DEPARTMENT OF MANAGEMENT STUDIES

BA 035 SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT

Short Questions and Answers:

1. Define money market.
Money market deals with short-term financial assets, which are debt instrument.
The principle instrument dealt with in a money market is Treasury bill, Bill of
exchange commercial paper etc.

2. Define investment
Investment is the employment of funds on assets with the aim of earning income
or capital appreciation. Investment involves making a sacrifice in the present with the
hope of deriving future benefits.

3. What is portfolio?
Portfolio is generally defined as a collection of different kinds of securities.
Government and corporate bonds, equity share, preference shares and convertible
securities

4. What is Mortgage bond?
A Mortgage bond is a promise by bond issuing authority to pledge real property
as additional security. If the coy does not pay its bondholders the interest or principal
when it falls due, the bondholders have the right to sell the security and get buck their
dues.

5. What is Dated Government Security?
Dated Government Securities have a maturity period longer than one year and
curry fixed coupon rate. An interest is paid semi annually through excusable coupon.
It is either in the form of stock certificates or promissory notes.

6. What is commercial paper?
Commercial paper is likely to Treasury bill (no coupon rate and issued at
discount to face value) and is raised by corporate to meet their working capital needs.

7. What is cyclical stock?
These are the stocks whose earnings fluctuate in accordance with conditions of
boom depression recession recovery etc.

8. Who is jobber?
Jobber is a professional speculator. He works for a profit called turn.


9. Clarify the meaning of the numbers found in following quotation.
(100)ABC (149.50) 146, 146.25, 147, 148.55
ABC is the name of the company. The number in brackets to the left of coys
name is the number of shares. The number in the brackets to the right of coys name,
which in the case of ABC is 149.50. Represents previous closing quotation. The first
Un bracketed quotation after this represents the opening price. The subsequent
numbers represents one or two other prices at which ABC during the day with the last
number representing the closing price of ABC for the day.

10. How does the OTC market differ from organized exchange
The primary objective of an OTC (Over The Counter) market is to help small or
medium companies with viable projects but high risks.

11. Explain Mechanics of Badla financing.
Postponing a transaction till the next settlement day.

12. What is option trading?
Option is a contract, which involves the right to buy or sell securities at a
specified price within the specified time.

13. What is hedging?
Hedging is a device through which a person protects himself against loss.

14. What is repo?
In a repo transaction a holders of securities sells them with as agreement to
repurchase the same after a certain period at a predetermined price, which is higher
than the sale price.

15. Explain private placement.
Private placement refers to sale of equity or equity related instruments of an
unlisted coy or sale of debentures of a listed or unlisted coy.

16. What is Rights issue?
Rights issue involves selling securities in the primary market by issuing rights to
the existing shareholders.

17. What is preferential allotment?
Preferential allotment refers to sale of equity or equity related instruments of a
listed coy.

18. What is bond?
Bond is a legal instrument in corpora ting an agreement between corporation,
which issues bonds the bondholder who tends money, and the trustee, which is either
commercial bank or trust co. and represents bondholder, and trustee.

19. What is a blue chip?
Stock of high quality financially strong companies, which are usually the leader in
their industry. They are stable and mature companies. They pay good demands
regularly and market price of shares doesnot fluctuates widely.

20. What is a collateral trust bond?
Collateral trust bonds are issued generally. When two companies exist and are in
relationship of parent and subsidiary



21. What is spot delivery?
Spot delivery means delivery and payment on the same day as the date of the
construct or the next day.

22. Who is bull?
A bull is a person on the stock exchange who expects a rise in price of certain
security.

23. What is Treasury bill?
A Treasury bill is basically an instrument of short term borrowing by the
government of India.

24. What is participating preference shares?
Participating preference share get share of dividend over and above shares of
dividend at a fixed rate yearly

25. Who is a bear?
A bear cannot always keep his commitments because the price does not move
the way be wants the share to move. He is therefore, said to be struggling like a lane
duck

26. What is a Growth shares?
Growth shares is a Shares of companies that have a fairly enriched
position
in a growing market and which enjoy an above average rate of growth as well as
profitability

27. What is an Income shares?
An income share is a share of companies that have fairly stable operations,
relatively limited growth opportunities, and high dividend payout ratios.

