Financial Markets MCQ Quiz - Objective Question with Answer for Financial Markets - Download Free PDF

The correct answer is All 1, 2, and 3.

Key Points

• Statement 1: Correct. The T+1 system settles trades one business day after the trade execution. For example, a trade executed on Monday is settled on Tuesday.
• Statement 2: Correct. In the T+2 system, the settlement is delayed by two business days. For example, a trade executed on Monday is settled on Wednesday.
• Statement 3: Correct. The T+0 system allows same-day settlement, ensuring that funds and securities are transferred immediately after the trade execution. This makes it the fastest settlement system in the world.

Comparison of the Systems

The correct answer is option 3.

Key Points

• In the T+1 settlement system, the process of clearing and settling a trade takes one business day after the trade execution date (T). 
• This means that any trade conducted on Day 1 (T) is fully settled on Day 2 (T+1), involving both the transfer of funds and securities.
• On the day of the trade (T), sellers receive 80% of the funds from the transaction. This allows them to access a significant portion of their funds immediately, but not the full amount.
• The remaining 20% of the funds are credited to the seller's account on the next business day (T+1).
• The delay is due to the time required for various processes like trade matching, fund clearance, and securities transfer through stock exchanges and depositories.

The correct answer is Securities and Exchange Board of India (SEBI).

Key Points 

• In the passage, the organization responsible for proposing the T+0 settlement cycle in December 2023 is mentioned as SEBI.
• SEBI is the regulatory authority for the securities and commodity markets in India.
• It oversees and implements policies to ensure efficiency, transparency, and fairness in the financial markets.

Additional Information

• Reserve Bank of India (RBI): RBI is the central banking authority responsible for monetary policy and regulation of banking in India. It does not regulate stock market settlements.
• Bombay Stock Exchange (BSE): While BSE is a major stock exchange in India, it operates under the regulations set by SEBI, not as a policy-making body.
• National Stock Exchange (NSE): Like BSE, NSE is a stock exchange that follows SEBI’s regulations but does not propose or implement settlement cycles independently.
• Ministry of Finance: Although the Ministry of Finance oversees SEBI, it does not directly propose market mechanisms like the T+0 settlement cycle.

Thus, SEBI is the organization referred to as "X" in the context of the passage.

The correct answer is  Less than 1 year.

Key PointsMaturity Period of Treasury Bills

• Treasury Bills (T-Bills) are short-term debt instruments issued by the government to meet short-term liquidity needs.
• In India, T-Bills are issued by the Reserve Bank of India (RBI) on behalf of the central government.
• The maturity period of T-Bills is less than 1 year. They are typically issued with maturities of 91 days, 182 days, and 364 days.
• T-Bills do not pay periodic interest. Instead, they are issued at a discount to their face value and redeemed at par, with the difference representing the interest income for the investor.
• They are considered safe and liquid investments due to the government guarantee and are commonly used by banks to meet their Statutory Liquidity Ratio (SLR) requirements.

Additional Information

• Gilt-Edged Securities refer to high-quality debt securities issued by the government and are considered low-risk due to the sovereign backing.
• These securities are used to finance the country’s fiscal deficit and manage public debt.
• Government Bonds are another form of Gilt-Edged Securities with a maturity period of more than one year.
• Both T-Bills and Government Bonds provide fixed interest payments, typically semi-annually, until maturity.
• They are popular among investors looking for stable returns and capital preservation, especially during uncertain market conditions.
• Despite offering lower returns compared to corporate bonds or equities, their government guarantee makes them a preferred choice for risk-averse investors.

The correct answer is  Covering the fiscal deficit.

Key PointsPrimary Purpose of Issuing Gilt-Edged Securities

• Gilt-Edged Securities are high-quality bonds issued by the government, considered to be low-risk due to sovereign backing.
• In India, these securities are issued by the Reserve Bank of India (RBI) on behalf of the central government.
• The primary purpose of issuing these securities is to finance the country’s fiscal deficit.
• They help in managing public debt by providing a stable and secure investment option for investors.
• Fiscal deficit refers to the gap between the government’s total revenue and its total expenditure. Covering this deficit is crucial for maintaining economic stability.
• By issuing Gilt-Edged Securities, the government can raise funds to meet its expenditure requirements without resorting to excessive borrowing from external sources.

