NISM Series XII · Unit 2 of 7 · about 20% of the paper
Securities: types, features and concepts: NISM Series XII notes and practice questions
Equity, preference shares, bonds, government securities and money market instruments all have different rights and risks. This is the biggest topic and most questions are definition or comparison based.
What to know in Unit 2
- Equity versus preference shares.
- Bonds, debentures, G-secs, T-bills, CP and CD.
- Corporate actions: dividend, bonus, split, rights, buyback.
- Credit ratings and key valuation ratios.
Key terms, examples and exam traps
Equity share
An equity share represents ownership in a company. Holders are residual owners who vote, receive dividends when declared, and share in the profits and losses.
Example. An investor buying shares in a listed company becomes a part-owner.
Exam trap. This statement is false: Equity shareholders are guaranteed a fixed dividend.
Preference share
A preference share carries a preferential right to a fixed dividend and to repayment of capital ahead of equity holders on winding up, usually with no voting rights.
Example. A holder is paid a fixed rate of dividend before any dividend goes to equity holders.
Exam trap. This statement is false: Preference shareholders always have full voting rights.
Face value
Face value is the nominal value of a security stated on the certificate; dividends are declared as a percentage of it.
Example. A share has a face value of ₹10 while its market price is ₹450.
Exam trap. This statement is false: Face value is the price at which the share trades in the market.
Market capitalisation
Market capitalisation equals the share price multiplied by the number of shares outstanding, and shows the market value of a company's equity.
Example. A company with 10 crore shares priced at ₹200 is valued at ₹2,000 crore.
Exam trap. This statement is false: Market capitalisation equals the company's total debt.
Dividend
A dividend is a distribution of part of a company's profits to its shareholders, declared by the board and approved by shareholders.
Example. A company pays ₹5 per share to every holder on the record date.
Exam trap. This statement is false: A company must pay a dividend every year.
Bonus shares
Bonus shares are free additional shares given to existing shareholders in a ratio from the company's reserves; the share price adjusts and total value is unchanged.
Example. A holder with 100 shares receives 100 more in a 1:1 bonus, while the price roughly halves.
Exam trap. This statement is false: Bonus shares increase the investor's wealth immediately.
Stock split
A stock split divides each share into more shares of lower face value, increasing the number of shares while leaving market capitalisation unchanged.
Example. A ₹10 face value share is split into two shares of ₹5 each.
Exam trap. This statement is false: A stock split increases the company's market capitalisation.
Rights issue
A rights issue offers existing shareholders the right to buy additional shares in proportion to their holding, usually at a discount.
Example. A company offers current holders one new share for every four held at a set price.
Exam trap. This statement is false: A rights issue is open to the general public.
Buyback
In a buyback, a company repurchases its own shares from shareholders, reducing the number of shares outstanding.
Example. A company buys back shares through a tender offer, and the share count falls.
Exam trap. This statement is false: A buyback increases the number of shares outstanding.
Bond
A bond is a debt instrument in which the issuer promises to pay periodic interest (coupon) and repay the principal at maturity.
Example. An investor lends to a company and receives interest every six months and principal at the end.
Exam trap. This statement is false: A bond makes the holder an owner of the company.
Debenture
A debenture is a long-term debt instrument issued by a company, which can be secured or unsecured and may be convertible into shares.
Example. A company raises money by issuing a convertible debt instrument.
Exam trap. This statement is false: A debenture is an equity instrument.
Government security (G-sec)
A G-sec is a debt instrument issued by the central or a state government, considered to have negligible credit risk.
Example. The central government borrows by issuing a 10-year security.
Exam trap. This statement is false: G-secs carry the highest credit risk in the market.
Treasury bill
A treasury bill is a short-term government money-market instrument issued at a discount and redeemed at face value, with tenors of 91, 182 and 364 days.
Example. The government issues a 91-day instrument at ₹98 that is redeemed at ₹100.
Exam trap. This statement is false: Treasury bills pay periodic coupons.
Commercial paper
Commercial paper is an unsecured, short-term money-market instrument issued by companies at a discount to meet working-capital needs.
Example. A highly rated company raises funds for three months without collateral.
Exam trap. This statement is false: Commercial paper is a long-term secured bond.
Certificate of deposit
A certificate of deposit is a negotiable money-market instrument issued by banks and financial institutions against funds deposited for a fixed period.
Example. A bank issues a negotiable paper against a large deposit for six months.
Exam trap. This statement is false: A certificate of deposit is issued by the government.
Coupon rate
The coupon rate is the fixed percentage of face value that a bond pays as interest each year.
Example. A bond of ₹1,000 face value with a 8% coupon pays ₹80 a year.
