Finance and Banking: Asset Management
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Questions and Answers

How many modules are available under the FOUNDATION level of NCFM certification?

  • 20
  • 9
  • 7
  • 11 (correct)

    • Candidates securing 80% or more marks in NSDL-Depository Operations Module will be certified as 'Trainers'.

    False

    What is the mission of NSE Academy?

    Spreading financial literacy for all

    NSE Academy has facilitated more than 41.8 lakh individuals become financially smarter through various initiatives, improving the financial well-being of people at large in ____________.

    <p>society</p> Signup and view all the answers

    What is the underlying objective of portfolio management?

    <p>To create a balance between the trade-off of returns and risk across multiple asset classes.</p> Signup and view all the answers

    Who are the main types of investors in the market?

    <p>Both individuals and institutions</p> Signup and view all the answers

    Mutual funds pool investors' money and invest according to pre-specified parameters.

    <p>True</p> Signup and view all the answers

    Pension funds are created to manage the retirement funds of ___ employees.

    <p>companies</p> Signup and view all the answers

    What is the fourth market known for?

    <p>direct transactions between institutional investors with transaction costs in mind</p> Signup and view all the answers

    In the secondary market, what are orders?

    <p>Instructions provided by a customer to a brokerage firm for buying or selling a security with specific conditions</p> Signup and view all the answers

    _____ Price/Order requires the price to be specified while entering the order into the system.

    <p>Limit</p> Signup and view all the answers

    Market Price/Order is based on the constraint of time, rather than price.

    <p>True</p> Signup and view all the answers

    What happens when the market price of a security reaches the threshold price for a Stop Loss order?

    <p>The stop loss order enters the market as a market/limit order and is executed at the market price or a better price</p> Signup and view all the answers

    What are the types of investors discussed in Chapter 1?

    <p>Individuals, Institutions</p> Signup and view all the answers

    Which constraints are mentioned in Chapter 1?

    <p>All of the above</p> Signup and view all the answers

    What are the goals of investors according to Chapter 1?

    <p>To maximize returns while managing risks</p> Signup and view all the answers

    What are the types of markets discussed in Chapter 2?

    <p>Secondary Markets</p> Signup and view all the answers

    What key concept is discussed in Chapter 3?

    <p>The Time Value of Money</p> Signup and view all the answers

    Market Efficiency is discussed in Chapter 4.

    <p>True</p> Signup and view all the answers

    Chapter 5 analyzes financial _ _ _ _ _ _ _ _ _ _ _.

    <p>statement</p> Signup and view all the answers

    Match the following financial ratios with their meanings:

    <p>RoA = Return on Assets RoE = Return on Equity Liquidity Ratios = Measures of a company's ability to pay off short-term obligations Operating Performance = Efficiency of a company’s operating activities Asset Utilization = Efficiency in utilizing assets to generate revenue</p> Signup and view all the answers

    What is the main source of income for banks?

    <p>Interest rate spread</p> Signup and view all the answers

    Banks lend out 100% of their deposits.

    <p>False</p> Signup and view all the answers

    Banks are required to maintain a certain portion of their deposits as cash and another portion in the form of ________ assets.

    <p>Government securities</p> Signup and view all the answers

    Match the investor classification with their objectives:

    <p>Hedgers = Cover for risks on existing portfolio Speculators = Earn supernormal returns Arbitrageurs = Earn riskless profits from price differentials Day-traders = Profit from intra-day price changes</p> Signup and view all the answers

    What are the two key parameters used to measure liquidity of an asset?

    <p>Market breadth and market depth</p> Signup and view all the answers

    What is the term used to define the set of relationships between rates of bonds of different maturities?

    <p>Term structure of interest rates</p> Signup and view all the answers

    What does fi represent in the context of forward interest rates?

    <p>1-year forward interest rate starting at year 2</p> Signup and view all the answers

    The yield curve is sometimes also referred to as the term structure of interest rates.

    <p>True</p> Signup and view all the answers

    According to the market expectation hypothesis, the forward rate equals the market expectation of the future short interest rate, i.e. fi = E(__).

    <p>ri</p> Signup and view all the answers

    What distinguishes T-bonds from T-notes?

    <p>T-bonds usually consist of a call/put option after a certain period</p> Signup and view all the answers

    Corporate bonds are typically issued at a higher discount than equivalent Government bonds.

