Mahatma Gandhi University Capital Market Chapter 1 Questions

Mahatma Gandhi University , Kottayam
Capital Market
Scanners referred are:-

1. BU 3rd SEM MBA 2009 edition
2. Bangalore and tumkur university 5th SEM Bcom Compulsory subjects 2009 edition
3. BU & Tumkur univ 6th SEM BBM finance spec 2009 edition
CHAPTER 1
SECTION A
PART I - 1 mark each - Choose the correct answer from the choices given:
1. Every financial market has the following characteristic:

A) It determines the level of interest rates.
B) It allows common stock to be traded.
C) It allows loans to be made.
D) It channels funds from lenders-savers to borrowers-spenders.
Answer: D
2) Financial markets have the basic function of

A) bringing together people with funds to lend and people who want to borrow
funds.
B) assuring that the swings in the business cycle are less pronounced.
C) assuring that governments need never resort to printing money.
D) both (A) and (B) of the above.
Answer: A
3) Which of the following can be described as involving direct finance?

A) A corporation’s stock is traded in an over-the-counter market.
B) People buy shares in a mutual fund.
C) A pension fund manager buys commercial paper in the secondary market.
D) None of the above.
Answer: D
4) Which of the following can be described as involving direct finance?

A) A corporation’s stock is traded in an over-the-counter market.
B) A corporation buys commercial paper issued by another corporation.
C) A pension fund manager buys commercial paper from the issuing corporation.
D) Both (B) and (C) of the above.
Answer: D
5) Which of the following can be described as involving indirect finance?

A) A corporation takes out loans from a bank.
B) People buy shares in a mutual fund.
C) A corporation buys commercial paper in a secondary market.
D) All of the above.
Answer: D
7) Financial markets improve economic welfare because
A) they allow funds to move from those without productive investment
opportunities to those who have such opportunities.
B) they allow consumers to time their purchases better.
C) they weed out inefficient firms.
D) they do (A) and (B) of the above.
Answer: D
8) Which of the following are securities?

A) A certificate of deposit
B) A share of Texaco common stock
C) A Treasury bill
D) All of the above
Answer: D
9) Which of the following statements about the characteristics of debt and equity are
true?
A) They can both be long-term financial instruments.
B) They both involve a claim on the issuer’s income.
C) They both enable a corporation to raise funds.
D) All of the above
Answer: D
11) Which of the following are short-term financial instruments?

A) A negotiable certificate of deposit
B) A banker’s acceptance
C) A U.S. Treasury bond
D) Both (A) and (B) of the above
Answer: D
12) Which of the following are short-term financial instruments?
A) A banker’s acceptance
B) A share of Walt Disney Corporation stock
C) A Treasury note with a maturity of 4 years
D) All of the above
Answer: A
13) Which of the following are primary markets?

A) The New York Stock Exchange
B) The U.S. government bond market
C) The over-the-counter stock market
E) None of the above
Answer: E
15) A corporation acquires new funds only when its securities are sold
A) in the secondary market by an investment bank.
B) in the primary market by an investment bank.
C) in the secondary market by a stock exchange broker.
D) in the secondary market by a commercial bank.
Answer: B
16) Intermediaries who are agents of investors and match buyers with sellers of securities
are called
A) investment bankers.
B) traders.
C) brokers.
D) dealers.
Answer: C
17) Intermediaries who link buyers and sellers by buying and selling securities at stated
prices are called
A) investment bankers.
B) traders.
C) brokers.
D) dealers.
Answer: D
18) The government regulates financial markets for three main reasons:
A) to ensure soundness of the financial system, to improve control of monetary
policy, and to increase the information available to investors.
B) to improve control of monetary policy, to ensure that financial intermediaries
earn a normal rate of return, and to increase the information available to
investors.
C) to ensure that financial intermediaries do not earn more than the normal rate of
return, to ensure soundness of the financial system, and to improve control of
monetary policy.
D) to ensure soundness of financial intermediaries, to increase the information
available to investors, and to prevent financial intermediaries from earning less
than the normal rate of return.
Answer: A
1. Which of the following is not a characteristic of a money market instrument?
A) liquidity
B) marketability
C) long maturity
D) liquidity premium
E) C and D
Answer: E
2. Which one of the following is not a money market instrument?

