Question 1

What is capital structure? What are the principles of capital structure management?

Accepted Answer

Capital structure is a term which is referred to be the mix of sources from which the long term funds are required for business purposes which are raised to improve the capital of the company To fund an organization plan this capital structure is required which is the combination of debt and equity The management ensures the capital structure accesses which are needed to fund future growth and enhance financial performance The principles of capital structure management which are essentially required are as follows:- 1) Cost Principle 2) Risk Principle 3) Control Principle 4) Flexibility Principle 5) Timing Principle

Question 2

What is money market?

Accepted Answer

A segment of the financial market in which financial instruments with high liquidity and very short maturities are traded The money market is used by participants as a means for borrowing and lending in the short term, from several days to just under a year Money market securities consist of negotiable certificates of deposit (CDs), bankers acceptances, US Treasury bills, commercial paper, municipal notes, federal funds and repurchase agreements (repos)

Question 3

What is Demat Account? what is the use of it?

Accepted Answer

Demat means Dematerialisation of share, in simple it is an account with which a person can trade in security market without which a person cannot buy or sell any share in security market

Question 4

Explain derivatives in terms of capital markets ?

Accepted Answer

The term derivative indicates that it has no independent value that is its value is entirely derived from the values of the underlying assets The underlying asset can be securities, commodities , bullion, currency, livestock or anything else

Question 5

What is insider trading and why is it illegal?

Accepted Answer

Undergraduates may get this question as feelers of their business knowledge Insider trading describes the illegal activity of buying or selling stock based on information that is not public information This is to prevent those with privileged information (company execs, I-bankers and lawyers) from using this information to make a tremendous amount of money unfairly

Question 6

Why would a company distribute its earnings through dividends to common stockholders?

Accepted Answer

Regular dividend payments are signals that a company is healthy and profitable Also, issuing dividends can attract investors (shareholders) Finally, a company may distribute earnings to shareholders if it lacks profitable investment opportunities

Question 7

What is the difference between JOURNAL ENTRY & LEDGER?

Accepted Answer

A journal is also called as a book of prime entryTransactions occurred are first entered in this book to show which accounts should be debited and which should be credited on the basis of entries made in the journal, accounts are prepared, the book which contains the accounts is called a ledger Transactions entered in the journal are classified according to their nature and posted in their respective accounts in ledger it is also called as book of final entry

Question 8

What is the difference between real money & nominal money?

Accepted Answer

Nominal money relates more to it's measure of counting - so nominal figure of what is written on bill, while "real" relates more to it's purchasing power (usually between some periods of time) For instance 100 units in nominal could buy 2 units of good in 1950 and 1 unit of good in 2005, at the same time real value of this 100 nominal units are 100 real units in 1950 and 50 real units in 2005 Same is with GDP In nominal it can rise due to inflation while it can stay the same or even decrease in real value

Question 9

What Is Inflaition?

Accepted Answer

In economic terms, inflation is the rise in the prices of goods and services in the given economy over a period of time As the prices rise, each unit of the country's currency will buy fewer goods and services when the purchasing power of a currency go down then more money comes to the market it is called inflation

Question 10

Distinguish between speculator and hedger?

Accepted Answer

The main difference lies in the motive of the two parties The main motive of the hedger is to hedge(minimize) the risk from the occurence of some events The motive of the speculator is to gamble in the market in order to make the profit by buying/selling the derivative products

Question 11

What is meant by Take Over ?

Accepted Answer

In business, a takeover is the purchase of one company by another

Question 12

What is the difference between asset management and invest management?

Accepted Answer

Investment and asset are really close in meaning Investment is when you put your money in stock, bond or other financial instruments Whereas Asset is what you own generally reffered to land, proprietorship , factory, etc

Question 13

Why one rupee note is signed by the ministry of finance? is governer has the right to sign this note? is there any interference by the RBI?

Accepted Answer

Rupess is the currency of our country and only govt has the authority to issue indian currency it has been signed by ministry of finance, all other notes are bearer notes which are signed by governor no interference by RBI RBI has the right to print currency notes in the country except coins & 1 Re note which are issued by Govt Thus, it bears the sign of MoF

Question 14

What is Trial Balance?

Accepted Answer

It is statement of balances of all the accounts in the ledger prepared to prove the arithmetical accuracy of the books of accounts A trial Balance is a list of Debit and Credit or a list of Debit & Credit Balance of all the ledger accounts prepared on any particular date

Question 15

What is Secondary Market?

