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Gauahti University BCom 6th Semester Fundamentals of Investment Solved Question Paper
2022
COMMERCE
(Honours Elective)
Paper: COM-HE-6016
(Fundamentals of Investment)
Full Marks: 80
Time: Three Hours
The figures in the margin indicate full marks for the questions.
1. Answer the following as directed: (any ten questions) 1×10=10
(a) Write the full form of NIFTY.
Ans:- NIFTY stands for National Stock Exchange Fifty.
(b) State whether the following statement is True' or 'False' :
Investment in equity is safer than bank fixed deposit.
Ans:- False. Equity investment involves higher risk than bank fixed deposits.
(c) “The basic objective of investor is to minimize the risk and maximize the return on investment." Write whether the statement is 'True' or 'False'.
Ans:- True. Maximizing return while minimizing risk is the basic objective of an investor.
(d) Who is the regulatory authority of Indian stock market?
Ans:- The Securities and Exchange Board of India (SEBI) is the regulatory authority of the Indian stock market.
(e) In India, mutual fund scheme was first started in
(i) 1964
(ii) 1987
(iii) 1992
(iv) None of the above
( Choose the correct alternative )
Ans:-1992
(f) Write the full form of CRISIL.
Ans:- CRISIL stands for Credit Rating Information Services of India Limited.
(g) Give an example of zero Coupon bond.
Ans:- Example, a bond with a face value of Rs. 1,000 may be issued at Rs. 800 and redeemed at Rs. 1,000 after a certain period of time.
(h) Which one of the following is the first public sector mutual fund in India?
(i) SBI Mutual Fund
(ii) Canbank Mutual Fund
(iii) UTI Mutual Fund
(iv) HDFC Mutual Fund
( Choose the correct alternative )
Ans:- (iii)The first public sector mutual fund in India is UTI Mutual Fund
(i) "Share prices on stock exchanges are determined by SEBI". Write whether the statement is True' or 'False'.
Ans:-False. SEBI regulates the stock exchanges, but share prices are determined by the forces of demand and supply in the market
(j) Which of the following features is not associated with the open-ended mutual fund ?
(i) It has a fixed maturity period.
(ii) The investors can subscribe their fund at any time.
(iii) It provides prompt liquidity to investors.
(iv) The investors have an option to redeem their holding at any time.
( Choose the correct alternative )
Ans:- (i) It has a fixed maturity period.
(k) "Security market is a market for equity, debts and derivatives." Write whether the statement is True or False.
Ans:- True. The security market deals in equity, debt and derivative instruments.
(l) Which of the following is the oldest stock exchange of India?
(i) Calcuta Stock Exchange
(ii) Ahmedabad Stock Exchange
(iii) Bombay Stock Exchange
(iv) Gauhati Stock Exchange
Ans:- (iii) Bombay Stock Exchange (BSE) is the oldest stock exchange of India, established in 1875.
(m) On which data SEBI introduced compulsory trading of shares of listed companies in 'DEMAT' form ?
(i) 1st January, 2016
(ii) 1st April, 2017
(iii) 1st January, 2018
(iv) 1st April, 2019
( Choose the correct alternative )
Ans:- (iv) 1st April, 2019. SEBI made it compulsory for shares of listed companies to be traded in dematerialized (DEMAT) form from 1st April, 2019.
(n) Which of the following is the feature of derivative ?
(i) It is an instrument whose value depends upon the value of some underlying assets.
(ii) It arises out of a contract between the two parties.
(iii) It may be of financial or commodity derivatives.
(iv) All of the above
( Choose the correct alternative )
Ans:- (iv) All of the above
(o) Securities and Exchange Board of India (SEBI) was constituted in the year______.
(i) 1988
(ii) 2002
(iii) 1992
(iv) 2000
Ans:- 1988.
2. Answer any five questions of the following in about 150 words each: 2×5=10
(a) Give the meaning of investment.
Ans:- Investment refers to the act of allocating resources (such as time, money, or effort) with the expectation of obtaining a profitable return in the future. This can involve the purchase of assets such as stocks, bonds, real estate, or commodities, or the establishment of a new business venture with the hope of generating profits.