A) a Treasury bill
B) a negotiable certificate of deposit
C) commercial paper
D) a Treasury bond
E) a Eurodollar account
Answer: D
3. T-bills are financial instruments initially sold by ________ to raise funds.
A) commercial banks
B) the U. S. government
C) state and local governments
D) agencies of the federal government
E) B and D
Answer: B
PART –II Fill in the blanks

1) An important financial institution that assists in the initial sale of securities in the
primary market is the ……………..
2) A …………. instrument is long term if its maturity is ten years or longer.
3) A corporation acquires new funds only when its securities are sold in the
………….
4) …………….markets is sometimes organized as an over-the-counter

market
5) ……………….. is not traded in a money market
6) …………..is traded in a capital market
7) Bonds that are sold in a foreign country and are denominated in a currency other than
that of the country in which they are sold are known as……………….
8) Financial intermediaries exist because there are substantial information and ………… costs in
the economy.
9) The main sources of financing for businesses, in order of importance, are …………………..
10 ) …………..is depository institutions
11) The presence of _____ in financial markets leads to adverse selection and moral
hazard problems that interfere with the efficient functioning of financial markets.
12) When the potential borrowers who are the most likely to default are the ones most
actively seeking a loan, ______________ is said to exist.
Ans- 1) investment bank 2) debt 3) primary market 4) bond market 5) T bills 6) Corporate
bonds 7) Euro Bonds 8) transactions 9) financial intermediaries, issuing bonds, issuing stocks
10) commercial bond 11) asymmetric information 12) adverse selection
PART –III State whether the following are true or false:

1) Every financial market allows loans to be made.
2) An example of direct financing is if you were to lend money to your neighbor.
3) The New York Stock Exchange is an example of a primary market.
4) Commercial paper is not traded in the capital market.
5) Eurodollars are traded in the money market.
6) The process of financial intermediation is also known as direct finance.
7) A mutual fund is not a depository institution.
8) A pension fund is not a contractual savings institution.
9) Equity represents an ownership interest in a firm and entitles the holder to the
residual cash flows.
10) Adverse selection refers to those most at risk being most aggressive in their search
for funds.
Ans- 1) F 2) T 3) F 4) T 5) T 6) F 7) T 8) F 9) T 10 ) F
PART- IV Match the following

a) Middlemen between investors and
1. Financial markets
borrowers
2. Financial intermediaries b) financial products outlet
3. Indian financial system c) Bankers bank
4. RBI d) mortgages
5. Financial instruments e) RBI , SEBI
Ans – 1 – b , 2 – a , 3 – e , 4 –c , 5 – d
SECTION B
1 weight questions and answers –

1. BU 3rd SEM MBA Finance elective 2009 edition – B2 , Q1

11. BU & Tumkur univ 6th SEM BBM finance spec 2009 edition – A69 , Q1
14. BU & Tumkur univ 6th SEM BBM finance spec 2009 edition – A69, Q4
23. BU & Tumkur univ 5th SEM BCom finance spec 2009 edition – B35 , Q1
SECTION C
2 weight questions and answers
2. BU 3rd SEM MBA Finance elective 2009 edition – B5, Q2
SECTION D
4 Weight questions and answers
CHAPTER II
SECTION A
PART I Choose the correct answer from the choices given
1. Retail Banking is due to rapid advances in the
a) Information technology
b) Financial services
c) Banking sector
d) Rural banking
Ans - a
2. Which of the following banks is not a one stop financial shop
a) ICICI
b) HDFC
c) Kotak mahindra
d) RBI
Ans - d
3. Which of the following is not a service provided by retail banks –
a) Housing loan
b) Personal Loans
c) Loan against securities
d) Farm Loans
Ans – c
4. Personal loans are not advanced to meet –
a) Marriage of children
b) Medical expenses
c) To buy a house
d) To buy a vehicle
Ans – c
5. The maximum ceiling for educational for studying in India is –
a) Rs 20 lakhs
b) Rs 25 lakhs
c) Rs 10 lakhs
d) Rs 15 lakhs
Ans – c
6. EMI should not exceed-
a) 50% of gross monthly slary
b) 60% of gross monthly salary
c) 40% of gross monthly salary
d) 80% of gross monthly salary
Ans – b
PART II Fill in the blanks

