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Gauhati University BCom 6th Semester Fundamentals of Investment Solved Question Paper 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.
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.
Gauhati University BCom Fundamentals of Investment Solved Question Paper 2023
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: 10×4=40
(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.
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