(b) What is bond yield ?
Ans:- Bond yield is the return on investment that an investor receives from a bond. It is calculated as a percentage of the bond's face value and takes into account the bond's price, coupon rate, and time to maturity.
(c) Write a note or price earning ratio. P.E.
Ans:- Price-to-earnings ratio (P/E) is a financial ratio that measures a company's current stock price relative to its earnings per share (EPS). It is used to evaluate whether a stock is overvalued or undervalued by comparing its P/E ratio to that of its peers or the market average.
(d) Mention two characteristics of investment.
Ans:-i).Return: All investments are characterized by the expectation of a return.
ii)Risk: Risk is inherent in any investment. The risk may relate to loss of capital, delay in repayment of capital, nonpayment of interest, or variability of returns.
(e) Give the meaning of bonus share.
Ans:- Bonus share refers to an additional share given to shareholders by a company, in proportion to their existing shareholding, without any additional cost. This is done to reward existing shareholders and to increase liquidity in the stock market.
(f) What is commodity derivative ?
Ans:- Commodity derivatives are financial instruments that allow investors to speculate on the price movements of commodities such as gold, oil, or agricultural products. They are traded on exchanges and can be used for hedging or investment purposes.
(g) What is meant by insider trading?
Ans:- Insider trading refers to the practice of buying or selling securities based on material, non-public information that is not available to the general public. This practice is illegal and can result in significant fines and penalties.
(h) Define NAV.
Ans:- NAV stands for Net Asset Value and is used to measure the value of a mutual fund or exchange-traded fund (ETF). It is calculated by subtracting the fund's liabilities from its assets and dividing the result by the number of outstanding shares. NAV is used to determine the price at which shares of the fund are bought and sold.
3. Answer any four questions of the following in about 150 words each : 5x4=20
(a) Write any five features of equity share.
Ans:- Equity shares, also known as common shares, represent ownership in a company. Here are five features of equity shares:
i)Voting Rights: Equity shareholders have the right to vote on important company matters such as electing directors, approving mergers and acquisitions, and amending the company's bylaws.
ii)Dividend Payments: Equity shareholders are entitled to a portion of the company's profits in the form of dividends. However, companies are not required to pay dividends, and the amount paid can vary.
iii)Residual Claim: In the event of the company's liquidation, equity shareholders have the right to receive their share of any remaining assets after all debts and other obligations have been paid.
iv)Transferability: Equity shares are easily transferable, allowing shareholders to sell their shares to other investors. The price of the shares is determined by the supply and demand in the market.
v)Limited Liability: Shareholders' liability is limited to the amount they have invested in the company. This means that they are not personally responsible for the company's debts and other financial obligations.
(b) Distinguish between financial assets and physical assets.
Ans:- Financial assets and physical assets are two broad categories of assets that can be owned or held by individuals, companies, or institutions. The main differences between these two types of assets are:
Nature: Financial assets are intangible assets that represent a legal claim to some future cash flows or a specific amount of money, while physical assets are tangible assets that have a physical existence and can be seen and touched.
Purpose: Financial assets are typically held for investment or speculative purposes, while physical assets are usually held for consumption or production purposes.
Liquidity: Financial assets are generally more liquid than physical assets, meaning they can be easily converted into cash without significant loss of value. Physical assets, on the other hand, may be less liquid, and it may take more time and effort to sell them or convert them into cash.
Risk: Financial assets are often subject to market risk, credit risk, and other types of financial risks, while physical assets may be subject to risks such as theft, damage, or natural disasters.
Examples of financial assets include stocks, bonds, derivatives, mutual funds, and bank deposits, while examples of physical assets include real estate, machinery, vehicles, commodities, and raw materials.
Storage and Maintenance: Physical assets often require storage and maintenance, which can involve additional costs and effort. For example, a car may need regular servicing and repairs, while a property may require maintenance and upkeep. In contrast, financial assets do not require storage or maintenance, and they are typically held in electronic or digital form.
