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Unit study guide · NISM Series VII

Introduction to the Securities Market

16 questions in this unit

What this unit covers

Key ideas

From the practice bank · 1

A company issues fresh equity shares to the public and receives the subscription money. This transaction takes place in the:

The issuer is raising capital by creating and selling new shares. The company is creating new shares and receiving the money raised. This is a primary-market transaction. A later sale of those shares between investors would be a different transaction. Remember: Look at whether the issuer is creating securities or investors are reselling them.

Hint Common mistake: Assuming that every transaction involving a listed or soon-to-be-listed company is secondary-market trading.

VII-001

From the practice bank · 2

Which set contains the standard Treasury-bill tenors issued by the Government of India?

All three day counts match the standard Treasury-bill categories. The standard tenors are expressed as exact day counts. Select 91, 182 and 364 days rather than rounded three-month, six-month and one-year approximations. Remember: Remember the exact sequence 91, 182 and 364.

Hint Common mistake: Replacing the published tenors with convenient calendar approximations.

VII-002

From the practice bank · 3

Which authority regulates financial services within the International Financial Services Centre at GIFT City?

IFSCA is the authority established for financial services in Indian IFSCs. The location in the question is an International Financial Services Centre. Its financial-services regulatory framework is administered by IFSCA. The question is not asking which authority regulates a comparable domestic activity outside the IFSC. Remember: Identify the IFSC context before selecting a domestic sector regulator.

Hint Common mistake: Choosing a regulator only from the type of product while ignoring the IFSC location.

VII-003

From the practice bank · 4

An investor holds an ordinary, non-convertible corporate bond. Compared with an equity shareholder, the investor is a:

The bondholder has lent money to the issuer through a debt instrument. A bond represents money borrowed by the issuer. Its holder has a creditor claim under the bond terms. Holding the bond does not itself make the investor an equity owner. Remember: A bond creates a debt relationship. An equity share creates an ownership relationship.

Hint Common mistake: Treating every security issued by a company as an ownership share.

VII-004

From the practice bank · 5

Which description correctly identifies commercial paper?

This combines the relevant money-market, unsecured and promissory-note features. Commercial paper is a debt instrument in the money market. Its defining features here are its unsecured status and promissory-note form. These distinguish it from secured bonds, deposits and equity. Remember: Associate commercial paper with unsecured short-term borrowing, not equity or a bank deposit.

Hint Common mistake: Assuming that the word paper implies a deposit certificate or a secured bond.

VII-005

From the practice bank · 6

A listed company offers existing shareholders one additional share for every four held, against payment of a subscription price. Which corporate action does this describe?

The paid pro-rata offer to existing shareholders is a rights issue. The company is inviting its existing shareholders to subscribe for additional shares in proportion to their holdings. The subscription payment distinguishes the offer from a bonus issue. The transaction is not merely dividing existing shares or reselling a shareholder’s holding. Remember: Look for existing-holder entitlement together with paid subscription.

Hint Common mistake: Calling every proportionate increase in a shareholder’s shares a bonus issue.

VII-041

From the practice bank · 7

A bond has a face value of ₹1,000, an annual coupon rate of 8% and a market price of ₹1,250. What is its current yield?

₹80 of annual coupon divided by the ₹1,250 market price gives 6.40%. Annual coupon = face value × coupon rate = ₹1,000 × 8% = ₹80. Current yield = annual coupon ÷ market price × 100 = ₹80 ÷ ₹1,250 × 100 = 6.40%. This is current yield, not yield to maturity. No redemption gain or loss is included. Remember: Compute the coupon from face value, then divide it by market price for current yield.

Hint Common mistake: Using the 8% coupon rate as the answer even though the bond trades above face value.

VII-051

From the practice bank · 8

Under a put option, its buyer obtains which contractual right, subject to the option terms?

This answer correctly combines the put direction with the buyer’s right. A put gives its holder the right to sell at the . The buyer holds a right, not a mandatory trade obligation merely from purchasing the option. Remember: Put buyer means a right to sell.

Hint Common mistake: Remembering only buy or sell while ignoring whether the party holds a right or an obligation.

VII-052

From the practice bank · 9

A Treasury bill is bought for ₹98 per ₹100 face value and redeemed for ₹100 after 182 days. Using simple annualisation on a 365-day year, what is the annualised return on the amount invested, rounded to two decimals?

This answer annualises the ₹2 gain relative to the ₹98 investment. Gain per ₹100 face value = ₹100 − ₹98 = ₹2. Holding-period return = ₹2 ÷ ₹98 = 0.02040816. Simple = (₹2 ÷ ₹98) × (365 ÷ 182) × 100 = 4.0928459%. Rounded answer = 4.09% per year. This is not a compounded annual return. Remember: Use the invested amount, then apply the stated day-count and annualisation method.

