CAIIB BFM Treasury MCQ: Unit 20 Module C - Bank Promotion Exam Guide

CAIIB BFM Treasury MCQ: Unit 20 Module C. Preparing for CAIIB BFM Module C? This post gives simple Multiple-Choice Questions (MCQs) on Treasury Products (Unit 20). Find easy questions and answers covering the Forex market, Money Market tools like T-Bills and Repos, Government Securities (G-Secs), and RBI’s role. Practice these CAIIB Treasury Products MCQs to check your knowledge and prepare well for your banking exam.

CAIIB BFM Treasury MCQ: Unit 20 Module C – Attempt Now!

Question 1: What is the primary function of the Forex market?

A. To trade stocks and bonds globally.
B. To facilitate the exchange of different national currencies.
C. To regulate international trade agreements.
D. To manage the supply of precious metals.

Show Explanation

Correct Answer: B. To facilitate the exchange of different national currencies. The Forex market is the global marketplace for trading currencies.

Question 2: Which of the following is NOT considered a major currency traded in high volumes in the Forex market?

A. United States Dollar (USD)
B. Euro (EUR)
C. Indian Rupee (INR)
D. Great British Pound (GBP)

Show Explanation

Correct Answer: C. Indian Rupee (INR). While the INR is traded, the major convertible currencies with high liquidity include USD, EUR, GBP, JPY, and CHF.

Question 3: What characteristic makes the Forex market highly liquid?

A. Strict control by central banks.
B. The large volume of trading in major currencies.
C. Limited participation from individual traders.
D. Trading restrictions across different time zones.

Show Explanation

Correct Answer: B. The large volume of trading in major currencies. High trading volumes of major convertible currencies contribute to the Forex market’s liquidity.

Question 4: Which feature of the Forex market allows traders to see currency exchange rates and execute transactions in real-time online?

A. Its operation as a virtual marketplace.
B. The rapid speed at which information is disseminated.
C. Its transparent nature.
D. Its continuous availability across time zones.

Show Explanation

Correct Answer: C. Its transparent nature. Real-time online transactions and visible rates are key aspects of the Forex market’s transparency.

Question 5: What does it mean that the Forex market is a “Virtual Market”?

A. It exists only in theory and not in practice.
B. Trading happens electronically without a central physical location.
C. Transactions involve only virtual or digital currencies.
D. It is regulated by international virtual organizations.

Show Explanation

Correct Answer: B. Trading happens electronically without a central physical location. The Forex market operates without a physical trading floor.

Question 6: How quickly does information typically spread within the Forex market?

A. Slowly, to ensure accuracy and prevent speculation.
B. At a moderate pace, allowing all participants equal access.
C. Rapidly, through electronic news services like Reuters and Bloomberg.
D. Only during official trading hours in major financial centers.

Show Explanation

Correct Answer: C. Rapidly, through electronic news services like Reuters and Bloomberg. Electronic media facilitates the fast dissemination of information in the Forex market.

Question 7: What does a narrow buy-sell spread generally indicate about a currency pair in the Forex market?

A. Low trading volume and poor liquidity.
B. High volatility and unpredictable price movements.
C. High trading volume and good liquidity.
D. Increased risk and potential for large profits.

Show Explanation

Correct Answer: C. High trading volume and good liquidity. A narrower spread suggests that there are many buyers and sellers, making it easier to trade.

Question 8: What type of Forex market involves the immediate exchange of currencies?

A. The forward market.
B. The futures market.
C. The spot market.
D. The options market.

Show Explanation

Correct Answer: C. The spot market. This market deals with the immediate purchase or sale of currencies.

Question 9: What is the typical settlement timeframe for a standard transaction in the Spot Market?

A. On the same day as the trade.
B. On the next working day after the trade.
C. Two working days after the trade date.
D. One week after the trade date.

Show Explanation

Correct Answer: C. Two working days after the trade date. This is the standard settlement period (T+2) for spot transactions.

Question 10: In the Spot Market, what does “TOD Settlement” mean?

A. The transaction will be settled tomorrow.
B. The transaction will be settled two days from now.
C. The transaction will be settled on the same day.
D. The settlement date is optional and can be decided later.

Show Explanation

Correct Answer: C. The transaction will be settled on the same day. TOD stands for Today or Cash settlement.

Question 11: How are the exchange rates for TOD and TOM settlements usually priced in comparison to the standard spot rate?

A. They are typically higher than the spot rate.
B. They are typically the same as the spot rate.
C. They are typically lower (discounted) than the spot rate.
D. Their pricing is not related to the spot rate.

Show Explanation

Correct Answer: C. They are typically lower (discounted) than the spot rate. TOD and TOM rates often reflect the time value of money for the shorter settlement periods.

Question 12: What are the primary factors that influence the determination of spot exchange rates between currencies?

A. Government regulations and fixed exchange rate mechanisms.
B. The forces of demand and supply, along with interest rate differences.
C. The volume of trading in the forward and futures markets.
D. The political stability of the countries involved.

Show Explanation

Correct Answer: B. The forces of demand and supply, along with interest rate differences. These factors play a significant role in determining the current exchange rates.

Question 13: What is the main purpose of the Forward Market in foreign exchange?

A. To execute immediate currency transactions at prevailing rates.
B. To speculate on short-term fluctuations in currency values.
C. To protect against potential losses from future changes in exchange rates.
D. To standardize currency trading through organized exchanges.

Show Explanation

Correct Answer: C. To protect against potential losses from future changes in exchange rates. Hedging currency risk is a primary function of the forward market.

Question 14: What is the key factor that primarily determines the forward exchange rate between two currencies?

A. The current spot exchange rate and the historical volatility of the currencies.
B. The difference in interest rates between the two countries.
C. The expected future inflation rates in both countries.
D. The balance of trade between the two countries.

Show Explanation

Correct Answer: B. The difference in interest rates between the two countries. Interest rate differentials are a major determinant of forward rates.