28. What is a Cyclical Shares?
A cyclical share is a share of companies that have a pronounced cyclicality in
their operations.

29. What is a Defensive Shares?
A Defensive Shares is a shares of companies that are relatively unaffected by the
ups and downs in general business conditions.

30. What is a Speculative Shares?
A Speculative shares is a shares that tend to fluctuate widely because there is a lot
of speculative trading in them
.
31. What is a slow growers?
Slow growers are large and ageing companies that are expected to grow slightly
faster than the gross national product.

32. What is a Stalwart?
Stalwart is a giant companies that are faster than slow growers but are not agile
climbers.
33. What is a Fast grower?
Fats growers are small, aggressive new enterprises that grow at 10 to 25 percent a
year.

34. What is a Cyclical?
Cyclical is a companies whose sales and profit rise and fall in a regular, through
not completely predictable fashion.

35. What is Turnarounds?
Turnarounds companies, which are steeped in, accumulated losses but which
show signs of recovery. Turnarounds companies have the potential to make up lost
ground quickly.

36. What is an Asset plays?
Assets plays companies that have valuable assets, which have been somewhat,
overlooked by the stock market.

37. What is a Net Asset value?
The net asset value (NAV) is the actual value of a share / unit on any business
day. It is computed as follows:
NAV= Market value of the funds investments+ Receivables+
Accrued income - Liabilities Accrued expenses
Number of shares or units outstanding

38. What is Professional Management?
When you invest in a mutual fund scheme, you are relieved of the chores and
tensions associated with managing investments on your own. Mutual funds are
managed by professionals who decide what to buy and sell, and when. Their
decisions are supposedly guided by investment research and analysis.

39. What is a future?
A futures contract is an agreement between two parties to exchange an asset for
cash at a predetermined future date for a prize that is specified today. The party,
which agrees to purchase the asset, is said to have a long position and the party,
which agrees to sell the asset, is said to have a short position.

40. What is a Rights Issue?
A rights issue involves selling securities in the primary market by issuing rights
to the existing shareholders. When a company issues additional equity capital, it has
to be offered in the first instance to the existing shareholders on a pro rata basis. This
is required under section 81 of the companies Act 1956.

41. What is a Private Placement?
Private placement refers to sale of equity related instruments of an unlisted
company or sale of debentures of a listed or unlisted company.

42. What is a Preferential Allotment
An issue of equity by a listed company to selected investors at a price, which
may or may not be related to the prevailing market price, is referred to as preferential
allotment in the Indian capital market.
43. What is a Value-weighted index?
An index reflecting the aggregate market capitalization of the sample shares in a
certain year (or month or week or on a particular day) in relation to a base year.

44. What is a Call risk?
A bond may have a call provision that gives the issuer the option to call the bond
before its scheduled maturity. The issuer would generally exercise the call option
when interest rate decline. While this is attractive from the issuers point of view, it
exposes the investors to call risk.

45. What is SML?
There is a linear relationship between their expected return and their covariance
with market portfolio. This is called Security Market Line.

46. What is a callable bond?
Callable bonds give the issuer the right (option) to redeem them prematurely on
certain terms.

47. What is Puttable bonds?
Puttable bonds give the investor the right to prematurely sell them back to the
issuer on certain terms.

48. What is a Straight bond?
The straight bond (also called plain vanilla bond) is the most popular type of
bond. It pays a fixed periodic (usually semi-annual) coupon over its life and returns
the principal on the maturity date.

49. Who is commission broker?
He is an independent dealer in securities. He purchase and sells securities in his own
name. He is not allowed to deal with the non-members. He can either deal with
broker or another jobber.

50. Who is Floor Broker?
The floor broker buys and sells shares for other brokers on the floor of the exchange.
He is an individual member, owns his own seat and receives commissions on the
orders they executes. He helps other brokers when they are busy.

51. Who is Taraniwalla?
The Taraniwalla is also called a jobber. He makes an orderly and continuous auction
in the market in the stock in which he specializes.

52. Who is Odd Lot Dealer?
The standard trading unit for listed stocks is designated as a round lot, which are
usually a hundred shares. Anything less than the round lot is an odd lot, which is
traded on the floor of the exchange because odd lots appear in odd quantities.

