Financial Instruments and Services Quiz
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Questions and Answers

What distinguishes primary instruments from secondary instruments?

  • Primary instruments are issued by intermediaries, while secondary instruments are issued directly by borrowers.
  • Primary instruments have lower transaction costs compared to secondary instruments.
  • Primary instruments are directly issued by borrowers to savers, while secondary instruments are issued by intermediaries. (correct)
  • Primary instruments are always safer than secondary instruments.

    • Which of the following is NOT a service typically offered by Non-Banking Financial Companies (NBFCs)?

  • Vehicle loans
  • Insurance Services
  • Home loans
  • Demand deposits (correct)

    • What is a primary objective of small finance banks?

  • To cater exclusively to affluent individuals.
  • To engage primarily in investment banking.
  • To financially include sections of the population not served by other banks. (correct)
  • To provide extensive corporate banking services.

    • Which financial instrument is classified under capital market instruments?

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

    In terms of financial instruments, what does marketability refer to?

    <p>The ease with which an instrument can be bought or sold in the market.</p> Signup and view all the answers

    Which entity is typically NOT included in the financial services sector?

    <p>Agricultural cooperatives</p> Signup and view all the answers

    What type of company is required to register with the RBI?

    <p>A Non-Banking Financial Company (NBFC).</p> Signup and view all the answers

    Which of the following is a characteristic of secondary financial instruments?

    <p>They are issued by financial intermediaries.</p> Signup and view all the answers

    What is a key characteristic of preference shares?

    <p>They do not participate in surplus profits.</p> Signup and view all the answers

    Which type of preference share cannot be redeemed except during liquidation?

    <p>Irredeemable preference shares</p> Signup and view all the answers

    What distinguishes convertible preference shares from non-convertible preference shares?

    <p>Convertible shares can be converted into equity shares.</p> Signup and view all the answers

    What is unique about fully convertible cumulative preference shares (FCCPS)?

    <p>They combine cumulative and convertible features.</p> Signup and view all the answers

    What happens to dividends for non-cumulative preference shares if there is insufficient profit?

    <p>The right to claim dividends lapses.</p> Signup and view all the answers

    Which type of preference shares entitles holders to both a fixed dividend and a share in surplus profit?

    <p>Participating preference shares</p> Signup and view all the answers

    What role do debenture holders have in relation to a company?

    <p>They are creditors of the company.</p> Signup and view all the answers

    What is a fundamental feature of redeemable preference shares?

    <p>They are redeemable after a specified period.</p> Signup and view all the answers

    What was the purpose of the Foreign Exchange Management Act (FEMA) enacted in 2000?

    <p>To simplify and manage foreign exchange transactions</p> Signup and view all the answers

    Which organization was established in 1996 to cater to share depository needs in India?

    <p>National Securities Depositories Ltd.</p> Signup and view all the answers

    What significant regulatory body was formed under the IRDA Act of 1999?

    <p>Insurance Regulatory and Development Authority</p> Signup and view all the answers

    Which Act was repealed to enact the Foreign Exchange Management Act (FEMA)?

    <p>Foreign Exchange Regulation Act (FERA) 1973</p> Signup and view all the answers

    What financial instrument allows foreign companies to raise capital in India?

    <p>Indian Depository Receipts</p> Signup and view all the answers

    Which initiative aimed at reducing the fiscal deficit through legislative measures?

    <p>Fiscal Responsibility and Budget Management Act 2003</p> Signup and view all the answers

    Which is a key development in the Indian financial sector allowing for investment range expansion?

    <p>Introduction of innovative financial instruments</p> Signup and view all the answers

    Which of the following is NOT a measure taken to improve banking supervision?

    <p>Lowering interest rates on loans</p> Signup and view all the answers

    What is the primary purpose of the capital market?

    <p>To promote capital formation and economic growth</p> Signup and view all the answers

    Which of the following describes equity shares?

    <p>They provide a residual interest in the assets of a company.</p> Signup and view all the answers

    Which of the following is NOT a function of the capital market?

    <p>Increasing government control over the economy</p> Signup and view all the answers

    What are creditorship securities primarily known for?

    <p>Providing fixed income and debt obligations</p> Signup and view all the answers

    How do equity shareholders participate in a company's management?

    <p>By voting rights in the board of directors' elections</p> Signup and view all the answers

    What differentiates ownership instruments from creditorship instruments?

    <p>Ownership instruments involve profit sharing, while creditorship instruments involve fixed returns.</p> Signup and view all the answers

    What is one characteristic of equity shares?

