Unit study guide · NISM Series XXI-A
Investments
11 questions in this unit
What this unit covers
- A client retains ₹15,000 from monthly income and later uses it to buy a bond. Which description correctly separates the two actions?
- A buyer enters a share solely because a rumour may lift its price tomorrow. No assessment of business value is made. What most directly characterises this decision?
- A client must pay an essential ₹8 lakh bill in four months and cannot replace a shortfall. Which objective should dominate the assessment of money earmarked for that bill?
- Which requirement most clearly describes a current-income objective rather than a capital-appreciation objective?
- A client requires a real return of 3% when expected annual inflation is 5%. Using the exact compound relationship, what nominal annual return is required?
- An analyst uses a nominal risk-free rate of 6% and adds a 4 percentage-point risk premium. Under this stated model, what required return results?
- Two firms have the same operating assets and sales uncertainty. One finances half its assets with fixed-interest debt. Which additional risk to its shareholders most directly arises from that financing choice?
- A portfolio holds a security with a recent indicative value of ₹200, but the only executable bid for the required quantity is ₹184. Which risk is most directly illustrated?
- A foreign asset gains 5% in its local currency. Over the same period, one unit of that currency falls 5% in rupee value. What is the unhedged rupee return, ignoring income, costs and tax?
- A client owns one office property and may need a small part of its value at short notice. Which feature creates the clearest difficulty compared with selling a small number of exchange-traded units?
- A note promises repayment of principal at maturity only if its issuer meets its obligations. Which risk remains even when the market-linked payoff cannot be negative?
Key ideas
From the practice bank · 1
A client retains ₹15,000 from monthly income and later uses it to buy a bond. Which description correctly separates the two actions?
Saving is the part of income not consumed. Investing concerns the assets into which available money is placed. Identify the action involving income: the client does not consume ₹15,000, creating a saving. Identify the action involving an asset: the bond purchase puts that money to work for an expected return, with the relevant risks. Remember: Distinguish the creation of a surplus from the subsequent use of that surplus.
Hint Common mistake: Treating saving and investing as mutually exclusive labels for the same person.
XXI-A-001From the practice bank · 2
A buyer enters a share solely because a rumour may lift its price tomorrow. No assessment of business value is made. What most directly characterises this decision?
Investment and speculation are distinguished by the basis and nature of the decision, not simply by whether the instrument is a share. The buyer is relying on a near-term market reaction to a rumour. A short holding period alone would not settle the classification, but the absence of an investment thesis and reliance on a price catalyst support speculation here. Remember: Look at why a position is taken, rather than labelling every share purchase an investment.
Hint Common mistake: Using the instrument’s name instead of the decision process to identify speculation.
XXI-A-002From the practice bank · 3
A client must pay an essential ₹8 lakh bill in four months and cannot replace a shortfall. Which objective should dominate the assessment of money earmarked for that bill?
Capital preservation and become central when money is assigned to a near-term liability with little capacity for loss. The date and required amount are fixed, while the client cannot readily absorb a deficit. Assess loss exposure and access to money first. This objective does not, by itself, identify a universally suitable product. Remember: An essential liability can constrain risk even when a client likes high-return investments.
Hint Common mistake: Choosing an investment from past returns without considering the consequences of a shortfall.
XXI-A-003From the practice bank · 4
Which requirement most clearly describes a current-income objective rather than a capital-appreciation objective?
Current income focuses on cash flows received while an asset is held. Capital appreciation focuses on an increase in its value. Identify whether the client needs money to spend during ownership or a larger asset value later. Periodic receipts address the first requirement, although their reliability, timing and tax treatment still need assessment. Remember: Income and appreciation are different components of total return.
Hint Common mistake: Assuming that a large quoted yield alone proves an income source is safe.
XXI-A-004From the practice bank · 5
A client requires a real return of 3% when expected annual inflation is 5%. Using the exact compound relationship, what nominal annual return is required?