Additional Information

• Types of Gilt-Edged Securities:
  • Treasury Bills (T-Bills): Short-term securities with a maturity of up to one year. They are issued at a discount and redeemed at face value.
  • Government Bonds: Long-term securities with a maturity exceeding one year. They offer fixed interest payments, typically semi-annually, until maturity.
• Statutory Liquidity Ratio (SLR) Requirements:
  • Banks in India are required to maintain a certain percentage of their net demand and time liabilities (NDTL) in the form of liquid assets, including Gilt-Edged Securities.
  • Maintaining SLR helps banks ensure liquidity and financial stability.
• Benefits of Gilt-Edged Securities:
  • Safety: Due to the sovereign backing, these securities are considered safe investment options.
  • Guaranteed Returns: They offer fixed interest payments, providing a predictable income stream for investors.
  • Low Risk: The low-risk nature of these securities makes them attractive during uncertain market conditions.
• Comparative Returns:
  • Although Gilt-Edged Securities offer lower returns compared to corporate bonds or equities, their stability and government guarantee make them a preferred choice for risk-averse investors.

The correct answer is  Zero-Coupon bonds.

Key PointsZero-Coupon Bonds

• Zero-Coupon bonds are a type of debt instrument that does not pay periodic interest (coupon) payments.
• These bonds are issued at a discount to their face value and are redeemed at their full face value upon maturity.
• The difference between the purchase price and the face value represents the interest income for the bondholder.
• These bonds are ideal for investors seeking a lump-sum payment at a future date, such as for retirement planning or education expenses.
• Zero-Coupon bonds are typically less expensive to purchase compared to other bonds that pay periodic interest.
• The interest income on Zero-Coupon bonds is subject to income tax each year, even though the investor does not receive any cash until maturity.

Additional Information

• Government bonds are issued by the government and typically pay periodic interest. They are considered low-risk investments.
• Municipal bonds are issued by local governments or municipalities and are often used to fund public projects like schools and infrastructure. They may offer tax advantages.
• Corporate bonds are issued by companies to raise capital. They usually pay periodic interest and are subject to credit risk based on the issuer's financial stability.
• Convertible bonds are corporate bonds that can be converted into a predetermined number of the issuer's equity shares. They offer both debt and equity characteristics.
• Interest income on bonds is an important consideration for investors, as it affects the overall return on investment.
• Understanding the tax implications of different types of bonds is crucial for effective financial planning.

The correct answer is  1 and 2 only.

Key PointsParticipatory Notes (P-Notes)

• Participatory Notes (P-Notes) are financial instruments used by foreign investors who are not registered with the Securities and Exchange Board of India (SEBI) to invest in Indian securities. These instruments provide a way for foreign investors to invest in the Indian stock market without having to register themselves with SEBI. Hence, statement 1 is correct.
• P-Notes are indeed a form of derivative instrument. They derive their value from underlying Indian securities such as shares, bonds, or derivatives. This allows foreign investors to gain exposure to Indian securities without holding them directly. Hence, statement 2 is correct.
• However, the statement that P-Notes are regulated by the Forward Markets Commission (FMC) is incorrect. The regulation of P-Notes falls under the jurisdiction of the Securities and Exchange Board of India (SEBI), not the FMC. The FMC was responsible for regulating commodity futures markets, but it was merged with SEBI in 2015. Hence, statement 3 is incorrect.