53. Who is Budliwalla?
The financier in the stock exchange is also called the Budliwalla. For giving credit
facilities to the market, he charges a fee called contango or backwardation charge.

54. Who is Arbitrageur?
An Arbitrageur is a specialist in dealing with securities in different stock exchange by
Security Dealers. He makes a profit by the difference in prices prevailing in different
centers of market activity.

55. Who is Security Dealers?
The purchase and sale of government securities is carried on the stock exchange by
security Dealers. Each transaction of purchase or sale has to be separately negotiated.

56. Define Debenture?
According to Companies Act 1956 Debenture includes debenture stock bond and
any other securities of company, whether constituting a charge on the assets of the
company or not.

57. What is secured debenture?
A secured debenture is secured by a lien on the companys specific assets. In the case
of default the trustee can take hold of the specific assets on behalf of the debenture
holders.

58. What is NYSE?
The NYSE is used as an example of a competitive market because of the double
auction process through which buyer and seller confront one another, through their
brokers, under the market influence of the exchange, which provides the mechanism
and physical market place where the process occurs.

59. Explain the object of well-established stock market.
A well functioning secondary market is essential to provide investors with confidence
that they will be able to sell securities in a reasonable time without major price
concessions. The liquidity of the market is crucial to the flow of capital which
sustains a market economy.

60. What is OTC?
The OTC is not a physical market place but an electronic network where the
negotiation process prevails. Organised exchanges are physical locations where the
auction process is the key to market making. The OTC is also larger than the
physical exchange both in dollar volume handled and number of issues traded.

61. What is short selling?
If an investor sells securities he eliminates his long position, and when he strongly
believer that an issue is over pried and will in most likelihood fall short within the
foreseeable future, he may ask his broker to sell short. A short sale involves selling
an issue that one does not wish to deliver.

62. What is stop order?
The stop order is a signal to execute a market order when the market price touches
the stop price as opposed to the limit order which imposes either a ceiling(floor) on
the price at which the order may be executed in buying. A stop limit order is thus a
restrictive special class of limit order.

63. What is Monopoly power in stock market?
Monopoly power implies complete price control which, with the existence of the
double-auction market, cannot exist. The stop and limit orders entered on the
specialists book must be executed and in the final analysis. The market price is
determined by the buy and sells orders of customers. The specialist may have an
influence on stock price, but it is certainly not monopolistic.

64. Distinguish OTC & NYSE.
The OTC market differs in that there is no physical market place as with the NYSE.
Further the OTC market relies upon negotiated bidding instead of the auction system
which chatacterises the NYSE.

65. What is margin trading?
Margin trading is a good idea so long as the investor recognizes the magnification of
both profits AND losses with changes in securities prices at differing margin levels.
Also, trading does not have to take place to the full extent of the margin required.
Margin trading is effective so long as the stocks total return exceeds the cost of
borrowing funds.

66. What is Characteristics line?
The characteristic line is finance terminology for a regression line. A regression line
with a negative slope indicates as inverse relationship between the variables. The
financial significance of this would be that the security in question tends to move
inverse to the market. In reality very few securities exhibit this characteristic.

67. What is cyclical industry?
A cyclical industry is one, which is extremely sensitive in measure of economic
activity as compared to the overall business cycle activity.

68. What is Eurobond?
A Eurobond is an international bond paying interest denominated in U.S $ and traded
in markets outside of the U.S. A Yankee bond is an international bond with interest
dominated in U.S. $s which is traded in U.S. markets.

69. What is junk bonds?
The term junk refers to the high level of default risk of the issues. Junk bonds
became popular vehicles for financing acquisitions in the 1980s.

70. What is pay-in-kind feature?
A pay-in-kind feature refers to the option of the issuer to pay with additional
securities instead of paying interest in cash.

71. What is reinvestment risk?
Reinvestment risk refers to the uncertainty of the return that can be earned on the
reinvestment of coupon income or the reinvestment of the investment principal.

72. What is roll?
Roll refers to the reprising of a bond because of higher or lower yields to maturity on
the yield curve as the bond ages.


