Financial Instruments Quiz

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

What is one characteristic of Depository Receipts (DRs)?

DRs cannot be issued by Indian companies.

DRs are subject to local country regulations. (correct)

DRs cannot be converted back to local shares.

DRs automatically confer voting rights to holders.

Which type of DR is specifically regulated by SEBI in India?

IDRs (correct)

HKDRs

GDRs

ADRs

What is a significant advantage of investing in commodities?

All commodities are considered soft commodities.

Commodities guarantee a fixed return on investment.

Commodities can help hedge against inflation. (correct)

Commodities have no storage costs.

What does a Managed Futures Contract allow investors to do?

Profit from price changes without owning the product. Signup and view all the answers

What primarily differentiates a commodity from non-commodity goods?

Commodities are uniform and interchangeable. Signup and view all the answers

What type of investment product pools investments in physical commodities?

Commodity ETFs Signup and view all the answers

What is a warehouse receipt primarily used for?

To prove ownership of stored goods. Signup and view all the answers

What can investors earn from REITs?

Dividends from rents or sales. Signup and view all the answers

What is the primary benefit of pooling funds in InvITs for investors?

Returns generated through tolls or lease income from infrastructure projects Signup and view all the answers

How does a Foreign Currency Convertible Bond (FCCB) function?

It allows conversion to equity with interest and principal repayments in foreign currency Signup and view all the answers

What are Equity-Linked Debentures (ELDs) primarily based on?

Market performance of underlying equity assets Signup and view all the answers

What is a key characteristic of Mortgage-Backed Securities (MBS)?

They are secured by a mortgage or a collection of mortgages Signup and view all the answers

Which market is known as the primary market?

A market where securities are issued for the first time Signup and view all the answers

What is the purpose of a Follow-on Public Offer (FPO)?

To raise additional equity capital from the market Signup and view all the answers

What does Private Placement entail in securities issuance?

Issuing shares to a limited number of investors, capped at 50 individuals Signup and view all the answers

What do Commodity-Linked Debentures (CLDs) derive their interest payments from?

Returns of specific commodities or their index Signup and view all the answers

What is the main purpose of hedging in financial trading?

Counteracting potential losses from another position Signup and view all the answers

Which of the following best describes arbitrage?

Simultaneously buying and selling assets to profit from price differences Signup and view all the answers

What happens to securities during the process of dematerialization?

They are converted into electronic or book entry forms Signup and view all the answers

What is a key characteristic of pledging shares?

Securities act as collateral for a loan Signup and view all the answers

What distinguishes rematerialization from dematerialization?

Rematerialization converts electronic securities back into physical form Signup and view all the answers

What is a primary function of the securities market?

To facilitate buying and selling of securities Signup and view all the answers

Which of the following is NOT considered a type of security?

Insurance policies Signup and view all the answers

Who issues securities in the market?

Companies, government, and financial institutions Signup and view all the answers

What role do households play in the securities market?

They participate in direct finance activities Signup and view all the answers

What is an equity share known to represent?

A form of ownership in the company Signup and view all the answers

What best describes the term 'dematerialisation' in securities?

The process of converting physical securities into electronic form Signup and view all the answers

Which of the following actions typically creates liquidity in the securities market?

Bringing together numerous buyers and sellers Signup and view all the answers

Which category is included in the various financial instruments defined as securities?

Derivatives Signup and view all the answers

What is the primary role of underwriters in the primary market?

Committing to purchase unsold securities Signup and view all the answers

Which of the following best describes hedge funds?

Privately pooled funds investing across diverse assets Signup and view all the answers

What is the main purpose of mutual funds?

To pool investments and buy securities on behalf of investors Signup and view all the answers

Participatory Notes (P-Notes) are primarily used to:

Offer overseas investors an entry point into Indian markets Signup and view all the answers

Which of these entities primarily pools retirement funds for long-term growth?

Employee Provident Fund (EPF) Signup and view all the answers

What defines Alternative Investment Funds (AIFs)?

Privately pooled investments in various non-traditional assets Signup and view all the answers

Who provides professional assistance in asset allocation and investment decisions?

Investment Advisers Signup and view all the answers

What distinguishes private equity firms from other investment entities?

They acquire or invest in companies that are not publicly traded. Signup and view all the answers

How are futures contracts characterized in the financial markets?

They are exchange-traded and standardized contracts. Signup and view all the answers

What is the main difference between a call option and a put option?