Additional Information

• Securities and Exchange Board of India (SEBI) is the regulatory body for the securities and commodity market in India under the jurisdiction of the Ministry of Finance, Government of India. It was established in 1988 and given statutory powers on 12 April 1992 through the SEBI Act, 1992.
• The Forward Markets Commission (FMC) was the regulatory authority for commodity futures market in India until 2015, when it was merged with SEBI to streamline and strengthen the regulation of securities and commodities market.
• P-Notes are often seen as a route for investors who prefer to remain anonymous or do not want to go through the rigorous registration process with SEBI. However, they have also been subject to scrutiny due to concerns about the potential for money laundering and market manipulation.
• To address these concerns, SEBI has introduced various measures to increase the transparency and accountability of P-Notes. For example, issuers of P-Notes are required to report details of their P-Notes transactions to SEBI on a regular basis.

The correct answer is  1 and 2.

Key PointsIn the context of the Indian Money Market

• Treasury Bills are short-term securities issued by the RBI on behalf of the Central Government. They are typically issued for tenures of 91 days, 182 days, and 364 days. These bills are used by the government to meet short-term liquidity needs. Hence, statement 1 is correct.
• Commercial Paper is an unsecured short-term debt instrument issued by large corporations to meet their short-term funding needs. It is usually issued at a discount to face value and does not require any collateral. This helps corporations in efficient cash management. Hence, statement 2 is correct.
• Treasury Bills are not issued at par value; rather, they are issued at a discount to their face value. The difference between the purchase price and the face value is the interest earned by the investor. They do not pay interest periodically. Hence, statement 3 is incorrect.

Additional Information

• Indian Money Market: The Indian Money Market is a market for short-term funds with maturity ranging from overnight to one year. It plays a crucial role in the economy by facilitating the borrowing and lending of short-term funds.
• RBI (Reserve Bank of India): The RBI is India's central banking institution, which controls the issuance and supply of the Indian rupee and manages the country's main payment systems. It also plays a pivotal role in the development strategy of the Government of India.
• Liquidity Management: Treasury Bills and Commercial Papers are essential tools for liquidity management in the financial system. They help in maintaining the balance between supply and demand for short-term funds.
• Discounted Instruments: Both Treasury Bills and Commercial Papers are typically issued at a discount to their face value. This means that they are sold at a price lower than their nominal value, and the difference serves as the interest for the investor.
• Non-collateralized Debt: Commercial Paper is an unsecured form of promissory note, which means it does not require any collateral. This feature makes it a flexible and attractive option for large corporations to manage their short-term funding requirements.

The correct answer is  Fixed dividends like interest.

Key PointsCharacteristics of Equity Shares

• Voting rights: Equity shareholders have the right to vote in the company's general meetings. This allows them to influence major decisions, such as the election of the board of directors and other significant corporate policies. Hence, statement 1 is correct.
• Dividends depend on performance: Unlike fixed-income securities, the dividends paid to equity shareholders are not guaranteed and depend on the company's profitability and performance. If the company performs well, shareholders may receive higher dividends. Conversely, if the company performs poorly, dividends may be low or nonexistent. Hence, statement 2 is correct.
• Bear losses in case of company failure: Equity shareholders are the owners of the company and, as such, they bear the risk of the company’s performance. If the company incurs losses or goes bankrupt, equity shareholders are the last to be paid after all debts and liabilities have been settled. This means they may lose their entire investment. Hence, statement 3 is correct.
• Fixed dividends like interest: This is not a characteristic of equity shares. Unlike debt instruments such as bonds, which pay fixed interest, equity shares do not guarantee fixed dividends. The dividends are variable and depend on the company’s earnings and decisions made by the board of directors. Therefore, equity shares do not provide a fixed income stream. Hence, statement 4 is incorrect.