Question 15: When would a forward premium typically be applied to a currency’s spot rate?

A. When the currency has a higher interest rate compared to the other currency.
B. When the currency is expected to depreciate in the future.
C. When the currency has a lower interest rate compared to the other currency.
D. When there is high demand for the currency in the spot market.

Show Explanation

Correct Answer: C. When the currency has a lower interest rate compared to the other currency. A forward premium compensates for the lower yield.

Question 16: What does a forward discount on a currency indicate?

A. The forward rate is higher than the spot rate.
B. The forward rate is equal to the spot rate.
C. The forward rate is lower than the spot rate.
D. The spot rate is expected to remain constant.

Show Explanation

Correct Answer: C. The forward rate is lower than the spot rate. A forward discount is deducted from the spot rate.

Question 17: Besides interest rate differentials, what other factor can significantly influence forward rates, especially for currencies with limited convertibility like the Indian Rupee?

A. The current account balance of the country.
B. The foreign exchange reserves held by the central bank.
C. Expectations about future exchange rate movements.
D. The level of government debt.

Show Explanation

Correct Answer: C. Expectations about future exchange rate movements. Market sentiment and anticipated changes play a crucial role, especially for less liquid currencies.

Question 18: What are Non-Deliverable Forwards (NDFs)?

A. Forward contracts where the physical exchange of currencies always takes place.
B. Forward contracts that are settled in cash, usually in US Dollars, without the physical delivery of the underlying currencies.
C. Spot market transactions that are agreed upon today but settled at a future date.
D. Standardized forward contracts traded on regulated exchanges.

Show Explanation

Correct Answer: B. Forward contracts that are settled in cash, usually in US Dollars, without the physical delivery of the underlying currencies. NDFs are offshore contracts with cash settlement.

Question 19: What is a common use for Non-Deliverable Forwards (NDFs)?

A. To facilitate the physical transfer of large amounts of foreign currency.
B. To make immediate payments in currencies that are not easily convertible.
C. To hedge against currency risk and to speculate on the price movements of less convertible currencies.
D. To standardize forward trading for major global currencies.

Show Explanation

Correct Answer: C. To hedge against currency risk and to speculate on the price movements of less convertible currencies. NDFs provide a way to manage exposure to restricted currencies.

Question 20: Which type of financial institution is a major participant in the Non-Deliverable Forwards (NDF) market?

A. Local credit unions.
B. Domestic retail banks only.
C. Foreign investors, hedge funds, and banks.
D. Small businesses involved in international trade.

Show Explanation

Correct Answer: C. Foreign investors, hedge funds, and banks. These entities frequently use NDFs for hedging and investment purposes.

Question 21: What is a key characteristic of a Futures Contract in the Forex market?

A. They are private agreements between two parties and can be customized.
B. They always involve the physical delivery of the underlying currency upon settlement.
C. They are standardized contracts traded on an exchange and require margin deposits.
D. Their settlement is not guaranteed by a central clearinghouse.

Show Explanation

Correct Answer: C. They are standardized contracts traded on an exchange and require margin deposits. Futures contracts have these specific features.

Question 22: What is the primary difference between an Options Contract and a Futures Contract in Forex?

A. Futures contracts give the buyer the right, but not the obligation, to trade, while options contracts are binding.
B. Options contracts give the buyer the right, but not the obligation, to trade, while futures contracts are binding.
C. Options contracts are traded on exchanges, while futures are traded over-the-counter.
D. Futures contracts always involve physical delivery, while options contracts never do.

Show Explanation

Correct Answer: B. Options contracts give the buyer the right, but not the obligation, to trade, while futures contracts are binding. This distinction is crucial.

Question 23: What right does the buyer of a Call Option on a currency have?

A. The right to sell the currency at a specified price.
B. The obligation to buy the currency at a specified price.
C. The right to buy the currency at a specified price.
D. The obligation to sell the currency at a specified price.

Show Explanation

Correct Answer: C. The right to buy the currency at a specified price. A call option grants the holder the right to purchase.

Question 24: What is the main feature that distinguishes an American Option from a European Option?

A. An American option can only be exercised on the expiration date.
B. A European option can be exercised at any time before the expiration date.
C. An American option can be exercised at any time up to and including the expiration date.
D. European options are settled physically, while American options are settled in cash.

Show Explanation

Correct Answer: C. An American option can be exercised at any time up to and including the expiration date. This provides more flexibility than a European option.

Question 25: What is a Swap transaction in the context of currency trading?

A. A simple spot transaction with a very short settlement period.
B. An agreement to exchange goods or services between two parties in different countries.
C. A combination of a spot and a forward transaction, or two forward transactions with different maturity dates.
D. A type of option contract that allows for the exchange of currencies at a future date.

Show Explanation

Correct Answer: C. A combination of a spot and a forward transaction, or two forward transactions with different maturity dates. Swaps involve exchanging cash flows over time.

Question 26: What is a primary reason for a company to enter into a Currency Swap agreement?

A. To speculate on short-term fluctuations in exchange rates for quick profits.
B. To exchange the principal and interest payments on loans that are denominated in different currencies.
C. To make immediate payments for import or export transactions.
D. To avoid all forms of foreign exchange risk associated with international trade.

Show Explanation

Correct Answer: B. To exchange the principal and interest payments on loans that are denominated in different currencies. Currency swaps help manage currency mismatches in liabilities.

Question 27: What is a Nostro Account?

A. A foreign currency account held by a domestic bank in its own country.
B. A domestic bank’s account held with a bank in a foreign country and denominated in that foreign currency.
C. A type of savings account for foreign residents.
D. An account used for trading in the domestic stock market.

Show Explanation

Correct Answer: B. A domestic bank’s account held with a bank in a foreign country and denominated in that foreign currency. Nostro accounts are essential for international transactions.

Question 28: What is the role of a bank’s Treasury department concerning foreign currency loans?