73. What is long delivery?
When an investor buys securities he is said to be long in the issue.

74. What is hand delivery?
Hand delivery is the transaction involving delivery and payment with in the time of
the contract or on the date stipulated when entering into bargain, which time or date is
usually not more than 14 days following the date of contract.

75. What is special delivery?
Special delivery in the delivery and payment exceeding 14 days following the date of
contract as specified when entering in to a bargain, with the specific permission of the
president of Governing Board. These transactions are conducted at the time of
executing an order.

76. What is Limit order?
Limit orders are instructions to a broker to buy or sell as a started price or better when
a buyer or seller of stock feels that be can purchase or sell a stock at a slight
advantage to himself within the next two or three days, he may place limited order to
sell at a specified price.

77. What is Market order?
Market orders are instructions to a broker to buy or sell at the best price immediately
available. Market orders are commonly used when trading in active stocks or when a
desire to buy or sell is urgent.

78. What is Stop order?
Another type of order that may be used to limit the amount of losses or to protect the
amount of capital gain is called stop order. This order is sometimes also called the
stop loss order.

79. What is Options?
Options is a contract which involves the right to buy or sell securities at a specified
price with in the stated time.

80. What is put option?
Negotiable contract is gives the holder the right to sell a certain number of shares at a
specified price within a limited time.

81. What is Call?
Call is the right to buy under a negotiable contract.

82. What is a cash sale?
Fictitious transaction in a speculator sales the security and then buys it at a higher
price through another broker.

83. What is cornering?
Brokers create a condition when the entire supply of particular securities is purchased
by small group of individuals. In this situation, those who have dealt with short sales
will be squeezed and will not be able not make their deliveries in time.

84. What is Blank transfer?
One in which the transferor signs the form but does not fill in the name of transferee
while transferring shares. Such a transfer facilities speculation in securities.

85. What is Arbitrage?
Arbitrage is a techniques of making a profit on stock exchange trading through
difference in price of two different markets. If the advantage of price is taken
between two markets in the same country domestic arbitrage. Arbitrage usually
equalizes the price of security in different placer.

86. What is Bull campaign of Bear Raid?
Bulls begins spread rumors in the market above rise in prices when there is an over
brought condition in the market. Purchase made the speculators exceed sales made
by them.

87. What is Bear Raid?
Bear Raid is a condition when speculative sales made by bear speculators exceed the
purchases made by them & they spread rumors to bring the price down.

88. What is Lame Duck?
A Bear cannot always keep his commitments because the price does not move the
way he wants the share to move. He is therefore said to be struggling like a lame
duck.

89. What is Stag?
Stag is cautious speculator.

90. What is Hedging?
Hedging is a device through which a person protects himself against loss.

91. What is purchasing power risk?
Purchasing poser risk or inflation risk is associated with decrease in purchasing power
of money on account of inflation.

92. What is Business risk?
Business risk is associated with the fluctuations in a firms earnings. The more the
variations in the earnings streams, the greater the business risk faced by the firm

93. What is financial risk?
Financial risk is connected to the capital structure decisions of the firm. The presence
of fixed interest carrying debt can always take away priority a part of the earnings of
the coy and leave behind no or less earnings for common shareholders.

94. What is liquidity risk?
Liquidity risk is not so sharply defined as a business or financial risks. Liquidity has
two connotations it would mean the liquidity of the firm to meet its obligations or
the liquidity of the asset to the investor which implies that he should receive
periodically a definite stream of cash flows to meet his requirements and should be
capable of transferring the asset if necessary.

95. What is interest rate risk?
Interest rate risk reflects the adverse possibility of depreciation in the asset values on
account of a change in the general level of interest rates.

96. What is default risk?
Default risk is of major concern to debenture holders and preference shareholders as
they are recipients of fixed income on their investment.

97. What is market risk?
Market risk I the risk which is common to all the firms. Macro level factors, which
affect all the business firms, are grouped together as the market factor.

98. What is political risk?
Political risk manifests itself in the firm of ideological changes in economic policy
environment as a result of change in the govt.

99. What is call money market?
It is the market for extremely short period loans some terms only for a day or for a
few days.

100. What is mutual fund?
A mutual fund is a fund in which investors pool their funds to invest in a diversified
portfolio so as to spread and minimise risk.