GUWAHATI UNIVERSITY (Board Question of Fundamentals of Investment for B.COM 6th semester of 2023)
Board Question paper of Fundamentals of Investment for B.COM 6th semester of 2023, SOLVED
2023
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.
Answer either
in English or in Assamese
1. Answer the following as directed: 1×10=10
(a) Write the full form of CARE.
ANSWER - The
full form of CARE is Credit Analysis and Research Limited. It is a credit rating
agency in India that provides credit ratings, research, and risk analysis
services.
(b) Which of the following is an example of financial
derivative? (Choose the correct
alternative)
(i)Share
(ii) Debenture
(iii) Forward contract
(iv) GDR
ANSWER - (iii)
Forward contract
(c) Who is the propounder of dividend capitalisation
model? (Choose the correct
alternative)
(i) Myron J. Gordon
(ii) David Ricardo
(iii) Adam Smith
(iv) John Stuart Mill
ANSWER - (i) Myron J. Gordon
(d) On which date SEBI introduced compulsory trading of
shares of listed companies in DEMAT?
(i) 1st January, 2016
(ii) 1st April, 2017
(iii) 1st January, 2018
(iv) 1st April, 2019
(Choose the correct alternative)
ANSWER - (ii) 1st April, 2017
(e) Who is the regulatory authority of Indian
securities market?
ANSWER - Securities
and Exchange Board of India (SEBI) is the regulatory authority of the Indian
securities market.
(f) NAV is a fund per share market value. (The statement
is True/False)
ANSWER - False.
NAV (Net Asset Value) is the per share market value of a mutual fund's
assets minus liabilities.
(g) “Securities market is a market for equity, debts and
derivatives.” (The statement is True/False)
ANSWER - True.
(h) Bond is a risk-free security. (The statement is True/False)
ANSWER - False.
(i) SBI mutual
fund is the first public sector mutual fund in India. (The statement is
True/False)
ANSWER - True.
(j) Investment in equity is safer than bank fixed deposit. (The
statement is True/False)
ANSWER - False.
2. Answer questions of the following in about 50 words each: 2×5=10
(a) Give the meaning
of equity share.
ANSWER - Equity share represents ownership in a
company, granting shareholders partial ownership rights and potential
dividends. It involves sharing profits, voting in decisions, and bearing risks
along with potential gains.
(b) State any two
risks associated with bonds.
ANSWER - Two risks associated with bonds are:
1. Interest Rate
Risk: Bond prices can fall when interest rates rise, impacting their market
value.
2. Credit Risk:
There's a chance of issuer defaulting on payments, affecting bondholders'
returns.
(c) Explain
any two types of financial derivatives.
ANSWER -
1. Futures
Contracts: These obligate buying/selling assets at a set price on a future
date, reducing price uncertainty. Used for speculation and hedging.
2. Options: Provide
the right (not obligation) to buy/sell assets at a predetermined price,
allowing investors to profit from market movements while limiting risk.
(d) Write two functions
of SEBI.
ANSWER -
1. Regulation:
SEBI oversees securities markets, formulates rules, and ensures fair
practices, protecting investors' interests and maintaining market integrity.
2. Investor
Education: It educates the public about investing, risks, and market
functioning, promoting informed investment decisions.
(e) Explain any two
assumptions of technical analysis.
ANSWER -
1. Price Discounts
Everything: Technical analysis assumes that all available information,
including past prices, is reflected in the current market price.
2. Price Moves in
Trends: It assumes that prices tend to move in trends, allowing
analysts to predict future price movements based on historical patterns.
3. Answer any four questions of the following in about 150 words each: 5x4=20
(a) Explain the structure of Indian securities
market.
ANSWER - The Indian securities market consists of
primary and secondary markets. The primary market involves the issuance of new
securities by companies through Initial Public Offerings (IPOs) and Follow-on
Public Offers (FPOs), enabling them to raise capital. The secondary market
facilitates the trading of already issued securities, like stocks and bonds,
between investors. It comprises stock exchanges like NSE and BSE, where buyers
and sellers meet. The market is regulated by SEBI, ensuring fair practices and
investor protection, while depositories like NSDL and CDSL handle electronic
holding of securities.
(b) Write a note on price earning ratio.