1. Retail loans are estimated to have accounted for nearly ………. of all bank credit.
2. The retail banking industry is ………… and ……………
3. The retail banking industry not only has checkings and savings account services but also
offers ………… and ………
4. Attracting …………. customers from competitors is essential for long-term success.
5. Types of retail payment services are …………… loans and ……………. Loans.
6. Retail deposits are ………… and constitute ……. Deposits.
7. Retail banking ……… the subsidiary business of a bank.
8. ………….. and ……………. have more commonality in the basic nature of their business.
9. The scope of operation of ……….. …………… is wider than ………… by definition.
10. The different types of General insurance products are …………… and ………….
Ans- 1) 1/5th 2) diverse, competitive 3) brokerage, insurance 4) profitable 5) housing, personal
6) stable, core7) increases 8) banking, insurance 9) general insurance, L.I.C 10) fire ,
burglary
PART III State whether the following statements are true or false
1. The scope of operation of General Insurance is wider than L.I.C by definition.
2. Retail banking decreases the subsidiary business of a bank
3. Retail deposits are unstable and constitute core deposits.
4. The retail banking industry is diverse and competitive .
5. Retail loans are estimated to have accounted for nearly 1/6th of all bank credit.
6. Attracting profitable customers from competitors is essential for long-term success
7. Types of retail payment services are housing loans and vehicle loans.
8. Banking and insurance have more commonality in the basic nature of their business
9. The retail banking industry not only has checkings and savings accont services but also offers
brokerage and insurance.
10. The different types of General insurance products are fire and burglary.
Ans- 1) T 2) F 3) F 4) T 5) F 6) T 7) T 8) T 9) T 10) T
PART IV Match the following

1. General insurance products a) housing loans and vehicle loans
2. Retail payment services b) stable
3. Retail banking industry c) diverse and competitive
4.. Retail deposits d) Charge for borrowing money
5. Interest e) fire and burglary
Ans – 1 –e, 2 –a 3 – c 4 – b, 5 – d
SECTION B

SECTION C
SECTION D

CHAPTER III
SECTION A
1) Primary determinants of a good security market include all of the following except:
a) transparency.
b) efficient price discovery.
c) liquidity.
d) a physical location.
Answer - d
2) Any number of shares not in increments of 100 is called:
a) a multiple lot.
b) a round lot.
c) a small lot.
d) an odd lot.
Answer - d
3) Which of the following would be used to stop losses from a short sale? Assume you short sell
at the current market price.
a) A stop buy order with the stop price set above the current market price.
b) A good-till-canceled market sell order.
c) A stop sell order with the stop price set below the current market price.
d) A stop buy order with the stop price set below the current market price.
e) A stop sell order with the stop price set above the current market price.
Answer – a
4) An investor purchased shares with a market price of $50 when the initial margin requirement
was 70%. If the price goes to $60, the investor’s rate of return, ignoring dividends and interest,
is:
a) 39%
b) 17%
c) 34%
d) 20%
e) 29%
Answer – e
5) An investor purchases 400 shares of stock at a price of $20 per share. The initial margin
requirement is 70%. What is the smallest amount that the investor can put up that will satisfy the
initial margin requirement?
a) $10,000.
b) $2,400.
c) $7,200.
d) $5,600.
e) $8,000.
Answer - d
6) Which type of order is most common?
a) Limit buy order.
b) Stop sell order.
c) Stop buy order.
d) Limit sell order.

e) Market order.
Answer – e
7) Which of the following statements is false?
a) Specialists cannot trade for their own accounts.
b) Specialists earn income from commissions and spreads in stock prices.
c) Specialists run the limit order book.
d) Specialists stand ready to execute at least a minimum number of market orders at quoted
bid and asked prices.
Answer - a
8) Which type of underwriting arrangement is riskiest to the underwriter?
a) Firm commitment.
b) Rights issue.
c) Contractual offering.
d) Best effort.
Answer - a
9) Which of the following is also known as the Big Board?
a) American Stock Exchange.
b) London Stock Exchange.
c) NASDAQ.
d) New York Stock Exchange.

e) Tokyo Stock Exchange.
Answer – d

1. Worldwide financial systems have undergone ……………. changes.
2. …………… is an important factor responsible for a country’s economic development.
3. Innovation means the introduction of something ……..
4. The process of ……………….. is part of process of meeting the financial asset needs of
customers.
5. ………… ……….. are comparatively high-yielding and safer.
6. ……….. …………. Is being practiced world over to combat the menace of poverty.
7. …….. ……… do not allow credit.
8. Technology has transformed the global world of …….. and …………. ………. Beyond
recognition.
9. Banks offer ……. Wealth management programmes under their private banking services
to customers .
10. ………… …………… ………….. include risk assessment and asset allocation advice
tailor-made to individual needs.
Ans- 1) structural 2) innovation 3) new 4) disintermediation 5) retail loans 6) micro-financing

7) debit cards 8) banking , financial services 9) niche 10) wealth management services
1. Specialists serve as dealers for stocks that are not listed on any exchange.
2. Exchange-listed stocks never trade over-the-counter.
3. A market need not be a physical location to be successful.

