AS 05 (iv) - Finance and Investment Mock Test 08

1. The Secondary Market is:

A. The market where new securities are first issued
B. The place for sale and purchase of existing securities; it enables an investor to adjust holdings in response to changes in risk and return expectations and provides liquidity by allowing securities to be sold for cash
C. A market only for government bonds
D. A market only for derivatives
E. A market only for money market instruments

2. Company shares are divided into:

A. Three types
B. Ordinary shares (common stock) and preference shares; the owner of the share is called the shareholder and the capital contributed is called share capital
C. Only ordinary shares
D. Only preference shares
E. Four types of shares

3. A Stock Exchange is an entity that:

A. Prints and distributes shares to companies
B. Provides services for stock brokers and traders to trade stocks, bonds, and other securities; facilitates the issue and redemption of securities and other financial instruments, and capital events including payment of income and dividends
C. Only regulates the stock market
D. Issues new shares to companies
E. Acts as the central bank for the securities market

4. What is 'Initial Margin' in the context of futures trading?

A. The profit realized when a futures position is closed out
B. The amount of commission paid to the broker
C. The upfront amount that must be deposited in the margin account prior to trading, computed using the concept of Value-at-Risk (VaR)
D. The daily adjustment made to reflect gains and losses on futures positions
E. The final settlement price of a futures contract

5. Risk premium is defined as:

A. The risk-free rate of return
B. The additional return above the risk-free rate required for taking on additional risk
C. The minimum guaranteed return
D. Total market return minus dividends
E. Return earned from investing in government bonds

6. The chapter mentions that a well-functioning corporate bond market allows firms to tailor their asset and liability profiles. What risk does it help manage?

A. Equity market risk
B. Maturity mismatch risk—it helps long-term liability holders such as insurance companies and pension funds manage the maturity structure of their balance sheets
C. Foreign exchange risk
D. Operational risk
E. Regulatory compliance risk

7. Weaknesses of investing in common stock include:

A. Returns are always guaranteed
B. Your original investment is not guaranteed—there is always a risk that the stock may decline in value and you could lose your entire principal; performance depends on the company's success
C. The stock market never declines
D. It is not liquid
E. It requires physical presence to trade

8. What is AMFI (Association of Mutual Funds in India)?

A. A government regulatory body for mutual funds
B. A second-tier self-regulatory organization created by market participants to regulate the mutual fund industry in India; responsible for distributor certification and industry standards
C. The central bank's mutual fund department
D. An international body for mutual fund standards
E. A statutory body created by an Act of Parliament

9. A bond with a face value of ₹100, 10% coupon rate (annual), 4-year maturity is discounted at 12%. What will happen to the bond's value compared to the 8% discount rate scenario?

A. The bond value will increase above ₹106.62
B. The bond value will remain at ₹106.62
C. The bond value will decrease below ₹106.62 (since a higher discount rate reduces the present value of future cash flows)
D. The bond value will equal the par value of ₹100
E. The bond value will exceed the par value

10. The CAPM formula for expected return on a security is:

A. kj = Rf − βj(km − Rf)
B. kj = Rf + βj(km − Rf)
C. kj = βj × km
D. kj = Rf × km / βj
E. kj = km − Rf + βj