Value: Physical assets often have intrinsic value, meaning that they have value in and of themselves, based on their utility, scarcity, or beauty. In contrast, financial assets have value only because of the legal rights they confer or the financial returns they generate. The value of financial assets is often subjective and depends on market conditions and investor expectations.
Divisibility: Physical assets may be indivisible or difficult to divide, while financial assets are typically highly divisible. For example, a piece of real estate may be difficult to divide into smaller units, while a stock or bond can be easily divided into smaller units, allowing investors to buy or sell fractional shares.
(c) Discuss the importance of fundamental analysis.
Ans:- Following are the Importance of fundamental analysis.
1. It helps investors make informed investment decisions: By analyzing the underlying factors that drive the price of an asset, investors can gain a deeper understanding of its true value, enabling them to make better investment decisions.
It helps identify undervalued and overvalued assets: By comparing an asset's intrinsic value with its market price, investors can identify assets that are undervalued or overvalued, providing potential opportunities for profit.
It provides a long-term perspective: Fundamental analysis focuses on the underlying economic and financial factors that drive an asset's price over the long term, making it a valuable tool for investors with a long-term investment horizon.
It helps manage risk: By understanding the fundamental factors that influence an asset's price, investors can better manage risk by identifying potential risks and taking steps to mitigate them.
It is applicable to a wide range of assets: Fundamental analysis is not limited to stocks and bonds; it can be applied to a wide range of assets, including commodities, currencies, and real estate, making it a valuable tool for investors across different asset classes
(d) Write the features of bonds.
Ans:- The features of bonds include:
Face value: Bonds have a face value or principal amount that is paid back to the bondholder at maturity.
Coupon rate: Bonds have a coupon rate, which is the interest rate paid to bondholders. This rate is usually fixed and expressed as a percentage of the face value.
Maturity: Bonds have a maturity date, which is the date on which the bond principal is repaid to the bondholder. The maturity can range from a few months to several decades.
Yield: The yield on a bond is the effective rate of return that an investor earns on the bond. It takes into account both the coupon rate and the price of the bond.
Credit rating: Bonds are rated by credit rating agencies based on the creditworthiness of the issuer. Higher-rated bonds are generally considered to be less risky and therefore offer lower yields.
Callability: Some bonds may be callable, which means that the issuer has the right to redeem the bonds before the maturity date.
Convertibility: Some bonds may be convertible, which means that they can be converted into shares of stock in the issuing company.
Seniority: Bonds may be issued with different levels of seniority, which determines the order in which bondholders are paid in the event of a default by the issuer.
(e) Briefly discuss the two types of bond yield.
Ans:- The two types of bond yield are current yield and yield to maturity. The current yield is the annual interest payment divided by the current market price of the bond. It represents the bond's annual return in percentage terms at the current market price. Current yield is a useful measure for investors who want to compare the yields of different bonds, but it does not take into account the bond's price fluctuations.
On the other hand, the yield to maturity is the total return anticipated on a bond if it is held until its maturity date. It includes the interest payments plus any gain or loss in the bond's market price over the holding period. Yield to maturity is a more comprehensive measure of a bond's return and is used to compare bonds with different maturities and coupon rates.
(f) Write a note on efficient market hypothesis.
Ans:- The efficient market hypothesis (EMH) is a theory that states that financial markets are efficient and that asset prices reflect all available information. In an efficient market, it is impossible to consistently achieve returns greater than the market average because all publicly available information about an asset is already reflected in its price.
The EMH has three forms: weak, semi-strong, and strong. The weak form states that all past prices and trading volume information is already reflected in the current price, making technical analysis useless. The semi-strong form states that all publicly available information, including financial statements and news, is already reflected in the price. The strong form states that all information, including insider information, is already reflected in the price.
The EMH has been a subject of debate among academics and practitioners. Critics argue that the market is not always efficient, and there are opportunities for profit through information asymmetry and market inefficiencies. Proponents argue that while the market is not always perfect, it is efficient enough to make active investment management futile in the long run.
(g) Explain different types of financial derivatives.