4. The market for a given security has breadth if a large volume of orders exist at prices above
and below the current price.
5. The opposite of a deep market is a thin market.
6. The issuing firm receives funds when its securities are traded in the secondary market.
7. A company can have only one IPO.
8. A best efforts offering for a new security does not expose the underwriter to price risk.
9. Except for IPOs sold by auction, new issues on average have been significantly under priced
compared to their aftermarket value.
10. An investor receives a margin call any time the actual margin is less than the initial margin.
11. For a sell stop order, the stop price is set below the current market price.
12. Potential losses for short sellers are infinite.
Ans - 1) F 2) F 3) T 4) T 5) F 6) F 7) T 8) T 9) T 10) F 11) T 12) T

1. Primary market a) merchant bankers
2. Players in primary market b) not allow credit
3. Debit cards c) New issue market
4. Micro-financing d) high-yielding and safer
5. Retail loans e) combat the menace of poverty
f) convenient way of keeping a track of the

6. Innovation
activity in your accounts.
7. Retail banking services offered by banks g) alert services and requests
h) introduction or application of something

8. Alert services
new
9. Two types of services i) ‘StanChart’s cricket card’
10. To book tickets for cricket matches j) Payment of utility bills like electricity,
telephone .
Ans - 1- c , 2 –a, 3- b, 4 –e , 5 –d , 6 – h , 7 – j , 8 – f , 9 – g, 10 – i
SECTION B

SECTION C
7. BU 3rd SEM MBA Finance elective 2009 edition – A39 , Q3
8. What is FPO ? Explain the difference between IPO and FPO.
A: A follow on public offering (FPO) is when an already listed company makes either a fresh
issue of securities to the public or an offer for sale to the public, through an offer document. An
offer for sale in such scenario is allowed only if it is made to satisfy listing or continuous listing
obligations.
The basic difference between Initial Public Offer (IPO) and Follow on Public Offer (FPO) is as
the names suggest IPO is for the companies which have not listed on an exchange and FPO is for
the companies which have already listed on exchange but want to raise funds by issuing some
more equity shares.
Companies usually go to debt market for raising their short term needs. Either they issue bonds
or get loans. But if they have massive expansion plans they may not raise sufficient funds in the
debt market and even if they could it costs more. Companies come with follow on offer to
restructure the business or to raise funds for new business or to expand the existing business.
Similar to an IPO a price band is fixed (usually with the help of Investment banks) for the issue
and interested investors can apply for it. Unlike the corporate actions (such as bonus, rights
issue; they are applicable only to the existing stake holders) FPO is open to all investors. The
price band for the FPO depends on the market value of the existing company shares and the
reason for raising funds.
11. What is esop ?
A: An employee stock ownership plan (ESOP) is a way in which employees of a company can
own a share of the company they work for. There are different ways in which employees can
receive stocks and shares of their company. Employees can receive them as a bonus, buy them
directly from the company, or receive them through an ESOP.
In the United States, ESOPs are a very common form of employee ownership. They have been
growing in strength since about 1974. Around 11,000 companies have an ESOP in place, and
nearly 8 million employees are involved in them.
Companies may establish an ESOP for a number of purposes. Most press attention regarding the
use of ESOPs focuses on their use as a takeover defense or as buyouts of failing companies.
These account for a very small percentage of ESOPs.
The main purpose of an ESOP is to reward and motivate employees. They are also used to
provide a market for departing owners of successful companies. In most cases, an ESOP is given
to an employee, rather than purchased by an employee.
An ESOP is similar to a profit-sharing plan. A company sets up a trust fund, into which it
contributes either new shares of its own stocks or cash to buy existing shares. Another version of
the ESOP borrows money in order to buy existing or new shares. In this case, the company
makes cash contributions to the plan in order to repay the loan.
Company contributions to the plan are tax deductible. Shares in the trust are generally allocated
to individual employee accounts. All employees over the age of 21 can participate in the plan,
and senior members of the workforce acquire an increasing right to the shares in their account.
This is known as vesting, and employees should be fully vested within five to seven years. Other
employee’s shares are based on relative pay or some other equitable formula.
When employees leave the company, they receives their share options, and the company must be
able to buy back these options. They must buy them back at their full market value. In private
companies, employees are able to vote their shares on major issues such as relocation or closure.
In public companies, employees can vote on all issues.
There are a few drawbacks to this plan. The cost of setting up an ESOP is around 30,000 US
dollars (USD) for even the simplest of plans. When any new shares are issued, the stock of
existing employees will become diluted. This dilution will be measured against the motivation
and tax benefits of the ESOP. Also, private companies must buy back departing employees'
shares, and this can become a major expense.
12. What do you mean by intermediaries ?
A: Commercial banks are the financial intermediary we meet most often in macroeconomics,
but mutual funds, pension funds, credit unions, savings and loan associations, and to some extent
insurance companies are also important financial intermediaries. 1 When people deposit money in
a bank, the bank uses the funds to make loans to home buyers for mortgages, to students so they
can pay for their education, to business to finance inventories, and to anyone else who needs to
borrow. A person who has extra money could, of course, seek out borrowers himself and bypass
the intermediary. By eliminating the middleman, the saver could get a higher return. Why, then,
do so many people use financial intermediaries?
Financial intermediaries provide two important advantages to savers. First, lending through an
intermediary is usually less risky than lending directly. The major reason for reduced risk is that
a financial intermediary can diversify. It makes a great many loans, and even though some of
those loans will be mistakes, the losses will be largely offset by loans that are sound. In contrast,
an average saver could directly make only a few loans, and any bad loans would substantially
affect his wealth. Because an intermediary can put its "eggs" in many "baskets," it insures its
depositors from substantial losses.
Another reason financial intermediaries reduce risk is that by making many loans, they learn how
to better predict which of the people who want to borrow money will be able to repay. Someone
who does not specialize in this lending may be a poor judge of which loans are worth making
and which are not, though even a specialist will make some mistakes.
A second advantage financial intermediaries give savers is liquidity. Liquidity is the ability to
convert assets into a spendable form--money--quickly. A house is an illiquid asset; selling one
can take a great deal of time. If an individual saver has lent money directly to another person, the
loan can also be an illiquid asset. If the lender suddenly needs cash, he must either persuade the
borrower to repay quickly, which may not be possible, or he must find someone else who will
buy the loan from him, which may be very difficult. Although the intermediary may use its funds
to make illiquid loans, its size allows it to hold some funds idle as cash to provide liquidity to
individual depositors. Only when a great many depositors want to withdraw deposits at the same
time, which happens when there is a "run" on the institution, will the financial intermediary be
unable to provide liquidity. Unless it can obtain help from the government or other institutions, it
will be forced to suspend payments to depositors.
In addition to lending money to individuals and groups, there are other ways in which banks are
part of financial markets. Banks borrow and lend funds among themselves in the federal-funds
market. They buy and sell foreign exchange. They buy and sell government and commercial
debt. And finally, one form of bank debt serves as money in modern economies, and banks
create this debt as a result of their financial transactions.
SECTION D
3. BU & Tumkur univ 5th SEM BCom finance spec 2009 edition – B14, Q3
CHAPTER IV
SECTION A
1) The preliminary prospectus, which has a statement on its cover that the registration statement
has not yet become effective, is referred to as a (an) __________.
a) red herring
b) registration statement
c) underwriting syndicate
d) standby arrangement
Answer – a
2) A market where new securities are bought and sold for the first time is known as a
__________ market.
a) primary
b)secondary
c) tertiary
d) capital
Answer - a
3) A market for existing (used) securities, such as the NYSE or AMEX, rather than new issues is
known as the __________ market.
a) primary
b) secondary
c) tertiary
d) capital.
Answer – b
4) A market for relatively long-term (greater than one year original maturity) financial
instruments (e.g., bonds and stocks) is known as the __________ market.
a) primary
b) secondary
c) tertiary
d) capital
Answer - d
5) Which securities law requires that public offerings be registered with the federal government
before they are sold?
a)Underwritten Rule 144a.
b)Blue Sky Laws.