    <p>They are the source of permanent capital for a company.</p> Signup and view all the answers

    What happens to profits in a company after preference dividends are paid?

    <p>They are shared among equity shareholders as per their holding.</p> Signup and view all the answers

    What is a primary characteristic of registered debentures?

    <p>They provide more security and transparency than bearer debentures.</p> Signup and view all the answers

    What is a key feature of non-convertible debentures with detachable equity warrants?

    <p>They allow holders to purchase shares at a fixed price after a specified period.</p> Signup and view all the answers

    How is interest on bonds typically calculated?

    <p>As a certain percentage of the bond's face value, known as coupon payment.</p> Signup and view all the answers

    What distinguishes government bonds from corporate bonds?

    <p>Corporate bonds generally have a higher risk of default.</p> Signup and view all the answers

    Which of the following statements about zero coupon bonds is correct?

    <p>Interest is embedded in the difference between the issue price and face value.</p> Signup and view all the answers

    What are two common types of bonds issued?

    <p>Government bonds and corporate bonds.</p> Signup and view all the answers

    Which option best describes bonds in the context of their face value?

    <p>The face value is returned to the investor only if the bond matures.</p> Signup and view all the answers

    What is a disadvantage of registered debentures compared to bearer debentures?

    <p>Higher administrative costs.</p> Signup and view all the answers

    Study Notes

    Financial Instruments

    • Primary financial instruments are issued directly by borrowers to savers. Examples include equity shares and debentures.
    • Secondary financial instruments are issued by financial intermediaries to savers. Examples include mutual fund units and insurance policies.
    • Financial instruments are classified into money market instruments and capital market instruments.

    Financial Services

    • The financial services sector provides services to individuals and corporations.
    • Financial services include activities like banking, investing, and insurance.
    • Financial firms include banks, investment houses, lenders, finance companies, real estate brokers and insurance companies.

    Non-Banking Financial Companies (NBFCs)

    • NBFCs are financial institutions registered under the Companies Act, 1956.
    • They engage in activities such as loans, advances, leasing, hire-purchase, insurance, and chit business.
    • They cannot accept demand deposits or issue cheques.
    • All NBFCs must register with the Reserve Bank of India (RBI).
    • Examples include Bajaj Finance, Mahindra Financial Service, Shriram Transport Finance Company, Kosamattom Finance, Manappuram Finance, and Muthoot Finance Ltd.

    Services Offered by NBFCs

    • Personal loans
    • Vehicle loans
    • Home loans
    • Gold loans
    • Microfinance
    • Insurance services
    • Leasing and hire purchase services

    Small Finance Banks

    • Small finance banks provide financial services to underserved and unbanked regions of the country.
    • They can provide basic banking services within a limited operating area.
    • Their objective is to financially include sections of the economy not served by other banks, such as small businesses, farmers, micro and small industries, and unorganized sector entities.

    Key Developments in the Indian Financial System

    • 1992: Indian firms are allowed to raise capital in international markets through bonds and Global Depository Receipts.
    • 1996: The National Securities Depositories Ltd. (NSDL) is established according to the Depositories Act of 1996.
    • 1999: The Insurance Regulatory and Development Authority (IRDA) is formed to regulate the insurance market following the IRDA Act of 1999.
    • 2000: The Foreign Exchange Management Act (FEMA) 2000 replaces FERA 1973.
    • 2003: The Fiscal Responsibility and Budget Management Act is enacted to reduce fiscal deficit.
    • 2003: The Pension Fund Development and Regulatory Authority is constituted to regulate and develop the Indian pension sector.

    Developments in the Banking Sector

    • Entry of new private and foreign banks and easing of restrictions on foreign banks.
    • Reduced Cash Reserve and Statutory Liquidity Requirements.
    • Measures to improve credit quality and risk management.
    • Tightening of Prudential Norms and Non-Performing Assets (NPA) management and improved banking supervision.
    • Implementation of BASEL 2 norms.
    • Diversification to various areas like merchant banking, underwriting, lease financing, venture capital financing, factoring, portfolio management, and mutual funds.

    Developments in the Pension and Insurance Sector

    • Private insurance companies are allowed to enter the market.
    • Private players are allowed to operate pension funds.

    Developments in the Mutual Funds Sector

    • Entry of private sector mutual funds.
    • This offers a wider range of investment options to Indian investors and efficient mobilization of public savings.

