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Unit study guide · NISM Series XIII

Introduction to the Underlying Markets

24 questions in this unit

What this unit covers

Key ideas

From the practice bank · 1

What does an ordinary equity share primarily represent?

An equity share represents a residual ownership interest in a company. Remember: Equity holders own a residual stake.

Hint Common mistake: Do not treat equity as guaranteed debt. Recall the difference between owners and lenders.

XIII-007

From the practice bank · 2

What is the main purpose of a broad market index?

A market index summarizes the performance of a defined group of securities. Remember: An index tracks a defined market basket.

Hint Common mistake: A market index cannot guarantee performance. Think of an index as a market indicator.

XIII-008

From the practice bank · 3

Why do index designers often prefer free-float market capitalization over total market capitalization?

Free-float weighting emphasizes the market value of shares available for public investors. Remember: Investability matters in index construction.

Hint Common mistake: Free float is not the same as total issued shares. Think about investable shares.

XIII-009

From the practice bank · 4

A market order buys 200 shares at ₹101 against a ₹100 reference price. What is the purchase-side impact cost?

= (101 − 100) ÷ 100 × 100 = 1%. Remember: Execution away from the reference price creates impact cost.

Hint Common mistake: Do not use the share quantity in a per-share percentage calculation. Compare execution with the reference price.

XIII-010

From the practice bank · 5

Two stocks have free-float values of ₹300 crore and ₹100 crore. If the first rises 8%, what is its contribution to index return?

First stock weight = 300 ÷ 400 = 75%. Contribution = 75% × 8% = 6 percentage points. Remember: Index contribution depends on weight and return.

Hint Common mistake: Do not assume every stock influences an index equally. Weight the return by investable market value.

XIII-011

From the practice bank · 6

In a USD/INR quotation, what does the quoted number show?

USD/INR expresses the number of Indian rupees for one US dollar. Remember: Read currency pairs in base and quote order.

Hint Common mistake: Do not accidentally invert the currency pair. Identify the base currency in the quotation.

XIII-012

From the practice bank · 7

What does the value date of a foreign exchange transaction identify?

The value date is the agreed settlement date for exchanging the currencies. Remember: Currency trades have an agreed settlement date.

Hint Common mistake: Trade date and value date may differ. Think about delivery of both currencies.

XIII-013

From the practice bank · 8

If USD/INR is 84 and EUR/USD is 1.10, what is EUR/INR, ignoring spreads?

EUR/INR = EUR/USD × USD/INR = 1.10 × 84 = 92.40. Remember: Cross rates follow currency units.

Hint Common mistake: Multiplication or division depends on quotation order. Join the two currency quotes using their common currency.

XIII-014

From the practice bank · 9

If USD/INR rises from 83 to 85, what has happened to the Indian rupee against the dollar?

The rupee has depreciated because more rupees are needed to buy one dollar. Remember: A higher USD/INR quote means a weaker rupee.

Hint Common mistake: Do not read USD/INR as the value of one rupee. Interpret how many rupees buy one dollar.

XIII-015

From the practice bank · 10

Country A's inflation unexpectedly rises while its nominal exchange rate is unchanged. What likely happens to its currency's purchasing power domestically?

Higher domestic inflation reduces the currency's purchasing power over domestic goods, even if the nominal exchange quote has not moved. Remember: Nominal exchange rates and purchasing power are distinct.

Hint Common mistake: Do not assume stable exchange quotes imply stable real value. Separate domestic purchasing power from the quoted foreign-exchange rate.

XIII-016

From the practice bank · 11

Which instrument is normally classified as a fixed-income security?

A bond usually promises defined contractual principal and coupon cash flows. Remember: Bonds are debt instruments.

Hint Common mistake: Fixed income does not mean the market price is fixed. Identify an instrument with contractual debt cash flows.

XIII-017

From the practice bank · 12

Why can a fixed-coupon bond still deliver a negative holding-period return?

A fixed coupon does not prevent a price decline large enough to create a negative total return. Remember: Total bond return includes price changes.

Hint Common mistake: Fixed coupons do not guarantee positive trading returns. Separate coupon from total holding return.

XIII-018

From the practice bank · 13

In a bond market, what does the interest rate mainly represent?

