Chapter 1: Introduction to Financial Markets

Key Points Summary

1. Definition of Financial Markets:

o A marketplace for the trading of financial assets like stocks, bonds,

foreign exchange, commodities, and derivatives.

2. Types of Financial Markets:

o Stock Market: Trading equity shares; volatile due to economic and

corporate earnings expectations.

o Bond Market: Companies/government raise money with fixed repayment

timelines.

o Commodities Market: Trading natural resources like oil, gold, and

agricultural products.

o Currency Market: For foreign exchange and hedging currency exposure.

o Money Market: For short-term funds (less than 1 year) like treasury
bills and commercial papers.

o Derivatives Market: Contracts based on the value of underlying assets.

3. Importance of Financial Markets:

o Channelizes savings into investments.

o Provides liquidity and ensures efficient price discovery.

o Facilitates resource mobilization for economic growth.

o Creates jobs and stimulates economic development.

4. Functions of Financial Markets:

o Productive Use of Savings: Mobilizes surplus funds for investments.

o Price Discovery: Reflects the value of securities based on demand and

supply.

o Liquidity Provision: Allows easy buying and selling of assets.

o Lower Transaction Costs: Provides information and reduces the cost of

trading.
 5. Stakeholders in Financial Markets:

o Primary Stakeholders: Shareholders, lenders, companies, mutual funds.

o Service Providers: Merchant bankers, brokers, underwriters,

depositories.

o Regulators: SEBI, RBI, IRDAI, PFRDA.

o Administrative Bodies: AMFI, FEDAI, FIMMDA, AIBI.

Sample MCQs

1. What is the primary purpose of the bond market?

o (a) Hedging currency risk

o (b) Raising short-term funds

o (c) Raising funds with fixed repayment timelines

o (d) Trading natural resources

Answer: (c) Raising funds with fixed repayment timelines

2. Which market provides short-term funding with instruments having

maturities of less than 1 year?

o (a) Derivatives Market

o (b) Bond Market

o (c) Money Market

o (d) Stock Market

Answer: (c) Money Market

3. Who regulates the securities market in India?

o (a) IRDAI

o (b) RBI

o (c) SEBI

o (d) AMFI
Answer: (c) SEBI
 4. The role of brokers in financial markets is to:

o (a) Issue treasury bills

o (b) Act as a custodian for securities

o (c) Facilitate buying and selling on behalf of clients

o (d) Regulate the financial markets

Answer: (c) Facilitate buying and selling on behalf of clients

5. What is the primary role of underwriters?

o (a) Manage stock market volatility

o (b) Provide liquidity in currency markets

o (c) Guarantee subscription for new issues

o (d) Trade derivatives on behalf of clients

Answer: (c) Guarantee subscription for new issues

Answers to Theoretical Questions

1. What do you understand by financial markets? Discuss their importance.

o Financial markets facilitate the buying and selling of financial assets and
channelize savings into investments. They ensure liquidity, enable
efficient resource mobilization, and stimulate economic growth.

2. Explain briefly the various service providers in financial markets.

o Service providers include:

 Merchant Bankers: Manage public issues and provide advisory

services.

 Brokers: Facilitate trading of securities for clients.

 Underwriters: Guarantee full subscription of securities in public

offerings.

 Depositories: Hold securities in electronic form and facilitate

ownership transfer.
 3. Discuss the objectives of SEBI and compare it with its U.S. counterpart,
the SEC.

o SEBI aims to protect investors, develop the securities market, and

regulate trading practices. In contrast, the U.S. SEC has broader powers,
including imposing unlimited fines, making it a stricter regulator.

Chapter 2: Impact of Various Policies on Financial Markets

Key Points Summary

1. Credit Policy of RBI:

o A plan to regulate money supply and credit flow to maintain economic

stability.

o Objectives:

 Price Stability: Control inflation using interest rates.

 Economic Growth: Maintain liquidity and spur demand.

