Securities Market Module (Advanced) Interview Questions
With the beginning of a new academic year, we understand that Securities Market Module (Advanced) interviews are once again on your mind. This post is part of a series on the most common technical finance interview questions and answers, covering a wide range of topics.
1. What are Capital Budgeting’s Limitations?
- Since of the large sums involve in capital budgeting, decisions must be made carefully.
- Capital budgeting approaches necessitate forecasting future cash flows (inflow and outflow of cash flows)
- Information interdependence
- Measurement of future unpredictable circumstances or situations is a problem.
2. Explain the Payback Period Technique for Capital Expenditure Proposal Evaluation.
The Payback Period (PBP) is compute using cash flows and cumulative cash flows to see whether a project returns the investment in a reasonable amount of time. If the time period is too long, the project should be rejected.
3. What exactly are IRR and ARR?
4. Deep Discount Bonds: What Are They?
Zero-coupon bonds are bonds that have a face value or par value that is reimburse when the bond matures, but the investor pays a lower price for the bond. The term zero-coupon bond refers to a bond that does not make periodic interest payments or does not pay interest during the life of the bond. When the bond matures, the investor receives simply the par value.
5. What exactly is the distinction between debt and equity?
- Debt is the company’s liability that must be paid off after a set period of time. Equity is money raise by a corporation by issuing Equity shares to the public or investors that can be use for a long time.
- Outsiders are debt holders, whereas equity investors are the true proprietors of the company.
- Debt is a borrowed fund, whereas equity is money that is owe.
- Debt refers to money owing by the firm to another individual or financial institution, whereas Equity refers to the company’s capital.
6. Is debt or equity more expensive?
For a variety of reasons, the cost of equity is always higher than the cost of debt. One of the most important considerations when deciding between debt and equity is that the cost of borrowing with debt is tax-deductible due to the company’s expenses. Equity is also more expensive since, unlike borrowers, equity investors do not always receive fixed dividends. Since lenders would receive their funds first, there will be less risk connected with debt.
7. What does monetary policy entail?
A monetary policy is a government policy that regulates the amount of money available in a country. The availability or flow of money in the economy is heavily influenced by monetary policy. The value of the rupee and the rate of interest on it are both affected by a government’s monetary policy. Governments often strive for economic stability and growth when selecting what monetary policy to implement.
8. What is the working capital calculation formula?
- Working capital is the difference between an organization’s current assets and current liabilities. This is critical for all businesses to fulfill their day-to-day expenses.
- Working capital is calculate by subtracting current assets from current liabilities or short term assets from short-term liabilities.
- Inventory, debtors, bills receivables, tradable securities, prepaid expenses, cash, and bank balance are all examples of current assets.
- Short-term obligations, creditors, bills payable, bank overdraft, and outstanding expenses are examples of current liabilities.
9. What is the difference between the Profitability Index (pi) and the Benefit Cost Ratio (b/c Ratio)?
- The benefit-cost ratio (BCR) is a profitability metric use in cost-benefit analysis to assess the feasibility of project cash flows.
- The Benefit Cost Ratio compares the present value of all project benefits/cash flows to the present value of all project costs.
- The benefit cost ratio is calculate as the present value of the project’s predicted benefit divided by the present value of the project’s cost.
10. Explain money laundering.
Money laundering is a method use by criminals to conceal the illegal source of their revenue. Money is “clean” of its illicit origin and made to appear as valid/ethical business revenues/ earnings by passing it via complex transfers and transactions, or through a series of firms.
11. Do you know what “Securities” and “Securities markets” mean?
Securities are money-raising financial products. The basic purpose of the securities markets is to allow capital to move from those who have it to those who require it. The securities market facilitates the movement of resources from individuals with idle resources to those who require them for productive purposes.
Securities markets serve as conduits for allocating savings to investments, separating the two activities. As a result, savers and investors are bound not by their own skills, but by the economy’s ability to invest and save, resulting in increased savings and investment in the economy.
