Investing in fixed income securities: NISM Series XXI-A notes and practice questions

Q1. Which statement best describes “Credit rating”?

1. A credit rating is an agency's opinion of an issuer's ability to repay, from AAA (highest) downward.
2. Managers must avoid and disclose conflicts, such as trading in the same securities for own account ahead of clients.
3. P/B compares share price with book value per share, widely used for banks and asset-heavy companies.
4. Clients may contribute securities instead of cash, and the manager may hold them or realign the portfolio, with tax consequences.

Q2. Which statement best describes “Government security”?

1. A G-sec is issued by the government with negligible credit risk, though price changes with yields.
2. PMS transactions are in the client's own name, so gains and losses are taxed directly in the client's hands.
3. P/B compares share price with book value per share, widely used for banks and asset-heavy companies.
4. The high-water mark is the highest value of the portfolio on which a performance fee was last paid; a new fee is charged only on gains above it.

Q3. Which term is described here? A bond is a debt instrument paying periodic interest (coupon) and repaying principal at maturity.

1. Tax on fees
2. Options
3. Top-down approach
4. Bond

Q4. Which statement best describes “Coupon and yield”?

1. The coupon is the fixed interest on face value, while yield is the return based on current price; yield rises when price falls.
2. Standard deviation measures the volatility of returns; higher values indicate more risk.
3. P/B compares share price with book value per share, widely used for banks and asset-heavy companies.
4. Diversification spreads investments across securities and asset classes to reduce specific risk.

Q5. Which term is described here? Money market instruments mature within a year and are used to park short-term funds.

1. Up and down capture
2. Stock exchange
3. Money market instruments
4. Fiduciary duty

Q6. Which term is described here? Duration measures a bond's price sensitivity to interest-rate changes; higher duration means larger price swings.

1. Hurdle rate
2. Quality investing
3. Duration
4. Constraints