A nominal return must provide both the desired increase in purchasing power and compensation for inflation. Use 1 + nominal return = (1 + real return) × (1 + inflation). Substitute 1.03 × 1.05 = 1.0815. Subtract 1 and convert to a percentage to obtain 8.15%. Remember: Use the compound relationship when an exact real-versus-nominal answer is required.
Hint Common mistake: Adding rates even when the question asks for the exact result.
XXI-A-005From the practice bank · 6
An analyst uses a nominal risk-free rate of 6% and adds a 4 percentage-point risk premium. Under this stated model, what required return results?
A risk premium is additional required compensation for exposure beyond the selected risk-free reference. The question specifies an additive model, so no further compounding convention is needed. Required return = 6% + 4 percentage points = 10%. This is a required return, not a promised realised return. Remember: Keep a percentage-point premium distinct from a percentage change in a rate.
Hint Common mistake: Treating the required return as a guaranteed outcome.
XXI-A-006From the practice bank · 7
Two firms have the same operating assets and sales uncertainty. One finances half its assets with fixed-interest debt. Which additional risk to its shareholders most directly arises from that financing choice?
Business risk arises from operations. Financial risk reflects how financing commitments affect the residual return to equity. Hold the operating business constant as instructed. The distinguishing feature is fixed-interest debt, which must be serviced before residual earnings accrue to shareholders. Remember: Separate the risk of the business from the extra risk introduced by leverage.
Hint Common mistake: Attributing every difference in shareholder risk to the operating business.
XXI-A-007From the practice bank · 8
A portfolio holds a security with a recent indicative value of ₹200, but the only executable bid for the required quantity is ₹184. Which risk is most directly illustrated?
A displayed or estimated value is not always an executable price for a particular transaction size. The investor needs to sell a specified quantity, so the available executable bid matters. The discount illustrates the cost of obtaining liquidity. It need not indicate that the issuer has defaulted. Remember: Evaluate exit depth and executable prices, not only a recent valuation.
Hint Common mistake: Assuming that an indicative price guarantees a sale at that price.
XXI-A-008From the practice bank · 9
A foreign asset gains 5% in its local currency. Over the same period, one unit of that currency falls 5% in rupee value. What is the unhedged rupee return, ignoring income, costs and tax?
The home-currency value of a foreign asset depends jointly on its local price and the exchange rate. Let the starting rupee value be ₹100. A 5% asset gain makes its local-currency value equivalent to ₹105 at the old exchange rate. Apply the new exchange-rate factor: ₹105 × 0.95 = ₹99.75. The loss is ₹0.25 on ₹100, or 0.25%. Remember: Multiply gross asset and currency return factors for an unhedged foreign investment.
Hint Common mistake: Adding the two percentage changes as though the interaction were zero.
XXI-A-009From the practice bank · 10
A client owns one office property and may need a small part of its value at short notice. Which feature creates the clearest difficulty compared with selling a small number of exchange-traded units?
Divisibility concerns whether an asset can be sold in convenient portions. Liquidity concerns the time and price impact of conversion to cash. The client needs only part of the property’s value rather than wishing to sell the entire asset. A direct property holding may not permit that partial sale, and arranging a full sale or borrowing takes time and involves costs. Remember: Assess divisibility and liquidity separately from an asset’s estimated value.
Hint Common mistake: Equating high net worth with immediately available cash.
XXI-A-010From the practice bank · 11
A note promises repayment of principal at maturity only if its issuer meets its obligations. Which risk remains even when the market-linked payoff cannot be negative?
A contractual payoff design and the creditworthiness of the party promising that payoff are separate considerations. The market-linked calculation limits one source of loss under the contract. The issuer must still honour the obligation. Also, a maturity promise should not be assumed to establish an equivalent early-exit value. Remember: Read who provides protection, when it applies and what obligations support it.
Hint Common mistake: Treating a protected payoff formula as protection against every type of loss.
XXI-A-011Liquidity describes how easily a given quantity can be traded.
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