12. Do you understand the terms “Risk” and “Return”?
The benefit that an investor will obtain from investing in security is referr to as a return. The possibility that the expect rewards would not materialize is refer to as risk. A firm may, for example, issue a bond to raise funds from an investor. A bond is a debt security, meaning it symbolizes the company’s borrowing.
The security will be granted for a set period of time, after which the investor will be refund the amount borrow. The return will be given to the investor in the form of interest at a rate and frequency state in the instrument.
13. What is the structure of the Indian stock markets?
The securities market is the market in which securities are issue, purchased by investors, and then transferred among investors. The primary market and secondary market are two interrelate and inseparable parts of the securities market. Issuers raise capital by selling securities to investors in the primary market, also known as the new issue market.
The secondary market, often known as the stock exchange, permits the trade of previously issued securities, allowing investors to exit a position. In the secondary markets, the risk of security investment is shifted from one investor (seller) to another (buyer). The primary market is where financial assets are create, while the secondary market is where they are sold.
14. In the securities markets, what do stockbrokers and sub-brokers do?
Stockbrokers are members of stock exchanges who are register to trade. They sell new security issuances to investors. They facilitate investor purchase and sell transactions on stock exchanges. On stock exchanges, all secondary market transactions must be handle through register brokers.
Sub-brokers assist brokers in reaching a larger number of investors with their services. Several brokers offer their clients research, analysis, and recommendations on which securities to purchase and sell. Brokers may also offer their clients screen-based electronic trading of securities or take orders over the phone. Brokers are compensate for their services with a commission.
15. What exactly is an asset management firm? Portfolio managers: what do they do?
Asset management firms and portfolio managers are investment experts that assist in the selection and administration of a securities portfolio. Asset management firms are allowed to sell securities (known as units) that represent participation in a money pool that is use to construct the portfolio. Portfolio managers are not permit to combine the money collect from investors and do not provide any security.
They construct and manage a portfolio on behalf of the investor. Both asset managers and portfolio managers charge fees to investors and may work with other security market intermediaries such as brokers, registrars, and custodians to complete their tasks.
16. In the securities markets, what role do merchant bankers play?
Merchant bankers, sometimes known as issue managers, investment bankers, or lead managers, assist issuers in gaining access to the securities market. They assess capital requirements, design a suitable instrument, participate in pricing, and oversee the entire issuance process until the securities are issued and list on a public exchange.
17. What are underwriters’ roles in the securities markets?
Underwriters are primary market professionals who pledge to buy the portion of a security offering that investors may not buy. In the primary market, they provide issuers with the assurance that if the securities being offer do not generate the desire demand, the underwriters will step in and acquire the securities. Primary dealers are the government bond market’s expert underwriters.
18. What are credit rating agencies’ roles in securities markets?
Credit rating firms assess a debt security to provide a professional judgement on the issuer’s capacity to meet the security’s obligations for interest payment and principal repayment. They utilise rating symbols to rate debt securities, allowing investors to estimate a security’s default risk.
19. What is an investment adviser’s role?
Investment advisers assist investors in selecting stocks to buy based on their needs, time horizon return expectation, and risk tolerance. They may also help investors create financial plans by defining the goals for which they need to save money and recommending appropriate investment techniques to achieve those goals.
20. Are you familiar with Floating Rate Bonds?
Floating rate bonds have an interest rate that is not fix, but re-sets periodically base on a pre-determined benchmark rate. A corporation could, for example, issue a 5-year variable rate bond with rates adjusted semi-annually at 50 basis points higher than the 1-year yield on central government assets. The 1-year benchmark rate on government securities is calculate every six months using current market values. This benchmark rate + 50 basis points is the coupon rate the corporation will pay for the next six months.
Variable-rate bonds and adjustable-rate bonds are other names for floating-rate bonds.