 Exchange Rate Stability: Control INR's exchange rate.

 Balance of Payment: Maintain equilibrium in international

transactions.

 Credit Flow: Ensure smooth credit flow to productive sectors.

 Moderate Interest Rates: Facilitate investments.

2. Fed Policy:

o U.S. Federal Reserve regulates economic stability using tools similar to

RBI, like:

 Open Market Operations

 Discount Rate adjustments

 Reserve Requirements

 Quantitative Easing (QE): Increases money supply to reduce long-

term interest rates.

3. Inflation Index:

o Measures the overall price level in an economy.

 o Consumer Price Index (CPI): Tracks retail inflation by measuring price
changes of goods and services.

o Wholesale Price Index (WPI): Measures inflation at the wholesale level.

4. Key Instruments of Monetary Policy:

o Cash Reserve Ratio (CRR): Reserves banks must maintain with RBI.

o Statutory Liquidity Ratio (SLR): Reserves banks must hold in liquid

form.

o Repo Rate: Rate at which RBI lends to banks.

o Reverse Repo Rate: Rate at which RBI borrows from banks.

o Open Market Operations: Buying/selling government securities to

control liquidity.

Sample MCQs

1. What is the primary objective of RBI's credit policy?

o (a) Increase foreign investments

o (b) Ensure liquidity in the economy

o (c) Boost exports

o (d) Regulate mutual funds

Answer: (b) Ensure liquidity in the economy

2. Quantitative Easing (QE) is:

o (a) A tool for raising short-term interest rates

o (b) A strategy to increase money supply and reduce long-term interest

rates

o (c) A measure to stabilize exchange rates

o (d) A means to curb inflation

Answer: (b) A strategy to increase money supply and reduce long-term
interest rates

3. Which monetary tool influences the liquidity of commercial banks?

o (a) Statutory Liquidity Ratio (SLR)

 o (b) Consumer Price Index (CPI)

o (c) Balance of Payments (BoP)

o (d) GDP Growth Rate

Answer: (a) Statutory Liquidity Ratio (SLR)

4. The Reserve Bank of India adjusts the repo rate to:

o (a) Stabilize currency exchange rates

o (b) Control liquidity in the banking system

o (c) Increase equity market investments

o (d) Reduce fiscal deficit

Answer: (b) Control liquidity in the banking system

5. What is the main difference between CPI and WPI?

o (a) CPI measures retail inflation; WPI measures wholesale inflation

o (b) CPI tracks industrial output; WPI tracks services

o (c) CPI is used by industries; WPI is used by governments

o (d) CPI measures GDP; WPI measures inflation

Answer: (a) CPI measures retail inflation; WPI measures wholesale
inflation

Answers to Theoretical Questions

1. Discuss the objectives of RBIÕs Credit Policy.

o Objectives include price stability, exchange rate stability, economic

growth, maintaining adequate credit flow, and ensuring balanced interest
rates.

2. Explain Quantitative Easing and its impact.

o QE involves purchasing securities to lower interest rates and increase

money supply. It stimulates borrowing, economic activity, and investment
during financial crises.
 Chapter 3: Financial Institutions and Their Roles

Key Points Summary

1. Definition and Importance:

o Financial institutions facilitate savings mobilization, credit allocation, and

risk management, forming the backbone of the financial system.

2. Types of Financial Institutions:

o Commercial Banks: Provide loans, accept deposits, and facilitate payment

systems.

o Development Banks: Provide long-term capital for infrastructure and

industrial projects.

o Insurance Companies: Offer risk coverage for life, health, and assets.

o Mutual Funds: Pool investor funds for diversified investments.

o Pension Funds: Manage retirement savings for individuals.

o NBFCs (Non-Banking Financial Companies): Offer credit services but

donÕt accept demand deposits.

