Unit study guide · NISM Series II-A
Introduction to Securities
10 questions in this unit
What this unit covers
- Which claim does an ordinary equity share normally give its holder in a company?
- Which payment normally represents the contractual return promised to a holder of a fixed-coupon bond?
- Which security combines a debt claim with a contractual feature for becoming an equity investment?
- An investor owns fully paid shares and has given no personal guarantee. The company cannot repay its loans. What normally limits this investor’s exposure?
- A listed share has very few willing buyers. Its holder must accept a large discount to sell quickly. Which risk is illustrated?
- Compared with ordinary equity holders, what is the usual position of creditors when a company is wound up?
- What does the usual absence of a maturity date mean for an ordinary equity shareholder?
- What normally distinguishes preference shares from ordinary equity shares in their claim on declared dividends?
- An investor holds 600 shares of ₹10 face value, with ₹7 paid on each. What unpaid amount remains callable?
- A winding-up example leaves ₹18 lakh after expenses. Creditor claims total ₹14 lakh and preference capital is ₹6 lakh. What reaches ordinary equity?
Key ideas
From the practice bank · 1
Which claim does an ordinary equity share normally give its holder in a company?
An ordinary equity share gives an ownership claim because its holder participates in the company as a shareholder. Remember: Equity represents ownership in a company.
Hint Think about the difference between contributing ownership capital and lending money. Common mistake: Treating shareholders as lenders.
II-A-001From the practice bank · 2
Which payment normally represents the contractual return promised to a holder of a fixed-coupon bond?
Interest is the contractual return on a fixed-coupon bond, although the issuer may still default. Remember: A promised bond coupon is not a guarantee against default.
Hint Recall what a borrower agrees to pay for using borrowed money. Common mistake: Assuming a contractual payment cannot be missed.
II-A-002From the practice bank · 3
Which security combines a debt claim with a contractual feature for becoming an equity investment?
A convertible debenture combines a debt claim with conversion into equity under specified terms. Remember: Conversion terms make some securities a blend of debt and equity.
Hint Look for a security whose legal form can change under its issue terms. Common mistake: Calling every debt security a hybrid.
II-A-003From the practice bank · 4
An investor owns fully paid shares and has given no personal guarantee. The company cannot repay its loans. What normally limits this investor’s exposure?
The investment in the fully paid shares is normally at risk because a shareholder does not become personally liable for company debt merely by owning shares. Remember: Fully paid share ownership normally carries limited liability.
Hint Consider whether the company and its shareholders have separate legal responsibilities. Common mistake: Confusing a company’s liabilities with its owners’ personal liabilities.
II-A-004From the practice bank · 5
A listed share has very few willing buyers. Its holder must accept a large discount to sell quickly. Which risk is illustrated?
risk is illustrated because the investor cannot sell promptly without accepting a substantial price discount. Remember: Being listed does not ensure that a security is easy to sell.
Hint Focus on the difficulty of converting an investment into cash at a reasonable price. Common mistake: Equating listing with strong trading liquidity.
II-A-005From the practice bank · 6
Compared with ordinary equity holders, what is the usual position of creditors when a company is wound up?
Creditors’ valid claims usually rank ahead of ordinary equity because equity holders receive only the residual value after prior claims. Remember: Ordinary equity stands behind prior claims on winding up.
Hint Distinguish contractual claims from the residual ownership claim. Common mistake: Assuming ownership means first access to the company’s remaining assets.
II-A-006From the practice bank · 7
What does the usual absence of a maturity date mean for an ordinary equity shareholder?
The issuer need not repay the share price on a fixed date because ordinary equity normally has no contractual maturity. Remember: No maturity does not mean that an investor can never exit.
Hint Separate the company’s repayment obligation from the investor’s ability to sell. Common mistake: Treating perpetual capital as a compulsory lifetime holding.
II-A-007From the practice bank · 8
What normally distinguishes preference shares from ordinary equity shares in their claim on declared dividends?
Preference shares normally have dividend priority according to their terms, but that priority is not an unconditional guarantee of payment. Remember: Preference means priority, not a risk-free payment.
Hint The security’s name points to the order of a claim rather than a guaranteed payment. Common mistake: Confusing a preferred claim with a guaranteed return.
II-A-008From the practice bank · 9
An investor holds 600 shares of ₹10 face value, with ₹7 paid on each. What unpaid amount remains callable?
₹1,800 remains unpaid on the shares. Unpaid amount per share = ₹10 − ₹7 = ₹3. Total unpaid amount = 600 × ₹3 = ₹1,800. Remember: Partly paid shares can carry an obligation to pay the unpaid amount.
Hint Identify the unpaid part of each share before considering the number of shares. Common mistake: Applying the fully paid share rule to partly paid shares.
II-A-009From the practice bank · 10
A winding-up example leaves ₹18 lakh after expenses. Creditor claims total ₹14 lakh and preference capital is ₹6 lakh. What reaches ordinary equity?
Ordinary equity receives ₹0 because the prior claims exhaust the available amount. After creditors, ₹18 lakh − ₹14 lakh = ₹4 lakh remains, which is less than the ₹6 lakh preference claim. Remember: Equity receives a residual only after all higher-ranking claims are met.
Hint Apply the stated claims in order before looking for a residual amount. Common mistake: Stopping the calculation after paying creditors.
II-A-010Liquidity in the stock market means how easily a quantity can be bought or sold.
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