Chapter 31: Fixed Income Markets - Debt / Bond Markets (JAIIB - MODULE D)

1. Which of the following is the issuer of Government Securities (G-Secs) in India?

• A. SEBI
• B. NABARD
• C. RBI on behalf of Government of India
• D. State Governments only

Government Securities (G-Secs) are issued by RBI on behalf of the Central and State Governments to raise funds.

2. A 5-year bond of face value ₹1,000 carries a coupon rate of 8% annually. If the required yield is 10%, the bond will be priced:

• A. Below par value
• B. At par value
• C. Above par value
• D. Equal to maturity value

When required yield (10%) is higher than coupon rate (8%), the bond trades at a discount (below par).

3. According to the bond price-yield relationship, which of the following is correct?

• A. Bond prices move in the same direction as yields
• B. Bond prices are unaffected by yield changes
• C. Bond prices remain constant until maturity
• D. Bond prices move inversely to yields

Bond prices and yields have an inverse relationship. When yields rise, bond prices fall and vice versa.

4. Which bond theorem states that for equal changes in yield, the price rise is more than the price fall?

• A. Duration Theorem
• B. Convexity Theorem
• C. Liquidity Preference Theorem
• D. Expectation Hypothesis

The Convexity Theorem states that bond prices rise more for a fall in yield than they fall for an equal rise in yield.

5. A 10-year Government Security of ₹100 face value carries a coupon of 7%. If current market yield is 6%, its price will be:

• A. ₹100 (At par)
• B. Less than ₹100 (Discount)
• C. More than ₹100 (Premium)
• D. Exactly equal to future value

When coupon rate (7%) exceeds the market yield (6%), the bond trades at a premium (above par).

6. Which type of auction is commonly used by RBI for issuing Government Securities to institutional investors?

• A. Multiple Price Auction
• B. Uniform Price Auction
• C. Dutch Auction only
• D. Reverse Auction

RBI uses both multiple price (discriminatory) and uniform price auctions, but the common method for institutional investors is multiple price auction, where successful bidders pay the price they bid.

7. In a Uniform Price Auction of G-Secs, how is the final price determined?

• A. Each bidder pays according to their bid
• B. Lowest bid price is accepted for all
• C. All successful bidders pay the same cut-off price
• D. Price is decided by weighted average of all bids

In a uniform price auction, all successful bidders are allotted securities at the same cut-off price, regardless of their individual bid prices.

8. Which participants are allowed non-competitive bidding in Government Securities auctions?

• A. Only Commercial Banks
• B. Only Insurance Companies
• C. Only Foreign Investors
• D. Retail investors and smaller participants like provident funds

Non-competitive bidding is provided by RBI to encourage wider participation by retail investors, provident funds, and small institutions, without them having to quote yields.

9. In a Government Security auction, the 'cut-off yield' refers to:

• A. Average yield of all bids
• B. The highest yield accepted for allotment
• C. The lowest yield accepted for allotment
• D. Weighted average yield of bids

The cut-off yield is the highest yield at which bids are accepted. Bids above this yield are rejected.

10. If the notified amount of a G-Sec auction is ₹10,000 crore and bids worth ₹25,000 crore are received, what does this indicate?

• A. Under-subscription
• B. RBI cancels the auction
• C. Over-subscription
• D. Non-competitive bidding only

When bid amount exceeds the notified amount, it is called over-subscription. RBI then allots based on cut-off yield/price.

11. What is the primary role of Primary Dealers (PDs) in the Government Securities market?

• A. To regulate bond prices in the secondary market
• B. To underwrite and make markets in Government Securities
• C. To manage monetary policy directly
• D. To lend to State Governments

Primary Dealers are financial institutions appointed by RBI to underwrite Government Securities auctions and provide liquidity in the secondary market.

12. Which of the following institutions are eligible to act as Primary Dealers in India?

• A. Only Commercial Banks
• B. Only Insurance Companies
• C. Select banks and financial institutions approved by RBI
• D. All NBFCs automatically

RBI authorizes select commercial banks and financial institutions to function as Primary Dealers. Not all NBFCs or insurers qualify automatically.

13. Which organization publishes reference rates such as the MIBOR (Mumbai Interbank Offered Rate) and valuation benchmarks for fixed income securities in India?