Accepted Answer

Secondary market refers to market where securities are traded after being initially offered to the public in the primary market and/or listed on the stock exchange

Question 16

What Is EFT?

Accepted Answer

Exchange Traded Funds (ETFs) are a relatively new phenomenon and are gaining popularity rapidly This post outlines the key features of an ETF ETFs are like mutual funds because they hold an underlying asset like stocks, debt, commodities future contracts etc If you are new to the concept of an ETF, think of it as a mutual fund, and build your understanding from thereon An example of an ETF is the SBI Gold ETF, which holds physical gold as its underlying asset

Question 17

In finance, what is hedging and why do investors and companies use hedging strategies?

Accepted Answer

Introduction / Context: Hedging is a core concept in risk management and modern finance. When investors, companies or even banks talk about managing market risk, interest rate risk or currency risk, they are often referring to hedging strategies. Understanding what hedging is, and why it is used, helps candidates in finance interviews show that they grasp how real world portfolios and corporate exposures are protected from volatility and unexpected price movements. Given Data / Assumptions: An investor or company already has an existing exposure, such as owning shares, holding commodities, or receiving cash flows in a foreign currency. Market prices, interest rates or exchange rates can move in unfavourable directions in the future. The goal is to reduce potential losses from those adverse movements, not necessarily to maximise profit from speculation. Financial instruments such as futures, options, forwards and swaps are available to construct hedges. Concept / Approach: Hedging means taking an additional financial position that is designed to move in the opposite direction to the risk you are exposed to. If the price of the original asset falls, the hedge position should gain, and vice versa. In practice, investors and firms use derivatives or offsetting cash positions to partially or fully neutralise risk. The main purpose is risk reduction or stabilising cash flows, not earning extra speculative profit. Hedging can be simple, like buying insurance on a house, or complex, like using currency swaps to manage foreign exchange risk in international projects. Step-by-Step Solution: Step 1: Identify the existing exposure, for example owning 1,000 shares of a company, holding an oil inventory, or expecting to receive US dollars in three months. Step 2: Analyse which market variable creates risk, such as share price volatility, commodity price fluctuations or exchange rate movements. Step 3: Select a hedging instrument whose value tends to move opposite to that risk, for example a futures contract, an option, a forward contract or a swap. Step 4: Enter into the hedging position in a size that is appropriate for the underlying exposure, aiming to reduce, not necessarily eliminate, potential losses. Step 5: Monitor both the original exposure and the hedge over time, adjusting positions if the risk profile or business needs change. Verification / Alternative check: Consider an airline that will need large quantities of jet fuel over the next year. If fuel prices rise sharply, its costs increase and profits fall. To hedge, the airline can lock in fuel prices using futures contracts or long term supply agreements. If market prices rise, the futures contracts gain value and offset the higher physical cost. If prices fall, the company pays more than the new spot price, but it has gained stability and avoided the worst case scenario. This example shows that hedging is about managing downside risk rather than beating the market. Why Other Options Are Wrong: Option B confuses hedging with aggressive borrowing and speculation, which actually increases risk. Option C describes risk avoidance by holding only cash, which is not realistic for most investors and does not match the technical meaning of hedging. Option D suggests ignoring risk entirely, which is opposite to the goal of hedging. Option E describes a narrow trading pattern, not a structured risk offset. None of these capture the essence of using offsetting financial positions to reduce the impact of adverse price movements. Common Pitfalls: People sometimes think hedging guarantees profits or completely eliminates risk, which is not true. Hedges can be imperfect, may involve costs such as option premiums and can limit upside potential. Another common mistake is treating any derivative trade as a hedge, even when there is no underlying exposure to protect. In interviews and exams, emphasise that hedging starts with an existing risk and uses offsetting positions to manage, not magnify, that risk. This balanced understanding reflects how hedging works in practice. Final Answer: Hedging is using one or more financial positions, such as derivatives or offsetting assets, to reduce or limit the risk of adverse price movements in an existing exposure.

Question 18

In government securities and money markets, what are Treasury Bills (T-bills)?