21. What is maturity yield?
The Yield to Maturity (YTM) of a bond is the rate that correlates the present value of future cash flows from the bond with the current price of the bond. The YTM changes in tandem with bond prices. As a result, YTM is the implied discount rate in the bond value at a given moment in time. The YTM method is a frequently use and popular method for calculating the return on a bond investment. YTM is commonly use in debt market yield quotations.
22. Are you familiar with the term “follow-on public offer” (fpo)?
A follow-on public offering occurs when an issuer has previously issued an IPO and now wants to sell more securities to the public. A corporation can issue more shares if the total amount of the proposed issue plus all other issues in a fiscal year does not exceed 5 times the pre-issue net value.
23. What do you mean when you say “Green shoe option”?
Companies employ the Green Shoe Option (GSO) in a public offering to provide price stability in the secondary market soon after listing. A corporation that chooses the Green Shoe option can allot additional shares to the general public who have subscribed in the issuance up to 15% of the issue size. The revenues from this additional allocation will be held in a separate bank account and use to purchase shares on secondary markets once the shares have been list, in case the price falls below the issue price. The price of the shares is project to benefit from this.
24. Are you familiar with the term “mutual fund”?
Mutual funds are vehicles for raising funds from investors and investing them in various markets and assets in accordance with mutual fund and investor investment objectives. In other words, a small investor can benefit from professional fund management services provided by an asset management firm by investing in a mutual fund.
25. Do you know about equity mutual funds?
A portfolio of equity shares and equity-relate products is held by an equity fund. The fund’s return and risk will be similar to those of an equity investment. Equity fund investors want growth and capital appreciation as their key goals, and they should have a lengthy investment horizon to allow the investment to appreciate in value without being influence by short-term volatility.
Diversified equity funds invest in a variety of areas, industries, and company sizes.
26. Are you familiar with Fixed Maturity Plans?
Fixed Maturity Plans (FMPs) are close-end funds that invest in securities with maturities that coincide with the scheme’s duration. At the conclusion of the designated term, the plan and the securities it holds mature together. On the closure day, the fund distributes the portfolio’s maturity proceeds. Investors who are able to hold the scheme to maturity will benefit from the FMP returns, which are lock in at the time the portfolio is construct. Because the instruments will be redeeme at face value when the fund matures (unless there is a default), there is no danger that the value of the securities will be lower.
27. Are you familiar with international funds?
Securities listed on marketplaces outside of India are purchase by international funds. The regulator SEBI specifies the types of assets that the fund can invest in, which include foreign-listed equities and debt, units of mutual funds and ETFs issued overseas, and ADRs and GDRs of Indian firms listed abroad. Part of the funds’ assets might be invest in Indian markets.
28. Are you familiar with the term “fund of funds” (fofs)?
The FoF identifies and invests in funds that match its investing objectives. Its investment portfolio is made up of other funds rather than securities. Most FoFs invest in the same mutual fund plan. For inclusion in the portfolio, certain FoFs examine schemes from other fund houses that fit the FoF’s investment goal.
29. In an unlevered DCF analysis, what is the appropriate discount rate?
Since the free cash flows in an unlevered DCF analysis are pre-debt (i.e., think of unlevered cash flows as the company’s cash flows if it didn’t have any debt – no interest expense, and no tax benefit from that interest expense), the cost of the cash flows is related to both the lenders and the equity providers of capital.
The capital asset pricing model (CAPM), which ties the project return of equity to its sensitivity to the general market (see WSP’s DCF module for a full examination of estimating the cost of equity), is commonly use to determine the cost of equity.
30. What is the formula for calculating the cost of equity?
Although there are multiple competing methods for determining the cost of equity, the capital asset pricing model (CAPM).The CAPM connects a security’s predicted return to its sensitivity to the general market basket (often proxied using the S&P 500). This is the formula: Risk free rate (rf) + x Market risk premium Equals cost of equity (re) (rm-rf )