ANSWER - The Price-Earnings Ratio (P/E ratio) is
a valuation metric used to assess a company's stock price relative to its
earnings per share (EPS). It indicates how much investors are willing to pay
for each rupee of earnings. A higher P/E ratio may suggest overvaluation, while
a lower ratio may indicate undervaluation. It helps investors gauge the
market's perception of a company's growth potential and risk. However, P/E
ratios should be compared within the same industry for accurate analysis due to
varying growth rates and risk levels.
(c) Describe the
factors affecting the choice of mutual fund.
ANSWER - The choice of a mutual fund depends on
factors like investment goals, risk tolerance, and time horizon. Financial
objectives, whether income or growth, influence fund selection. Risk appetite
determines whether to opt for equity, debt, or balanced funds. Fees, expenses,
and past performance are considered. Market conditions and economic outlook
influence sector or thematic choices. Manager expertise, fund size, and exit
load impact decisions. An investor's knowledge, liquidity needs, and tax
considerations also play a role in selecting the right mutual fund.
(d) What do you mean
by fundamental analysis? What are its objectives?
ANSWER - Fundamental analysis is a method of
evaluating stocks by studying a company's financials, industry trends, and
economic factors. Its objectives include assessing a stock's intrinsic value,
gauging its potential for growth and profitability, and identifying if it's undervalued
or overvalued. It involves analyzing financial statements, earnings, cash
flows, and competitive advantages. The aim is to make informed investment
decisions based on a company's underlying strengths and weaknesses, considering
both quantitative and qualitative factors.
(e) Write any five
functions of stock exchange.
ANSWER -
1. Facilitates
Trading: Stock exchanges provide a platform for buying and selling
securities like stocks, bonds, and derivatives, ensuring liquidity and fair
market pricing.
2. Price
Discovery: They determine market prices through supply and demand
dynamics, aiding investors in making informed decisions.
3. Market
Transparency: Stock exchanges provide timely and accurate information,
enhancing transparency and reducing information asymmetry.
4. Capital
Formation: Companies raise funds by issuing shares to the public,
promoting economic growth and development.
5. Risk
Management: Exchanges offer risk mitigation tools like hedging through
derivatives, allowing investors to manage their exposure to market fluctuations.
(f) State any five
features of bond.
ANSWER –
1. Fixed Income: Bonds provide
regular fixed interest payments to bondholders, offering a predictable income
stream.
2. Maturity Date:
Bonds have a predetermined maturity date when the principal amount is
repaid to the bondholder.
3. Creditor
Relationship: Bondholders are creditors to the issuer, not
owners, entitling them to repayment before equity shareholders in case of
bankruptcy.
4. Coupon Rate:
Bonds have a fixed or floating coupon rate, determining the interest
payments to bondholders.
5. Liquidity: Bonds
can be traded in the secondary market, providing investors with potential
liquidity and an avenue to exit their investment.
4. Answer any four questions of the following in about
600 words each:
(a)Explain briefly
about different types of investment stating their advantages and disadvantages.
ANSWER – There
are several types of investments, each with its own set of advantages and
disadvantages.
1. Stocks: Investing
in stocks means buying shares of a company. The advantage is the potential for
high returns, as the value of stocks can increase significantly over time.
However, stocks are also risky and their value can plummet, resulting in losses.
2. Bonds: Bonds
are debt securities issued by governments or corporations. They offer steady
income through interest payments and are generally considered less risky than
stocks. However, bond returns are usually lower, and there's a risk of default.
3. Real Estate: Real
estate involves purchasing properties for rental income or capital
appreciation. It offers diversification and a hedge against inflation.
Nevertheless, real estate requires substantial initial investment, and property
values can fluctuate.
4. Mutual Funds:
Mutual funds pool money from multiple investors to invest in a diversified
portfolio of stocks, bonds, or other assets. They provide diversification and
professional management. However, fees can eat into returns.
5. ETFs: Exchange-Traded
Funds (ETFs) are similar to mutual funds but trade on stock exchanges. They
offer diversification and typically have lower fees. Yet, their prices can be
volatile.
6. Savings
Accounts: These offer low risk and easy access to funds, but the
returns are minimal, often not keeping up with inflation.
7. Commodities: Investing
in commodities like gold, oil, or agricultural products can provide a hedge
against inflation and diversification. However, commodity prices can be unpredictable.
(b) Do you think that
credit rating is an important service for the investor?