3. Functions of Financial Institutions:

o Act as intermediaries between savers and borrowers.

o Enable efficient resource allocation in the economy.

o Provide risk management through insurance and hedging services.

4. Role in Economic Growth:

o Promote entrepreneurship through credit provision.

o Enhance economic development by funding infrastructure and innovation.

o Act as conduits for implementing monetary policy.

Sample MCQs

1. Which institution primarily handles long-term industrial project financing?

o (a) Commercial Bank

o (b) Development Bank

 o (c) Mutual Fund

o (d) NBFC
Answer: (b) Development Bank

2. What is the main function of mutual funds?

o (a) Provide life insurance

o (b) Offer long-term loans

o (c) Pool funds for diversified investments

o (d) Manage pension funds

Answer: (c) Pool funds for diversified investments

3. Which of the following is not a function of commercial banks?

o (a) Accepting deposits

o (b) Providing short-term loans

o (c) Managing retirement savings

o (d) Facilitating payment systems

Answer: (c) Managing retirement savings

4. NBFCs differ from banks as they:

o (a) Cannot issue loans

o (b) Do not accept demand deposits

o (c) Focus only on rural areas

o (d) Operate outside government regulation

Answer: (b) Do not accept demand deposits

5. What role do insurance companies play in the financial system?

o (a) Regulate monetary policy

o (b) Provide risk management

o (c) Mobilize long-term savings

o (d) Facilitate money transfers

Answer: (b) Provide risk management

Answers to Theoretical Questions

 1. What are the roles of financial institutions in economic development?

o Financial institutions mobilize savings, allocate resources, provide credit,

and mitigate risks, thus driving entrepreneurship and infrastructure
development.

2. Explain the difference between commercial banks and NBFCs.

o While both provide credit, NBFCs do not accept demand deposits or

participate in payment systems, unlike commercial banks.

Chapter 4: Money Market Instruments

Key Points Summary

1. Definition:

o The money market is for short-term borrowing and lending, with

maturities of less than one year.

2. Instruments:

o Treasury Bills (T-Bills): Issued by the government to meet short-term

funding needs.

o Commercial Papers (CPs): Issued by corporations to fund working capital.

o Certificates of Deposit (CDs): Issued by banks to meet short-term

funding needs.

o Call and Notice Money: Short-term interbank borrowing for liquidity

management.

o Repo and Reverse Repo Agreements: Short-term loans secured against

government securities.

3. Functions of the Money Market:

o Provides liquidity for short-term needs.

o Aids in monetary policy implementation.

o Ensures efficient allocation of short-term funds.

Sample MCQs
1. Which money market instrument is issued by the government?

o (a) Commercial Paper

o (b) Treasury Bill

o (c) Certificate of Deposit

o (d) Call Money

Answer: (b) Treasury Bill

2. Call money refers to:

o (a) Loans for overnight use

o (b) Loans for 1-14 days

o (c) Government borrowing

o (d) Corporate bonds

Answer: (a) Loans for overnight use

3. Who issues commercial papers?

o (a) Banks

o (b) Corporates

o (c) Government

o (d) RBI
Answer: (b) Corporates

4. What is a reverse repo transaction?

o (a) RBI lends money to banks

o (b) Banks lend money to RBI

o (c) Corporates borrow from banks

o (d) Interbank loans for liquidity

Answer: (b) Banks lend money to RBI

5. Which of the following has the shortest maturity?

o (a) Treasury Bills

o (b) Call Money

o (c) Certificates of Deposit

 o (d) Commercial Papers
Answer: (b) Call Money

Answers to Theoretical Questions

1. What are the major money market instruments and their features?

o Instruments like T-Bills, CPs, CDs, and repos serve short-term liquidity
needs with low risk and high liquidity.

2. Explain the role of the money market in monetary policy implementation.

o The money market ensures liquidity and facilitates tools like repo rates
and open market operations, enabling the RBI to control money supply.