A. To directly negotiate the interest rates with borrowers.
B. To manage the marketing and promotion of foreign currency loan products.
C. To evaluate the availability and cost of funds for lending in foreign currencies.
D. To handle the documentation and legal aspects of foreign currency loans.

Show Explanation

Correct Answer: C. To evaluate the availability and cost of funds for lending in foreign currencies. The Treasury plays a key role in funding decisions.

Question 29: What is the maximum maturity period for instruments traded in the Money Market?

A. More than 1 year.
B. Exactly 1 year.
C. Less than or equal to 1 year.
D. There is no limit on the maturity period.

Show Explanation

Correct Answer: C. Less than or equal to 1 year. The definition states that the money market deals in short-term funds with maturity of ≤ 1 year.

Question 30: What is the primary function of the Money Market?

A. Long-term capital formation.
B. Facilitating international trade.
C. Liquidity management.
D. Investment in equity shares.

Show Explanation

Correct Answer: C. Liquidity management. The key function of the money market is managing liquidity.

Question 31: What does “Call Money” refer to in the financial market?

A. Money borrowed by individuals from banks.
B. Overnight lending between banks.
C. Funds raised by companies through initial public offerings.
D. Long-term loans provided by financial institutions.

Show Explanation

Correct Answer: B. Overnight lending between banks. Call money is defined as overnight inter-bank lending.

Question 32: What does O/N MIBOR stand for?

A. Overnight Mumbai Inter-Bank Offer Rate.
B. Outright National Monetary Borrowing Rate.
C. Offshore Negotiable Instrument Borrowing Rate.
D. Open Market Inter-Bank Overnight Rate.

Show Explanation

Correct Answer: A. Overnight Mumbai Inter-Bank Offer Rate. O/N MIBOR is the benchmark rate for call money.

Question 33: Which of the following is a participant in the Call Money market?

A. Individual investors.
B. Foreign institutional investors.
C. Scheduled Commercial Banks.
D. Commodity traders.

Show Explanation

Correct Answer: C. Scheduled Commercial Banks. The list includes Scheduled Commercial Banks as participants.

Question 34: What is the maximum amount a Scheduled Commercial Bank can borrow in the Call Money market on any given day, as a percentage of its capital funds?

A. 50%
B. 75%
C. 100%
D. 125%

Show Explanation

Correct Answer: D. 125%. The prudential limit for Scheduled Commercial Banks is up to 125% on any day.

Question 35: What is the borrowing limit for Co-operative Banks in the Call Money market, as a percentage of their aggregate deposits?

A. 1.0%
B. 1.5%
C. 2.0%
D. 2.5%

Show Explanation

Correct Answer: C. 2.0%. The prudential limit for Co-operative Banks is up to 2.0% of aggregate deposits.

Question 36: What is the maximum borrowing limit for Primary Dealers in the Call Money market, as a percentage of their Net Owned Fund (NOF)?

A. 100%
B. 150%
C. 200%
D. 225%

Show Explanation

Correct Answer: D. 225%. The prudential limit for Primary Dealers is up to 225% of NOF.

Question 37: What is the duration for lending in the “Notice Money” market?

A. Overnight only.
B. More than 14 days.
C. Between 2 to 14 days.
D. Up to 1 year.

Show Explanation

Correct Answer: C. Between 2 to 14 days. Notice money involves inter-bank lending for this period.

Question 38: What is the maturity period for “Term Money” in the inter-bank lending market?

A. Overnight.
B. 2 to 14 days.
C. More than 14 days up to 1 year.
D. More than 1 year.

Show Explanation

Correct Answer: C. More than 14 days up to 1 year. Term money covers lending for this duration.

Question 39: What are Treasury Bills (T-Bills)?

A. Long-term debt instruments issued by the Government of India.
B. Short-term debt instruments issued by the Reserve Bank of India.
C. Short-term debt instruments issued by the Government of India.
D. Unsecured promissory notes issued by corporations.

Show Explanation

Correct Answer: C. Short-term debt instruments issued by the Government of India. T-Bills are issued by the GoI.

Question 40: Which of the following is a standard maturity period for Treasury Bills issued by the Government of India?

A. 30 days
B. 60 days
C. 120 days
D. 182 days

Show Explanation

Correct Answer: D. 182 days. The standard maturities are 91, 182, and 364 days.

Question 41: How are Treasury Bills typically issued to investors?

A. At a premium to their face value.
B. At their face value.
C. At a discount to their face value.
D. With interest paid periodically.

Show Explanation

Correct Answer: C. At a discount to their face value. This is the standard method of issuing T-Bills.

Question 42: Which organization publishes the yield curve for Treasury Bills in India?

A. Reserve Bank of India (RBI)
B. Securities and Exchange Board of India (SEBI)
C. Financial Benchmark India Ltd (FBIL)
D. National Stock Exchange (NSE)

Show Explanation

Correct Answer: C. Financial Benchmark India Ltd (FBIL). FBIL is responsible for publishing the T-Bill yield curve.

Question 43: What are Cash Management Bills (CMBs) primarily used for by the government?

A. To finance long-term infrastructure projects.
B. To manage temporary mismatches in cash flow.
C. To control the overall money supply in the economy.
D. To provide investment opportunities for retail investors.

Show Explanation

Correct Answer: B. To manage temporary mismatches in cash flow. CMBs are designed for this purpose.

Question 44: What is the maximum maturity period for Cash Management Bills (CMBs)?

A. 30 days
B. 60 days
C. 90 days
D. 1 year

Show Explanation

Correct Answer: C. 90 days. CMBs have a maturity of up to 91 days.

Question 45: How are Cash Management Bills (CMBs) issued to investors?

A. At a fixed interest rate.
B. At their face value.
C. At a discount to their face value.
D. With interest compounded annually.

Show Explanation

Correct Answer: C. At a discount to their face value. Similar to T-Bills, CMBs are issued at a discount.

