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Securities Market and Financial Awareness MCQs for upcoming SEBI Grade A and RBI Grade B examination. For all MCQs Archive CLICK HERE
Q1. Call risk exists in which of the following securities?
A. Stocks
B. Options
C. Puttable Bonds
D. Callable Debt Securities
Explanation: (D) Call risk exists in callable debt securities. The investor may have planned to stay invested until bond maturity, but the issuer may exercise the option to call the security earlier. Usually securities are called back when interest rates decline because issuers want to retire high-cost debt and re-issue fresh debt at lower rates. As a result, investors are forced to reinvest at lower rates.
- Call risk is the risk that a bond issuer will redeem its bonds before they mature.
Q2. A bond is said to be issued at premium when
A. When Coupon rate is greater than Required returns
B. When Coupon rate is equal to Required returns
C. When Coupan rate is less than Required returns
D. None of the above
Explanation: (A) A bond that is trading above its par value in the secondary market is a premium bond. A bond will trade at a premium when it offers a coupon (interest) rate that is higher than the current prevailing interest rates (required returns) being offered for new bonds. This is because investors want a higher yield and will pay for it.
- For example, if a bond with a par value of Rs. 10,000 is selling at a premium when it can be bought for more than Rs. 10,000 and is selling at a discount when it can be bought for less than Rs. 10,000.
- Bonds can be sold for more and less than their par values because of fluctuating interest rates in an economy.
Q3. What does 'D' stands for in CDS?
A. Discount
B. Demand
C. Decline
D. Default
Explanation: (D) CDS Stands for Credit Default Swap.
- Credit Default Swaps (CDS) are a type of insurance against default risk by a particular company. The company is called the reference entity and the default is called credit event. It is a contract between two parties, called protection buyer and protection seller. Under the contract, the protection buyer is compensated for any loss emanating from a credit event in a reference instrument. In return, the protection buyer makes periodic payments to the protection seller.
- In brief, A credit Default Swap (CDS) is a contract between two parties in which one party purchases protection from another party against losses from the default of a borrower for a defined period of time.
Q4. Which section of Companies Act 2013 is related to issue of Red Herring Prospectus (RHP)?
A. Section 31
B. Section 27
C. Section 25
D. Section 32
Explanation: (D) The Section 32 of Companies Act, 2013 states that a company proposing to make an offer of securities may issue a red herring prospectus prior to the issue of a prospectus.
- A red herring prospectus, as a first or preliminary prospectus, is a document submitted by a company as part of a public offering of securities.
- In India, A Red Herring Prospectus (RHP) is a preliminary registration document that is filed with SEBI in the case of book building issue which does not have details of either price or number of shares being offered or the amount of issue.
Q5. AT-1 bonds are a type of _________?
A. Secured Bonds
B. Perpetual Bonds
C. Pay less interest rates as compared to other bonds
D. None of the above
Explanation: (B) Perpetual bonds, known as Additional Tier – I in market parlance do not have any fixed maturity but offer call option after a stipulated period of time, which acts as an exit route for investors.
- AT-1, short for Additional Tier-1 bonds, are a type of unsecured, perpetual bonds that banks issue to shore up their core capital base to meet the Basel-III norms.
- Recently SEBI released a circular mentioning, AT-1 bonds will be less accessible to retail investors because now only institutional buyers can invest in AT-1 bonds.
READ ALSO: SEBI GRADE A / RBI GRADE B MCQs Part 6
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