Chapter 5: Capital Markets

Key Points Summary

1. Definition and Role:

o Capital markets facilitate long-term funding through equity and debt

instruments.

o Components:

 Primary Market: New securities are issued (e.g., IPOs).

 Secondary Market: Trading of existing securities.

2. Types of Instruments:

o Equity Shares: Ownership stake in a company.

o Debentures/Bonds: Debt instruments for raising capital.

o Derivatives: Contracts based on underlying assets like stocks or

commodities.

3. Key Players:

o Investors: Retail, institutional, and foreign investors.

o Regulators: SEBI ensures market transparency and investor protection.

o Exchanges: Platforms like NSE and BSE facilitate trading.

 4. Functions:

o Mobilizes long-term funds.

o Ensures liquidity and price discovery.

o Promotes industrial and economic growth.

Sample MCQs

1. What is the primary function of the capital market?

o (a) Provide short-term funds

o (b) Facilitate long-term funding

o (c) Manage foreign exchange reserves

o (d) Control inflation

Answer: (b) Facilitate long-term funding

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

o (a) Equity Shares

o (b) Treasury Bills

o (c) Bonds

o (d) Debentures
Answer: (b) Treasury Bills

3. What does SEBI regulate?

o (a) Insurance sector

o (b) Capital markets

o (c) Foreign exchange

o (d) Money markets

Answer: (b) Capital markets
 4. The secondary market facilitates:

o (a) Issuance of new securities

o (b) Trading of existing securities

o (c) Currency exchange

o (d) Foreign investments

Answer: (b) Trading of existing securities

5. Who ensures transparency in IndiaÕs capital markets?

o (a) RBI

o (b) IRDAI

o (c) SEBI

o (d) AMFI
Answer: (c) SEBI

Answers to Theoretical Questions

1. Explain the difference between primary and secondary markets.

o Primary markets deal with the issuance of new securities, while

secondary markets involve trading of already-issued securities.

2. What role does SEBI play in capital markets?

o SEBI regulates and promotes transparency, protects investors, and

ensures orderly market development.
 Chapter 6: Derivatives Market

Key Points Summary

1. Definition:

o Derivatives are financial instruments whose value is derived from

underlying assets like stocks, commodities, or currencies.

2. Types of Derivatives:

o Futures: Contracts to buy/sell assets at a future date at a

predetermined price.

o Options: Contracts giving the right but not obligation to buy/sell assets.

o Swaps: Agreements to exchange cash flows between parties.

3. Functions:

o Risk management through hedging.

o Price discovery for underlying assets.

o Enhanced liquidity in financial markets.

4. Participants:

o Hedgers: Use derivatives to mitigate risks.

o Speculators: Take risks to earn profits.

o Arbitrageurs: Exploit price differences across markets.

Sample MCQs

1. What is a derivative?

o (a) A primary market instrument

o (b) A financial instrument derived from an underlying asset

o (c) A type of government bond

o (d) A long-term debt instrument

Answer: (b) A financial instrument derived from an underlying asset

2. Which derivative gives the holder the right, but not obligation, to buy or
sell?
 o (a) Futures

o (b) Options

o (c) Swaps

o (d) Forwards
Answer: (b) Options

3. Hedging in derivatives is primarily used for:

o (a) Speculation

o (b) Risk management

o (c) Arbitrage

o (d) Currency exchange

Answer: (b) Risk management

4. Arbitrageurs in the derivatives market:

o (a) Hedge against risks

o (b) Earn profit by exploiting price differences

o (c) Regulate market operations

o (d) Provide liquidity

Answer: (b) Earn profit by exploiting price differences

5. Which of the following is not a derivative?

o (a) Futures

o (b) Bonds

o (c) Swaps

o (d) Options
Answer: (b) Bonds
Answers to Theoretical Questions

1. What are the main types of derivatives, and how do they differ?

o Futures are contracts to trade assets at a future date; options grant

rights without obligations; swaps involve cash flow exchanges.