Question 46: What is Commercial Paper (CP)?

A. A long-term secured debt instrument issued by banks.
B. An unsecured promissory note issued by corporations and other entities.
C. A short-term debt instrument issued by the Government of India.
D. A type of certificate of deposit offered by financial institutions.

Show Explanation

Correct Answer: B. An unsecured promissory note issued by corporations and other entities. This is the definition of Commercial Paper.

Question 47: What is the typical maturity range for Commercial Paper (CP)?

A. Overnight to 7 days.
B. 7 days to 1 year.
C. 1 year to 3 years.
D. More than 3 years.

Show Explanation

Correct Answer: B. 7 days to 1 year. This is the specified maturity range for CP.

Question 48: What is a prerequisite for a company to be able to issue Commercial Paper (CP)?

A. It must be listed on a stock exchange for at least 5 years.
B. It must have a minimum paid-up capital of Rs. 10 crores.
C. It must have a minimum credit rating from a recognized agency.
D. It must be a public sector undertaking.

Show Explanation

Correct Answer: C. It must have a minimum credit rating from a recognized agency. A credit rating is required for issuing CP.

Question 49: Which regulatory body governs the issuance of Commercial Paper (CP) in India?

A. Securities and Exchange Board of India (SEBI) only.
B. Reserve Bank of India (RBI) only.
C. Reserve Bank of India (RBI) and Fixed Income Money Market and Derivatives Association of India (FIMMDA).
D. Ministry of Finance, Government of India.

Show Explanation

Correct Answer: C. Reserve Bank of India (RBI) and Fixed Income Money Market and Derivatives Association of India (FIMMDA). Both bodies provide guidelines for CP.

Question 50: In what form must Commercial Paper (CP) be issued?

A. Physical certificate form.
B. Dematerialized (demat) form.
C. Either physical or demat form, at the issuer’s discretion.
D. As a bank draft.

Show Explanation

Correct Answer: B. Dematerialized (demat) form. CP must be issued in demat form.

Question 51: What is the minimum denomination amount for issuing Commercial Paper (CP)?

A. Rs. 1 lakh
B. Rs. 2 lakhs
C. Rs. 5 lakhs
D. Rs. 10 lakhs

Show Explanation

Correct Answer: C. Rs. 5 lakhs. The minimum amount for CP issuance is Rs. 5 lakhs.

Question 52: Where are trades in Commercial Paper (CP) required to be reported?

A. To the Reserve Bank of India (RBI) directly.
B. To the Securities and Exchange Board of India (SEBI) directly.
C. To F-TRAC (Financial Market Trade Reporting and Confirmation Platform).
D. To the National Stock Exchange (NSE).

Show Explanation

Correct Answer: C. To F-TRAC (Financial Market Trade Reporting and Confirmation Platform). CP trades must be reported to F-TRAC.

Question 53: What are Certificates of Deposit (CDs)?

A. Long-term secured deposits offered by commercial banks.
B. Negotiable, unsecured time deposits issued by banks and select Financial Institutions.
C. Short-term debt instruments issued by the government.
D. Shares representing ownership in a company.

Show Explanation

Correct Answer: B. Negotiable, unsecured time deposits issued by banks and select Financial Institutions. This is the definition of CDs.

Question 54: What is the maturity range for Certificates of Deposit (CDs) issued by banks?

A. Overnight to 7 days.
B. 7 days to 1 year.
C. 1 year to 3 years.
D. More than 3 years.

Show Explanation

Correct Answer: B. 7 days to 1 year. This is the maturity range for bank-issued CDs.

Question 55: What is the maturity range for Certificates of Deposit (CDs) issued by select Financial Institutions (FIs)?

A. 7 days to 1 year.
B. 1 year to 3 years.
C. 3 years to 5 years.
D. More than 5 years.

Show Explanation

Correct Answer: B. 1 year to 3 years. This is the maturity range for FI-issued CDs.

Question 56: What is the minimum amount for a Certificate of Deposit (CD) issued by a bank?

A. Rs. 1 lakh
B. Rs. 2 lakhs
C. Rs. 5 lakhs
D. Rs. 10 lakhs

Show Explanation

Correct Answer: C. Rs. 5 lakhs. The minimum amount for bank CDs is Rs. 5 lakhs.

Question 57: What is the minimum amount for a Certificate of Deposit (CD) issued by a select Financial Institution (FI)?

A. Rs. 1 lakh
B. Rs. 2 lakhs
C. Rs. 5 lakhs
D. Rs. 10 lakhs

Show Explanation

Correct Answer: A. Rs. 1 lakh. The minimum amount for FI CDs is Rs. 1 lakh.

Question 58: In what form must Certificates of Deposit (CDs) be issued?

A. Physical certificate form.
B. Dematerialized (demat) form.
C. Either physical or demat form, at the issuer’s discretion.
D. As a bearer bond.

Show Explanation

Correct Answer: B. Dematerialized (demat) form. CDs must be issued in demat form.

Question 59: Where are trades in Certificates of Deposit (CDs) required to be reported?

A. To the Ministry of Finance.
B. To the Securities Appellate Tribunal.
C. To F-TRAC (Financial Market Trade Reporting and Confirmation Platform).
D. To the Bombay Stock Exchange (BSE).

Show Explanation

Correct Answer: C. To F-TRAC (Financial Market Trade Reporting and Confirmation Platform). CD trades must be reported to F-TRAC.

Question 60: What is a Market Repo?

A. A long-term loan secured by real estate.
B. Short-term borrowing using securities as collateral under a repurchase agreement.
C. The sale of government securities in the open market.
D. An agreement to buy and sell currencies at a future date.

Show Explanation

Correct Answer: B. Short-term borrowing using securities as collateral under a repurchase agreement. This is the definition of a market repo.

Question 61: What is a “Haircut” in the context of a Repo transaction?

