NISM Series XII: Securities Market Foundation Mock Test (Set 5)

Explanation:

Equity index futures and equity index options are among the largest traded products in derivative markets worldwide. These instruments are popular because they allow investors to gain exposure to an entire stock market index or a specific sector without having to buy individual stocks. They offer opportunities for hedging, speculation, and portfolio diversification, making them highly liquid and actively traded in derivative markets.

Explanation:

An example of a derivative contract is a “forward.” A forward contract is a financial derivative that represents an agreement between two parties to buy or sell an asset at a specified future date for a price agreed upon today. The underlying asset can vary and may include commodities, currencies, stocks, or bonds.

Explanation:

Constituents in a public issue typically include registrar and transfer agents, bankers, and brokers to the issue. These entities play different roles in the process of a public issue. Registrar and transfer agents handle the administrative tasks related to maintaining records of shareholders and facilitating the transfer of shares. Bankers manage the financial aspects of the issue, including underwriting and distribution of shares. Brokers to the issue assist in marketing and selling the shares to investors.

Explanation:

A mutual fund that collects money from investors and invests in the market is an example of an “Intermediary.” Mutual funds act as intermediaries or intermediaries between investors and the securities market. They pool funds from individual investors and use those funds to invest in a diversified portfolio of stocks, bonds, or other securities.

Explanation:

An open-ended short-term debt scheme investing in debt and money market instruments is known as a “Short Duration Fund.” Short Duration Funds are a category of mutual funds that typically invest in a portfolio of debt securities and money market instruments with a maturity duration ranging from one to three years.

Explanation:

The trading “lot” depends on the value of the underlying asset. In financial markets, a lot refers to a standardized quantity of a financial instrument that is traded as a unit. The size of a lot can vary depending on the asset class and market conventions.

For example:

• In the stock market, a lot may represent a specific number of shares, such as 100 shares.
• In the futures market, a lot represents a standardized contract size for the underlying commodity or financial instrument.
• In the forex market, a lot size represents a specific quantity of a currency pair.

The lot size is an important factor in determining the quantity of the underlying asset that is bought or sold in a single transaction. It plays a crucial role in risk management and position sizing for traders and investors.

Explanation:

Explanation:

A good till cancelled (GTC) order remains in the system until it is executed or cancelled by the trader. This type of order instructs the broker to keep the order active until either it is filled or the trader decides to cancel it. GTC orders are commonly used by investors who want to execute a trade at a specific price but are willing to wait for the market conditions to meet their criteria.

Explanation:

According to SEBI (Securities and Exchange Board of India) Regulations, 2008, the intermediaries of securities markets include bankers to an issue, trustees of trust deeds, and credit rating agencies. This means that all the options mentioned (a) Bankers to an issue, (b) Trustees of trust deeds, and (c) Credit rating agencies are considered intermediaries according to the regulations. Therefore, option (d) “All the above” is the correct answer. These intermediaries play crucial roles in facilitating various aspects of securities transactions and ensuring market integrity.

Explanation:

SEBI (Securities and Exchange Board of India) regulations allow an issuer to decide the price at which the shares will be allotted to investors in a preferential issue.

In a preferential issue, the issuer issues new shares to a select group of investors, such as existing shareholders or strategic investors, on a preferential basis. The price at which these shares are allotted is determined by the issuer, often based on negotiations with the investors or as per the valuation norms specified by SEBI.

Explanation:

A private placement of shares or debt securities that can be converted into shares at a future date can take the form of:

a) Fully Convertible Debentures (FCDs): These are debt securities that can be converted into equity shares at a predetermined conversion ratio.

b) Partly Convertible Debentures (PCDs): These are debt securities where a part of the debenture is converted into equity shares, and the remaining part continues as a debt.

c) Warrants: Warrants are financial instruments that give the holder the right, but not the obligation, to buy equity shares at a specified price within a certain period.

Explanation:

In the primary market, investors purchase securities directly from the issuer. This is the market where new securities are issued and sold for the first time. Companies or governments raise capital by issuing new stocks or bonds, and investors buy these securities directly from the issuer. The primary market facilitates the initial issuance and sale of securities, and the process involves activities like initial public offerings (IPOs) for stocks or bond offerings.

On the other hand:

• The secondary market is where existing securities are bought and sold among investors.
• The currency market deals with the exchange of currencies.
• The money market involves short-term borrowing and lending of funds in financial instruments like Treasury bills and commercial paper.

Explanation:

A large institutional investor who does not want the market to know that they are placing orders to buy or sell a large quantity of shares often uses a “disclosed quantity” order. With a disclosed quantity order, only a part of the total order quantity is displayed to the market, maintaining a level of confidentiality regarding the full size of the order.

