamlessly. The other options—bank, stock exchange, and financial institution—may play roles in the financial ecosystem but are not the entities directly providing both broking and depository services in a 3-in-1 account.

Explanation:

Infrastructure Debt Funds (IDF) are closed-ended schemes with a minimum tenure of at least five years. These funds invest in debt securities and securitized debt issued by infrastructure companies. The objective is to provide long-term financing for infrastructure projects, aligning with the extended investment horizon required for such initiatives.

Explanation:

A future is a contract for buying or selling a specific underlying asset on a future date at a price specified today. These contracts are entered into through a formal mechanism on an exchange. Unlike forward contracts, futures are standardized and traded on organized exchanges, providing liquidity and transparency. Options and swaps (options and swaps) represent other types of derivative contracts with distinct characteristics.

Explanation:

Marking To Market (MTM) is the process of valuing securities at their current market prices. This valuation method reflects the most up-to-date market value of the securities in a portfolio. It involves adjusting the book value of the securities to reflect their current market value, providing a more accurate representation of the portfolio’s worth. The other options—Unit Capital, Net Asset Value (NAV), and Transaction Pricing—refer to different aspects of investment valuation and are not specifically related to the process of marking securities to market.

Explanation:

A forward contract is a derivative contract where two parties agree to exchange a specific good at a predetermined price on a specified date in the future. It is a private agreement customized to the needs of the parties involved, and it does not involve a centralized exchange. The other options—options and futures—refer to different types of derivative contracts with distinct characteristics. Options give the holder the right, but not the obligation, to buy or sell an asset at a predetermined price, while futures involve an agreement to buy or sell an asset at a future date with standardized terms and traded on a centralized exchange.

Explanation:

The government offers a portion of its shares to the public through an Initial Public Offer (IPO). An IPO is the first time a company’s shares are made available for public purchase, allowing investors to buy a stake in the government-owned entity. Other options—Further Public Offer (FPO), Private Placement, and Bonus Issue—represent different methods of raising capital or distributing shares but are not specifically related to the government offering its shares to the public for the first time.

Explanation:

SEBI’s regulations on public issues and the Companies Act require that an issue should receive a minimum subscription of 90 percent of the net offer to the public. This stipulation ensures a sufficient level of public interest and participation before a company can proceed with the issuance of securities to the public. The other options—Banking Regulation Act, Securities Contract Act, and DEA—are not directly associated with the minimum subscription requirement for public issues.

Explanation:

Market turnover of a stock indicates how much trading activity took place in it on a given business day. It represents the total value of shares traded and provides insights into the level of activity and liquidity in the market for that particular stock. Market capitalization (Option a) is the total value of a company’s outstanding shares and is different from market turnover, which specifically focuses on the trading volume during a specified period. Market indices (Option b) represent the performance of a group of stocks and do not directly measure the trading activity of a single stock.

Explanation:

Diversification reduces the risk of loss in a portfolio and stabilizes the returns it generates. By spreading investments across different asset classes, industries, or geographic regions, diversification helps minimize the impact of poor performance in any single investment on the overall portfolio. This strategy aims to achieve a balance that can enhance returns while reducing the overall volatility and risk associated with a concentrated investment approach. The other options, Asset allocation and Managing Return, may be components of an overall investment strategy, but diversification specifically addresses the risk-reducing aspect by spreading investments.

Explanation:

Investors buy and sell units at a price based on the Net Asset Value (NAV). The Net Asset Value represents the per-unit value of a mutual fund’s assets minus its liabilities. It is calculated by dividing the total net assets of the fund by the number of outstanding units. The NAV is used as a reference point for determining the transaction price when investors buy or sell mutual fund units. Other options, such as Unit Capital, Marking To Market (MTM), and Transaction Pricing, are not typically used to determine the price of mutual fund units.

Explanation:

SEBI functions under the Ministry of Finance. It operates as an autonomous regulatory body overseeing the securities and financial markets in India. The Ministry of Finance provides the regulatory framework and oversight for SEBI to carry out its responsibilities effectively. While SEBI collaborates with various other entities, its direct administrative authority lies under the Ministry of Finance, ensuring coordination and alignment with the broader financial regulatory framework in the country.

Explanation:

An open-ended medium-term debt scheme investing in debt and money market instruments with a Macaulay duration between 4 years and 7 years is known as a “Medium to Long Duration Fund.” These funds aim to strike a balance between medium and long-term debt securities in their portfolio, targeting a specific duration range to align with the fund’s investment objectives. The other options—Liquid Fund, Short Duration Fund, and Medium Duration Fund—refer to funds with different investment objectives and duration profiles.

Explanation:

Explanation:

The broker’s responsibilities include maintaining funds of clients in a separate account, issuing a contract note to clients within 24 hours of order execution, and making delivery or payment to the client within 24 hours of pay-out from the stock exchange. These measures ensure transparency, timely communication, and efficient handling of client transactions in the financial markets.

Explanation:

Underwriters facilitate the new issuance of securities to investors. They play a crucial role in the primary market by committing to purchase a certain number of shares or bonds from the issuing company and ensuring that the securities are successfully sold to investors. This commitment provides financial support and helps in the smooth issuance of securities, reducing the risk for the issuing company. Merchant bankers, stock brokers, and authorized persons may be involved in the process, but underwriters specifically take on the responsibility of guaranteeing the sale of the securities.

Explanation:

Companies use the Green Shoe Option (GSO) in a public offer to provide stability to the price of the share in the secondary market immediately upon listing. The Green Shoe Option allows the underwriters to sell additional shares, usually up to 15% more than the original offering size, to meet excess demand and stabilize the share price. This helps in managing price volatility and ensures a smoother listing process. The other options mentioned, such as Red Herring Prospectus, Unified Payment Interface (UPI), and Application Supported by Blocked Amount (ASBA), are not directly related to stabilizing share prices in the secondary market.

Explanation:

SEBI has established strict eligibility criteria for SEBI registered market participants seeking to utilize facilities under the “Regulatory Sandbox.” The Regulatory Sandbox is a framework that allows entities to test innovative financial products, services, or technologies in a controlled environment, fostering innovation within the regulatory framework. Participants must meet certain criteria to ensure compliance and mitigate risks during the testing phase within the Regulatory Sandbox.

Explanation:

An open-ended liquid scheme that invests in debt and money market securities is known as a “Liquid Fund.” These funds are designed for short-term investments, providing liquidity and typically investing in instruments with short maturities to minimize interest rate risk. Ultra Short Duration Funds, Overnight Funds, and Low Duration Funds, on the other hand, may have different investment objectives and risk profiles compared to Liquid Funds.

Explanation:

The market capitalization of a stock is primarily influenced by changes in the price of the stock. Market capitalization is calculated by multiplying the stock’s current market price by its total outstanding shares. Therefore, fluctuations in the stock price directly impact its market capitalization. While trading volumes, market index changes, and liquidity can indirectly affect stock prices, they are not the direct determinants of market capitalization.