A. The interest rate charged on the borrowed funds.
B. A fee paid to the intermediary facilitating the transaction.
C. A margin applied to the value of the collateral to account for price risk.
D. The difference between the purchase and repurchase price of the security.

Show Explanation

Correct Answer: C. A margin applied to the value of the collateral to account for price risk. Haircut is a safety margin.

Question 62: Where are Market Repo trades typically reported?

A. Only to the Reserve Bank of India (RBI).
B. Only to the Securities and Exchange Board of India (SEBI).
C. To F-TRAC (Financial Market Trade Reporting and Confirmation Platform) or Clearcorp Repo Order Matching System (CROMS).
D. To the National Housing Bank (NHB).

Show Explanation

Correct Answer: C. To F-TRAC (Financial Market Trade Reporting and Confirmation Platform) or Clearcorp Repo Order Matching System (CROMS). These are the reporting platforms.

Question 63: What is a key feature of Tripartite Repo Trades (TREPS)?

A. They involve only two parties: the borrower and the lender.
B. They use the Clearing Corporation of India Ltd (CCIL) as a third-party agent.
C. They are long-term borrowing arrangements.
D. They do not require any collateral.

Show Explanation

Correct Answer: B. They use the Clearing Corporation of India Ltd (CCIL) as a third-party agent. CCIL acts as an intermediary in TREPS.

Question 64: What is the primary purpose of Repo under the Liquidity Adjustment Facility (LAF) of the RBI?

A. To provide long-term funding to banks for infrastructure projects.
B. To manage the overall liquidity in the banking system through repo and reverse repo auctions.
C. To regulate the trading of government securities in the secondary market.
D. To offer investment opportunities to retail investors in government bonds.

Show Explanation

Correct Answer: B. To manage the overall liquidity in the banking system through repo and reverse repo auctions. LAF is a monetary policy tool.

Question 65: What is the main function of the Standing Deposit Facility (SDF)?

A. To provide overnight borrowing to banks.
B. To absorb excess liquidity from the banking system.
C. To regulate the interest rates on savings accounts.
D. To facilitate the trading of government securities.

Show Explanation

Correct Answer: B. To absorb excess liquidity from the banking system. SDF replaced the fixed-rate reverse repo for this purpose.

Question 66: What is the Marginal Standing Facility (MSF)?

A. A facility for banks to invest their surplus funds with the RBI.
B. An overnight borrowing facility for banks from the RBI at a penal rate.
C. A scheme to promote lending to small and medium enterprises.
D. A platform for trading in corporate bonds.

Show Explanation

Correct Answer: B. An overnight borrowing facility for banks from the RBI at a penal rate. MSF is a last-resort borrowing option.

Question 67: What does “Bill Rediscounting” refer to in the banking context?

A. The process of a bank re-evaluating the creditworthiness of its borrowers.
B. Banks buying or discounting existing bills of exchange that were already discounted by another bank.
C. The act of extending the maturity period of a bill of exchange.
D. A new type of bill of exchange introduced by the central bank.

Show Explanation

Correct Answer: B. Banks buying or discounting existing bills of exchange that were already discounted by another bank. This is the definition of bill rediscounting.

Question 68: What are Government Securities (G-Secs)?

A. Shares issued by public sector undertakings.
B. Debt instruments issued by the Reserve Bank of India for the Government of India and State Governments.
C. Short-term loans provided by commercial banks to corporations.
D. Gold bonds issued by the central government.

Show Explanation

Correct Answer: B. Debt instruments issued by the Reserve Bank of India for the Government of India and State Governments. G-Secs are issued by RBI on behalf of the governments.

Question 69: How is the price of Government Securities (G-Secs) typically determined during primary issuance?

A. It is fixed by the Reserve Bank of India (RBI).
B. It is determined by negotiations between the RBI and primary dealers.
C. It is determined by the bids submitted in RBI auctions.
D. It is based on the prevailing interest rates in the market.

Show Explanation

Correct Answer: C. It is determined by the bids submitted in RBI auctions. Auctions are the primary method of price discovery.

Question 70: What is the relationship between the price and the yield of a Government Security (G-Sec)?

A. They move in the same direction (both increase or decrease together).
B. They move in opposite directions (when price increases, yield decreases, and vice versa).
C. The price is directly proportional to the square of the yielD.
D. There is no consistent relationship between the price and the yield.

Show Explanation

Correct Answer: B. They move in opposite directions (when price increases, yield decreases, and vice versa). This is an inverse relationship.

Question 71: What is the role of the Reserve Bank of India (RBI) with respect to Government Securities (G-Secs)?

A. It only regulates the trading of G-Secs in the secondary market.
B. It acts as the issuer and paying agent for G-Secs and conducts Open Market Operations (OMO).
C. It only holds G-Secs as part of its foreign exchange reserves.
D. It advises the government on the interest rates for G-Secs.

Show Explanation

Correct Answer: B. It acts as the issuer and paying agent for G-Secs and conducts Open Market Operations (OMO). RBI plays a central role in the G-Sec market.

Question 72: What is the Statutory Liquidity Ratio (SLR)?

A. The percentage of a bank’s total assets that must be held in cash.
B. The percentage of a bank’s Net Demand and Time Liabilities (NDTL) that must be held in approved liquid assets.
C. The ratio of a bank’s capital to its risk-weighted assets.
D. The percentage of a bank’s deposits that are insured.

Show Explanation

Correct Answer: B. The percentage of a bank’s Net Demand and Time Liabilities (NDTL) that must be held in approved liquid assets. This is the definition of SLR.

Question 73: What is the current maximum limit for the Statutory Liquidity Ratio (SLR)?

A. 15%
B. 18%
C. 30%
D. 40%

Show Explanation

Correct Answer: D. 40%. The current SLR is 18%, with a maximum limit of 40%.

Question 74: Which of the following assets is eligible to be included in a bank’s Statutory Liquidity Ratio (SLR)?