2. Explain the role of hedgers in the derivatives market.

o Hedgers use derivatives to protect against adverse price movements in

underlying assets.
 Chapter 9: Insurance Markets

Key Points Summary

1. Definition:

o The insurance market provides risk management by transferring potential

financial losses to an insurer in exchange for a premium.

2. Types of Insurance:

o Life Insurance: Covers the life of the insured; includes term plans, whole
life, and endowment policies.

o General Insurance: Covers assets and liabilities; includes health, motor,

property, and marine insurance.

3. Functions of Insurance:

o Protects against financial uncertainty and risks.

o Mobilizes savings through life insurance policies.

o Encourages risk-taking by providing security.

4. Key Participants:

o Insurers, policyholders, agents, brokers, and regulators (e.g., IRDAI in

India).

5. Regulation:

o The Insurance Regulatory and Development Authority of India (IRDAI)

governs the insurance sector, ensuring policyholder protection and
orderly market growth.

Sample MCQs

1. Which type of insurance covers assets and liabilities?

o (a) Life Insurance

o (b) General Insurance

o (c) Endowment Plans

o (d) Pension Insurance

Answer: (b) General Insurance
 2. Who regulates the insurance industry in India?

o (a) SEBI

o (b) RBI

o (c) IRDAI

o (d) AMFI
Answer: (c) IRDAI

3. The primary function of life insurance is to:

o (a) Provide financial protection in case of the insuredÕs death

o (b) Cover property loss

o (c) Insure health expenses

o (d) Fund retirement savings

Answer: (a) Provide financial protection in case of the insuredÕs death

4. A motor insurance policy falls under:

o (a) Life Insurance

o (b) General Insurance

o (c) Marine Insurance

o (d) Term Plans

Answer: (b) General Insurance

5. Which of the following is not a function of the insurance market?

o (a) Risk Management

o (b) Mobilizing savings

o (c) Creating liquidity for stocks

o (d) Promoting economic stability

Answer: (c) Creating liquidity for stocks

Answers to Theoretical Questions

1. Discuss the importance of the insurance market.

o The insurance market mitigates risks, mobilizes savings, and provides

financial protection against uncertainties, fostering economic stability.
 2. Explain the role of IRDAI in the insurance sector.

o IRDAI regulates and promotes the insurance industry, ensuring

policyholder protection, orderly market growth, and compliance with
ethical practices.

Chapter 10: Mutual Funds

Key Points Summary

1. Definition:

o Mutual funds pool money from investors and invest in diversified

portfolios of stocks, bonds, or other assets.

2. Types of Mutual Funds:

o Equity Funds: Invest primarily in stocks.

o Debt Funds: Invest in fixed-income instruments like bonds.

o Hybrid Funds: Combine equity and debt investments.

o Index Funds: Track market indices like the Nifty or Sensex.

3. Advantages of Mutual Funds:

o Diversification reduces risk.

o Professional management of funds.

o Liquidity and transparency.

4. Key Participants:

o Fund managers, investors, asset management companies (AMCs), and

regulators (e.g., SEBI).

5. NAV (Net Asset Value):

o Represents the per-unit value of a mutual fund; calculated as (Total

Assets - Liabilities) / Number of Units.
Sample MCQs

1. Which mutual fund type primarily invests in stocks?

o (a) Debt Fund

o (b) Equity Fund

o (c) Index Fund

o (d) Hybrid Fund

Answer: (b) Equity Fund

2. NAV is calculated by:

o (a) Dividing total assets by total units

o (b) Subtracting liabilities from total assets and dividing by units

o (c) Multiplying total units by liabilities

o (d) Subtracting liabilities from dividends

Answer: (b) Subtracting liabilities from total assets and dividing by units

3. Which regulator governs mutual funds in India?

o (a) RBI

o (b) AMFI

o (c) SEBI

o (d) IRDAI
Answer: (c) SEBI

4. Index funds aim to:

o (a) Outperform market indices

o (b) Mimic the performance of market indices

o (c) Invest in bonds only

o (d) Provide fixed returns

Answer: (b) Mimic the performance of market indices
 5. The primary benefit of diversification in mutual funds is:

o (a) Higher returns

o (b) Reduced risk

o (c) Greater liquidity

o (d) Higher taxes

Answer: (b) Reduced risk

Answers to Theoretical Questions

1. What are the advantages of investing in mutual funds?

o Benefits include diversification, professional management, liquidity, and

affordability for small investors.

2. Explain the significance of NAV in mutual funds.

o NAV reflects the per-unit value of a mutual fund and helps investors
track their investment performance.
 Chapter 11: Non-Banking Financial Companies (NBFCs)
Key Points Summary

1. Definition:

o NBFCs are financial institutions providing banking services without

holding a banking license. They cannot accept demand deposits.

2. Types of NBFCs:

o Asset Finance Companies (AFCs): Finance for assets like machinery,

vehicles.

o Loan Companies: Provide loans but do not accept deposits.

o Investment Companies: Engage in securities trading and investments.

o Infrastructure Finance Companies (IFCs): Focus on funding

infrastructure projects.

3. Functions:

o Extend credit to sectors underserved by banks.

o Mobilize resources for investment in productive activities.

o Support economic development through specialized services.

4. Key Regulations:

o Regulated by the Reserve Bank of India (RBI).

o Must maintain a certain capital adequacy ratio (CAR).

o Prohibited from accepting demand deposits or issuing cheques drawn on

themselves.
Sample MCQs

1. Which of the following is not a feature of NBFCs?

o (a) They accept demand deposits.

o (b) They provide loans.

o (c) They are regulated by the RBI.

o (d) They invest in securities.

Answer: (a) They accept demand deposits.

2. Which type of NBFC focuses on funding infrastructure projects?

o (a) Loan Companies

o (b) Asset Finance Companies

o (c) Infrastructure Finance Companies

o (d) Investment Companies

Answer: (c) Infrastructure Finance Companies

3. NBFCs are prohibited from:

o (a) Providing loans

o (b) Accepting demand deposits

o (c) Engaging in securities trading

o (d) Funding infrastructure projects

Answer: (b) Accepting demand deposits

4. Which regulatory body oversees NBFCs in India?

o (a) SEBI

o (b) RBI

o (c) IRDAI

o (d) AMFI
Answer: (b) RBI
 5. What is the primary role of NBFCs?

o (a) Handle foreign exchange

o (b) Provide loans to underserved sectors

o (c) Regulate mutual funds

o (d) Issue treasury bills

Answer: (b) Provide loans to underserved sectors

Answers to Theoretical Questions

1. Discuss the role of NBFCs in financial inclusion.

o NBFCs extend credit to sectors and regions underserved by traditional

banks, driving inclusive growth and economic development.

2. What are the key differences between NBFCs and banks?

o NBFCs cannot accept demand deposits or issue cheques, while banks can.
NBFCs primarily target niche markets.

Chapter 12: Credit Rating Agencies

Key Points Summary

1. Definition:

o Credit rating agencies (CRAs) evaluate the creditworthiness of an entity

or financial instrument.

2. Functions:

o Provide independent assessments of credit risk.

o Help investors make informed decisions.

o Facilitate market transparency.

3. Major CRAs in India:

o CRISIL, ICRA, CARE, and India Ratings.

4. Rating Scales:

o Ratings range from AAA (highest credit quality) to D (default).

 5. Regulation:

o Governed by SEBI to ensure impartiality and accuracy.