Hint Common mistake: Confusing an investment-yield calculation with a face-value discount rate.

VII-076

From the practice bank · 10

A fixed-rate bond has unchanged promised cash flows and maturity. If the market-required yield rises, what happens to its present value, other things unchanged?

The unchanged future payments are discounted at a higher rate. Each future payment is discounted to the present using the required yield. A higher discount rate reduces those present values, so their sum falls. The coupon itself has not changed. Remember: For unchanged fixed cash flows, price and required yield move in opposite directions.

Hint Common mistake: Assuming a fixed coupon means the market value is fixed.

VII-077

From the practice bank · 11

An Indian importer must pay a fixed US-dollar amount in three months. Which USDINR futures position offsets the risk of a higher rupee cost? Assume an eligible, correctly sized hedge with a matching maturity.

A long futures position gains as the quoted rupees per dollar rise, offsetting the adverse payable movement. USDINR states the number of rupees required to buy one US dollar. For a fixed dollar payable, a higher USDINR rate means more rupees must be paid. A long USDINR futures position gains when that futures quotation increases, offsetting the stated exposure. Remember: A dollar payable is exposed to dollar appreciation. A matched long USDINR futures position offsets that direction.

Hint Common mistake: Using the hedge direction appropriate to a dollar receivable.

VII-078

From the practice bank · 12

A bank raises cash by selling government securities with an agreement to repurchase them on a specified future date at an agreed price. From the bank’s perspective, this is a:

The bank obtains funding through a sale with an agreed repurchase. The bank receives cash now and commits to repurchase the securities later. From the cash borrower’s side, this is a repo. The opposite cash-lending side is the reverse repo. Remember: Identify whether the participant is borrowing cash or lending it.

Hint Common mistake: Naming the transaction from the counterparty’s perspective.

VII-101

From the practice bank · 13

A zero-coupon bond will pay ₹2,420 exactly two years from today. At a required yield of 10% a year, compounded annually, what is its present value, ignoring credit risk and charges?

This answer discounts both years with annual compounding. Present value = future payment ÷ (1 + annual yield)^years. Substitute: ₹2,420 ÷ 1.10² = ₹2,420 ÷ 1.21 = ₹2,000. Forward check: ₹2,000 × 1.10 × 1.10 = ₹2,420. The answer is a current rupee value, not an annual income. Remember: Use the number of compounding periods stated in the question.

Hint Common mistake: Replacing compound discounting with a one-period or simple-interest calculation.

VII-102

From the practice bank · 14

How can an active secondary market make investors more willing to subscribe to a company’s new equity issue?

A resale opportunity can support willingness to invest at issuance. An investor considering a new equity issue may value the ability to sell later rather than hold indefinitely. Secondary-market trading provides a resale route. The buyer in that later trade pays the selling holder, rather than making the issuer redeem the share. is not a promise that resale will be immediate or profitable. The point is the availability of a market exit route. Remember: A resale market supports initial investment by providing a potential exit route.

Hint Common mistake: Confusing a secondary-market sale with issuer repayment or new capital raised by the issuer.

VII-126

From the practice bank · 15

A bank issues a negotiable, unsecured money-market instrument against funds deposited with it. Which instrument is described?

This answer matches the negotiable bank-deposit instrument in the stem. The issuer is a bank and the instrument is issued against a deposit. Those features identify a Certificate of Deposit under the RBI definition. The question does not ask about current issue denominations or permitted investor categories. Remember: Connect the bank-issued negotiable deposit instrument with a Certificate of Deposit.

Hint Common mistake: Treating all unsecured money-market instruments as commercial paper.

VII-127

From the practice bank · 16

A bond has ₹1,000 face value, a 9% annual coupon and a clean price of ₹1,012 per bond. Assume 90 accrued days on a 360-day year, ordinary cum-interest settlement and no charges. What is the dirty price?

This answer adds the correctly accrued ₹22.50 to the ₹1,012 clean price. Annual coupon = ₹1,000 × 9% = ₹90. Accrued interest = ₹90 × 90 ÷ 360 = ₹22.50 per bond. Dirty price = clean price + accrued interest = ₹1,012 + ₹22.50 = ₹1,034.50 per bond. The stated 360-day basis is an assumption for this calculation, not a universal convention for every debt security. Remember: Calculate accrued interest using the stated convention, then add it to clean price.

Hint Common mistake: Using the full annual coupon or subtracting accrued interest from the clean price.

VII-128

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