Exam trap. This statement is false: The coupon rate changes with the bond's market price.
Yield
Yield is the return an investor earns on a security, shown as a percentage of the price paid. It moves inversely to bond prices.
Example. When a bond's price rises, the yield for a new buyer falls.
Exam trap. This statement is false: Bond yields rise when bond prices rise.
Credit rating
A credit rating is an independent agency's opinion on the issuer's ability to repay debt on time. Higher ratings mean lower risk.
Example. An issuer rated AAA is seen as safer than one rated BBB.
Exam trap. This statement is false: A credit rating guarantees that the issuer will not default.
Convertible security
A convertible security can be converted into equity shares at a specified ratio and time, at the holder's or issuer's option.
Example. A debenture holder exchanges the debenture for shares as per pre-set terms.
Exam trap. This statement is false: A convertible security can never be converted into shares.
Depository receipt
A depository receipt represents shares of a company held by a depository in another country, such as ADRs and GDRs, and allows foreign trading of the underlying shares.
Example. An Indian company's shares are traded abroad through receipts issued against them.
Exam trap. This statement is false: A depository receipt is issued only for bonds.
Price-to-earnings ratio
The P/E ratio is the market price per share divided by earnings per share. It shows how much investors pay for each rupee of earnings.
Example. A share priced at ₹200 with EPS of ₹10 has a ratio of 20.
Exam trap. This statement is false: P/E is the share price divided by its face value.
Earnings per share
EPS is a company's profit after tax divided by the number of shares outstanding.
Example. A company with ₹100 crore profit and 10 crore shares has an EPS of ₹10.
Exam trap. This statement is false: EPS is the dividend paid per share.
REIT and InvIT
REITs and InvITs are trusts that pool money to invest in income-generating real estate and infrastructure and distribute most income to unit holders.
Example. An investor buys units of a trust that owns rented office buildings.
Exam trap. This statement is false: REITs invest only in shares of listed companies.
Warrants
A warrant gives the holder the right to buy a company's shares at a fixed price within a specified period.
Example. An investor holds a right to buy shares at ₹100 for the next three years.
Exam trap. This statement is false: A warrant obliges the holder to buy shares.
Gilt versus corporate bond
Government securities carry negligible credit risk, while corporate bonds carry credit risk and pay a higher yield for it.
Example. A saver compares a government bond with a corporate bond offering a higher rate.
Exam trap. This statement is false: Corporate bonds are safer than government securities.
6 practice questions
Read each question and choose your answer before opening the free mock, which shows the correct answer and the reason.
Q1. Which term is described here? A debenture is a long-term debt instrument issued by a company, which can be secured or unsecured and may be convertible into shares.
- Buyback
- Settlement cycle
- Debenture
- Minimum subscription
Q2. Which term is described here? A certificate of deposit is a negotiable money-market instrument issued by banks and financial institutions against funds deposited for a fixed period.
- Margin trading
- Government security (G-sec)
- Tax on investments
- Certificate of deposit
Q3. Which term is described here? A rights issue offers existing shareholders the right to buy additional shares in proportion to their holding, usually at a discount.
- Preferential allotment
- Government security (G-sec)
- Mutual fund
- Rights issue
Q4. Which term is described here? A warrant gives the holder the right to buy a company's shares at a fixed price within a specified period.
- Option contract
- Hybrid fund
- Warrants
- Promoter lock-in
Q5. Which statement best describes “REIT and InvIT”?
- A G-sec is a debt instrument issued by the central or a state government, considered to have negligible credit risk.
- A certificate of deposit is a negotiable money-market instrument issued by banks and financial institutions against funds deposited for a fixed period.
- The Net Asset Value is the per-unit value of a mutual fund scheme, calculated as total assets less liabilities divided by the units outstanding.
- REITs and InvITs are trusts that pool money to invest in income-generating real estate and infrastructure and distribute most income to unit holders.
Q6. Which term is described here? Market capitalisation equals the share price multiplied by the number of shares outstanding, and shows the market value of a company's equity.
- Draft Red Herring Prospectus (DRHP)
- Market capitalisation
- Promoter lock-in
- Diversification
Frequently asked questions
How much of NISM Series XII comes from Unit 2?
Unit 2 (Securities: types, features and concepts) usually carries about 20% of the questions. The whole exam has 100 questions and the pass mark is 60%.
What should I study in NISM Series XII Unit 2?
Equity versus preference shares. Bonds, debentures, G-secs, T-bills, CP and CD. Corporate actions: dividend, bonus, split, rights, buyback. Credit ratings and key valuation ratios.
Are these NISM Series XII practice questions free?
Yes. Take the full free mocks to see the correct answer and the reason for every question.
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