c)Securities Exchange Act of 1933.
d) Securities Exchange Act of 1934.
Answer - d
6)Which securities law regulates the secondary market for long-term securities already
outstanding?
b)Blue Sky Laws.
Answer – d
7) An arrangement with a single investment banker or group of investment bankers to "stand

by" and be ready to underwrite any unsold portion of an issue, is referred to as a (an)
__________.
a) red herring
b)registration statement
c) underwriting syndicate
d)standby arrangement
Answer –d
8) Which securities law(s) is (are) involved with state laws regulating the offering and sale of
securities?
b)Blue Sky Laws.
Answer - b
9)Which of the following is privately placed common stock that cannot be immediately resold?
A) Red herring.
b) Letter stock.
c)Initial public offering.
d)Right.
Answer -b
10)Which of the following is a short-term option to buy a certain number of securities from the
issuing corporation?
a) Red herring.
b) Letter stock.
c) Initial public offering.
d) Right.
Answer – d
12) What happens, according to the text, to the average common stock price immediately after
the announcement of a new equity issue by a publicly traded firm?
a) The average stock price increases a few percentage points.
b) The average stock price decreases a few percentage points.
c) The average stock price does not generally change because no new information is provided to
investors.
d) The average stock price does not generally change because of asymmetric information.
Answer - b
13)Which of the following is not a method a firm can use to publicly issue common stock?
a) Private placement.
b)Firm commitment underwriting.