• A. RBI
• B. SEBI
• C. NSE
• D. FIMMDA

FIMMDA (Fixed Income Money Market and Derivatives Association of India) publishes benchmark rates like MIBOR, and provides valuation guidelines for debt securities.

14. What is one of the key functions of FIMMDA in the Indian financial system?

• A. Setting standard market practices for fixed income and derivatives markets
• B. Directly controlling monetary policy
• C. Issuing Government Securities
• D. Providing deposit insurance to investors

FIMMDA sets standard documentation, market conventions, and valuation practices for bonds, money market instruments, and derivatives in India.

15. Which of the following statements about Primary Dealers (PDs) is correct?

• A. PDs are allowed to issue Government Securities
• B. PDs are prohibited from participating in secondary markets
• C. PDs are obliged to bid in primary auctions and provide two-way quotes in the secondary market
• D. PDs are restricted to acting as brokers only

PDs have dual responsibility: they must participate in primary auctions of G-Secs and provide continuous buy-sell quotes in the secondary market to maintain liquidity.

16. The RBI Retail Direct Scheme (RDS) primarily allows which type of investors to directly invest in Government Securities?

• A. Only Banks and NBFCs
• B. Only Foreign Investors
• C. Only Institutional Investors
• D. Individual retail investors

The RDS allows individual retail investors to directly invest in Government Securities through an RBI-managed platform.

17. Under the RBI Retail Direct Scheme, which type of account is opened by retail investors with RBI?

• A. NRO Account
• B. Retail Direct Gilt (RDG) Account
• C. Demat Account with NSDL only
• D. Regular Savings Bank Account

Investors open a Retail Direct Gilt (RDG) Account with RBI to buy and hold Government Securities directly.

18. Which of the following securities can be purchased by retail investors under the RDS?

• A. Only Equity Shares
• B. Only Corporate Bonds
• C. Government Securities, Treasury Bills, Sovereign Gold Bonds, State Development Loans
• D. Only Mutual Funds

Through RDS, investors can invest in G-Secs, T-Bills, SGBs, and State Development Loans directly.

19. Which statement about the RBI Retail Direct Scheme is correct?

• A. Investors can participate in both primary issuance and secondary market of G-Secs
• B. Investors can only purchase securities in the secondary market
• C. Only NRIs can use the scheme
• D. Investors can purchase only Sovereign Gold Bonds

RDS provides access to both primary issuance (auctions) and secondary market trading of Government Securities.

20. What is the minimum investment amount required for a retail investor to bid in a Government Security auction under RDS?

• A. ₹1 crore
• B. ₹10,000
• C. ₹1 lakh
• D. ₹50,000

Under non-competitive bidding in RDS, the minimum bid amount is ₹10,000 and in multiples thereof.

21. Which regulatory body oversees the Corporate Bond Market in India?

• A. RBI
• B. Ministry of Finance
• C. SEBI
• D. SIDBI

The Corporate Bond Market in India is regulated by SEBI, which frames rules for issuance, listing, and trading of corporate debt securities.

22. Which of the following is NOT typically a feature of corporate bonds?

• A. Fixed coupon payments
• B. Tradable in secondary markets
• C. Credit rating requirement
• D. Guaranteed by the Government of India

Unlike Government Securities, corporate bonds are not guaranteed by the Government. They carry credit risk and rely on ratings by agencies like CRISIL, ICRA, etc.

23. Which of the following participants is the largest investor group in the Indian corporate bond market?

• A. Retail investors
• B. Institutional investors such as mutual funds, insurance companies, and pension funds
• C. Only banks
• D. Small finance companies

The corporate bond market in India is dominated by institutional investors such as insurance companies, pension funds, and mutual funds due to large ticket sizes.

24. Inter-Corporate Deposits (ICDs) are best described as:

• A. Unsecured short-term loans extended by one corporate to another
• B. Deposits maintained by corporates in banks
• C. Fixed deposits with maturity of 5 years
• D. Deposits made by foreign investors in Indian corporates

ICDs are unsecured, short-term funding arrangements where one company lends to another, usually to manage working capital requirements.

25. Which of the following is a risk associated with Inter-Corporate Deposits (ICDs)?

• A. They are always guaranteed by RBI
• B. They are fully secured by collateral
• C. They carry high default risk since they are unsecured
• D. They have interest rates regulated by SEBI

ICDs are unsecured and therefore subject to a high risk of default. They are not regulated like bank deposits, making them risky for lenders.