Volviendo a la transacción (Protosintaxis-Sin- (Protosintaxis-Sin-taxis)(Protosintaxis-Sin-taxis)

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l Stocks : It is a type of security that signifies ownership in a

corporation and represents a claim on part of the corporation’s assets and earnings.

l Equity : It is the residual claimant or interest of the most junior

class of investors in assets, after all liabilities are paid.

l Equity shares : Shares that carry no preferential or special

rights in respect of annual dividends and in the repayment of capital at the time of liquidation of the company are called equity shares.

l Share premium : It is the amount that is over and above par

value on the amount that has been subscribed to for a new issue of corporate capital. It can only be used for certain specific purposes that are laid out in the corporation’s by-laws.

l Bonds : It is a debt instrument issued for a period of more

than one year with the purpose of raising capital by borrowing. Generally, a bond is a promise to repay the principal alongwith interest on a specified date.

l Debentures : It is a type of debt instrument that is not secured

by physical assets or collateral. Debentures are backed only by the general creditworthiness and reputation of the issuer.

l Dividend : A sum of money paid regularly (typically annually)

by a company to its shareholders out of its profits or reserves.

l Earning Per Share (EPS) : It is the portion of the company’s

profits allocated to each outstanding share of common stock. The essential equation for EPS is:

EPS = _{Total Number of Capital Stock Shares}Net Income

l Price-Earnings Ratio (P/E Ratio) : It is the valuation ratio

of company’s current share price compared to its per share earnings. It is calculated as:

P/E Ratio = _{Earnings Per Share (EPS)}Market Value Per Share

l Stock exchange : It is the organized and regulated financial

market where securities are bought and sold at prices governed by the forces of demand and supply.

l Face value of stocks or bonds : The face value of bonds

represents the principal or redemption value. Interest payments are expressed as a percentage of face value.

l Market value of stock : The current quoted price at which

investors buy or sell a share of common stock or a bond at a given time.

l Primary market :It is the part of the capital market that deals

with issuing of new securities. It is the market in which buyers and sellers negotiate and transact business directly without any intermediary such as resellers.

l Secondary market : It is also called after-market. It is

the financial market in which previously issued financial instruments such as stocks, bonds, options etc., are bought and sold.

l Dematerialization : It refers to the absolute and relative

reduction in the quality of materials required to serve economic functions in society. In finance, it refers to the substitution of paper form securities by book-entry securities.

l Demat account : In India, shares and securities are held

electronically in a Dematerialized Account (Demat Account), instead of the investor taking physical possession of certificates. The account is opened by the investor while registering with the investment broker.

l Nifty : Nifty stands for National Stock Exchange’s Fifty. It

is an index computed from performance of top stocks from different sectors listed on National Stock Exchange (NSE).

l BSE SENSEX : The BSE SENSEX also called the BSE 30

or simply the SENSEX is a free float market index of 30 well established and financially sound companies. (It stands for Bombay Stock Exchange Sensitive Index.)

l National Stock Exchange of India (NSEI) : The NSEI

was set up by All India Financial Institutions and Commercial Banks in November 1992. In this, the system of transaction of securities is very efficient and transparent. It is also called a ‘Model Exchange’.

l Bear : A bear is a pessimistic speculator in the stock market

who always sells securities in anticipation of falling prices.

l Bull : A bull is an optimistic speculator who always buys

securities in anticipation of selling them at higher prices and thereby makes a profit.

l Initial Public Offer (IPO) : An Initial Public Offering (IPO)

is a type of public offering where shares of stock in a company are sold to the general public, on a securities exchange, for the first time.

Multiple Choice Questions

1. A place where stocks and shares and other long term

commitments or investments are bought and sold is called (a) Commodity market (b) Stock market

2. An optimistic speculator who buys securities in anticipation of selling them at higher prices is called

(a) Bull (b) Bear

3. Suppose Companies A and B both earn `1000, but Company A has 10 shares outstanding, while Company B has 50 shares outstanding. Which company’s stock would you like to own?

(a) Stock of company A (b) Stock of both A and B

4. What is the market value of a `10,000 face value bond with a 10 percent coupon rate when the market’s rate of return is 9%?

(a) More than its face value (b) Less than its face value

5. What is the yield on a share of preferred stock, which has a `100 par value and is currently selling for `160 in the market place? The shares of preferred stock pays a 16% annual dividend.

(a) 10% (b) 14%

6. If the intrinsic value of a share of common stock is less than its market value, which of the following is the most reasonable conclusion?