This allows institutional investors to execute large trades without revealing the entire size of their position, which could potentially impact the market price adversely. The disclosed quantity order provides a balance between executing a significant order and minimizing the potential market impact.

Explanation:

The investors who buy securities in the primary markets can include various categories, and “Persons of Indian Origin (PIO)” is one such category. PIO refers to individuals of Indian origin or ancestry who may have acquired citizenship of another country but maintain a connection to India.

Foreign Portfolio Investors (FPIs) are also investors who can participate in the primary markets, but they are typically entities (institutional or individual) that are not necessarily of Indian origin.

Limited Liability Partnerships (LLPs) are business entities and may not directly refer to individual investors in the context of primary markets.

Explanation:

Mutual funds issue units of a scheme to investors to mobilize money and invest on behalf of those investors in securities. When an investor invests in a mutual fund, they are essentially buying units of that mutual fund scheme. The money collected from investors is pooled together, and the fund manager uses it to invest in a diversified portfolio of stocks, bonds, or other securities based on the fund’s investment objectives.

Explanation:

The Central Government has notified Clearing Corporation of India Limited (CCIL), Registrars to Issue, and Share Transfer Agents as collecting agents. These entities play specific roles in financial and securities markets, and they may be designated by the government to act as collecting agents for various purposes, such as the collection of taxes, fees, or other financial transactions.

Explanation:

Interaction between investors and borrowers is facilitated through “financial intermediaries,” who are the third component of the market. Financial intermediaries play a crucial role in connecting surplus units (investors) with deficit units (borrowers) in the financial markets.

Financial intermediaries include entities such as banks, financial institutions, and other intermediaries that act as intermediaries in the flow of funds between savers and borrowers. They mobilize funds from investors and channel them to borrowers in various forms, facilitating the efficient functioning of the financial system.

While banks and financial institutions are specific types of financial intermediaries, the term “financial intermediaries” encompasses a broader range of entities that facilitate the transfer of funds between those who have excess funds and those who need funds for investment or consumption.

Explanation:

Investors submit the completed application form or transaction slip along with the payment instrument at the “Official Point of Acceptance (OPoA).” The OPoA is a designated location where investors can submit their applications and make transactions related to mutual funds. These points of acceptance can include branches of the asset management company (AMC), registrar and transfer agents (RTAs), or other authorized locations.

Submitting the application form, transaction slip, or other relevant documents along with the payment instrument at the OPoA is the standard process for investors to participate in mutual fund transactions. It ensures that the necessary paperwork and payments are appropriately processed by the mutual fund service providers.

Explanation:

The number of units issued by a mutual fund scheme multiplied by its face value is referred to as “Unit Capital.” Unit Capital represents the total capital contributed by the investors in the scheme. Each unit of the mutual fund represents a share of the total Unit Capital.

Explanation:

An open-ended equity scheme investing in a specific sector, such as banking or power, is referred to as a “Sectoral Fund.” Sectoral funds focus on investing in companies within a particular sector of the economy. In this case, if the fund specifically targets the banking sector or the power sector, it would be categorized as a Sectoral Fund.

Explanation:

In the futures market segment, the margin collected to cover the risk of an open position over a 2-day horizon is known as the “Initial margin.” Initial margin is the amount of money that market participants are required to deposit when they enter into a futures contract. It acts as a security deposit to ensure that traders have sufficient funds to cover potential losses.

The calculation of the initial margin involves using a formula that estimates the risk associated with the open position over a specified time horizon, often 2 days. This margin is intended to provide a buffer against adverse market movements and helps ensure the financial integrity of the market.

Explanation:

SEBI (Securities and Exchange Board of India) regulations require that at least 35 percent of the portfolio should be held in physical assets for Real Estate Mutual Funds. Real estate mutual funds primarily invest in physical real estate assets, such as residential or commercial properties, and they are regulated by SEBI.

This regulatory requirement is designed to ensure that real estate mutual funds maintain a significant exposure to physical assets, providing investors with a more direct connection to the real estate market.

Explanation:

Explanation:

Securities Pay-in refers to the process of delivering securities to the clearing corporation to complete the settlement of a sale transaction. This involves the transfer of securities from the seller’s account to the buyer’s account to fulfill the terms of the trade.

Explanation:

An issuer may make an initial public offer (IPO) only if it fulfills certain eligibility criteria. These criteria include:

a) Net tangible assets of at least Rs. 3 crores: This indicates the financial strength and asset base of the issuer.

b) An average operating profit of at least Rs. 15 crores: This criterion assesses the issuer’s profitability and financial performance over a specified period.

c) A net worth of at least Rs. 1 crore: Net worth is a measure of the company’s assets minus its liabilities, representing the shareholders’ equity.

