NISM XV Markets & Instruments — Practice Questions
Practice questions on securities markets and instruments for NISM Series XV — equity, debt, derivatives, mutual funds and market structure, with explanations.
111 questions on Markets & Instruments in the ScoreSetu bank — each with a detailed explanation and, where useful, a memory hook.
What this topic covers
- Equity & debt instruments
- Derivatives basics
- Primary vs secondary markets
- Market participants
Free sample questions
1. Which factors usually have the most influence in the movement of commodity prices in the near term?
- A. Secular trends
- B. Inventory Cycle ✅
- C. Economic Cycle
- D. Monetary Policy
Answer: B — Inventory Cycle
Why: Inventory cycles are short term cycles that occur within a commodity cycle. These occur on account of inventory adjustments by producers and customers. Customers who may have huge inventory may temporarily reduce procurement. This would result in high inventory pile up at the suppliers’ end resulting in fall in prices. Similarly, during a downturn, cautious customers may significantly reduce their procurement. However, if demand for their products improves marginally, they may not have adequate inventory and will have to go for immediate procurement. This can result in prices increasing.
2. The Return on Capital Employed (ROCE) of company M/s. Hightech Industries Ltd. is 8% and the cost of debt is 10%. What will be the most likely Return on Equity (ROE)?
- A. ROE is likely to be below 8% ✅
- B. ROE is likely to be above 10%
- C. ROE will be 2%
- D. ROE will be between 8 to 10%
Answer: A — ROE is likely to be below 8%
Why: ROCE is 8% but the cost of debt is 10%. Since the company earns less on its capital than it pays on borrowings, debt reduces overall returns. This drags down shareholder returns, so the ROE will end up below 8%. In other words : ROCE shows how efficiently the company earns on total capital, while cost of debt is what it pays on borrowings. Here, the company earns 8% but pays 10% on debt, so borrowing is costlier than returns. This creates negative leverage, which reduces returns for equity shareholders (ROE). Hence, the ROE will be lower than 8%.
💡 If ROCE < cost of debt -> leverage HURTS -> ROE falls BELOW ROCE.
3. Find out the Cost of Equity if the risk free rate is 7%, the market risk premium is 9% and the Beta is 0.60.
- A. 8.1%
- B. 13.8%
- C. 10.5%
- D. 12.4% ✅
Answer: D — 12.4%
Why: To find the Cost of Equity, we use the Capital Asset Pricing Model (CAPM) formula: Cost of Equity = Rf + β × (Rm−Rf) Where: Rf = Risk-free rate = 7% Rm − Rf = Market risk premium = 9% (Note : ' Rm − Rf' ie. the Market risk premium, is directly given as 9%) β = Beta = 0.60 Substituting the value : Cost of Equity = 7% + ( 0.60 × 9% ) = 7% + 5.4% = 12.4%
💡 Market risk = losses from overall market/price falls (systematic).
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