Accepted Answer

Introduction / Context: Treasury Bills, commonly called T-bills, are among the most important money market instruments issued by governments. They are widely used by central banks, commercial banks, mutual funds and large investors as safe, short term investments and as tools for liquidity management. Understanding what Treasury Bills are is essential for anyone preparing for finance, banking or economics interviews, because they are central to how governments finance short term deficits and manage cash flows. Given Data / Assumptions: The issuer is the national government or its central bank acting on its behalf. The instrument is classified as a money market security, not a long term bond. The maturity period is short, typically ranging from a few days to up to one year. Treasury Bills are usually sold at a discount to their face (par) value and redeemed at par on maturity. Concept / Approach: Treasury Bills are zero coupon securities, meaning they do not pay periodic interest in the form of coupons. Instead, investors earn a return by buying the bill at a price lower than its face value and receiving the full face value at maturity. The difference between purchase price and redemption amount represents the investor income. Because they are backed by the government, T-bills are generally considered to have very low default risk, which is why they often serve as the risk free benchmark in financial models and valuation. Step-by-Step Solution: Step 1: Recognise that Treasury Bills are government securities with short maturities, typically 91 days, 182 days or 364 days in many markets. Step 2: Understand that T-bills do not pay periodic interest; instead, they are issued at a price below their face value. Step 3: At maturity, the investor receives the full face value from the government, and the difference between face value and purchase price is the return. Step 4: Note that T-bills are usually highly liquid, actively traded in the money market and used as collateral in various financial transactions. Step 5: Recognise that their low risk and short maturity make them attractive for cash management, parking surplus funds and as a benchmark for risk free rates. Verification / Alternative check: Suppose an investor buys a 182 day Treasury Bill with a face value of Rs 100,000 at a discounted price of Rs 96,000. The government does not pay any interest during the 182 days. On maturity, the investor receives Rs 100,000. The Rs 4,000 difference is the investor earnings, reflecting the implied interest for the period. This example confirms that T-bills are short term, discount instruments rather than long term coupon paying bonds or equity securities. Why Other Options Are Wrong: Option B describes long term government bonds with fixed coupons, which are quite different from Treasury Bills in maturity and payment structure. Option C incorrectly treats T-bills as equity shares of public sector companies, which involve ownership and dividends, not government short term debt. Option D refers to certificates of deposit issued by banks, not by the government. Option E confuses T-bills with insurance products, which serve a different purpose. None of these match the definition of short term, discounted government securities. Common Pitfalls: Students sometimes confuse Treasury Bills with Treasury Bonds or with corporate commercial paper. Another mistake is to think that all government securities pay coupons, ignoring the discount structure of T-bills. In exams and interviews, always emphasise the key features: issued by government, short maturity (up to one year), zero coupon structure, issued at discount and redeemed at par. This concise description accurately captures what Treasury Bills are in finance and money markets. Final Answer: Treasury Bills are short term government debt instruments, usually with maturities of up to one year, issued at a discount and redeemed at face value.

Question 19

In basic finance terminology, a person or institution that loans money to others is called what?

Accepted Answer

Introduction / Context: Understanding basic roles in a financial transaction is fundamental for all finance, banking and business interviews. When money is borrowed and repaid with interest, two main parties are involved. One party provides the funds, while the other receives them and promises repayment. Knowing the correct names for these roles is essential for interpreting loan agreements, credit contracts and many exam questions related to financial markets and instruments. Given Data / Assumptions: There is a loan transaction involving two main parties and possibly intermediaries. One party supplies funds to another party for a period of time. The receiving party is expected to repay the principal amount and, usually, interest. The question asks specifically for the term used for the party that provides or advances the money. Concept / Approach: In finance, the party that provides funds is called the lender, and the party that receives funds is the borrower. This terminology applies whether the transaction is a bank loan, a personal loan, or even a bond where investors lend money to an issuer. Other related terms, such as investor, investee and guarantor, have different meanings. Using correct terms helps avoid confusion when discussing who owes whom and who bears which type of risk in a transaction. Step-by-Step Solution: Step 1: Identify which direction the money is moving. The party sending or providing the money is the one we are naming. Step 2: Recall that in standard loan terminology, the provider of funds is termed the lender. Step 3: The party receiving the money, who has an obligation to repay, is called the borrower, so this is not the answer to the question. Step 4: Recognise that terms like investee and investor relate to investments and ownership, rather than simple lending and borrowing in a credit contract. Step 5: Conclude that the correct label for someone who loans money is lender. Verification / Alternative check: Consider a typical bank loan scenario. A bank provides Rs 500,000 to a customer to buy a car. The bank gives the funds today and expects repayment with interest over several years. In this relationship, the bank is the lender and the customer is the borrower. This same logic applies to many contexts, including private lending between individuals, microfinance institutions and credit card companies. The pattern is consistent: the provider of funds is always the lender. Why Other Options Are Wrong: Option B, borrower, is the opposite role: the person or institution that receives money and must repay it. Option C, investee, usually refers to a company or project that receives investment capital, often in exchange for equity, not a pure lending relationship. Option D, investor, is a broader term for someone who invests capital, often in shares or other assets, and is not limited to loan structures. Option E, guarantor, refers to a third party who promises to pay if the borrower defaults, which again is a different role. None of these correctly describe the party that directly loans money in a credit transaction. Common Pitfalls: A common confusion in early finance learning is mixing up lender with investor or assuming that both terms are interchangeable. While a bond investor does effectively lend money to an issuer, the technical term in a simple loan context between two parties remains lender. Also, some students reverse roles because they imagine the person needing money is more important. In exams, always focus on the direction of cash flow and legal obligation: the entity advancing funds is the lender, and the entity obligated to repay is the borrower. Final Answer: In basic finance terminology, a person or institution that loans money to others is called a lender.

