Financial Markets & Instruments

Capital markets are financial markets where long-term securities, such as stocks and bonds, are traded. They provide a platform for raising capital for businesses and governments.  On the other hand, Money markets are financial markets where short-term securities such as T-Bill, C-Paper, Cash Management Bills, Ways and Means advances, etc are traded.  * Statement 1 is correct- Government bonds are long-term debt securities issued by governments to finance their activities. The government bond market is a part of the capital market as it involves the trading of long-term debt securities.  * Statement 2 is incorrect- The call money market is a short-term market where funds are borrowed and lent for very short durations, usually overnight. It deals with short-term funds, and its transactions are not classified as part of the capital market. * Statement 3 is incorrect- Treasury bills are short-term debt instruments issued by governments to finance their short-term cash flow requirements. The treasury bill market, similar to the call money market, deals with short-term instruments and is not considered part of the capital market.  * Statement 4 is correct\- The stock market, also known as the equity market or share market, is where shares or stocks of publicly listed companies are bought and sold. The stock market is a part of the capital market as it involves the trading of ownership interests (equity securities) in companies.

* Statement 1 is incorrect: NABARD began promoting self-help groups in 1991-1992. And it served as the actual launch pad for the SHG movement. The Reserve Bank of India additionally permitted SHGs to open savings bank accounts in 1993.  * Statement 2 is correct: The Banks provide the loan to the Self-Help Group as a whole and it is the collective responsibility of the SHG to repay that loan. Hence all members of a group take responsibility for a loan that an individual member takes. Further, the SHG may decide to not provide any share in further loans to the defaulter member.  * Statement 3 is correct: The Financial Inclusion Fund scheme to support Scheduled Commercial Banks (SCBs) and Regional Rural Banks (RRBs) for enabling Dual Authentication options in the micro ATMs for SHG transactions is being launched to provide an enabling eco-system for the SHGs to seamlessly operate at Business Correspondent points with the proposed Dual Authentication feature. Thus, it can be said that SCBs and RRBs support the SHGs in availing the credits as per their needs.

* The beta value of a stock measures how much its price moves compared to the overall market: * Beta > 1: Stock is more volatile than the market (moves more). * Beta < 1: Stock is less volatile than the market (moves less). * Beta = 1: Stock moves in line with the market.

A convertible bond is a type of debt security that provides an investor with a right or an obligation to exchange the bond for a predetermined number of shares in the issuing company at certain times of a bond's lifetime. It is a hybrid security that possesses features of both debt and equity. * Statement 1 is correct: Convertible bonds tend to offer a lower coupon rate or rate of return in exchange for the value of the option to convert the bond into a common stock. Investors will generally accept a lower coupon rate on a convertible bond, compared with the coupon rate on an otherwise identical regular bond, because of its conversion feature. This enables the issuer to save on interest expenses, which can be substantial in the case of a large bond issue. * Statement 2 is correct: The option to convert to equity affords the bondholder a degree of indexation to rising consumer prices as equity prices can differ widely from the given interest and the difference in that can be used as a hedge for inflation.

Statement 1 is correct. Inflation-indexed bonds (IIBs) typically offer a fixed real rate of return above inflation. Therefore, the coupon rates on IIBs are adjusted based on changes in inflation to maintain the real rate of return. Statement 2 is correct. Inflation-indexed bonds (IIBs) provide investors with protection against inflation because their principal and interest payments are adjusted based on changes in the inflation rate. This helps investors preserve their purchasing power. Statement 3 is incorrect. Tax exemption Currently, the interest income on IIBs is taxable in India. Capital gains tax treatment on IIBs might depend on the specific holding period and type of investor.