c)Shelf registration.
d) Best efforts offering.
Answer - a
14) Which of the following is not a method a firm can use to finance their long-term needs
externally?
a)Retained earnings.
b)Public issue.
c)Privileged subscription.
d) Private placement.
Answer - a
15) How are investment bankers generally compensated under traditional underwriting?
a)The stockbroker, representing the investment banker, charges a commission to investors.
b)The leader underwriter in the underwriting syndicate dictates the commission that the other
firms must charge so that investors pay for a majority of the underwriting expense.
c) Investment bankers earn a spread based on the difference between the purchase price from the
firm and the sales price to investors of the securities being underwritten.
d) The issuing firm pays a flat fee, usually $1 million, plus all of the commissions charge by
stockbrokers who are ultimately selling the securities to investors.
Answer - c
1.…………. market is a market of all those stock which are already issued to the public
2.Merchants dealing in shares, debentures as independent operators are called as ………..
3.……… market is an arena where discounting and rediscounting of certain financial market
instruments takes place.
4.A ………….. is the transfer of the interest in a specific immovable property by one person
to another for the purpose of securing an advance of money.
5. A banker is a ………… debtor.
6. A banker’s lien is always a …………..lien.
7. Accepting a bill and making it payable at the bank is called ………….
8. For willful dishonour of a cheque …………damage is payable by the banker.
9. To claim a banking debt …………. In writing is necessary.
Ans-1) Secondary 2) jobbers 3) Discount 4) mortgage 5) Priviledged 6) generall 7)

Domiciliation of a B/E 8) Vindictive 9) An express demand
1. When a stock goes "ex-rights," its market price theoretically declines.
2. The enforcement agency for the federal government is the Exchange and Security Law
Commission, whose authority encompasses both the sale of new securities and the trading of
existing securities.
3. A venture capitalist is the slang term used by the SEC to represent individuals who are
involved in insider trading.
4. The value of a right will often differ from its theoretical value due to speculation and
transaction costs.
5. The capital market involves financial instruments such as bonds, stocks, and six-month
bank notes.
6. The Sarbanes-Oxley (SOX) Act of 2002 was designed to regulate the signaling effects of
issuing new common stock in the primary market.
Ans - 1) T 2) F 3) F 4) T 5) F 6) F

1. OTCEI A) Companies that have a large capital base
2. De – listing B) Assurance given by one person to the other
3. Gurantee C) over the counter exchange of India
4. Group A shares D) Removing the stock of a company
5. Jobbers E) discounting of commercial bills or t bills
6. Term loan market F) independent operators
7. Discount market G) Created by government
Ans: 1-c : 2-d : 3-b 4-a 5-f 6- g 7-e
SECTION B
SECTION C
SECTION D
2. What is stock market index? Explain the determinants of the same.
A: Stock Market is a place where the stocks of a listed company are traded. A single figure that
sums up the overall performance of the market on a daily basis is the Stock Index. A good Stock
Index captures the movement of the well diversified and highly liquid stocks. For a lay man it is
the pulse rate of the economy. Index movements reflect the changing expectations of the stock
market about future dividends of the corporate sector. The index is calculated by finding the
weighted average of the prices of the most actively traded companies in the market, where the
weights are generally in proportion to the market capitalization of the company.
Stock Exchanges as a centre for trading were established as early as the 16th century. In
Antwerp, a major financial hub in Belgium, traders gathered together in 1531 to speculate in
shares and commodities. This was the world's first Stock Exchange. London and Paris set up
Exchanges sometime near the end of the 17th century. Close to hundred years later, in 1792, the
New York Stock Exchange (NYSE) was established, which is still one of the world’s most
powerful exchanges today. The reason for establishment was primarily the need for financing
businesses and for providing returns for the finances. In India, the Stock Exchange, Mumbai, was
established in 1875 as "The Native Share and Stockbrokers Association" (a voluntary non-profit
making association) and is now popularly known as the Bombay Stock Exchange (BSE). The
other major exchange is the National Stock Exchange of India Limited (NSE) and was
incorporated in November 1992. Combined the two trading zones are responsible for 99.9% of
the trading done in India.
Types of Indexes available:-