A call option allows for purchase at a predetermined price, while a put option allows for sale. Signup and view all the answers

What generally happens to an option if it expires below the strike price?

The option expires worthless, and the premium is lost. Signup and view all the answers

What type of financial market instrument helps manage risks associated with volatile interest and currency rates?

Swaps Signup and view all the answers

In the example provided, what payment mechanism does Company A use to pay based on their agreement?

They pay a fixed rate. Signup and view all the answers

What is one of the main features of spot trades?

They generally settle two business days after the trade date. Signup and view all the answers

Which of the following refers to the correct nature of options in derivatives?

Options provide the right, but not the obligation, to conduct a transaction. Signup and view all the answers

How do futures contracts ensure that both parties fulfill their obligations?

By providing margin requirements to secure trades. Signup and view all the answers

Study Notes

Introduction to Securities Market

Securities are transferable financial instruments representing ownership or debt in an entity's assets.
They are issued by companies, governments, and financial institutions.
Examples include equity shares, preference shares, debentures, and bonds.

Function of Securities Market

Facilitates buying and selling of securities.
Creates liquidity by bringing together numerous buyers and sellers.
Enables transactions at market prices.

Various Financial Instruments

Foreign Currency Bonds: Issued by companies in a currency different from their home country's currency.
Equity Shares: Represent fractional ownership in a company, allowing investors to share in the company's profits and growth.
Debentures/Bonds/Notes: Long-term debt instruments, unsecured or secured, issued to raise money. Types include fully convertible, partially convertible, and non-convertible.
Warrants: Options granting investors the right to buy the issuer company's shares at a predetermined price on a specific date.
Mutual Fund Units: Investment pools gathering investor money to invest in a portfolio based on shared investment goals.
Indices: Statistical measures tracking the performance of a group of stocks, often weighted by market capitalization. Examples in India include Nifty 50, S&P BSE Sensex, and Nifty 500.
Indices help: Compare stock returns, serve as benchmarks, reflect economic performance, and support index-based financial products.
External Bonds/Masala Bonds: Issued in a currency different from the country of issuance. Masala Bonds are denominated in Indian rupees (INR).

Market Structure

Primary Market: New issue market where issuers raise capital. Includes Initial Public Offer (IPO), Follow-on Public Offer (FPO), Private Placement, Qualified Institutional Placements (QIPs), and Preferential Issues.
Secondary Market: Enables trading of already issued securities, providing liquidity to investors wishing to buy or sell.

Market Participants

Market Intermediaries: Facilitating transactions.
- Stock Exchanges: Platforms for trading securities with electronic terminals.
- Depositories: Institutions holding securities electronically like CDSL and NSDL.
- Depository Participants (DPs): Providing dematerialized services and maintaining investor-level accounts.
- Trading Members/Stock Brokers: Facilitate buy/sell transactions.
- Authorized Persons: Appointed by stock brokers, acting as agents to connect with investors.
- Custodians: Safeguarding funds and securities, settling transactions, and monitoring corporate actions.
- Clearing Corporations: Ensuring trade settlement, reducing counterparty risk.
- Clearing Banks: Managing funds between clearing members and corporations.
Institutional Investors: Entities making substantial investments like banks, insurance companies, mutual funds.
Retail Investors: Individual investors trading for personal accounts.
Proxy Advisory Services Firms: Advise investors on voting matters in companies.

Transactions

Cash Trades: Settle on the same trading day.
Tom Trades: Settle the day after the trading date.
Spot Trades: Settle two business days after the trade date.
Forward Transactions: Agreements to buy or sell an asset at a pre-agreed price in the future.

Other important Concepts

Dematerialization: Converting physical securities to electronic form.
Rematerialization: Reverse process, converting electronic securities to physical form.
Futures: Standardized contracts for future delivery of assets.
Options: Contracts providing the right but not the obligation to buy or sell an asset at a specific price.
Swaps: Agreements to exchange cash flows between parties based on a pre-agreed formula.
Trading, Hedging, Arbitrage, Pledging of Securities: Key investment strategies and practices involving trading, risk management, and security use as collateral for loans.

Studying That Suits You

Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

Description

Test your knowledge on various financial instruments including Depository Receipts, Managed Futures, and Real Estate Investment Trusts. This quiz covers important characteristics, regulations, and advantages of different investment products. Perfect for finance students looking to solidify their understanding of key concepts.