Question 20

Why is diversification considered important when building an investment portfolio?

Accepted Answer

Introduction / Context: Diversification is a central principle of modern investing and portfolio management. Whether you are dealing with mutual funds, pension plans, or personal stock portfolios, you will hear advisors recommending diversification as a way to manage risk. Understanding why diversification is important helps candidates explain how well designed portfolios can reduce volatility without necessarily sacrificing long term return potential. Given Data / Assumptions: An investor can allocate money across different asset classes such as equities, bonds, real estate and cash. Within each asset class, money can be spread across many securities, sectors or geographic regions. Different investments do not always move in the same direction at the same time. The investor wants to reduce the impact of poor performance in any single investment or sector. Concept / Approach: Diversification works because not all assets are perfectly correlated. When one security or sector performs badly, another may perform better or at least decline less. By combining assets with different risk and return characteristics, a portfolio can achieve a more stable overall performance. The main goal is risk reduction, not eliminating risk completely or guaranteeing the highest possible returns. Proper diversification considers both asset allocation (across asset classes) and security selection (within each class). Step-by-Step Solution: Step 1: Recognise that putting all your money into a single investment, such as one company share or one sector, exposes you to high unsystematic risk. Step 2: Understand that by spreading investments across different companies, industries and asset classes, you reduce reliance on any single source of return. Step 3: Note that when one investment performs poorly due to company specific or sector specific issues, others in the portfolio may still perform reasonably or well, cushioning the overall effect. Step 4: Construct a portfolio that aligns with your risk tolerance and goals, using diversification to smooth out returns over time. Step 5: Review and rebalance periodically to maintain the desired level of diversification as markets move and holdings change in value. Verification / Alternative check: Imagine two investors. Investor A puts all their savings into one technology stock. Investor B spreads funds across technology, consumer goods, healthcare, bonds and a cash component. If the technology sector suddenly declines due to regulatory changes, Investor A portfolio could drop sharply because all money is in one place. Investor B portfolio will also be affected but far less, because other sectors and bonds may hold or gain value. Over time, Investor B experiences smoother returns thanks to diversification. This example confirms that the main benefit of diversification is balancing risk across different investments. Why Other Options Are Wrong: Option A is incorrect because diversification does not guarantee only low risk investments or eliminate the possibility of loss. Option C exaggerates, implying that diversification always gives the highest return regardless of risk, which is not true. Option D wrongly states that diversification increases risk and guarantees more money, which contradicts investment theory. Option E describes concentration, not diversification, and actually increases specific risk. Only option B correctly captures the risk spreading and balancing function of diversification. Common Pitfalls: Some investors misunderstand diversification as simply owning many investments, even if they are all similar, such as holding several technology funds that move together. True diversification requires mixing assets with different behaviours. Others think diversification is unnecessary if they can pick the “best” stock, ignoring that even strong companies can face unexpected problems. In interviews and exams, always emphasise that diversification is about reducing unsystematic risk by combining different types of investments, not about eliminating risk or chasing the highest possible returns alone. Final Answer: Diversification is important in investing because it helps you to balance and spread your risk across different types of investments, so that poor performance in one area may be offset by better performance in others.

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