Additional Information

• Equity Shares: Equity shares are a type of security that represents ownership in a corporation. Shareholders are entitled to a share of the company's profits through dividends and have the potential for capital gains if the value of the shares increases. However, they also bear the highest risk among all types of securities.
• Dividends: Dividends are payments made by a corporation to its shareholders, usually in the form of cash or additional shares. The amount and frequency of dividend payments are determined by the company's board of directors and can vary based on the company's financial performance.
• Shareholder Rights: Equity shareholders have several rights, including the right to vote on major corporate matters, the right to receive dividends, the right to inspect company records, and the right to sue for wrongful acts. These rights are designed to protect the interests of the shareholders and ensure transparency in corporate governance.
• Risk and Return: Investing in equity shares involves a higher level of risk compared to other types of investments such as bonds or fixed deposits. However, the potential for higher returns makes equity shares an attractive option for investors looking to grow their wealth over the long term.
• Market Fluctuations: The value of equity shares can fluctuate based on various factors including market conditions, economic indicators, company performance, and investor sentiment. This makes equity investments more volatile but also provides opportunities for significant gains.

The correct answer is  Lacks systematic coordination by the RBI.

Key PointsCharacteristics of the Organized Money Market

• The organized Money Market in India includes institutions that are registered with market regulators such as the Reserve Bank of India (RBI).
• It comprises a variety of financial institutions including commercial banks, mutual funds, and other entities that operate under the guidelines and regulations of the RBI.
• The organized market is characterized by a high level of systematic coordination and oversight by the RBI, ensuring stability and efficiency in financial transactions.
• Therefore, a characteristic that “Lacks systematic coordination by the RBI” does not fit within the definition of the organized Money Market. Hence, statement 3 is correct.

Additional Information

• Organized Money Market:
  • The organized Money Market in India includes institutions that are well-regulated and supervised by the Reserve Bank of India (RBI).
  • Entities such as commercial banks, cooperative banks, and development financial institutions form a part of the organized Money Market.
  • These institutions operate under strict regulations and guidelines issued by the RBI, ensuring transparency, efficiency, and stability in the financial system.
• Unorganized Money Market:
  • The unorganized Money Market, on the other hand, consists of informal and less regulated entities such as local moneylenders, chit funds, and indigenous bankers.
  • This market lacks the systematic regulation and oversight provided by the RBI, leading to higher risks and inefficiencies.
  • Transactions in this market are often based on personal trust and are typically not documented, making it difficult to enforce legal contracts.
• Role of RBI:
  • The Reserve Bank of India plays a crucial role in maintaining the stability and integrity of the organized Money Market through various monetary policies and regulatory frameworks.
  • The RBI ensures that financial institutions adhere to the required standards and practices, thereby safeguarding the interests of investors and the economy.

The correct answer is All 1, 2, and 3.

Key Points

• Statement 1: Correct. The T+1 system settles trades one business day after the trade execution. For example, a trade executed on Monday is settled on Tuesday.
• Statement 2: Correct. In the T+2 system, the settlement is delayed by two business days. For example, a trade executed on Monday is settled on Wednesday.
• Statement 3: Correct. The T+0 system allows same-day settlement, ensuring that funds and securities are transferred immediately after the trade execution. This makes it the fastest settlement system in the world.

Comparison of the Systems

The correct answer is option 3.

Key Points

• In the T+1 settlement system, the process of clearing and settling a trade takes one business day after the trade execution date (T). 
• This means that any trade conducted on Day 1 (T) is fully settled on Day 2 (T+1), involving both the transfer of funds and securities.
• On the day of the trade (T), sellers receive 80% of the funds from the transaction. This allows them to access a significant portion of their funds immediately, but not the full amount.
• The remaining 20% of the funds are credited to the seller's account on the next business day (T+1).
• The delay is due to the time required for various processes like trade matching, fund clearance, and securities transfer through stock exchanges and depositories.

The correct answer is Securities and Exchange Board of India (SEBI).

Key Points 

• In the passage, the organization responsible for proposing the T+0 settlement cycle in December 2023 is mentioned as SEBI.
• SEBI is the regulatory authority for the securities and commodity markets in India.
• It oversees and implements policies to ensure efficiency, transparency, and fairness in the financial markets.

