29 Questions
What is the primary focus of a Debt Fund as described in the text?
Investing in debt instruments of listed and unlisted companies
How do LPs (Limited Partners) typically benefit from investments in a fund?
Receiving all earned profits
What triggers the GP (General Partner) to exit an investment according to the text?
When they think the investment has reached its maximum potential
How do GPs (General Partners) usually earn in a fund based on the text?
By charging a management fee
What kind of companies are considered good investment options for Debt Fund investors?
Companies facing capital crunch despite high growth potential and good corporate practices
How are Debt funds managed as per the text?
By collecting money and investing in fixed income securities
What is the main characteristic of Category III funds?
They employ diverse trading strategies for short-term returns
What distinguishes Hedge Funds from mutual funds and other investment vehicles?
Higher management fees
What does a Private Investment in Public Equity Fund (PIPE) involve?
Buying shares of publicly traded stock at a discounted price
Why do Hedge Funds take up leverage to a great extent?
To generate high returns
What type of investors typically contribute to Hedge Funds?
Institutional and accredited investors
How do Category III funds differ from other funds in terms of their trading strategies?
They use diverse strategies for short-term capital growth
What distinguishes revenue bonds from general obligation bonds?
They have extended maturity periods.
What is a notable advantage of municipal bonds with a credit rating of BBB or higher?
No taxes on the interest earned
What is a common disadvantage associated with retail bonds?
Limited trading flexibility
Why are junk bonds also known as high-yield bonds?
For falling below investment grade
What purpose do companies typically issue retail bonds for?
To fund specific projects or expand business
What is the defining characteristic of revenue bonds regarding repayment?
Repayment is made from revenue generated by specified projects
What is one of the issues with the methodologies used by rating agencies highlighted in the text?
Neglecting the impact of public sector banks in developing countries
Why does the government argue that rating assessments discriminate against developing countries?
Because of non-transparent selection of experts for assessment
What impact can the lack of transparency in assigning weights have on credit rating methodologies?
Leading to difficulties in quantifying the impact of qualitative factors
What is one consequence of overreliance on qualitative factors in credit rating methodologies?
Cascading effects and cognitive biases
Which factor contributes to the challenging quantification of the impact of qualitative factors on credit ratings?
Opaqueness in assigning weights by rating agencies
What is the minimum allocation under the retail quota in the IPO application process?
35%
In case of oversubscription, how are IPO shares allocated to retail investors?
Randomly using a lottery system
Which investor category includes High Net-worth Individual (HNI) investors in the IPO application process?
Institutional Bidders (NII)
What is the criteria that distinguishes Small NII (s-NII) from Big NII (b-NII) investors?
Amount of shares bid for by the investor
Which entities are included in the NII reserved portion in the IPO application process?
Companies, NRIs, HUFs, FPIs, and Trusts
When applying for an IPO, which category of investors would bid between Rs. 2 lakhs and Rs. 10 lakhs?
Small NII (s-NII)
Study Notes
Private Equity Fund
- Evaluates and executes investments in various companies according to the fund's strategy
- Works actively with management teams to enhance operational performance, implement growth strategies, and improve the companies' overall value
- Exits the investment when it reaches its maximum potential, converting it into cash, and distributes profits to LPs
Debt Fund
- Invests in debt instruments of listed and unlisted companies
- Companies with low credit scores release high-yield debt securities with high risk
- Good investment option for debt fund investors are companies with high growth potential, good corporate practices, but facing a capital crunch
- Debt funds collect money from various investors and invest in fixed-income securities like debt mutual funds
Category III Funds
- Aims at short-term returns
- Employs complex and diverse trading strategies
- Includes Hedge Funds and Private Investment in Public Equity (PIPE) Funds
- Hedge Funds pool capital from institutional and accredited investors and invest in domestic and international markets
- Hedge Funds are relatively less regulated and expensive, charging 2% as the asset management fee and 20% of profits earned
Bond Valuation and Prices
- Revenue Bonds: focused on generating funds for specified projects, with repayment and interest processed via revenue generated by the projects
- Advantages: transparency, tax-free interest rates, minimal risk
- Disadvantages: 3-year lock-in period, low interest rates, hard to sell bonds of unpopular municipalities
Investment Options
- Retail Bonds: allow companies to raise capital by borrowing from investors at a fixed rate for a specific length of time
- Junk Bonds (High-Yield Bonds): below investment grade, with high yields but high risk
- Issues with credit rating agencies: discrimination against developing countries, non-transparent selection of experts, lack of transparency in assigning weights, and over-reliance on subjective assessments
Initial Public Offering (IPO)
- Process by which a privately held company gets listed on the stock exchange and sells its shares to investors
- Categories of investors in IPO application process: Retail Individual Investors, Institutional Bidders (NII)
- Allocation of IPO shares: Retail Individual Investors (minimum allocation of 35%), Institutional Bidders (further divided into NII, s-NII, and b-NII categories)
Test your knowledge on the process of Initial Public Offering (IPO) and the various categories of investors involved in the IPO application process. Learn about maximizing chances of allotment by applying through different investor categories.
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