Explanation:

Explanation:

Extreme Loss Margin aims at covering the losses that could occur outside the coverage of VaR (Value at Risk) margins. While VaR margins are designed to cover normal market movements within a specified confidence level, extreme events that fall outside the VaR coverage may still occur. Extreme Loss Margin is an additional margin imposed to provide a buffer for such extreme and unexpected market moves, ensuring that the clearing members have sufficient funds to cover potential losses in exceptional circumstances.

Explanation:

The fully automated computerized mode of trading on the National Stock Exchange (NSE) is called National Exchange Automated Trading (NEAT). NEAT is the trading system used by the NSE, providing a seamless and efficient platform for buying and selling financial instruments such as stocks, derivatives, and other securities. Investors and traders can place orders, execute trades, and access market information through the NEAT system. The system plays a crucial role in facilitating electronic trading on the NSE.

Explanation:

A mutual fund scheme is first offered to investors in a New Fund Offer (NFO). An NFO is the initial subscription or launch of a new mutual fund scheme. During the NFO period, investors have the opportunity to subscribe to the units of the new mutual fund scheme at the offer price.

The fund house specifies the terms of the NFO, including the investment objectives, asset allocation strategy, and other relevant details. Investors who wish to participate in the new scheme can invest during the NFO period, and they typically buy units at the Net Asset Value (NAV) specified during the offer

Explanation:

Investors in a mutual fund are referred to as “unit holders.” When an individual invests in a mutual fund, they purchase units of the fund. Each unit represents a proportionate share of the mutual fund’s assets. The total number of units held by an investor is directly proportional to their ownership stake in the mutual fund.

While the term “shareholders” is commonly used in the context of companies, in the context of mutual funds, the more appropriate term is “unit holders.

Explanation:

Mutual funds are an easy way for investors to diversify their investments even with a small investment amount. When an investor buys mutual fund units, they are essentially pooling their money with other investors. The fund manager then uses this pool of funds to invest in a diversified portfolio of stocks, bonds, or other securities.

By investing in a mutual fund, even with a small amount, an investor gains exposure to a diversified basket of assets. This diversification helps spread risk and reduce the impact of poor performance in any single investment. Mutual funds provide an accessible and cost-effective way for investors to achieve diversification without the need for a large capital outlay.

Explanation:

In the context of mutual fund folios, KYC (Know Your Customer) requirements need to be completed by all holders, except minors. KYC is a regulatory process designed to verify the identity of investors and assess their suitability for certain financial products.

When there are multiple holders in a mutual fund folio, each adult holder is typically required to complete the KYC process. However, minors, being below the legal age of majority, do not complete the KYC process themselves. Instead, the KYC requirements for minors are usually fulfilled by their parents or guardians.

Explanation:

In derivative trading, clearing members play a crucial role in settling transactions. Clearing members are intermediaries that facilitate the clearing and settlement process for derivative trades. They act as intermediaries between the trading members (who execute the trades) and the clearing corporation or clearinghouse.

When a derivative trade is executed, it goes through a clearing process where the obligations of both the buyer and the seller are settled. Clearing members guarantee these settlements and ensure that the trades are honored. They also manage the collateral requirements and risk associated with derivative transactions.

Explanation:

An open-ended equity-linked savings scheme (ELSS) with a statutory lock-in period of three years and tax benefits is specifically designed to encourage long-term equity investments while providing tax advantages to investors. ELSS is a type of mutual fund that primarily invests in equity-related instruments, and it comes with a mandatory lock-in period of three years. Investors in ELSS can avail tax benefits under Section 80C of the Income Tax Act in India.

Explanation:

When a company is making an initial issue of shares, it typically needs approval from both the board of directors and existing shareholders. The board of directors is responsible for making strategic decisions, including approving the issuance of new shares. Existing shareholders may also need to give their approval, especially if it involves a significant dilution of their ownership stake. Regulatory bodies like SEBI (Securities and Exchange Board of India) may also have certain guidelines and approvals, but the primary decision-making entities for the issuance of shares are usually the board of directors and existing shareholders.

Explanation:

Explanation:

The order type can indeed include various options, and all the options provided are examples of different order types:

a) Regular lot order: This is a standard order to buy or sell a security in a specified quantity.

b) Stop loss order: This is an order placed to buy or sell a security once the price reaches a specified level, known as the stop price. It is often used to limit losses or protect profits.

c) Immediate or Cancel (IOC) order: This is an order that allows the user to buy or sell a security as soon as the order is released into the system, and if it cannot be executed immediately, it is canceled.

