Question 1

A bond whose proceeds are used only to finance or refinance a combination of both environmental and social projects is called:

Accepted Answer

Social Bond. * (c) Sustainability Bond is correct: A Sustainability Bond is a specific debt security where the proceeds are dedicated solely to funding or refinancing a deliberate blend of both environmental (green) and social initiatives. * Green Bonds focus exclusively on climate and eco-projects. * Social Bonds focus solely on public themes (healthcare, affordable housing). * Sovereign Bonds are government-issued securities classified by their issuer rather than specific social/green asset funding.

Question 2

Which of the following statements about insurance in aviation sector is/are correct?
1. 'Aviation Hull Insurance' covers the physical aircraft, including the body, engine, and on-board equipment.
2. Under the Montreal Convention, adopted in 1999 by over 130 countries, including India, airlines are strictly liable to pay compensation to the family/nominee of every deceased passenger without requiring the family to prove fault.
Select the answer using the code given below:

Accepted Answer

2 only. * Statement 1 is correct: Aviation Hull Insurance covers the physical structure and onboard machinery of an aircraft (body, engines, equipment) against loss, accidental damage, or crash destruction. * Statement 2 is correct: Under the international Montreal Convention (1999), to which India is a signatory, airlines are bound by a strict liability rule up to a specific limit, ensuring immediate baseline compensation to a deceased passenger's family without requiring them to prove administrative fault or negligence.

Question 3

Which of the following statements about Crowdfunding is/are correct?
1. Crowdfunding is solicitation of funds (small amount) from multiple investors through a web-based platform or social networking site for a specific project.
2. Small and Medium Enterprises (SMEs) are able to raise funds at lower cost of capital without undergoing rigorous procedures.
Select the answer using the code given below:

Accepted Answer

2 only. * Statement 1 is correct: Crowdfunding represents the process of raising small amounts of capital from a large crowd of individual contributors via internet platforms or social networking tools for a defined goal. * Statement 2 is correct: Crowdfunding lets SMEs bypass the complex, expensive legal compliance required by bank loans or public equity markets (IPOs), helping them secure alternative funding smoothly and often at a more affordable cost.

Question 4

With reference to investments, consider the following:
I. Bonds
II. Hedge Funds
III. Stocks
IV. Venture Capital

How many of the above are treated as Alternative Investment Funds?

Accepted Answer

Only one. * Alternative Investment Funds (AIFs) collect capital to invest in non-public or complex instruments beyond traditional choices like listed stocks and bonds. * Item II is an AIF: Hedge Funds employ complex trading strategies and leverage, classified under Category III AIF. * Item IV is an AIF: Venture Capital funds invest in startups or early-stage ventures, classified under Category I AIF. * Therefore, only two options (II and IV) are treated as Alternative Investment Funds.

Question 5

Consider the following statements:
Statement I: As regards returns from an investment in a company, generally, bondholders are considered to be relatively at lower risk than stockholders.
Statement II: Bondholders are lenders to a company whereas stockholders are its owners.
Statement III: For repayment purpose, bondholders are prioritized over stockholders by a company.

Which one of the following is correct in respect of the above statements?

Accepted Answer

Both Statement II and Statement III are correct and both of them explain Statement I. * Statement I is correct: Bondholders generally face lower financial risk than stockholders because they receive fixed interest payments and hold priority positions. * Statement II is correct: Bondholders lend money to the company (debt), while stockholders purchase equity shares and act as its owners. * Statement III is correct: In liquidation or bankruptcy situations, bondholders are legally prioritized over stockholders for repayment. * Since both II (creditor status) and III (payment priority) explain why bondholders are at lower risk than equity holders, option (a) is correct.

Question 6

Consider the following statements:
I. India accounts for a very large portion of all equity option contracts traded globally thus exhibiting a great boom.
II. India's stock market has grown rapidly in the recent past even overtaking Hong Kong's at some point of time.
III. There is no regulatory body either to warn the small investors about the risks of options trading or to act on unregistered financial advisors in this regard.