Justify your answer.
ANSWER – Yes, credit
rating is indeed an important service for investors. A credit rating provides
valuable information about the creditworthiness of a borrower, such as a
government or a company, and the likelihood of them defaulting on their
financial obligations. For investors, especially those looking to invest in
bonds or lend money, credit ratings offer a clear assessment of the risk
associated with a particular investment.
Investors rely on credit ratings to make informed decisions
about where to allocate their funds. A higher credit rating indicates a lower
risk of default, providing investors with confidence in the stability of their
investments. Conversely, a lower rating suggests higher risk and may lead
investors to demand higher interest rates or returns to compensate for the
added risk.
In summary, credit ratings serve as a reliable tool for
investors to assess the risk and potential return of their investments. They
play a crucial role in promoting transparency and helping investors make
well-informed choices in the complex world of finance.
(c) What do you mean
by mutual fund? Discuss the different types of mutual fund. 2+8=10
ANSWER – A mutual fund is a type of investment
vehicle where funds from multiple investors are pooled together to create a
diversified portfolio of stocks, bonds, or other securities. These funds are
managed by professional fund managers who make investment decisions on behalf
of the investors.
There are several
types of mutual funds, including:
1. Equity Funds:
These invest primarily in stocks, offering the potential for higher returns
but also greater risk.
2. Bond Funds:
Bond funds invest in various types of bonds, aiming for steady income and
lower risk compared to stocks.
3. Money Market Funds:
These invest in short-term, low-risk securities like Treasury bills,
providing stability and liquidity.
4. Index Funds:
These replicate the performance of a specific market index, aiming to match
its returns rather than outperform it.
5. Sector Funds:
These focus on specific industries or sectors, allowing investors to target
their investments.
6. Balanced Funds:
These combine both stocks and bonds to achieve a balance between growth and
income.
7. Target-Date
Funds: Designed for retirement planning, these gradually shift
investments from riskier to more conservative options as the target date
approaches.
8. Fund of Funds:
These invest in other mutual funds, offering diversification across
multiple funds.
(d) Discuss the role
played by SEBI in the protection of interest of the investors in Indian
securities market.
ANSWER – The Securities and Exchange Board of
India (SEBI) plays a crucial role in safeguarding the interests of investors in
the Indian securities market. SEBI is the regulatory authority responsible for
overseeing and regulating various aspects of the securities market to ensure
transparency, fairness, and investor protection.
SEBI's role includes:
1. Regulation and
Oversight: SEBI formulates and enforces rules and regulations to ensure
fair practices and prevent fraudulent activities in the securities market. It
oversees stock exchanges, brokers, and other market intermediaries to maintain
integrity.
2. Disclosure
Requirements: SEBI mandates companies to provide accurate and timely
information to investors. This ensures that investors have access to relevant
information to make informed investment decisions.
3. Investor
Education and Awareness: SEBI conducts awareness campaigns and
educational programs to enhance investor knowledge and promote safe investment
practices.
4. Regulating
Mutual Funds: SEBI regulates mutual funds to ensure they operate in the
best interest of investors and adhere to investment guidelines.
5. Prevention of
Insider Trading: SEBI enforces regulations to prevent insider trading,
ensuring that individuals with access to privileged information do not exploit
it for personal gain.
6. Redressal
Mechanism: SEBI provides a platform for investors to file complaints
and seek Redressal for grievances related to securities trading.
7. Continuous
Monitoring: SEBI monitors market activities, investigates irregularities,
and takes corrective actions to maintain market integrity.
(e) What are the
basic features of financial derivatives? Also state briefly about the major
participants in financial derivative market. 5+5=10
ANSWER – Financial derivatives are contracts
whose value is derived from an underlying asset, index, or reference rate. They
serve as tools for hedging risk, speculating on price movements, and managing
financial exposure.
The basic features of
financial derivatives include:
1. Underlying Asset: Derivatives
derive their value from an underlying asset, such as stocks, bonds,
commodities, or currencies.
2. Contractual Agreement:
Derivative contracts outline the terms, conditions, and specifications of the
transaction, including the price, quantity, and expiration date.
3. Leverage: Derivatives often
allow investors to control a larger position with a relatively small upfront
investment, magnifying potential gains and losses.