Additional Information

• Reserve Bank of India (RBI): RBI is the central banking authority responsible for monetary policy and regulation of banking in India. It does not regulate stock market settlements.
• Bombay Stock Exchange (BSE): While BSE is a major stock exchange in India, it operates under the regulations set by SEBI, not as a policy-making body.
• National Stock Exchange (NSE): Like BSE, NSE is a stock exchange that follows SEBI’s regulations but does not propose or implement settlement cycles independently.
• Ministry of Finance: Although the Ministry of Finance oversees SEBI, it does not directly propose market mechanisms like the T+0 settlement cycle.

Thus, SEBI is the organization referred to as "X" in the context of the passage.

Introduction:

The relationship between the stock market and macroeconomic indicators in India is complex and interdependent. The performance of the stock market often reflects the overall economic health of the country, while macroeconomic indicators such as GDP growth, inflation, interest rates, fiscal policy, and foreign exchange reserves directly influence investor sentiment and stock prices. Evaluating this relationship helps to understand the stock market’s sensitivity to economic trends and policy changes.

Impact of GDP Growth on the Stock Market:

Gross Domestic Product (GDP) is a key macroeconomic indicator that signals the economic performance of a country. Higher GDP growth generally boosts corporate profitability, attracting investors. For instance, in 2021, India's GDP grew by 8.7%, leading to a bullish trend in the NSE Nifty 50, which crossed 18,000 points for the first time. This highlights the positive correlation between GDP growth and stock market performance.

Influence of Inflation and Interest Rates:

Inflation and interest rates play a critical role in stock market performance. High inflation typically leads to tighter monetary policies, resulting in increased interest rates. The RBI raised the repo rate by 250 basis points in 2022 to combat rising CPI inflation, which impacted stock prices, particularly in sectors like banking and real estate. Rising interest rates often lead to higher borrowing costs, reducing corporate profits and stock market valuations.

Fiscal Deficit and Government Policy:

India’s fiscal policy also affects the stock market. A widening fiscal deficit, as seen in 2020-21 due to pandemic relief measures, leads to higher government borrowing, affecting investor confidence. In contrast, fiscal consolidation and favourable budgetary policies, like the Union Budget 2022 with a focus on infrastructure development, positively influenced stock market growth.

Foreign Exchange Reserves and FDI:

India's foreign exchange reserves and Foreign Direct Investment (FDI) inflows also affect stock market stability. High forex reserves bolster investor confidence by ensuring currency stability. In 2022, India’s forex reserves peaked at $642 billion, stabilizing the market during global volatility.

Conclusion:

The interplay between macroeconomic indicators and the stock market is evident in India’s financial system. To sustain growth, policymakers must focus on maintaining economic stability through balanced fiscal and monetary policies. A stable macroeconomic environment encourages investor confidence, promoting long-term growth in the stock market.

The correct answer is  Less than 1 year.

Key PointsMaturity Period of Treasury Bills

• Treasury Bills (T-Bills) are short-term debt instruments issued by the government to meet short-term liquidity needs.
• In India, T-Bills are issued by the Reserve Bank of India (RBI) on behalf of the central government.
• The maturity period of T-Bills is less than 1 year. They are typically issued with maturities of 91 days, 182 days, and 364 days.
• T-Bills do not pay periodic interest. Instead, they are issued at a discount to their face value and redeemed at par, with the difference representing the interest income for the investor.
• They are considered safe and liquid investments due to the government guarantee and are commonly used by banks to meet their Statutory Liquidity Ratio (SLR) requirements.

Additional Information

• Gilt-Edged Securities refer to high-quality debt securities issued by the government and are considered low-risk due to the sovereign backing.
• These securities are used to finance the country’s fiscal deficit and manage public debt.
• Government Bonds are another form of Gilt-Edged Securities with a maturity period of more than one year.
• Both T-Bills and Government Bonds provide fixed interest payments, typically semi-annually, until maturity.
• They are popular among investors looking for stable returns and capital preservation, especially during uncertain market conditions.
• Despite offering lower returns compared to corporate bonds or equities, their government guarantee makes them a preferred choice for risk-averse investors.