Unit study guide · NISM Series IX
Introduction to Capital Market
15 questions in this unit
What this unit covers
- Which market allows a company to raise money by issuing new shares to investors?
- What does an ordinary equity share principally represent for its holder?
- Which instrument derives its value from an underlying stock index rather than directly representing company ownership?
- Which institution maintains securities in electronic form through its account system?
- Which financial-market function helps investors convert existing securities into money?
- An investor buys already-listed shares from another investor on an exchange. Who receives the sale proceeds, ignoring transaction charges?
- Which risk most directly concerns a bond issuer failing to make a promised interest payment?
- A ₹1,000 face-value bond pays an annual coupon of 8%. What is its annual coupon payment?
- A bond pays ₹90 annually and trades at ₹900. What is its current yield?
- A company has 2 crore outstanding shares trading at ₹150 each. What is its equity market capitalisation?
- A company needs funds for a ten-year factory project. Which financing instrument most directly matches this long-term requirement?
- What mainly distinguishes a depository participant from a depository for an individual account holder?
- A private equity investor invests ₹20 crore in new shares at an ₹80 crore pre-money valuation. What post-investment ownership results?
- An investor buys 200 shares at ₹120 and receives ₹4 dividend per share before selling at ₹132. What is the total return?
- Market yields rise after a fixed-rate bond is issued. Its promised payments and credit risk remain unchanged. What happens to its theoretical price?
Key ideas
From the practice bank · 1
Which market allows a company to raise money by issuing new shares to investors?
The primary market lets issuers raise capital by selling newly issued securities to investors. Remember: New securities are issued in the primary market.
Hint Common mistake: Confusing a new issue with trading in existing shares. Think about whether the securities are being created or resold.
IX-001From the practice bank · 2
What does an ordinary equity share principally represent for its holder?
An ordinary equity share represents an ownership interest in the company. Remember: Equity holders participate as owners rather than lenders.
Hint Common mistake: Treating a shareholder as a creditor. Recall the difference between an owner and a lender.
IX-002From the practice bank · 3
Which instrument derives its value from an underlying stock index rather than directly representing company ownership?
A stock-index futures contract is a derivative because its value depends on the underlying index. Remember: Index futures are derivatives rather than direct ownership of each underlying company.
Hint Common mistake: Assuming every financial document is a derivative. Think about a contract whose value depends on something else.
IX-003From the practice bank · 4
Which institution maintains securities in electronic form through its account system?
A depository maintains securities electronically and supports transfers through its account system. Remember: Dematerialised securities are maintained within the depository system.
Hint Common mistake: Confusing the place of trading with the system that holds securities. Think about the infrastructure behind dematerialised holdings.
IX-004From the practice bank · 5
Which financial-market function helps investors convert existing securities into money?
Providing helps investors sell existing securities and convert their holdings into money. Remember: Liquidity concerns the ability to transact in a security.
Hint Common mistake: Equating liquidity with a guaranteed sale price. Recall the term for being able to buy or sell with relative ease.
IX-005From the practice bank · 6
An investor buys already-listed shares from another investor on an exchange. Who receives the sale proceeds, ignoring transaction charges?
The selling investor receives the proceeds because this is a secondary-market sale of existing shares. Remember: Secondary-market trading does not itself raise fresh capital for the issuer.
Hint Common mistake: Assuming every purchase of company shares funds the company. Follow the ownership transfer between the two investors.
IX-006From the practice bank · 7
Which risk most directly concerns a bond issuer failing to make a promised interest payment?
Credit risk concerns the issuer’s ability and willingness to meet promised debt payments. Remember: A missed contractual debt payment is a credit-risk event.
Hint Common mistake: Confusing the issuer’s payment failure with difficulty selling a bond. Identify which party has failed to meet an obligation.
IX-007From the practice bank · 8
A ₹1,000 face-value bond pays an annual coupon of 8%. What is its annual coupon payment?
The annual coupon is ₹80 because the rate applies to face value. Annual coupon = ₹1,000 × 8 ÷ 100 = ₹80. Remember: Coupon payments use face value rather than market price.
Hint Common mistake: Applying the percentage with the wrong decimal position. The coupon rate applies to the bond’s face value.
IX-008From the practice bank · 9
A bond pays ₹90 annually and trades at ₹900. What is its current yield?
The current yield is 10% because annual income is measured against the market price. Current yield = ₹90 ÷ ₹900 × 100 = 10%. Remember: Current yield compares annual coupon income with current market price.
Hint Common mistake: Confusing current yield with the coupon rate or yield to maturity. Compare one year’s income with the price paid today.
IX-009From the practice bank · 10
A company has 2 crore outstanding shares trading at ₹150 each. What is its equity market capitalisation?
Equity market capitalisation is ₹300 crore because all outstanding shares are valued at the market price. Market capitalisation = 2 crore × ₹150 = ₹300 crore. Remember: Market capitalisation values the company’s outstanding equity at market prices.
Hint Common mistake: Using the share price alone as the company’s total equity value. Value every outstanding share at the quoted market price.
IX-010From the practice bank · 11
A company needs funds for a ten-year factory project. Which financing instrument most directly matches this long-term requirement?
A ten-year debenture directly matches the project’s stated long-term funding horizon. Remember: Funding maturity should be considered alongside the asset’s funding horizon.
Hint Common mistake: Choosing short maturity solely because the borrowing is initially available. Compare the project’s horizon with each instrument’s maturity.
IX-011From the practice bank · 12
What mainly distinguishes a depository participant from a depository for an individual account holder?
A depository participant connects investors to the depository’s services through their securities accounts. Remember: The participant is the investor-facing access point to depository services.
Hint Common mistake: Assuming the depository and its participant are identical entities. Think about the entity through which an investor accesses the account system.
IX-012From the practice bank · 13
A private equity investor invests ₹20 crore in new shares at an ₹80 crore pre-money valuation. What post-investment ownership results?
The investor owns 20% because the new funds increase the valuation denominator. Post-money value = ₹80 crore + ₹20 crore = ₹100 crore. Ownership = ₹20 crore ÷ ₹100 crore × 100 = 20%, assuming no other dilution. Remember: Fresh-equity ownership uses the post-money valuation.
Hint Common mistake: Dividing the investment by the pre-money valuation. The new investment becomes part of the company’s post-investment value.
IX-013From the practice bank · 14
An investor buys 200 shares at ₹120 and receives ₹4 dividend per share before selling at ₹132. What is the total return?
The total return is 13.33% because it includes the dividend and the price gain. Initial cost = 200 × ₹120 = ₹24,000. Total gain = 200 × (₹132 − ₹120 + ₹4) = ₹3,200. Return = ₹3,200 ÷ ₹24,000 × 100 = 13.33%, ignoring charges and taxes. Remember: Holding-period return includes both income and .
Hint Common mistake: Ignoring dividends when measuring the investment’s total return. Include both the change in price and the cash received during ownership.
IX-014From the practice bank · 15
Market yields rise after a fixed-rate bond is issued. Its promised payments and credit risk remain unchanged. What happens to its theoretical price?
The theoretical price falls because a higher market yield discounts the same future payments more heavily. Remember: Fixed-rate bond prices and required yields move in opposite directions, other things unchanged.
Hint Common mistake: Assuming an unchanged coupon means an unchanged market price. Consider the present value of the same future payments at a higher required return.
IX-015Liquidity describes how easily a given quantity can be traded.
Read moreA capital gain is the gain from selling an asset for more than its eligible cost.
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