A. Equity shares of listed companies.
B. Corporate bonds with a credit rating below investment grade.
C. Government Securities (G-Secs).
D. Loans extended to large corporations.

Show Explanation

Correct Answer: C. Government Securities (G-Secs). G-Secs are explicitly mentioned as SLR eligible.

Question 75: What does “Held to Maturity (HTM)” refer to in the context of a bank’s investment portfolio?

A. Securities that are actively traded on a daily basis.
B. Securities that are intended to be held until their maturity date.
C. Securities that are available for sale in the open market.
D. Securities that are marked-to-market quarterly.

Show Explanation

Correct Answer: B. Securities that are intended to be held until their maturity date. HTM is an investment classification.

Question 76: What is the classification “Available for Sale (AFS)” for Government Securities (G-Secs) primarily used for by banks?

A. For securities held with the intention of trading actively.
B. For securities held until their maturity.
C. For tradable securities that are marked-to-market quarterly.
D. For securities that are not eligible for trading.

Show Explanation

Correct Answer: C. For tradable securities that are marked-to-market quarterly. AFS securities are part of the trading book.

Question 77: What is the classification “Held for Trading (HFT)” for Government Securities (G-Secs) used for?

A. For long-term investments held until maturity.
B. For securities that are available for sale but not actively traded.
C. For securities that are actively traded and marked-to-market regularly.
D. For securities that are held as part of the Statutory Liquidity Ratio (SLR).

Show Explanation

Correct Answer: C. For securities that are actively traded and marked-to-market regularly. HFT securities are actively traded.

Question 78: What does STRIPS stand for in the context of Government Securities?

A. Standardized Treasury Receipts for Interest and Principal Securities.
B. Separate Trading of Registered Interest and Principal Securities.
C. Systematic Transfer of Revenue and Investment in Public Securities.
D. Secured Treasury Receipts for Investment and Payment of Securities.

Show Explanation

Correct Answer: B. Separate Trading of Registered Interest and Principal Securities. STRIPS allows for separate trading of interest and principal components.

Question 79: What are Corporate Debt instruments?

A. Short-term loans issued by companies to meet their working capital needs.
B. Medium or long-term bonds or debentures issued by corporations and Financial Institutions.
C. Equity shares representing ownership in a company.
D. Government securities issued by public sector undertakings.

Show Explanation

Correct Answer: B. Medium or long-term bonds or debentures issued by corporations and Financial Institutions. This is the definition of corporate debt.

Question 80: Are Corporate Debt instruments eligible to be included in a bank’s Statutory Liquidity Ratio (SLR)?

A. Yes, all corporate debt instruments are SLR eligible.
B. Yes, but only those with the highest credit rating.
C. No, Corporate Debt instruments are generally not SLR eligible (Non-SLR Securities).
D. Only corporate debt issued by public sector undertakings is SLR eligible.

Show Explanation

Correct Answer: C. No, Corporate Debt instruments are generally not SLR eligible (Non-SLR Securities). This is a key distinction.

Question 81: Why is the yield on Corporate Debt typically higher than that on Government Securities (G-Secs)?

A. Because corporate debt instruments are more liquid than G-Secs.
B. Because corporate debt instruments have a longer maturity period.
C. Because corporate debt instruments carry a higher credit risk.
D. Because the demand for corporate debt is lower than for G-Secs.

Show Explanation

Correct Answer: C. Because corporate debt instruments carry a higher credit risk. Higher risk generally leads to higher yields.

Question 82: Which of the following is a SEBI-registered Credit Rating Agency in India?

A. Reserve Bank of India (RBI)
B. Securities and Exchange Board of India (SEBI)
C. CRISIL
D. National Stock Exchange (NSE)

Show Explanation

Correct Answer: C. CRISIL. CRISIL is listed as a SEBI-registered credit rating agency.

Question 83: According to the Company Law, what is a requirement for Debentures issued by a company?

A. They must be unsecured.
B. They must be convertible into equity shares.
C. They must be secureD.
D. They must have a maturity period of less than one year.

Show Explanation

Correct Answer: C. They must be secured. This is a requirement under the Company Law.

Question 84: What is a key characteristic of Bonds?

A. They are not transferable.
B. They are negotiable instruments.
C. They are always issued at a discount.
D. They represent ownership in a company.

Show Explanation

Correct Answer: B. They are negotiable instruments. This means they can be transferred.

Question 85: What is the role of Trustees in the context of Bonds?

A. To issue the bonds on behalf of the company.
B. To guarantee the repayment of the bond principal.
C. To protect the interests of the bondholders.
D. To determine the credit rating of the bonds.

Show Explanation

Correct Answer: C. To protect the interests of the bondholders. Trustees act as a safeguard for investors.

Question 86: What is a key restriction on Private Placement of bonds under the Companies Act 2013, Section 62?

A. The issuance is limited to a maximum of 200 investors per tranche.
B. The issuance is limited to a maximum of 50 investors per tranche, excluding QIBs and employees.
C. Private placement is not allowed for bonds.
D. Only listed companies can issue bonds through private placement.

Show Explanation

Correct Answer: B. The issuance is limited to a maximum of 50 investors per tranche, excluding QIBs and employees. This is the specified limit.

Question 87: What are Convertible Bonds?

A. Bonds that can be exchanged for gold or other commodities.
B. Bonds that can be converted into equity shares of the issuing company.
C. Bonds that offer a fixed rate of interest that changes over time.
D. Short-term bonds with a high degree of liquidity.

Show Explanation

Correct Answer: B. Bonds that can be converted into equity shares of the issuing company. This is the definition of convertible bonds.

Question 88: How do the coupon rates of Convertible Bonds typically compare to those of non-convertible bonds issued by the same company?

A. Convertible bonds usually have higher coupon rates.
B. Convertible bonds usually have the same coupon rates.
C. Convertible bonds usually have lower coupon rates.
D. The coupon rates depend on the prevailing market conditions and are not necessarily related to convertibility.