Statement 1 is incorrect. Credit Rating Agencies (CRA) analyse a debtor's ability to repay the debt and also rate their credit risk. All the credit rating agencies in India are regulated by SEBI (Credit Rating Agencies) Regulations, 1999 of the Securities and Exchange Board of India Act, 1992. There are a total of six credit agencies in India viz, CRISIL, CARE, ICRA, SMREA, Brickwork Rating, and India Rating and Research Pvt. Ltd. Statement 2 is correct. ICRA Limited is a public limited company that was set up in 1991 in Gurugram. The company was formerly known as Investment Information and Credit Rating Agency of India Limited. Statement 3 is correct. Brickwork Ratings is recognized as an external credit assessment agency (ECAI) by the Reserve Bank of India (RBI) to carry out credit ratings in India. Brickwork Rating was established in 2007 and is promoted by Canara Bank. It offers ratings for bank loans, SMEs, corporate governance ratings, municipal corporations, capital market instruments, and financial institutions.

Statement 1 is correct: A portion of household financial savings in India does indeed go towards government borrowings. The government raises funds through various debt instruments like bonds and treasury bills. When households save money, they might invest it in these government debt instruments through banks or other financial institutions. This provides a source of funding for the government while offering a return to the investors (savers). Statement 2 is correct: Dated securities are a major component of India's internal debt. These are essentially government bonds issued at market-determined interest rates through auctions. Investors, including households, banks, and financial institutions, can participate in these auctions and purchase dated securities. Hence, both statements are correct.

Statement 1 is correct. Acquiring new technology - This is a capital expenditure. When a company acquires new technology (like software, machinery, or equipment), it's considered an investment that will benefit the organization for several years. The cost is added to the company's asset base and depreciated over its useful life. Statement 2 is incorrect. Debt vs. Equity Financing - The way a company finances its expenditures (debt or equity) doesn't determine whether it's a capital or revenue expenditure. The nature of the expense itself matters more. |Aspect|Capital Expenditure| Revenue Expenditure |
|--|--|--|
|Definition |Expenditure incurred for acquiring or improving fixed assets, which provide long-term benefits.|Expenditure that is incurred for routine operations and maintenance, providing short-term benefits.|
| Purpose|To acquire, enhance, or extend the life of assets such as buildings, machinery, or equipment.| To meet day-to-day operational needs, like salaries, utilities, and maintenance.|
|Impact on Assets | Increases the value of assets or creates new assets. |Does not increase the value of assets.|
|Accounting Treatment |Recorded as an asset on the balance sheet and depreciated over time. |Recorded as an expense in the profit and loss statement for the current period.|
|Time Horizon |Long-term benefit, typically spread over several years. |Short-term benefit, usually within the current year.|
|Examples | Purchase of machinery, construction of buildings, land acquisition. |Salaries, wages, rent, repairs, and maintenance costs.|

Foreign Direct Investment (FDI) typically involves a long-term interest and control in a company. However, the definition includes specific instruments and thresholds. Statement 1 and 3 are correct: Foreign Currency Convertible Bonds (FCCBs) and Global Depository Receipts (GDRs) are instruments used by Indian companies to raise capital abroad. Since these are essentially precursors to equity (convertible to shares) or represent underlying shares, they are treated as part of the FDI policy framework and statistics under the "Foreign Investment" category. Statement 2 is correct: Foreign Institutional Investment (FII)—now largely subsumed under Foreign Portfolio Investment (FPI)—is generally considered short-term. However, with certain conditions, it becomes FDI. According to international standards and the Arvind Mayaram Committee recommendations adopted by India, if an FPI holds a stake of 10% or more in a company, it is reclassified and treated as FDI. Statement 4 is incorrect: Non-Resident External (NRE) deposits are simply bank accounts held by NRIs in India. These are classified as External Debt (if repatriable) or Banking Capital, not foreign investment in a productive enterprise.

Statement 1 is correct: Retail investors through demat accounts can invest in Treasury Bills and Government of India Debt Bonds in the primary market. Statement 2 is correct: The Negotiated Dealing System-Order Matching is a government securities trading platform of the Reserve Bank of India. Statement 3 is incorrect: Central Depository Services Ltd (CDSL), is the first listed Indian central securities depository based in Mumbai. CDSL is promoted by BSE Ltd. jointly with leading banks such as State Bank of India, Bank of India, Bank of Baroda, HDFC Bank, and Standard Chartered Bank.