    <p>True</p> Signup and view all the answers

    Zero coupon bonds do not pay any ________ during the life of the bonds.

    <p>interest</p> Signup and view all the answers

    Match the international bond with its correct description:

    <p>Eurobonds = Bonds issued in a currency other than that of the country which issues them Eurodollar bonds = US dollar-denominated bonds issued outside the United States Samurai Bonds = Yen-denominated bonds issued in Japan by non-Japanese issuers</p> Signup and view all the answers

    What is the formula for estimating simple interest?

    <p>I = P * R * T</p> Signup and view all the answers

    What is the formula for calculating total amount under compound interest rate?

    <p>A = P * (1 + R/m)^(m*T) - P</p> Signup and view all the answers

    What is the additional parameter in compound interest rate calculation that affects total interest payments?

    <p>Compounding period</p> Signup and view all the answers

    What is another term for interest rate when compounded continuously?

    <p>e^r - 1</p> Signup and view all the answers

    What is the relationship between real and nominal interest rate?

    <p>(1 + real interest rate) = (1 + nominal interest rate) / (1 + inflation rate)</p> Signup and view all the answers

    What is the formula for calculating Coupon Yield?

    <p>Coupon Payment / Face Value</p> Signup and view all the answers

    What is the formula for calculating Current Yield?

    <p>Coupon Payment / Current Market Price of the Bond</p> Signup and view all the answers

    What is the main drawback of coupon yield and current yield?

    <p>They consider only interest payments and ignore capital gains or losses</p> Signup and view all the answers

    What is Yield to Maturity (YTM)?

    <p>Yield to Maturity refers to the internal rate of return earned from holding the bond till maturity.</p> Signup and view all the answers

    What is the relationship between bond price and yields?

    <p>There is a negative relationship between yields and bond price. The bond price falls when yield increases, and vice versa.</p> Signup and view all the answers

    What is another term for Yield to Maturity (YTM)?

    <p>Yield to Maturity (YTM) is also known as YTM.</p> Signup and view all the answers

    Study Notes

    NCFM Module Examination Details

    • The NCFM module examination consists of 38 modules, divided into three categories: Foundation, Intermediate, and Advanced.
    • Each module has a specific duration, number of questions, maximum marks, and pass marks.
    • Some modules have additional features such as negative marking, open office, distribution sheet, scientific calculator, and financial calculator.

    Foundation Modules

    • There are 11 modules in the Foundation category, including Financial Markets, Mutual Funds, Currency Derivatives, Equity Derivatives, and Interest Rate Derivatives.
    • Each module has a duration of 120 minutes, with 60 questions, and a maximum mark of 100.
    • The pass mark for each module is 50.

    Intermediate Modules

    • There are 21 modules in the Intermediate category, including Capital Market, Derivatives Market, Investment Analysis, and Portfolio Management.
    • Each module has a duration of 120 minutes, with 60 questions, and a maximum mark of 100.
    • The pass mark for each module is 60.

    Advanced Modules

    • There are 18 modules in the Advanced category, including Algorithmic Trading, Financial Markets, Securities Markets, and Derivatives.
    • Each module has a duration of 120 minutes, with 60-100 questions, and a maximum mark of 100-150.
    • The pass mark for each module is 60.

    NSE Academy

    • NSE Academy is a subsidiary of the National Stock Exchange of India.
    • It offers a range of financial courses for students from standard VIII to MBA professionals.
    • NSE Academy has tied up with premium educational institutes to develop a pool of human resources with the right skills and expertise for the financial market.
    • The academy aims to spread financial literacy and has facilitated more than 41.8 lakh individuals to become financially smarter through various initiatives.

    NCFM Certification

    • NCFM is an online certification program that aims to upgrade skills and build competency.
    • The program has a widespread reach with testing centers present at more than 154 locations across the country.
    • NCFM offers certifications ranging from Basic to Advanced.
    • Candidates can register for NCFM through online or offline mode.
    • Once registered, candidates can access facilities like SMS alerts, online payment, and profile update through their online login id.### Chapter 1: Objectives of Investment Decisions

    1.1 Introduction

    • Investment decisions involve balancing returns and risk across multiple asset classes
    • Portfolio management aims to maximize returns subject to risk tolerance or achieve a pre-specified return with minimum risk

