MCQs- CHAPTER 3: TERMINOLOGY IN EQUITY AND DEBT MARKETS

Duration is calculated as the weighted average maturity of the bond, where the present values of the future cash flows are used as weights. It incorporates the tenor, coupon, and yield in its calculation.

The principal represents the initial investment made by the investor and is returned to the investor on maturity.

Debt securities are securities representing a loan agreement between the issuer (company) and the lender (investor).

The face value of a share is the nominal price of a share.

Equity and debt securities are two distinct asset classes with fundamental differences. Equity investors are owners of the business, participate in the management of the business, and do not enjoy any fixed return or return of principal investe Debt investors are lenders to the business, earn a fixed rate of interest and return of principal at maturity, and represent a relatively lower risk, steady, income-oriented investment. Residual profits of the business belong to the equity investors; debt investors’ claim is restricted to the periodic fixed coupons and principal repayment on maturity.

Market capitalization is the market value of the entire equity of a company and is computed as market price per share multiplied by total number of outstanding shares.

The PE ratio is calculated by dividing the market price per share by the earnings per share. It indicates the price that the market is willing to pay for the company's earnings.

PPNs aim to provide protection of the principal amount invested by investors if held to maturity. A portion of the investment is allocated to debt, which matures to the principal amount, while the remaining portion is invested in other products that have the potential for high returns.

Duration measures the sensitivity of the price of a bond to changes in interest rates. Bonds with high duration experience greater increases in value when interest rates decline and greater losses in value when rates increase, compared to bonds with lower duration.

Zero-coupon bonds, or zeroes, do not pay periodic coupon payments. They are issued at a discount to their face values and are redeemed at par. The return on these bonds is in the form of the difference between the issue price and redemption value.

Earnings can be classified as historical (earnings of previous years), trailing (earnings of the latest four quarters calculated on a rolling basis), and forward (earnings based on future projections).

Floating-rate bonds have coupon rates that are not fixed but are reset periodically with reference to a defined benchmark. This ensures that the bonds pay interest that reflects current market rates.

A Differential Voting Right (DVR) is a share of a company with less than 1 voting right per share.

EPS is calculated by dividing the net profit of the company by the number of shares outstanding. It represents the amount of profit earned per share.

The equity capital of the company is calculated by multiplying the number of shares issued by their face value.

When a bond matures, the investor 'redeems' the bond, which means the contract between the issuer and the investor is over. The issuer repays the principal and makes the final coupon payment, and the bond ceases to exist.

The intrinsic value of an equity share represents the discounted value of its future benefits to the investors.

Book value per share means the theoretical amount of money each share would get in case the company was to wind up. It is calculated by dividing the net worth of the company by the number of outstanding shares.

The Price-to-Book Value ratio is calculated by dividing the current market price (CMP) by the book value (BV).

A P/BV less than 1 indicates that the stock is undervalue

Foreign currency bonds create significant foreign currency risk for the issuer. If the currency in which the bond is issued appreciates against the issuer's local currency, it will require a higher amount of local currency to repay the loan, thereby increasing the risk for the issuer.

When interest rates increase, the bond's price tends to decrease, so it is likely to quote at a price below its face value.

Convertible bonds have features of both debt and equity. Investors earn coupon income during the initial stage, similar to debt, and have the option to convert the bonds into equity shares of the issuer company later.

A lower P/S ratio relative to peers indicates that the stock is relatively undervalue

Bonds that have embedded call options in them are known as Callable Bonds.

The Price-to-Book Value ratio measures a company's current market price (CMP) relative to its book value.

Inflation-Indexed Bonds (II are government securities that provide inflation-protected returns to investors. Both the principal and interest are adjusted for inflation, ensuring that investors' returns keep pace with inflation.

Current Yield is calculated by dividing the coupon payment with the current market price of the bon It provides a simple method to determine return, but it doesn't consider future cash flows.

The enterprise value is calculated by summing the value of common equity, value of non-controlling interest, value of preferred capital, and debt, and then subtracting cash, cash equivalents, and financial investments. In this case, the enterprise value is Rs.45.0 crores.

The Price-to-Sales ratio is calculated by dividing the market capitalization by the annual net sales.

DPS represents the portion of profit that the company distributes to its shareholders per share. It is usually declared as a percentage of the face value of the shares.

Yield to Maturity (YTM) takes into consideration all future cash flows from the bond, including coupon payments and the principal repayment. It calculates the rate that equates the present value of these cash flows to the market price of the bon It is a comprehensive measure of return.

Higher duration and higher interest rate risk are associated with bonds that have a longer time to maturity. Bonds with longer maturities are more sensitive to changes in interest rates.

The Face Value

Enterprise Value is calculated by adding market capitalization and total debt and subtracting cash. Therefore, the Enterprise Value is 9 lakhs. (Market capitalization+Debt) - Cash

Holding Period Return (HPR) is the return earned on an investment during a specific period when it was bought and held by the investor. It includes coupon payments, reinvestment of coupons, and gain or loss from selling the bon

Perpetual bonds do not have a stated maturity date, unlike normal bonds. They can be bought back or called by the issuer at their discretion, and the investors receive periodic coupons.

The Price-to-Sales ratio measures the price investors are willing to pay for each rupee of sales.