Which of the statements given above are correct?

Accepted Answer

I and II only. * Statement I is correct: India has safely emerged as a dominant global player in equity options; in early 2024, over 84% of all equity option contracts traded globally were executed on Indian exchanges. * Statement II is correct: In January 2024, the combined value of shares listed on Indian exchanges reached $4.33 trillion, briefly surpassing Hong Kong's market value to make India the world's fourth-largest stock market. * Statement III is not correct: India has an active regulatory body, the Securities and Exchange Board of India (SEBI), which actively monitors options risks, issues public warnings, and regulates unregistered investment platforms or financial advisors.

Question 7

In India, which of the following can trade in Corporate Bonds and Government Securities?
1. Insurance Companies
2. Pension Funds
3. Retail Investors

Select the correct answer using the code given below:

Accepted Answer

1 and 3 only. * All items are correct: The institutional participant base for trading sovereign Government Securities (G-Secs) and corporate bond structures incorporates commercial banking entities, mutual funds, insurance companies (1), and provident or pension funds (2). * Concurrently, under the RBI's Retail Direct Scheme, individual retail investors (3) can directly open Gilt accounts with the central bank to trade and bid on sovereign debt assets.

Question 8

Consider the following:
1. Exchange-Traded Funds (ETF)
2. Motor vehicles
3. Currency swap

Which of the above is/are considered financial instruments?

Accepted Answer

1, 2 and 3. * Items 1 and 3 are financial instruments: A financial instrument represents a formal legal agreement or document that carries contractual monetary value. This includes equity-based pools like Exchange-Traded Funds (1) and foreign exchange derivatives or cash-flow swaps like currency swaps (3). * Item 2 is incorrect: Motor vehicles are tangible, physical assets rather than virtual financial claims or contractual financial agreements.

Question 9

With reference to Corporate Social Responsibility (CSR) rules in India, consider the following statements:
1. CSR rules specify that expenditures that benefit the company directly or its employees will not be considered as CSR activities.
2. CSR rules do not specify minimum spending on CSR activities.

Which of the statements given above is/are correct?

Accepted Answer

1 only. * Statement 1 is correct: Under the Companies (CSR Policy) Rules, 2014, any corporate spending on projects or programs that exclusively or directly benefit the company's own employees and their families is disqualified and cannot count as valid CSR expenditure. * Statement 2 is incorrect: Section 135 of the Companies Act, 2013 explicitly sets out a minimum mandatory baseline spending limit, requiring qualifying corporate entities to spend at least 2% of their average net profits earned during the three immediately preceding financial years on approved CSR initiatives.

Question 10

Consider the following statements:
Statement-I: If the United States of America (USA) were to default on its debt, holders of US Treasury Bonds will not be able to exercise their claims to receive payment.
Statement-II: The USA Government debt is not backed by any hard assets, but only by the faith of the Government.

Which one of the following is correct in respect of the above statements?

Accepted Answer

Both Statement-I and Statement-II are correct and Statement-II explains Statement-I. * (a) is correct: If the US Congress fails to raise or suspend its statutory debt ceiling and the Treasury runs out of cash, a historic sovereign debt default would occur, preventing holders of US Treasury Bonds from successfully exercising their claims to collect immediate obligations. This validates Statement I. * US government debt and currency operate as fiat instruments, meaning they are not backed by physical hard commodities (like gold or silver reserves) but rely entirely on the full faith, credit, and stability of the issuing sovereign government. This validates Statement II. * Because the reality that US bonds are backed solely by governmental faith and no physical assets (Statement II) is the precise reason why an institutional default would completely block bondholders from enforcing claims or extracting underlying value (Statement I), Statement II provides the direct causal explanation for Statement I.

Indian Economy: Financial Markets & Instruments PYQ.

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