Investment Training - Part1 And 2

The term risk tolerance refers to the degree of uncertainty that an investor can handle in relation to a negative change in the value of his portfolio. It indicates the level of risk that an investor is willing and able to endure without becoming overly anxious or making impulsive decisions. This concept is crucial in investment decision-making as it helps investors determine the appropriate level of risk they can afford to take on based on their financial goals, time horizon, and personal circumstances.

Debt securities, such as bonds, do not carry voting rights. Unlike equity securities, which represent ownership in a company and typically come with voting rights, debt securities are essentially loans made to a company or government entity. Investors who hold debt securities are considered creditors and have a claim on the issuer's assets and income, but they do not have the right to vote on corporate matters or decisions. Therefore, the correct answer is false.

The capital market primarily deals with long-term securities, such as stocks and bonds, which have a maturity period of more than one year. Short-term securities, on the other hand, are typically traded in the money market. Therefore, the statement that the capital market offers short-term securities is false.

Asset-backed securities are debt securities because they are backed by a pool of assets, such as loans or mortgages. These assets serve as collateral for the securities, providing security to the investors. In case of default, the investors have a claim on the underlying assets. This makes asset-backed securities similar to traditional debt securities, where the issuer promises to repay the principal amount along with interest. Therefore, the statement that asset-backed securities are debt securities is correct.

Inter-bank lending refers to the borrowing and lending of funds between banks. This activity occurs in the money market, which is a segment of the financial market where short-term borrowing and lending of funds take place. Banks participate in inter-bank lending to manage their liquidity needs, meet regulatory requirements, and earn interest income. Therefore, the statement that inter-bank lending takes place in the money market is true.

Bondholders are not able to participate in the profits of the company. Unlike shareholders, who are owners of the company and have the right to share in its profits through dividends, bondholders are creditors who lend money to the company in exchange for regular interest payments. They do not have any ownership rights or the ability to share in the profits of the company. Their main source of income is the interest earned on the bonds they hold. Therefore, the statement that bondholders are able to participate in the profits of the company is false.

In liquidation, ordinary shareholders do not rank above creditors. When a company goes into liquidation, creditors have the first claim on the company's assets to recover their debts. Ordinary shareholders, on the other hand, are the last to receive any remaining funds after all the creditors and other stakeholders have been paid. Therefore, the statement that ordinary shareholders rank above creditors in liquidation is false.

When interest rates rise, bond values fall because bonds have fixed interest rates. When new bonds are issued with higher interest rates, the older bonds with lower rates become less attractive to investors. As a result, the demand for the older bonds decreases, causing their prices to drop. Conversely, when interest rates decrease, bond values tend to rise as the older bonds with higher rates become more valuable. This inverse relationship between interest rates and bond values is a fundamental principle in bond investing.

The correct answer is convertibles and equity warrants. Convertibles are hybrid securities because they have characteristics of both debt and equity. They are bonds or preferred stocks that can be converted into common stock at a later date. Equity warrants, on the other hand, give the holder the right to buy a company's stock at a specific price within a certain time frame. They are also considered hybrid securities because they combine elements of both equity and options contracts.

The correct answer is commodities market and foreign exchange market. These are two other types of financial markets apart from capital and money market. The commodities market is where commodities such as gold, oil, and agricultural products are traded. The foreign exchange market is where currencies from different countries are bought and sold. These markets play a crucial role in facilitating trade and investment activities and provide opportunities for investors to diversify their portfolios.

Debt securities exist in both the capital and money market because they are financial instruments that represent a loan made by an investor to a borrower. They include bonds, notes, and debentures, which are traded in the capital market, and treasury bills and commercial paper, which are traded in the money market. These securities allow investors to earn interest on their investment while providing borrowers with a means to raise capital. Therefore, it is true that debt securities exist in both the capital and money market.

Dividends are not fixed payments made to investors. Dividends are payments made by a company to its shareholders as a portion of the company's profits. The amount of dividends can vary and is usually determined by the company's board of directors. The board may choose to increase, decrease, or eliminate dividends based on the company's financial performance and other factors. Therefore, dividends are not fixed and can change over time.

The statement is false because there is no requirement for trustees to review their SIPP (Self-Invested Personal Pension) documents at least twice per year. The frequency of document review is not specified or mandated by any regulatory body or governing authority. Therefore, trustees have the flexibility to determine the appropriate frequency for reviewing their SIPP documents based on their specific needs and circumstances.

The SIPP does not need to be submitted 90 days after a Fund or Scheme has been approved by the FSC. The given statement is incorrect.

Diversification is a risk management strategy that aims to reduce the impact of unsystematic risk, which is the risk specific to an individual investment or industry. By spreading investments across different asset classes, sectors, or geographic regions, the positive performance of some investments can offset the negative performance of others. This helps to reduce the overall volatility of a portfolio and potentially increase the chances of achieving more consistent returns.

A repurchase agreement is a short-term borrowing where one party sells securities to another party with a promise to repurchase them at a higher price. Treasury bills, on the other hand, are short-term debt instruments issued by the government to finance its short-term borrowing needs. Both of these securities are commonly traded in the money market due to their low risk and high liquidity.

Hybrid securities are not a mix of short term and long term securities. They are a type of financial instrument that combines elements of both debt and equity securities. These securities typically have characteristics of both bonds and stocks, offering investors features such as fixed income payments and potential for capital appreciation. The combination of these features makes hybrid securities unique and distinct from short term and long term securities. Therefore, the correct answer is false.

An investor's risk tolerance varies according to their age, financial goals, and income requirements. Age plays a role in risk tolerance as younger investors may have a longer time horizon and can afford to take on more risk. Financial goals also impact risk tolerance, as investors with long-term goals may be willing to take on more risk to potentially earn higher returns. Income requirements affect risk tolerance as investors with higher income may be more willing to take on risk. Family ties are not mentioned in the course material as a factor affecting risk tolerance.

The correct answer is floating rate bonds and mortgage-backed securities. Floating rate bonds are debt securities that have variable interest rates, which are adjusted periodically based on a reference interest rate. Mortgage-backed securities are financial instruments that represent an ownership interest in a pool of mortgage loans. These securities allow investors to participate in the income generated from the mortgage payments made by borrowers. Both of these capital market securities are commonly traded and provide different investment opportunities for investors.

A repurchase agreement, also known as a repo, involves selling a security to an investor with an agreement to repurchase it at a fixed price on a fixed date. This allows the seller to temporarily raise funds by selling the security and then repurchasing it at a later date. The fixed price and fixed date provide clarity and certainty to both parties involved in the agreement.