• Broad-Market Index: This consists of all the large, liquid stocks of the country and becomes
the benchmark for the entire capital market of the country. An example for this is the S&P CNX
500.
• Specialized Index: We can either have Industry or Sector specific Index for any particular
sector of the economy which then serves as the benchmark for that particular industry or we can
have an index for the highly liquid stocks. Taking an example for an industry specific index we
have the S&P Banking Index which is a capitalization-weighted index of 26 domestic equities
traded on the New York Stock Exchange and NASDAQ, The stocks in the Index are high-
capitalization stocks representing a sector of the S&P 500. Similarly, The S&P CNX Nifty is a
relevant example for an index composed of highly liquid stocks
Determinants of a Stock Index
Following parameters should be taken into picture before one constructs a stock index:
• Liquidity – Liquidity of stocks as measured by the “impact cost” criterion which determines
the cost faced when actually trading the index. For example if the current market price of a stock
is Rs 200 and a trader purchases it at Rs 202 (due to involved transaction costs) then the market
impact cost is 1% and the stock is considered highly liquid for lower impact cost. EG.
• Diversification – Diversification, by putting stocks of various sectors that reflect the economy,
is used to cancel out stock noise which is essentially the individual stock fluctuations and to
reduce investor’s risks. An index must thus have a balanced representation of all sectors.
• Optimum size - More stocks lead to greater diversification but the limiting factor is the size of
the index. Increasing number of stocks in an index from 10 to say 30 gives a sharp reduction in
risks but increasing the number beyond a point does very little in risk reduction. Further it might
lead to addition of illiquid stocks. For example, the optimal size for BSE Sensex is 30.
• Market Capitalization: The index should include primarily the stocks of companies that have
significant market capitalization with respect to the index such that any major change in the price
of the stock is reflected in the index. For example in BSE 30 Index, the scrip must have a
minimum of 0.5% of the market capitalization of the Index.
• Averaging - Every stock primarily moves for two reasons: The news about the company and
the news about the country. An ideal index is affected only by the latter, that is the news of the
economy and the effect of the former is knocked out by proper averaging. The various methods
of averaging employed are:
o Price Weighted: The weights assigned are proportional to the stock prices.
o Market Capitalization Weighted: The equity price is weighted by the market capitalization
of the company. Hence each constituent stock in the index affects the index value in proportion
to the market value of all outstanding shares.
(Current market capitalization)
Index = ---------------------------------------- x Base Value
(Base Market Capitalization)
Where:
CMS = Sum of (current market price * outstanding shares) of all securities in the index
BMS = Sum of (market price * issue size) of all securities as on base date.
o Equal Weighted: The weights are equal and assigned irrespective of both market
capitalization or price Index revision is done periodically taking into consideration the factors
mentioned above. The relevant index body makes clear, researched and publicly documented
rules for this purpose. These rules are applied regularly, to obtain changes to the index set.
However, it is ensured that the value of the index does not change significantly after the revision
of the index set.
CHAPTER V
SECTION A
1) To insure a stock portfolio against price decreases, owners of stock portfolios should:
a) sell a put on a stock index.
b) buy a call on a stock index.
c) buy a put on a stock index.
d) None of the above
Answer – c
2) When an investor exercises a call option on a futures contract, she or he:

a) receives the asset underlying the futures contract.
b) receives a long position in the futures contract.
c) receives an amount of money equal to the current futures price.
d) pays an amount of money equal to the current futures price.
Answer – b
3) Which of the following is most like buying a warrant?
a) Buying a put option.
b) Selling a call option.
c) Buying a call option.
d) Selling a put option.
Answer – c
4) Buying a callable bond is equivalent to:
a) buying common stock, selling a straight bond, and buying a call option.
b) buying a straight bond and selling a call option.
c) buying a convertible bond.
d) buying a straight bond and buying a call option.
Answer - b

1. A modern central bank performs many functions like regulating the issues of ……….
…………
2. A central bank is the …… body of an economy’s financial system.
3. Local boards consist of …….. members appointed by Central Government.

4. The …………… of RBI is to regulate the issue of bank notes.
5. The mission of NBFC sector is the work of Department of Non-banking …………..
6. The regulation of acceptance of deposits is authorized by Section …………
7. The schemes of social control over banks was announced in the Parliament in ………….
………
8. The equity holding in public Sector Banks was …………… by 33%.
9. The NBFC’s can be converted into ………..
10. The primary sector constitutes agriculture and activities like ……… and poultry farming.
Ans-1) bank notes 2) apex 3) 5 4) objective 5) supervision 6) 35A 7) december 1967 8)

reduced 9) bank 10) dairy
1. The equilibrium price of a call option can never be greater than the price of the underlying
asset.
2. The price of a call must always be greater than or equal to the call’s strike price.
3. Option prices can never be less than zero.
4. Everything else held constant, the time value of an option decreases as the option approaches
expiration.
5. Everything else held constant, prices of both puts and calls increase with volatility of the
underlying asset.
6. The value of a deep in-the-money call option converges to its upper boundary.
7. A portfolio that remains riskless by construction after the initial purchase is known as a
dynamic hedge.
8. An arbitrage opportunity arises when the basis doesn’t go to 1 right before maturity.
9. Option value boundaries are not influenced by assumptions regarding the distribution of
returns.
10. Put-call parity establishes an exact relationship among the stock price, the call price, and the
put price at expiration.
11. The binominal model is a model in continuous time.