Sample MCQs

1. What is the role of credit rating agencies?

o (a) Trade securities

o (b) Assess credit risk

o (c) Provide insurance

o (d) Issue loans

Answer: (b) Assess credit risk

2. Which of the following is a major credit rating agency in India?

o (a) RBI

o (b) SEBI

o (c) CRISIL

o (d) AMFI
Answer: (c) CRISIL

3. A rating of AAA signifies:

o (a) Default risk

o (b) High credit risk

o (c) Highest credit quality

o (d) Low market confidence

Answer: (c) Highest credit quality

4. Who regulates credit rating agencies in India?

o (a) RBI

o (b) IRDAI

o (c) SEBI

o (d) AMFI
Answer: (c) SEBI
 5. Which of the following is not a function of credit rating agencies?

o (a) Provide transparency

o (b) Issue loans

o (c) Assess credit risk

o (d) Facilitate investment decisions

Answer: (b) Issue loans

Answers to Theoretical Questions

1. Explain the significance of credit ratings.

o Credit ratings guide investors on the creditworthiness of entities,

reducing information asymmetry and promoting market efficiency.

2. Discuss the role of SEBI in regulating credit rating agencies.

o SEBI ensures fair practices, impartial assessments, and adherence to

ethical standards in credit ratings.

Chapter 13: Investment Banking

Key Points Summary

1. Definition:

o Investment banks provide financial services related to capital raising,

mergers, acquisitions, and advisory for corporations and governments.

2. Functions of Investment Banks:

o Underwriting: Assists companies in issuing securities like IPOs.

o Advisory Services: Guides on mergers, acquisitions, and restructuring.

o Market Making: Facilitates buying and selling of securities.

o Asset Management: Manages investments for institutions and high-net-

worth individuals.
 3. Key Activities:

o IPO issuance and book-building.

o Valuation of companies in M&A.

o Structuring financial instruments like derivatives.

4. Examples of Investment Banks:

o Globally: Goldman Sachs, Morgan Stanley, J.P. Morgan.

o In India: ICICI Securities, Kotak Investment Banking.

5. Regulation:

o Governed by SEBI in India to ensure compliance and transparency.

Sample MCQs

1. What is the primary function of investment banks?

o (a) Accepting deposits

o (b) Issuing loans

o (c) Facilitating capital raising

o (d) Regulating mutual funds

Answer: (c) Facilitating capital raising

2. Which service is not provided by investment banks?

o (a) Underwriting

o (b) Asset management

o (c) Currency regulation

o (d) Mergers and acquisitions advisory

Answer: (c) Currency regulation

3. Who regulates investment banking activities in India?

o (a) RBI

o (b) SEBI

o (c) IRDAI
 o (d) AMFI
Answer: (b) SEBI

4. Investment banks assist in IPOs by:

o (a) Issuing insurance policies

o (b) Underwriting securities

o (c) Providing loans to buyers

o (d) Regulating corporate bonds

Answer: (b) Underwriting securities

5. Which of the following is an example of an investment bank?

o (a) LIC

o (b) Goldman Sachs

o (c) HDFC Bank

o (d) Reserve Bank of India

Answer: (b) Goldman Sachs

Answers to Theoretical Questions

1. What are the main functions of investment banks?

o They facilitate capital raising, provide advisory on mergers and

acquisitions, underwrite securities, and manage client investments.

2. Explain the role of investment banks in IPOs.

o Investment banks underwrite and price securities, assist in regulatory

compliance, and market IPOs to investors.
 Chapter 14: Financial Instruments
Key Points Summary

1. Definition:

o Financial instruments are contracts representing an asset or liability,

facilitating resource mobilization.

2. Types of Financial Instruments:

o Equity Instruments: Represent ownership (e.g., stocks).

o Debt Instruments: Represent borrowing (e.g., bonds, debentures).

o Hybrid Instruments: Combine equity and debt features (e.g., convertible

debentures).

o Derivatives: Derive value from underlying assets (e.g., futures, options).

3. Characteristics:

o Risk, return, and liquidity.

o Governed by regulatory frameworks to ensure transparency and investor

protection.