    Developments in Other Financial Services

    • Adoption of the Book Building mechanism for pricing of issues.
    • Non-Banking Financial Companies (NBFC) are allowed to operate.

    Capital Market: Significance and Functions

    • Promotes capital formation and economic growth.
    • Mobilizes savings for investment.
    • Channelizes funds to productive sectors.
    • Increases production and productivity.
    • Enhances economic welfare of society.
    • Facilitates technological upgradation in the industrial sector.
    • Helps corporations expand, grow, and diversify.
    • Connects borrowers with surplus funds to lenders with deficits.

    Capital Market Instruments

    • Corporate funds can be raised through ownership instruments (equity shares and preference shares) and creditorship instruments (debentures, bonds).
    • Ownership securities represent ownership in the issuing company.
    • Creditorship securities represent debt, making holders creditors of the issuing company.

    Equity Shares

    • Represent ownership capital of a company.
    • Equity shareholders are legal owners of the company.
    • Guarantee a residual interest in the company's assets after liabilities are settled.
    • Are the source of permanent capital with no maturity date.
    • Allow shareholders to participate in management through the elected board of directors and voting rights.
    • Shareholders share profits and assets in proportion to their holdings.
    • Equity shareholders are eligible for profits remaining after preference shareholders are paid dividends.
    • Preference Shares
      • Paid a fixed dividend before equity shareholders.
      • Non-participatory in extra profits.
      • Given preference in liquidation after creditors.
      • Have no voting rights.

    Types of Preference Shares

    • Redeemable preference shares: Redeemable after a specified period.
    • Irredeemable preference shares: Not redeemable except upon company liquidation.
    • Convertible preference shares: Can be converted to equity shares at the holder's option (also known as quasi-equity shares).
    • Non-convertible preference shares: Do not carry the right to convert into equity shares.
    • Participating preference shares: Holders receive a fixed dividend rate and a share in surplus profits.
    • Non-participating preference shares: Holders receive only a fixed dividend rate, not a share in surplus profits.
    • Cumulative preference shares: Dividends not paid in a year can be cumulated in the next year.
    • Non-cumulative preference shares: Dividends do not accumulate and the right to claim lapses if insufficient profits are available in a year.
    • Preference shares with warrants: The holder can apply for equity shares at a premium with a certain number of warrants.
    • Fully convertible cumulative preference shares (FCCPS): Combine features of cumulative preference shares and convertible preference shares, allowing dividends to accumulate and conversion into ordinary shares.

    Debentures

    • A debt instrument under seal that evidences debt.
    • Represents a company’s promise to pay interest and repay the principal on maturity
    • Debenture holders are creditors of the company.
    • Debenture deeds specify rights of debenture holders and obligations of the company.

    Registered Debentures

    • The holder's name and address are registered in a company book.
    • Offer more security and transparency than bearer debentures, but less flexibility and higher administrative costs.

    Non-Convertible Debentures with Detachable Equity Warrants (NCD-DEW)

    • A hybrid instrument combining a non-convertible debenture with a detachable equity warrant.
    • Holders can buy a specified number of shares at a predetermined price after a set period.

    Bonds

    • Debt instruments issued by companies or governments to raise capital.
    • Investors lend money at a fixed interest rate for a set period.
    • Bonds have a fixed face value, which is repaid to the investor upon maturity.
    • Investors receive regular interest payments during the term.
    • Interest is calculated as a percentage of the face value known as the "coupon payment."
    • Bonds can be issued at "par," "discount," or "premium."
    • Bonds have a specific maturity date, which can range from days to decades.
    • Debentures and bonds are essentially the same.
    • In India, debentures are issued by corporates and bonds by government or semi-government bodies.
    • Corporates also now issue bonds, which typically have lower interest rates and higher repayment priority compared to debentures.

    Types of Bonds

    • Government bonds: Fixed income debt instruments issued by the government to finance fiscal deficits or development projects.
    • Corporate bonds: Debt securities issued by public or private corporations to raise money for working capital or capital expenditure projects.

    Zero Coupon Bonds

    • Issued at a discount to their face value and repaid at face value at maturity.
    • No interest payments are made.
    • The difference between the issue price and face value functions as interest to the holders.

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    Financial System and Institutions 1.pdf

    Description

    Test your knowledge on financial instruments, services, and the role of Non-Banking Financial Companies (NBFCs). This quiz covers the distinctions between primary and secondary financial instruments, as well as the various services offered by financial firms. Explore the intricacies of the financial sector and enhance your understanding.

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