(a) The market is undervaluing the stock (b) The market is overvaluing the stock

(d) The stock offers a high dividend payout ratio

7. In case the market’s required rate of return for a particular bond is less than its coupon rate, the bond is called

(a) Discount bond (b) Premium bond (c) Face bond (d) Par bond

8. The record of a country’s transactions in goods and services and assets with the rest of the world is called .

(a) Current account (b) Capital account (c) Balance of Payments (d) Balance of trade

9. Look at the picture and identify the building

(a) Stock Exchange (b) Reserve Bank of India (c) Parliament House (d) None of these

10. If the market value of a share is lower than the face value,

then the shares are said to be at a (a) Discount (b) Dividend (c) Premium (d) Equality

11. Mr. Chopra wants to start a company, ABC Limited with 8 friends. Mr Chopra invests `500 and invites the friends to invest `200 each, to which all the friends agree. In this case, the total capital of the company would be

(a) `2000 (b) `2200

12. A trading account of a company reveals the (a) Financial position of an organisation (b) Assets of the company

13. The regulatory power of SEBI includes

(a) Protecting the interests of investors in securities (b) Promoting the development of the securities market

14. Shares and debentures of a company or corporate body or government are the

(a) Economic instruments (b) Financial instruments

15. If a company is currently trading at `43 a share and earnings over the last 12 months were `1.95 per share, then P/E Ratio for the stock would be

(a) 21.05 (b) 22.05 (c) 23.05 (d) 24.05

16. Business in stock exchanges and any other securities market is regulated by

(a) Stock Exchange Market (b) Government Authorities

17. Bonds issued by companies with a low credit rating and high growth potential are called

(a) Convertible bonds (b) Non-convertible bonds (c) Secured bonds (d) Floating bonds

18. The part of the capital market that deals with issuing of new securities is known as

(a) Primary market (b) Secondary market (c) Capital market (d) Trading market

19. A sum of money paid regularly by a company to its shareholders is called

(a) Profit (b) Dividend (c) Share (d) Equity

20. An optimistic speculator in the stock market is called

(a) Bear (b) Bull

21. Interest on government securities on fixed basis is known as

(a) Bank Rate (b) Prime Lending Rate (c) Coupon (d) None of these

22. A market for existing securities rather than new issues is known as the

(a) Secondary market (b) Prime market (c) Tertiary market (d) Capital market

23. A market where new securities are bought and sold for the first time is known as

(a) Primary market (b) Secondary market (c) Tertiary market (d) Current market

24. A market for relatively long term financial instruments is called

(a) Tertiary market (b) Secondary market (c) Primary market (d) Capital market

25. Which of the following is not a characteristic of stock exchange?

(a) It allows securities to be listed on more than one exchange (b) It requires one to be a member in order to be allowed to

trade

(d) Stocks traded on exchange must meet minimum listing requirements

26. What is the most appropriate goal of a firm? (a) Profit maximisation

(b) Stakeholder maximisation (c) EPS maximisation

(d) Shareholder wealth maximisation

27. Securities and Exchange Board of India (SEBI) was established in 1988 and was given statutory status through an Act in

(a) 1988 (b) 1989

28. Which is not the function of stock exchange? (a) Pricing of securities

(b) Safety of transaction

29. Important money market instruments are?

(a) Treasury Bills (b) Commercial Bills (c) Call money (d) All of the above 30. Equity shareholders are called

(a) Partners of the company (b) Owners of the company

31. Public deposits are the deposits that are raised directly from (a) The Directors (b) The Auditors

32. Those shares which do not carry any preferential rights in the payment of annual dividend and repayment of capital in the event of liquidation are called

(a) Equity Shares (b) Preferential Shares

33. Which is not the advantage of public deposit? (a) Easy method

(b) Fair weather friend (c) No need of mortgage (d) Benefit of trading on Equity 34. Trade credit is an example of

(a) Short term finance (b) Long term finance

35. Functions of financial markets include (a) Facilitating price discovery

(b) Providing liquidity to financial assets (c) Reducing the cost of transactions (d) All of the above

Answers

1. (b) 2. (a)

3. (a) Explanation: EPS of Company A = Net Earnings

Outstanding Shares = 100010 = 100

EPS of Company B = Net Earnings

Outstanding Shares = 100050 = 20

You would like to own the stock of company A with an EPS of 100, whereas company B has EPS of 20

4. (a) Explanation : When the required rate of return is less than the coupon rate, the bond sells at a premium i.e., greater than the face value.

5. (a) Explanation : The dividend on the share of preferred stock is `16 (16% × 100). The yield is :

Yield = Dividend

Market Price = 16160 = 10%

6. (b) 7. (b) 8. (c) 9. (a) 10. (a)

11. (c) 12. (d)

13. (c) Explanation : Securities and Exchange Board of India (SEBI) is authorised to regulate all merchant banks on issue activity, lay guidelines and supervise and regulate the working of mutual funds and oversee the working of stock exchanges in India. 14. (b) Explanation : All securities are financial instruments.

15. (b) Note : P/E Ratio = Market Value Per Share

Earnings Per Share (EPS)

16. (c)

17. (a) Note : Bond holders can convert these into a specified number of shares of common stock in the issuing company or cash of equal value.

18. (a) 19. (b) 20. (b)

21. (c) Explanation : A coupon payment on a bond is a periodic interest payment that the bondholder receives during the time between when the bond is issued and when it matures.

22. (a) 23. (a)

24. (d) Explanation : Capital market is a part of a financial system concerned with raising capital by dealing in shares, bonds and other long-term investments.

25. (c) 26. (d) 27. (d) 28. (d) 29. (d)

30. (b) Explanation : The entity owner of shares or stock, are more commonly known as shareholder or stockholder.

31. (c) 32. (a) 33. (b)

34. (a) Explanation : Trade credit refers to that credit facility which is extended by one businessman to another for purchase of goods and services.

35. (d) Explanation : Financial market is a market for the creation and exchange of financial assets.

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