Show Explanation

Correct Answer: C. Convertible bonds usually have lower coupon rates. The conversion feature often compensates for a lower interest payment.

Question 89: What are Equities?

A. Debt instruments issued by the government.
B. Shares representing ownership in a company.
C. Bonds issued by corporations to raise capital.
D. Short-term money market instruments.

Show Explanation

Correct Answer: B. Shares representing ownership in a company. This is the fundamental definition of equities.

Question 90: Which of the following is a type of Equity share?

A. Debenture
B. Preference share
C. Bond
D. Commercial Paper

Show Explanation

Correct Answer: B. Preference share. Preference shares are a type of equity.

Question 91: What is a characteristic of Preference Shares?

A. They always have voting rights.
B. They cannot be redeemed by the company.
C. They have a fixed dividend and priority in case of company winding up.
D. Their dividend rate fluctuates based on the company’s performance.

Show Explanation

Correct Answer: C. They have a fixed dividend and priority in case of company winding up. These are key features of preference shares.

Question 92: Where are Equity shares typically traded?

A. In the money market.
B. On stock exchanges like the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).
C. In the over-the-counter (OTC) market only.
D. Directly between companies and investors.

Show Explanation

Correct Answer: B. On stock exchanges like the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). Stock exchanges are the primary trading venues for equities.

Question 93: What is the maximum investment limit for a bank in the equity of a single company, as a percentage of the investee company’s capital OR the bank’s capital/reserves (whichever is lower)?

A. 10%
B. 20%
C. 30%
D. 40%

Show Explanation

Correct Answer: C. 30%. The limit is the lower of 30% of the investee’s capital or 30% of the bank’s capital/reserves.

Question 94: What is the overall capital market exposure limit for a bank, as a percentage of its net worth (for direct exposure)?

A. 10%
B. 20%
C. 30%
D. 40%

Show Explanation

Correct Answer: B. 20%. The direct exposure limit is 20%, with an overall cap of 40% including indirect exposure.

Question 95: How are Bank Guarantees provided to stock brokers treated in terms of a bank’s capital market exposure?

A. They are considered as direct capital market exposure.
B. They are considered as indirect capital market exposure.
C. They are not considered as part of capital market exposure.
D. They are treated as off-balance sheet items with no impact on exposure limits.

Show Explanation

Correct Answer: B. They are considered as indirect capital market exposure. Bank guarantees to stock brokers fall under indirect exposure.

Question 96: Which of the following is included under the term “Derivatives”?

A. Equity shares
B. Corporate bonds
C. Index futures and options
D. Government securities

Show Explanation

Correct Answer: C. Index futures and options. Derivatives include these types of contracts.

Question 97: What is a Foreign Institutional Investor (FII)?

A. An individual residing outside India who invests in the Indian stock market.
B. Entities that invest in domestic stock and debt markets with the aim of short-term portfolio gains.
C. Indian companies that invest in foreign stock markets.
D. Government agencies from other countries investing in Indian infrastructure projects.

Show Explanation

Correct Answer: B. Entities that invest in domestic stock and debt markets with the aim of short-term portfolio gains. This describes the primary objective of FIIs.

Question 98: Who primarily regulates the investment limits for Foreign Institutional Investors (FIIs), especially in government debt?

A. The Reserve Bank of India (RBI).
B. The Securities and Exchange Board of India (SEBI).
C. The Government.
D. The Ministry of Finance.

Show Explanation

Correct Answer: C. The Government. The government sets the limits for FII investments, particularly in government debt.

Question 99: What are American Depositary Receipts (ADRs) and Global Depositary Receipts (GDRs)?

A. Instruments used by foreign companies to invest in the Indian stock market.
B. Instruments issued by Indian companies abroad that represent underlying domestic equity shares.
C. Government bonds issued in foreign currencies.
D. Short-term money market instruments traded internationally.

Show Explanation

Correct Answer: B. Instruments issued by Indian companies abroad that represent underlying domestic equity shares. ADRs/GDRs are used to raise foreign currency.

Question 100: What are External Commercial Borrowings (ECBs)?

A. Investments made by foreign companies in Indian businesses.
B. Loans raised by eligible Indian entities from foreign sources, including banks and bonds.
C. Deposits held by non-resident Indians in Indian banks.
D. Grants provided by foreign governments to Indian companies.

Show Explanation

Correct Answer: B. Loans raised by eligible Indian entities from foreign sources, including banks and bonds. This is the definition of ECBs.

Question 101: Which institution primarily governs the guidelines related to External Commercial Borrowings (ECBs) regarding borrowers, amount, maturity, and end-use?

A. The Securities and Exchange Board of India (SEBI).
B. The Ministry of Finance.
C. The Reserve Bank of India (RBI).
D. The Export-Import Bank of India (EXIM Bank).

Show Explanation

Correct Answer: C. The Reserve Bank of India (RBI). The RBI sets the rules for ECBs.

Question 102: Who typically bears the risk of currency exchange fluctuations in the case of External Commercial Borrowings (ECBs)?

A. The foreign lender.
B. The Reserve Bank of India (RBI).
C. The Indian borrower.
D. The Government of India.

Show Explanation

Correct Answer: C. The Indian borrower. The borrower usually takes on the currency exchange risk.

Question 103: In what currencies can External Commercial Borrowings (ECBs) be raised by eligible Indian entities?

A. Only in major foreign currencies like USD, EUR, and GBP.
B. Only in Indian Rupees (INR).
C. Either in foreign currency or Indian Rupees (INR).
D. Only in the currency of the country from which the loan is being raised.

Show Explanation

Correct Answer: C. Either in foreign currency or Indian Rupees (INR). ECBs can be denominated in both foreign and local currency.

Question 104: What are Foreign Currency Non-Resident (FCNR) deposits primarily used for by banks?