    1.2 Types of Investors

    • Investors can be broadly classified into two categories: individuals and institutions
    • Each type of investor has distinct investment styles, mandates, horizons, and assets under management
    • Risk appetites and return requirements vary across investor classes, influencing their investment strategies and constraints

    1.2.1 Individuals

    • Individuals comprise the largest group of investors in most markets, but with smaller portfolio sizes
    • Individuals differ in their risk appetite and return requirements
    • Risk-averse individuals opt for safe investments like government securities and bank deposits
    • Risk-taking individuals invest in or speculate in equity markets
    • Individuals' requirements evolve based on their life-cycle positioning, such as planning for:
      • Purchase of a house and vehicle (25-35 years age group)
      • Children's education and marriage (35-45 years age group)
      • Post-retirement life (50+ years age group)

    1.2.2 Institutions

    • Institutions include:
      • Mutual funds
      • Pension funds
      • Endowment funds
      • Insurance companies (life and non-life)
      • Banks
    • Each institutional type has its own specific investment objectives, mandates, and constraints### Institutional Investors
    • Institutional investors are the largest active group in the financial markets
    • They invest capital on behalf of others, such as individuals or other institutions
    • Examples of institutional investors include:
      • Mutual funds
      • Pension funds
      • Insurance companies
      • Hedge funds
      • Endowment funds
      • Banks
      • Private equity and venture capital firms

    Mutual Funds

    • Mutual funds pool investors' money to invest in various assets
    • Managed by professionals whose remuneration is linked to the fund's performance
    • Fund's profit or capital gain is distributed among investors in proportion to their holdings
    • Vary greatly depending on investment objectives, asset classes, and strategies

    Pension Funds

    • Created to manage retirement funds of employees
    • Funds are contributed by employers and employees during working life
    • Objective is to provide benefits to employees post-retirement
    • Management of pension funds may be in-house or through financial intermediaries

    Endowment Funds

    • Non-profit organizations that manage funds to generate steady returns
    • Initiated by a non-refundable capital contribution
    • Contributor specifies purpose and appoints trustees to manage the funds
    • Investment policy requires approval from trustees

    Insurance Companies

    • Hold large portfolios from premiums contributed by policyholders
    • Invest to meet current cash flow needs and future liabilities
    • Generally conservative in their attitude towards risks

    Banks

    • Assets consist mainly of loans to businesses and consumers
    • Liabilities comprise deposits from consumers
    • Main source of income is the interest rate spread
    • Required to maintain a certain portion of deposits as cash and liquid assets

    Investor Classifications

    • Hedgers: invest to provide a cover for risks on a portfolio they already hold
    • Speculators: take additional risks to earn supernormal returns
    • Arbitrageurs: take simultaneous positions to earn riskless profits from price differentials
    • Day-traders: trade to profit from intra-day price changes

    Constraints in Portfolio Management

    Liquidity

    • Refers to the marketability of an asset
    • Measured by market breadth and market depth
    • High demand and supply result in low impact costs of trading and reduce liquidity risk

    Investment Horizons

    • Refers to the length of time an investor expects to remain invested in a security or portfolio
    • Helps in security selection and risk exposure
    • Investors with shorter horizons prefer low-risk assets, while those with longer horizons look at riskier assets

    Taxation

    • Affects investment decisions, as investors are concerned with net returns
    • Tax-free investments or those with lower tax rates may trade at a premium
    • Taxation benefits on specific investments should be considered when designing a portfolio

    Goals of Investors

    • Specific needs for individual investors include retirement, children's education, housing, etc.
    • Institutional investors have specific needs, such as the average age of plan participants for pension funds
    • Investment decisions depend on these goals and constraints

    Financial Markets

    • Classified into money markets and capital markets
    • Money markets include short-term, marketable, liquid, low-risk debt securities
    • Capital markets include longer-term and riskier securities, such as bonds and equities
    • Derivatives instruments are also traded in capital markets

    Primary and Secondary Markets

    • Primary market: new securities are issued to the public for the first time
    • Secondary market: existing securities are traded among investors
    • Derivatives market: futures, forwards, and options on underlying instruments

    Trading in Secondary Markets

    • Orders are placed by investors, specifying conditions such as price, time, or type of order
    • Types of orders include:
      • Limit price/order
      • Market price/order
      • Stop loss order
      • Time-related conditions, such as day order, immediate or cancel order, etc.

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