Explanation:

Explanation:

Mutual funds are investment vehicles that pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities. Therefore, they exhibit the characteristics mentioned:

a) Diversified: Mutual funds are typically diversified, meaning they hold a variety of securities within their portfolios. Diversification helps spread risk and reduce the impact of poor performance in any single security.

b) Liquid: Mutual fund shares are generally liquid, meaning investors can buy or sell them on any business day at the fund’s net asset value (NAV). This provides liquidity compared to certain other investment vehicles.

c) Flexible: Mutual funds offer flexibility in terms of investment choices. There are various types of mutual funds catering to different investment objectives, risk tolerances, and time horizons.

Explanation:

Explanation:

Explanation:

Explanation:

Capital market intermediaries include various entities that facilitate the smooth functioning of the capital market. The options listed—Registrars and Transfer Agents (RTAs), custodians, and depositories—are all examples of capital market intermediaries:

a) Registrars and Transfer Agents (RTAs): They assist in maintaining records of securities holders, processing transfers of securities, and handling other administrative tasks related to securities.

b) Custodians: Custodians are responsible for safeguarding and holding financial assets on behalf of institutional investors, such as mutual funds, pension funds, and foreign institutional investors.

c) Depositories: Depositories play a crucial role in the electronic holding and transfer of securities. They provide a centralized platform for holding securities in electronic form, making it more efficient and secure.

Explanation:

Discounted Cash Flow (DCF) models are rigorous valuation models that require clearly specified assumptions and focus on the core factors that drive the valuation of a stock. In DCF analysis, future cash flows generated by an investment or business are estimated and then discounted back to their present value. The discounting takes into account the time value of money, reflecting the idea that a dollar received in the future is worth less than a dollar received today.

DCF models are widely used in financial analysis and valuation to determine the intrinsic value of a stock. They are considered fundamental valuation models that provide a detailed and systematic approach to evaluating the worth of an investment based on its expected future cash flows.

Explanation:

Power of Attorney (PoA) in the context of financial transactions and trading typically grants the broker certain rights to act on behalf of the client. In the case of PoA related to securities trading, it often includes authorization for the broker to access and operate the client’s demat account.

A demat account is an account that holds securities in an electronic form. By granting access to the demat account through the PoA, the broker can facilitate various activities such as executing trades, settling transactions, and managing securities on behalf of the client. The PoA should specify the extent of the authority granted to the broker and the specific actions they are authorized to take in connection with the demat account.

Explanation:

A bull market is characterized by a sustained upward trend in the prices of financial assets, such as stocks. During a bull market, buyers are generally optimistic about the future performance of stocks, and they are willing to pay higher and higher prices. Positive economic indicators, strong corporate earnings, and overall optimism contribute to the upward movement in prices.

Investors in a bull market anticipate further gains and are more inclined to buy, contributing to a self-reinforcing cycle of rising prices. It is the opposite of a bear market, where there is a sustained downward trend, and investors are generally pessimistic about the market’s future performance.

Explanation:

Net Asset Value (NAV) represents the per-unit value of a mutual fund and is calculated by dividing the total value of the fund’s assets minus liabilities by the number of outstanding units. Investors in mutual funds are typically provided with information on the NAV on a daily basis. This transparency allows investors to track the fund’s performance and make informed decisions about buying or selling units in the mutual fund. Daily NAV reporting is a common practice in the mutual fund industry to ensure that investors have up-to-date information about the value of their investments.

Explanation:

Explanation:

A stock market index serves multiple purposes:

a) Real-time data on market movements: Stock market indices provide real-time or delayed information about the overall movements of the stock market. They offer a snapshot of how the market is performing at any given moment.

b) Leading indicator of overall economic performance: Stock market indices are often considered leading indicators of overall economic performance. Changes in stock prices can reflect investors’ expectations about the future health of the economy.

c) Performance benchmark: Indices serve as benchmarks against which the performance of individual stocks, investment portfolios, or mutual funds can be measured. Investors and fund managers use indices to assess how well their investments are performing relative to the broader market.

Explanation:

An Immediate or Cancel (IOC) order is a type of order that allows the user to buy or sell a security as soon as the order is released into the system. If the order cannot be executed immediately, either in full or in part, the portion that cannot be executed is canceled from the system.

In other words, an IOC order is designed to be executed immediately, and any part of the order that cannot be filled right away is canceled. It is particularly useful when the investor wants to ensure prompt execution and is willing to accept only immediate, rather than partial, fulfillment of the order.