Ans:- There are several types of financial derivatives, some of which are:
Futures contracts: Futures contracts are agreements to buy or sell an underlying asset at a future date and at a predetermined price. Futures are traded on organized exchanges and are standardized contracts with set expiry dates and contract sizes. Futures can be used to hedge risk or to speculate on price movements.
Options contracts: An options contract gives the holder the right, but not the obligation, to buy or sell an underlying asset at a predetermined price within a specified time period. There are two types of options: call options and put options. Call options give the holder the right to buy the underlying asset, while put options give the holder the right to sell the underlying asset. Options can be used to manage risk or to speculate on price movements.
Swaps: A swap is a contract between two parties to exchange cash flows based on different financial instruments. The most common types of swaps are interest rate swaps, currency swaps, and commodity swaps. Swaps can be used to manage interest rate or currency risk, or to speculate on changes in interest rates or currency exchange rates.
Forwards contracts: Forwards contracts are similar to futures contracts, but they are not traded on an organized exchange. Instead, they are customized contracts between two parties that specify the terms of the underlying asset transaction. Forwards can be used to hedge risk or to speculate on price movements.
Warrants: A warrant is a financial instrument that gives the holder the right, but not the obligation, to buy a specified number of securities at a predetermined price within a specified time period. Warrants are often issued by companies as a way to raise capital. They can also be traded in secondary markets.
These are some of the most common types of financial derivatives. Each type has its own unique characteristics and can be used for different purposes, such as hedging risk, speculating on price movements, or raising capital.
(h) Distinguish between open-ended mutual fund and close-ended mutual fund.
Ans:- Following are the Differences between Open-ended mutual fund and close-ended mutual fund.
4. Answer any four questions of the following in about 600 words each : 10×4=40
(a) What do you mean by investment decision process ? Discuss various steps involved in an investment decision process.
Ans:- Investment decision-making is the process of determining where and how to allocate resources such as money, time, and effort in order to achieve financial objectives. The investment decision process is a complex process that requires a detailed analysis of various factors such as the return on investment, risk, liquidity, tax implications, and other relevant factors. The investment decision process can be broken down into the following steps:
Setting Investment Objectives: The first step in the investment decision process is to set investment objectives. Investors must identify their financial goals, risk tolerance, and time horizon for investment.
Research and Analysis: After setting the investment objectives, investors should conduct research and analysis to identify the investment options that meet their investment objectives. The research and analysis should consider the investment alternatives, historical performance, risk factors, management team, and other relevant factors.
Asset Allocation: Once the research and analysis have been conducted, investors must determine how to allocate their investment capital among different asset classes, such as stocks, bonds, and real estate.
Investment Selection: Once the asset allocation has been determined, investors should select specific investments that meet their investment objectives and risk tolerance. Investors can use various investment vehicles such as mutual funds, exchange-traded funds, or individual securities to implement their investment strategy.
Monitoring and Rebalancing: After investments have been made, investors should regularly monitor their portfolio to ensure that it remains aligned with their investment objectives. If necessary, investors should rebalance their portfolio to maintain their desired asset allocation.
(b) What is real estate? Discuss various types of real estate properties in India.
Ans:- Real estate is property consisting of land and the buildings on it, along with its natural resources such as crops, minerals, or water. Real estate can be classified into various types based on its use, location, and legal ownership. Some of the most common types of real estate properties in India are:
Residential Properties: Residential properties are the most common type of real estate in India. These include individual homes, apartments, villas, and townhouses. Residential properties are used for personal dwelling purposes and are owned by individuals, families, or institutions.
Commercial Properties: Commercial properties are used for business purposes such as offices, retail stores, hotels, and restaurants. Commercial properties are owned by businesses or individuals who lease out the space to generate income.
Industrial Properties: Industrial properties are used for manufacturing, distribution, and storage purposes. These include factories, warehouses, and logistics centers.
Agricultural Properties: Agricultural properties are used for farming and agriculture. These include farms, ranches, and orchards.
Special Purpose Properties: Special purpose properties are properties that are designed for a specific use such as hospitals, schools, and government buildings. These properties are usually owned by institutions or government agencies.