4. Examples:

o Bonds, stocks, treasury bills, commercial papers, and swaps.

Sample MCQs

1. Which of the following is a debt instrument?

o (a) Equity shares

o (b) Futures contracts

o (c) Bonds

o (d) Mutual funds

Answer: (c) Bonds

2. Hybrid instruments are:

o (a) Purely equity instruments

o (b) A combination of equity and debt features

 o (c) Fixed-income securities

o (d) Money market instruments

Answer: (b) A combination of equity and debt features

3. Which instrument derives its value from an underlying asset?

o (a) Equity

o (b) Bond

o (c) Derivative

o (d) Treasury bill

Answer: (c) Derivative

4. Convertible debentures are an example of:

o (a) Derivatives

o (b) Hybrid instruments

o (c) Equity instruments

o (d) Fixed deposits

Answer: (b) Hybrid instruments

5. Which of the following is not a financial instrument?

o (a) Stock

o (b) Treasury bill

o (c) Fixed deposit

o (d) Insurance premium

Answer: (d) Insurance premium

Answers to Theoretical Questions

1. Differentiate between equity and debt instruments.

o Equity represents ownership and entails higher risk and return; debt
represents borrowing with fixed returns.

2. What are derivatives, and why are they used?

o Derivatives derive value from underlying assets and are used for hedging
risks, speculation, and price discovery.
 Chapter 15: Central Banks and Monetary Policy
Key Points Summary

1. Role of Central Banks:

o Issue currency, regulate money supply, and ensure financial stability.

2. Monetary Policy:

o Controls inflation and promotes economic growth.

o Tools:

 CRR, SLR, repo rate, reverse repo rate, and open market
operations.

3. RBI vs. Federal Reserve:

o RBI focuses on inflation control, while the Fed emphasizes growth and
employment.

4. Importance of Monetary Policy:

o Stabilizes prices, ensures adequate liquidity, and controls inflationary

pressures.

Sample MCQs

1. Which of the following is a monetary policy tool?

o (a) Mutual funds

o (b) Repo rate

o (c) Insurance premium

o (d) Equity shares

Answer: (b) Repo rate

2. What is the main objective of monetary policy?

o (a) Regulate mutual funds

o (b) Control inflation and stabilize the economy

o (c) Issue government bonds

 o (d) Manage forex reserves
Answer: (b) Control inflation and stabilize the economy

3. SLR is maintained by:

o (a) The central bank

o (b) Commercial banks

o (c) Insurance companies

o (d) Foreign investors

Answer: (b) Commercial banks

4. Which central bank governs the U.S. economy?

o (a) RBI

o (b) Federal Reserve

o (c) Bank of England

o (d) IMF
Answer: (b) Federal Reserve

5. Open Market Operations involve:

o (a) Issuing shares

o (b) Buying and selling government securities

o (c) Regulating insurance companies

o (d) Lending to private institutions

Answer: (b) Buying and selling government securities

Answers to Theoretical Questions

1. Compare the RBI's and Federal Reserve's monetary policy objectives.

o RBI focuses on inflation control, while the Federal Reserve balances

growth and employment with inflation control.

2. What role does monetary policy play in financial stability?

 o It ensures price stability, manages liquidity, and fosters sustainable
economic growth.

Chapter 16: Global Financial Markets

Key Points Summary

1. Definition:

o Integrated platforms for trading financial instruments globally.

2. Components:

o Capital markets, forex markets, commodity markets.

3. Significance:

o Promotes international trade, enhances capital flow, and fosters

globalization.

4. Challenges:

o Currency volatility, geopolitical risks, regulatory complexities.

Sample MCQs

1. What is the primary role of global financial markets?

o (a) Promote local trade

o (b) Enhance international trade and investment

o (c) Control inflation

o (d) Regulate monetary policies

Answer: (b) Enhance international trade and investment