12. A necessary property of the binominal tree is that it is recombinant.
13. The Black-Scholes option valuation model does not depend on the expected returns on the
underlying stock.
14. One method of dealing with volatility peaks in determining volatility is to use an
exponentially weighted moving average (EWMA).
15. The Black-Scholes option valuation model assumes a continuous change in asset prices and
therefore overestimates the change of out of the money options becoming in the money.
Ans- 1) T 2) F 3) T 4) T 5) T 6) F 7) F 8) F 9 ) T 10) F 11) F 12) F 13) T 14) T 15) F

1. Primary sector a) village and cottage industries
2. Advisor Service market b) agriculture and dairy
3. secondary sector c) Operational CRM
4. First stage of CRM d) retail trade and business
e) to help the corporate in their financial

5. tertiary sector
restructuring efforts.
6. PMRY f) It brings a rapid economic development
7. Advantage of universal banking g) Margin 20%
8 . SJSRY h) brokerage and venture capital
9. Activities of Universal banking i ) interest at 4% plus taxes
j) Margin 5%
10. DRI
Ans - 1 – b , 2 – e , 3 – a , 4 – c , 5 – d , 6 – g, 7 – f , 8 – j , 9 – h , 10 – i
SECTION B

SECTION C and SECTION D combine

Mahatma Gandhi University Capital Market Chapter 1 Questions

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Mahatma Gandhi University , Kottayam

Scanners referred are:-

1. Every financial market has the following characteristic:

2) Financial markets have the basic function of

3) Which of the following can be described as involving direct finance?

4) Which of the following can be described as involving direct finance?

5) Which of the following can be described as involving indirect finance?

8) Which of the following are securities?

11) Which of the following are short-term financial instruments?

13) Which of the following are primary markets?

1. Which of the following is not a characteristic of a money market instrument?

2. Which one of the following is not a money market instrument?

B) a negotiable certificate of deposit

3. T-bills are financial instruments initially sold by ________ to raise funds.

C) state and local governments

D) agencies of the federal government

PART –II Fill in the blanks

2) A …………. instrument is long term if its maturity is ten years or longer.

4) …………….markets is sometimes organized as an over-the-counter

6) …………..is traded in a capital market

10 ) …………..is depository institutions

PART –III State whether the following are true or false:

PART- IV Match the following

2. Financial intermediaries b) financial products outlet

3. Indian financial system c) Bankers bank

5. Financial instruments e) RBI , SEBI

1 weight questions and answers –

2. BU 3rd SEM MBA Finance elective 2009 edition – B2 , Q2

3. BU 3rd SEM MBA Finance elective 2009 edition – B2 , Q3

4. BU 3rd SEM MBA Finance elective 2009 edition – B2 , Q4

5. BU 3rd SEM MBA Finance elective 2009 edition – B2 , Q5

6. BU 3rd SEM MBA Finance elective 2009 edition – B2 , Q6

7. BU 3rd SEM MBA Finance elective 2009 edition – B3 , Q11

9. BU 3rd SEM MBA Finance elective 2009 edition – B3 , Q13

10. BU 3rd SEM MBA Finance elective 2009 edition – B3 , Q14

2 weight questions and answers

1. BU 3rd SEM MBA Finance elective 2009 edition – B4 , Q1

2. BU 3rd SEM MBA Finance elective 2009 edition – B5, Q2

3. BU 3rd SEM MBA Finance elective 2009 edition – B5, Q3

4. BU 3rd SEM MBA Finance elective 2009 edition – B6, Q4

4 Weight questions and answers

1. BU 3rd SEM MBA Finance elective 2009 edition – B14, Q1

2. BU 3rd SEM MBA Finance elective 2009 edition – B17, Q2

1. Retail Banking is due to rapid advances in the

2. Which of the following banks is not a one stop financial shop

3. Which of the following is not a service provided by retail banks –

c) Loan against securities

4. Personal loans are not advanced to meet –

5. The maximum ceiling for educational for studying in India is –

6. EMI should not exceed-

a) 50% of gross monthly slary

b) 60% of gross monthly salary

c) 40% of gross monthly salary

d) 80% of gross monthly salary

PART II Fill in the blanks

2. The retail banking industry is ………… and ……………

4. Attracting …………. customers from competitors is essential for long-term success.

6. Retail deposits are ………… and constitute ……. Deposits.

7. Retail banking ……… the subsidiary business of a bank.

9. The scope of operation of ……….. …………… is wider than ………… by definition.

2. Retail banking decreases the subsidiary business of a bank

3. Retail deposits are unstable and constitute core deposits.