Land: Land is the raw material that underlies all real estate. Land can be used for various purposes such as residential, commercial, industrial, or agricultural. Land is owned by individuals, families, institutions, or governments.
Mixed-use Properties: Mixed-use properties are properties that have a combination of two or more types of real estate such as a commercial building with residential apartments or a shopping mall with office space.
In conclusion, real estate is a diverse asset class that includes various types of properties. Investors should carefully consider the specific characteristics and risks of each type of real estate before making an investment decision.
(c) Define financial derivative. Discuss the features of financial derivative. 2+8=10
Ans:- A financial derivative is a financial contract or instrument that derives its value from the performance of an underlying asset or group of assets, such as stocks, bonds, commodities, or currencies. The value of a derivative depends on the price movement of the underlying asset. Derivatives are contracts between two parties, known as counterparties, where one party agrees to buy the underlying asset and the other party agrees to sell the asset at a specific price and time in the future.
Features of Financial Derivatives:
Underlying asset: The value of a financial derivative depends on the performance of an underlying asset or group of assets. The underlying asset can be a stock, bond, commodity, or currency. The performance of the underlying asset determines the value of the derivative.
Contractual agreement: A financial derivative is a contractual agreement between two parties. The parties agree to buy or sell the underlying asset at a specific price and time in the future. The terms of the contract are binding on both parties.
Leverage: Derivatives allow traders to control a larger amount of the underlying asset with a smaller amount of capital. This is known as leverage. Derivatives provide leverage because the trader does not need to own the underlying asset to trade the derivative.
Complexity: Derivatives can be complex and difficult to understand. The pricing and valuation of derivatives can be challenging due to the dependence on the underlying asset's price movements. Therefore, derivatives are often used by experienced traders and institutional investors.
Risk: Derivatives can be highly risky. The value of a derivative can change rapidly and can result in significant losses. Therefore, derivatives are typically used by investors who are willing to take on higher levels of risk in exchange for the potential for higher returns.
Types: There are several types of financial derivatives, including futures, options, swaps, and forwards. Each type of derivative has its own unique features and risks.
(d) What is bond ? Explain different types of bonds. 2+8=10
Ans:- A bond is a debt instrument that is issued by a company, government, or other organization to raise capital. Bonds are used to borrow money from investors, and the issuer agrees to pay interest on the bond and to repay the principal at a specific time in the future.
Types of Bonds:
Government Bonds: Government bonds are issued by governments to fund their operations. These bonds are considered to be low-risk because they are backed by the full faith and credit of the government. Government bonds are usually issued by the treasury department of the government.
Corporate Bonds: Corporate bonds are issued by companies to fund their operations or to finance specific projects. Corporate bonds are considered to be riskier than government bonds because the creditworthiness of the company is a factor in determining the risk of default.
Municipal Bonds: Municipal bonds are issued by state and local governments to fund public projects such as roads, schools, and hospitals. Municipal bonds are considered to be low-risk because they are backed by the taxing authority of the government.
Zero-Coupon Bonds: Zero-coupon bonds are bonds that do not pay interest. Instead, they are issued at a discount to their face value and pay the full face value at maturity. Zero-coupon bonds are considered to be high-risk because they do not provide any regular income to the investor.
Convertible Bonds: Convertible bonds are bonds that can be converted into common stock at a specified price and time. Convertible bonds are considered to be high-risk because they provide the potential for capital gains if the underlying stock price increases.
Junk Bonds: Junk bonds are bonds that are rated below investment grade by credit rating agencies. Junk bonds are considered to be high-risk because they have a higher probability of default than investment-grade bonds. Junk bonds usually offer higher yields to compensate.
(e) Briefly discuss about various market participants in the Indian securities market.
Ans:- The Indian securities market has various market participants, including:
Individual investors: These are retail investors who buy and sell securities in the market. They invest in stocks, bonds, mutual funds, and other financial instruments.
Institutional investors: These are entities that invest large sums of money in the market, such as banks, insurance companies, mutual funds, and pension funds.
Foreign institutional investors (FIIs): These are foreign entities that invest in the Indian market. They can invest directly in securities or through participatory notes.
