Unit study guide · NISM Series III-A
Introduction to the Financial System
8 questions in this unit
What this unit covers
- In which market does a company raise funds by issuing new shares to investors?
- What is the main function of the secondary market for existing securities?
- Which security generally represents a residual ownership interest in a company?
- A derivative contract derives its value mainly from which of the following?
- A bond has ₹20,000 face value and an 8% annual coupon. What annual coupon amount is due?
- An investor pays ₹950 for a ₹1,000-face-value bond with a 7% annual coupon. What is its current yield?
- A call costs ₹12 per share with a ₹200 strike. At expiry the share is ₹225. What is buyer profit per share, excluding costs?
- A clearing corporation becomes the buyer to each seller and the seller to each buyer. Which process replaces the original counterparty relationship?
Key ideas
From the practice bank · 1
In which market does a company raise funds by issuing new shares to investors?
The primary market channels money to an issuer through newly issued securities. Remember: New securities are issued in the primary market.
Hint Common mistake: Confusing a new share issue with trading an existing share. Think about whether the company creates new securities.
III-A-001From the practice bank · 2
What is the main function of the secondary market for existing securities?
The secondary market lets investors trade existing securities and provides . Remember: Secondary trading gives investors a way to enter or exit holdings.
Hint Common mistake: Assuming every share purchase directly finances the company. Follow who receives the sale proceeds.
III-A-002From the practice bank · 3
Which security generally represents a residual ownership interest in a company?
An equity share represents ownership, with a residual claim after higher-priority claims. Remember: Equity holders own a residual stake rather than a fixed repayment claim.
Hint Common mistake: Treating a debt investor as an owner merely because the security is tradable. Distinguish an owner’s claim from a lender’s claim.
III-A-003From the practice bank · 4
A derivative contract derives its value mainly from which of the following?
A derivative draws its value from an underlying reference such as a share, rate or index. Remember: Identify the underlying before analysing a derivative.
Hint Common mistake: Confusing a trading cost with the source of a contract’s value. Look for the economic reference used by the contract.
III-A-004From the practice bank · 5
A bond has ₹20,000 face value and an 8% annual coupon. What annual coupon amount is due?
The annual coupon is ₹1,600. Coupon = face value × annual coupon rate = ₹20,000 × 8 ÷ 100 = ₹1,600. Remember: A fixed coupon is calculated on face value, not the purchase price.
Hint Common mistake: Using the quoted market price when the question asks for the coupon. Use the stated coupon rate with the bond’s face value.
III-A-005From the practice bank · 6
An investor pays ₹950 for a ₹1,000-face-value bond with a 7% annual coupon. What is its current yield?
The current yield is approximately 7.37%. Annual coupon = ₹1,000 × 7% = ₹70. Current yield = ₹70 ÷ ₹950 × 100 = 7.3684%. Remember: Current yield compares annual coupon income with the bond’s market price.
Hint Common mistake: Confusing current yield with yield to maturity. Distinguish annual income yield from the coupon rate and redemption return.
III-A-006From the practice bank · 7
A call costs ₹12 per share with a ₹200 strike. At expiry the share is ₹225. What is buyer profit per share, excluding costs?
The buyer’s profit is ₹13 per share. Expiry payoff = max(₹225 − ₹200, 0) = ₹25. Net profit = ₹25 − ₹12 = ₹13. Remember: An option buyer’s profit deducts the premium from the payoff.
Hint Common mistake: Reporting intrinsic value as the buyer’s net profit. Separate the exercise payoff from the amount paid for the contract.
III-A-007From the practice bank · 8
A clearing corporation becomes the buyer to each seller and the seller to each buyer. Which process replaces the original counterparty relationship?
Novation replaces the original trade obligations with obligations involving the clearing corporation. Remember: Novation makes the clearing corporation the central counterparty.
Hint Common mistake: Assuming clearing only records trades without changing counterparty obligations. Think about replacing the parties to an existing obligation.
III-A-008Liquidity describes how easily a given quantity can be traded.
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