An interest rate expresses the cost of borrowing or return for lending over time. Remember: Interest is the time price of money.

Hint Common mistake: Do not confuse lending income with share ownership. Think about the cost of using funds.

XIII-019

From the practice bank · 14

An investment earns 7% nominally while inflation is 4%. What is the approximate real return?

Approximate real return = 7% − 4% = 3%. Remember: Real returns account for inflation.

Hint Common mistake: Nominal and real returns are not the same. Adjust nominal returns for inflation.

XIII-020

From the practice bank · 15

What does an inverted government yield curve usually indicate?

An inverted yield curve has short-maturity yields higher than long-maturity yields for comparable debt. Remember: Yield-curve shape compares maturities.

Hint Common mistake: Do not confuse an inverted curve with negative yields. Compare short and long maturities.

XIII-021

From the practice bank · 16

A bond pays a ₹80 annual coupon on ₹1,000 face value. What coupon accrues over exactly one-quarter of a year?

Accrued coupon = ₹80 × 1/4 = ₹20. Remember: Accrued interest grows with elapsed coupon time.

Hint Common mistake: Do not book the entire annual coupon after three months. Assume simple time-proportionate accrual.

XIII-022

From the practice bank · 17

A bond pays ₹90 annual coupon and trades for ₹900. What is its current yield?

Current yield = ₹90 ÷ ₹900 × 100 = 10%. Remember: Current yield divides annual coupon by market price.

Hint Common mistake: Current yield is not the same as coupon rate. Use current market price, not face value.

XIII-023

From the practice bank · 18

A one-year zero-coupon bond will pay ₹1,050 at maturity and costs ₹1,000. What is its yield to maturity?

For one year, yield = 1,050 ÷ 1,000 − 1 = 5%. Remember: Zero-coupon yield comes from price appreciation to redemption.

Hint Common mistake: Do not use the maturity payment as the original investment. Find the discount rate equating price and redemption amount.

XIII-024

From the practice bank · 19

For a standard fixed-rate bond, what usually happens to price when the required market yield rises?

A fixed-rate bond's present value generally falls when the market discount rate rises. Remember: Bond prices generally move inversely to yields.

Hint Common mistake: Coupon rate and market yield are different. Recall the inverse price-yield relationship.

XIII-025

From the practice bank · 20

A bond has modified duration 4.5 years. If yield rises by 0.20 percentage point, approximately how much does its price change?

Approximate price change = −4.5 × 0.002 = −0.009 = −0.9%. Remember: Modified duration estimates price sensitivity.

Hint Common mistake: Convert percentage points into decimals before multiplying. Use duration for a small yield change.

XIII-026

From the practice bank · 21

What does the price value of a basis point, or PVBP, measure for a bond?

PVBP approximates the bond's price change for a one-basis-point change in yield. Remember: PVBP measures small-move interest-rate sensitivity.

Hint Common mistake: A basis point means 0.01 percentage point. Think about a very small yield movement.

XIII-027

From the practice bank · 22

Two fixed-rate bonds have similar yields, but Bond A has higher modified duration. Which bond is more rate-sensitive for small yield changes?

Bond A is more rate-sensitive because higher modified duration implies a larger approximate percentage price response. Remember: Higher duration means greater first-order rate exposure.

Hint Common mistake: Do not compare price sensitivity using yield alone. Compare duration, keeping yield changes equally small.

XIII-028

From the practice bank · 23

Why is convexity useful in addition to duration when estimating a bond's price change?

Convexity helps capture the curvature that duration alone misses for larger yield movements. Remember: Duration is linear while convexity adds curvature.

Hint Common mistake: Do not treat duration as exact for large rate changes. Think beyond a straight-line approximation.

XIII-029

From the practice bank · 24

GBP/USD is 1.25 and USD/INR is 82.40. A payment of GBP 2,000 equals approximately how many rupees?

GBP/INR = 1.25 × 82.40 = 103. Payment = 2,000 × 103 = ₹2,06,000. Remember: Currency amounts require both conversion rate and quantity.

Hint Common mistake: Do not stop after computing a cross rate. Convert through the common US dollar quote.

XIII-030
Impact Cost (Slippage)

Impact cost is the difference between the price shown on screen and the price a trade is actually filled at.

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