Brokers: These are intermediaries who facilitate buying and selling of securities in the market. They can be full-service brokers, discount brokers, or online brokers.
Market makers: These are firms that provide liquidity in the market by buying and selling securities. They ensure that there is always a buyer and a seller for every security traded in the market.
Regulators: These are entities that regulate the securities market, such as the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI).
Investment bankers: These are professionals who help companies raise capital by underwriting their securities offerings or providing advisory services related to mergers, acquisitions, and other corporate actions.
Depository participants: These are entities that facilitate electronic trading and settlement of securities. They maintain investor accounts and hold securities in electronic form.
Clearing corporations: These are entities that ensure the settlement of trades by acting as intermediaries between buyers and sellers. They guarantee the delivery and payment of securities and funds.
Rating agencies: These are firms that assess the creditworthiness of securities issuers and assign ratings based on their analysis. These ratings can influence the demand and pricing of securities in the market.
(f) What is technical analysis? Explain various assumptions of technical analysis. 2+8=10
Ans:- Technical analysis is a method of analyzing securities that involves using charts and other technical tools to identify patterns and trends. It is based on the assumption that past market behavior can be used to predict future behavior. Some of the key assumptions of technical analysis are:
Market trends exist: Technical analysts believe that markets move in trends, which can be identified using charts and other technical tools.
Prices reflect all available information: Technical analysts believe that all information about a security is reflected in its price.
History repeats itself: Technical analysts believe that market behavior is cyclical and that patterns that occurred in the past will repeat themselves in the future.
Volume confirms price trends: Technical analysts believe that changes in volume can confirm the direction of a price trend.
Trends continue until there is a reversal: Technical analysts believe that trends will continue until there is a clear signal that the trend has reversed.
Support and resistance levels: Technical analysts use support and resistance levels to identify potential buying or selling opportunities. Support levels are areas where prices have historically bounced back up, while resistance levels are areas where prices have historically bounced back down. When prices break through these levels, it can signal a potential trend reversal.
Technical indicators: Technical analysts use a variety of technical indicators, such as moving averages, relative strength index (RSI), and stochastic oscillator, to help identify trends and potential buying or selling opportunities.
Price patterns: Technical analysts also look for specific price patterns, such as head and shoulders, triangles, and flags, to help identify potential trend reversals or continuation patterns.
(g) Discuss the role played by the SEBI in investor protection.
Ans:- SEBI, or the Securities and Exchange Board of India, is the regulatory body that oversees the functioning of the securities market in India. One of its primary roles is to protect the interests of investors by ensuring transparency, fairness, and integrity in the market. Here are some of the specific ways in which SEBI helps protect investors:
Registration and regulation of intermediaries: SEBI registers and regulates intermediaries such as brokers, investment advisers, and mutual funds to ensure that they comply with the necessary regulations and guidelines. This helps investors to make informed decisions about their investments.
Disclosure requirements: SEBI mandates companies to disclose all relevant information to investors, such as financial statements, annual reports, and any material events that could affect the value of their investments. This helps investors to make informed decisions based on complete information.
Investor education: SEBI conducts various awareness programs and initiatives to educate investors about the risks and benefits of investing, as well as the regulations governing the market. This helps investors to make informed decisions and protect themselves against fraud and mis-selling.
Monitoring and surveillance: SEBI closely monitors the market for any irregularities, such as insider trading or price manipulation, and takes appropriate action to protect the interests of investors.
Enforcement actions: SEBI takes strict enforcement actions against market participants who violate securities laws or engage in fraudulent activities. This helps to maintain the integrity of the market and protect investors from scams and fraudulent schemes.
Investor grievance redressal: SEBI has set up a mechanism to address investor grievances and complaints. Investors can approach SEBI with their grievances, and the regulator takes necessary steps to resolve the issue.
Overall, SEBI plays a critical role in protecting the interests of investors in the securities market in India. Its various initiatives and regulations ensure that investors can make informed decisions and have a fair and transparent market to invest in.
