1. What is a market?
Ans: the world of commercial activity where goods and services are bought and sold
2. What is equity?
Ans : Its just ownership in a company. Its otherwise called owners' equity.
In financial statement analysis, its defined as Assets less liabilities.
3. What is fixed income securities?
Ans: A kind of securities from where investor at least expecting a fixed amount of return.
4.What are various day count basis of the bond?
Ans: Actual/365, Actual/360, Actual/Actual, 30/360.
Actual/365 : Called as bond basis. All years are assumed to be 365 days.
Actual/360 : Called as money basis. All years are assumed to be 360 days.
Actual/Actual: Actual year is calculated as it is. e.g. Leap year 366 days, 365 days
30/360: All months to be assumed to be 30 days.
5.What is dirty price of a bond and how its calculated?
Ans: Dirty price of a bond is the price of the bond with accrued interests
6.How can a bond issuer alter the maturity of a bond?
Ans: The bond issuer can alter the maturity of a bond by special redemption provisions such as call options, sinking funds, put options or purchase funds.
7.What are evidence of ownerships in case of bonds?
Ans: There are two evidences of ownerships: Bearer Form and Registered form.
8. Difference between bearer and registered form?
Ans: Bearer form:
a) Possession of bond gives the holder the right to receive interest and principal.
b) Interest is paid when holder presents a coupon.
c) Owner is not registered anywhere so is anonymous.
Registered form:
a) Owner is listed by the issuer on a register.
b) Name of the owner is printed on bond.
c) Bond can only be transferred through endorsement by the owner.
d) Interests and principal payment made to the registered owners at appropriate time.
9.What is soft Dollar and Hard dollar?
Ans: A means of paying brokerage firms for their services through commission revenue, as opposed to through normal payments is called soft dollar.
Fees or payments paid to brokerage firms in return for their services are called hard dollar.
For example, a mutual fund may offer to pay for research from a brokerage firm by executing trades at the brokerage. Let's say that Cory's Large-Cap Value Fund wants to buy some research from XYZ brokerage firm. Cory's may agree to spend at least $10,000 in commissions at the firm in return for research from the brokerage. This would represent a soft dollar payment. Alternatively, if Cory's wanted to simply buy the research and not agree to any kind of soft dollar fee, he might have to pay the brokerage $7,000 in "hard dollars" (cash) for the transaction.
10.What is net proceeds?
Ans: The amount of money received from a sale, after subtracting transaction costs.
11.What is settlement amount?
Ans: Net dollar amount expected from a dealer so as to complete the transaction.
12.What is gross consideration?
Ans: "Gross consideration" refers to anything of value, including cash or other tangible or intangible property, that a taxpayer pays in consideration for the retail purchase of utility services for consumption before deduction of any costs incurred in providing the utility services.
13.What is redemption value?
Ans: Redemption of a financial security is the repayment by the issuer of principal, accrued interest and in some cases a premium above par, at or prior to the redemption dates.
14.Define zero coupon swap.
Ans: A zero coupon swap is similar to the basic interest rate swap in that one party pays floating interest and the other pays fixed rate interest. They differ in that the fixed rate payments are not made periodically throughout the life of the swap. Instead, only one fixed payment is made on the termination date of the swap, whereas floating payments are made periodically throughout the life of the swap.
15.Give some examples of risk arbitrage.
Ans: Risk arbitrage is basically the investment in securities of corporations that are subject to takeover bids, liquidation, restructuring, recapitalization, etc. Traditionally, risk arbitrage meant the simultaneous purchase of stock in a corporation that is being acquired (target) and the sale of stock of the acquirer (bidder). However, in modern finance, it is associated with capturing the spreads between the market value of announced takeover targets and the eventual price at which acquirers will buy target shares. Therefore, it is basically an attempt to make a profit between the value of the stock at the time of the deal and the actual takeover price. Investors can partake in risk arbitrage individually or through investing in a hedge or arbitrage fund.
16.Explain cross currency swap.
Ans: A cross currency swap is a swap that converts both the basis of the interest rate obligation and the currency in which the interest rate obligation is denominated. In general, one interest payment is calculated using a floating rate index and the other using a fixed rate or another floating rate index denominated in a different currency.A cross currency swap sometimes entails an exchange of principal. This initial exchange occurs at the beginning of the swap with a re-exchange at maturity.
17.What are price taking and market making?
Ans: If the dealer calls the counterparty, the dealer will have to be prepared to accept the counterparty's prices if the deal is made (price taking). If the counterparty calls the dealer, the counterparty will trade at the dealer's own prices if they prove acceptable (market making).
18.. What are nastro accounts?
Ans: Nostro accounts are foreign currency accounts that a bank maintains with its various correspondent banks abroad.
19.In financial terminology, what is risk?
Ans: The possibility of financial loss
20.What are major categories of financial risks?
Ans: Risks can be broadly categorised into credit risk, market risk, liquidity risk and operational risk.
21.What are various types of Credit risk?
Ans: Sovereign Risk, Country risk, Legal and Force Majeure risk, Marginal risk
,settlement risk.
22.What is marginal risk?
Ans: Marginal risk is the risk of loss arising from replacing a contract.
23.Give an example of liquidity risk.
Ans: If there was a sudden run on a bank and the bank found it difficult to raise fresh deposits, or if borrowers drew down on committed loan facilities, perhaps to meet tax demands which had not been anticipated. With credit risk counter party might not be able to pay where as in liquidity risk Bank might not be able to pay.
24.What is basis in future market?
Ans: Basis in the futures markets refers to the difference between an instrument's cash market price and its futures market price.
25.What is cost of carry?
Ans: With financial securities/commodities, the cost of carry refers to the net effect of borrowing funds and investing them in a security for the same period. If the interest earned on the security is greater than the borrowing cost incurred, then the cost of carry is positive. If the interest earned on the security is less than the borrowing cost incurred, then the cost of carry is negative.
26.What is yield curve?
Ans: A yield curve is a graph which depicts the structure of interest rates over time.
27.For a portfolio consisting of n securities how many covariance required?
Ans: [n² - n]/2
28.Why its necessary to identify the perfectly negatively co-related returns?
Ans: It will ensure risk-neutral environment. e.g. , then the return on stock A is 12% and the return on stock B is 6%. If condition 2 pertains, then the return on stock A is only 6% while the return on stock B rises to 12%. It is clear that an equally-weighted portfolio of the two stocks will always yield a return of 9%, no matter which market condition pertains. As the return on the portfolio is guaranteed, its risk will be zero.
29.What is systematic risk?
Ans: There is some risk that is present no matter how many securities are included in a portfolio. Such risk is known as ‘market-related' or systematic risk.
30.What is that bond called which obliges the issuer to repay or repurchase a predetermined amount of the issue each year while it operates.
Ans: Sinking fund.
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