4. Risk Management: Derivatives
enable hedging against price fluctuations, reducing exposure to market risk.
5. Speculation: Traders can use
derivatives to speculate on the future price movement of the underlying asset,
aiming for profit.
6. Variety of
Instruments: Financial derivatives include options, futures, swaps, and
forward contracts, each serving specific purposes.
Major participants in
the financial derivative market include:
1. Hedgers:
These participants use derivatives to mitigate risk. For example, a company
might use derivatives to protect against unfavorable currency exchange rate
movements.
2. Speculators: Traders, who aim to
profit from price movements of the underlying asset, without necessarily owning
it, fall into this category.
3. Arbitrageurs: These participants
exploit price discrepancies between markets to make risk-free profits.
4. Market Makers:
These are intermediaries who provide liquidity to the market by quoting bid and
ask prices for derivatives, facilitating trading.
5. Investors: Individuals or
institutions looking to diversify their portfolios or gain exposure to specific
assets may use derivatives.
6. Financial Institutions: Banks
and financial firms often engage in derivative trading for various purposes,
including risk management and profit generation.
(f)
What is efficient market hypothesis? Discuss about the different forms of
efficient market hypothesis.
ANSWER – The Efficient Market Hypothesis (EMH) is
a theory that suggests financial markets quickly and accurately reflect all
available information, making it impossible to consistently outperform the
market or predict future price movements. In simpler terms, EMH posits that
stock prices always incorporate all relevant information, and it is not
possible to consistently find undervalued or overvalued stocks.
There are three forms
of the Efficient Market Hypothesis:
1. Weak Form: This
form asserts that stock prices already reflect all past trading information,
including price and volume data. Therefore, technical analysis (studying
historical price patterns) cannot consistently lead to excess returns.
2. Semi-Strong
Form: In this form, stock prices incorporate all publicly available
information, including financial statements, news, and announcements. Thus,
fundamental analysis (analyzing financial data) cannot consistently lead to
superior returns.
3. Strong Form:
This is the strongest version, suggesting that stock prices incorporate all
public and private information, even insider information. According to this
form, no type of analysis or information advantage can consistently beat the
market.
(g) What do you mean
by bond? Mr. X purchased a 10% coupon rate bond.
The bonds have a face value of Rs.10, 000 and maturity of 4 years. If the current
market interest rate is 8%, find the value of the bond using present value
method.
If the current market
price of the bond is Rs.
9,000; state whether X should sell it or hold it till its maturity, along
with the reason.
(Present value of Re.1 at 8%
discount rate is as follows:
1 year - 0.926,
2 years - 0.857,
3 years - 0.794, 4 years - 0.735)
ANSWER – A bond is a debt security issued by
governments or corporations to raise capital. When an individual purchases a
bond, they are essentially lending money to the issuer in exchange for regular
interest payments (coupon) and the return of the principal (face value) at
maturity.
In this scenario, Mr. X bought a 10% coupon rate bond with a
face value of Rs.10,000 and a 4-year maturity. The current market interest rate
is 8%. To calculate the value of the bond using the present value method, we'll
discount the future cash flows (coupon payments and face value) back to the
present using the given discount rates for each year:
Value of Bond =
(Coupon Payment Year 1 + Coupon Payment Year 2 + Coupon Payment Year 3 + Coupon
Payment Year 4 + Face Value Year 4) * Discount Factors
Value of Bond =
(1000 * 0.926) + (1000 * 0.857) + (1000 * 0.794) + (1000 * 0.735) + (10000 *
0.735)
Value of Bond =
Rs. 926 + Rs. 857 + Rs. 794 + Rs. 735 + Rs. 7350
Value of Bond =
Rs. 10,652
Since the current market price of the bond is Rs. 9,000,
which is lower than the calculated value of Rs. 10,652, Mr. X should consider
holding the bond until maturity. Selling it at the lower market price would
result in a loss compared to the higher intrinsic value calculated using the
present value method. By holding it until maturity, Mr. X can receive the face
value of Rs. 10,000 plus the final coupon payment, ensuring he receives the
full value of the bond.
FOR MORE INFORMATION -
- Board Question paper of Auditing and Corporate Governance for B.COM 6th semester of 2023, SOLVED -CLICK HERE
- Board Question paper of Indian financial system for B.COM 5th semester of 2022, SOLVED -CLICK HERE
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