(h) What is meant by mutual fund ? Explain advantages and disadvantages. 2+8=10
Ans:- A mutual fund is a type of investment vehicle that pools money from multiple investors to invest in a diversified portfolio of securities such as stocks, bonds, and other financial instruments. The fund is managed by a professional fund manager who uses the pooled money to buy and sell securities in accordance with the fund's investment objectives.
Advantages of mutual funds:
Diversification: Mutual funds offer investors a diversified portfolio of securities, which helps to reduce risk and volatility.
Professional management: Mutual funds are managed by experienced fund managers who have the expertise to identify and invest in the right securities to maximize returns.
Convenience: Investing in mutual funds is easy and convenient. Investors can buy and sell mutual fund units at any time, and the fund manager takes care of the day-to-day management of the portfolio.
Liquidity: Mutual fund units can be easily redeemed at any time, providing investors with liquidity when they need it.
-Disadvantages of mutual funds:
Fees and expenses: Mutual funds charge various fees and expenses, such as management fees and expense ratios, which can eat into investors' returns.
No guarantee of returns: Mutual funds are subject to market risks, and there is no guarantee that investors will earn positive returns.
Lack of control: Investors have no control over the securities held in the mutual fund portfolio, and must rely on the fund manager to make investment decisions.
Tax implications: Mutual fund investments are subject to various tax implications, such as capital gains tax and dividend distribution tax, which can affect investors' returns.
(i) Explain the major advantages and disadvantages of investing in bonds.
Ans:- Advantages:
Steady income: Bonds provide a regular income stream in the form of interest payments, which is particularly beneficial for investors looking for a stable source of income.
Lower risk: Bonds are generally considered to be less risky than stocks, as they are issued by government entities or companies with strong credit ratings, and offer a fixed rate of return.
Diversification: Bonds can be used as a tool for diversifying an investment portfolio, as they offer a different risk-reward profile than stocks.
Preservation of capital: Bonds provide a way to preserve capital, as the principal amount invested is typically returned to the investor at maturity.
Transparency: Bond issuers are required to disclose information about their financial condition, which can help investors make informed investment decisions.
Disadvantages:
Low returns: Bonds typically offer lower returns than stocks, particularly in periods of low interest rates.
Inflation risk: Bond investors face the risk that inflation will erode the purchasing power of their returns over time.
Credit risk: There is always the risk that the issuer of a bond may default on their payments, particularly for lower-rated bonds.
Interest rate risk: Bond prices are sensitive to changes in interest rates, so if interest rates rise, the value of a bond may decrease.
Limited growth potential: Bonds offer limited potential for capital appreciation, as the return is typically fixed at the time of purchase.
(j) In which year SEBI came into effect ? Also point out the principal functions of SEBI. 2+8=10
Ans:- SEBI (Securities and Exchange Board of India) came into effect in 1988.
Functions of SEBI:
Regulating the securities market: SEBI regulates the securities market in India by setting rules and regulations for market participants and enforcing them to ensure fair and transparent trading practices.
Protecting investors: SEBI's primary function is to protect the interests of investors in the securities market by ensuring transparency, preventing fraudulent practices, and providing education and awareness programs.
Promoting development: SEBI promotes the development of the securities market in India by introducing new products and instruments, encouraging investment, and fostering competition among market participants.
Regulating intermediaries: SEBI regulates intermediaries such as brokers, portfolio managers, and investment advisors to ensure they follow ethical and professional standards.
Supervising stock exchanges: SEBI supervises and regulates stock exchanges in India to ensure they operate efficiently and transparently. Monitoring insider trading: SEBI monitors insider trading in listed companies to ensure that individuals with access to confidential information do not use it for personal gains.
Regulating credit rating agencies: SEBI regulates credit rating agencies to ensure that they provide accurate and reliable ratings of securities to investors.
Enforcing corporate governance norms: SEBI enforces corporate governance norms for listed companies to ensure that they adhere to ethical and transparent business practices.
Redressing investor grievances: SEBI has set up a grievance redressal mechanism to help investors resolve their complaints and grievances against market participants.
Promoting investor education: SEBI promotes investor education and awareness programs to help investors make informed investment decisions and protect themselves from fraudulent practices.
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