A. To fund domestic Rupee loans.
B. For overseas investments or providing foreign currency loans within India, subject to RBI limits.
C. To meet the cash reserve ratio requirements.
D. To invest in the Indian stock market.

Show Explanation

Correct Answer: B. For overseas investments or providing foreign currency loans within India, subject to RBI limits. Banks utilize these funds for specific purposes.

Question 105: What is the purpose of an Exchange Earner’s Foreign Currency (EEFC) Account?

A. To allow resident individuals to hold foreign currency for personal expenses.
B. To enable exporters to retain their foreign currency earnings up to certain limits.
C. To facilitate foreign currency transactions for importers.
D. To provide a platform for trading in foreign currencies.

Show Explanation

Correct Answer: B. To enable exporters to retain their foreign currency earnings up to certain limits. EEFC accounts benefit exporters.

Question 106: What type of financial assistance is referred to as Pre-Shipment Credit in Foreign Currency (PCFC)?

A. Loans provided to importers for making payments in foreign currency.
B. Foreign currency loans extended by banks to exporters before the shipment of goods.
C. Credit provided by foreign banks to Indian companies for overseas investments.
D. Short-term loans in foreign currency for working capital requirements of domestic industries.

Show Explanation

Correct Answer: B. Foreign currency loans extended by banks to exporters before the shipment of goods. PCFC supports export activities.

Question 107: What is Overseas Direct Investment (ODI)?

A. Investments made by foreign individuals in Indian companies.
B. Investments made by Indian companies in foreign joint ventures or wholly-owned subsidiaries.
C. Loans provided by Indian banks to foreign companies.
D. Purchase of foreign government bonds by Indian entities.

Show Explanation

Correct Answer: B. Investments made by Indian companies in foreign joint ventures or wholly-owned subsidiaries. ODI involves Indian companies investing abroad.

Question 108: What typically determines the limits for Overseas Direct Investment (ODI) by Indian companies?

A. The foreign exchange reserves of the Reserve Bank of India (RBI).
B. The credit rating of the foreign entity receiving the investment.
C. Caps set by the RBI, often linked to the net worth of the investing Indian company.
D. The bilateral trade agreements between India and the host country.

Show Explanation

Correct Answer: C. Caps set by the RBI, often linked to the net worth of the investing Indian company. RBI regulates ODI limits.

Question 109: What is the Liberalised Remittance Scheme (LRS)?

A. A scheme allowing foreign companies to remit profits from India without restrictions.
B. A scheme allowing resident individuals to send funds abroad up to a specified limit per year for permitted purposes.
C. A scheme providing financial assistance to Indian students studying abroaD.
D. A scheme facilitating foreign direct investment into India.

Show Explanation

Correct Answer: B. A scheme allowing resident individuals to send funds abroad up to a specified limit per year for permitted purposes. LRS enables outward remittances by individuals.

Question 110: What is the current limit for remittances under the Liberalised Remittance Scheme (LRS) per financial year per individual?

A. USD 100,000
B. USD 150,000
C. USD 200,000
D. USD 250,000

Show Explanation

Correct Answer: D. USD 250,000. This is the current specified limit for LRS remittances.

Question 111: Can banks in India provide credit facilities specifically to individuals for making remittances under the Liberalised Remittance Scheme (LRS)?

A. Yes, banks are encouraged to provide such credit to facilitate outward remittances.
B. Yes, but only for specific purposes like education and medical treatment.
C. No, banks are not allowed to extend credit specifically for making remittances under LRS.
D. Banks can provide credit, but it is subject to certain restrictions and approvals from the RBI.

Show Explanation

Correct Answer: C. No, banks are not allowed to extend credit specifically for making remittances under LRS. This is a specific rule under the scheme.

Question 112: What is the likely impact of large capital inflows into the Indian economy on the value of the Rupee?

A. It tends to cause the Rupee to depreciate.
B. It tends to cause the Rupee to appreciate.
C. It has no significant impact on the value of the Rupee.
D. It leads to increased volatility in the value of the Rupee.

Show Explanation

Correct Answer: B. It tends to cause the Rupee to appreciate. Increased demand for the Rupee due to inflows strengthens its value.

Question 113: What is the likely impact of large capital outflows from the Indian economy on the value of the Rupee?

A. It tends to cause the Rupee to appreciate.
B. It tends to cause the Rupee to depreciate.
C. It has no significant impact on the value of the Rupee.
D. It stabilizes the value of the Rupee.

Show Explanation

Correct Answer: B. It tends to cause the Rupee to depreciate. Increased supply of the Rupee in the market weakens its value.

Question 114: How do global interest rates and liquidity conditions generally affect the Indian economy?

A. They primarily influence the inflation rate in the domestic market.
B. They influence domestic interest rates and the availability of credit.
C. They directly control the fiscal policies of the Indian government.
D. They mainly impact the export performance of Indian companies.

Show Explanation

Correct Answer: B. They influence domestic interest rates and the availability of credit. Global financial conditions have a ripple effect.

Question 115: What is the significant impact of Foreign Institutional Investor (FII) flows on the Indian economy?

A. They primarily affect the agricultural sector.
B. They significantly influence domestic stock market levels and the value of the Indian currency.
C. They mainly determine the level of foreign direct investment in infrastructure.
D. They have a direct impact on the monetary policy decisions of the RBI.

Show Explanation

Correct Answer: B. They significantly influence domestic stock market levels and the value of the Indian currency. FII activity has a notable impact on these areas.

Question 116: Why does the Reserve Bank of India (RBI) maintain foreign exchange reserves?

A. To earn profits from trading in foreign currencies.
B. To provide loans to Indian companies investing abroad.
C. To manage exchange rate volatility and act as a buffer against sudden capital flight.
D. To finance the government’s budget deficits.

Show Explanation

Correct Answer: C. To manage exchange rate volatility and act as a buffer against sudden capital flight. These are key reasons for holding forex reserves.

Question 117: How do minimum capital requirements for banks help in mitigating risks arising from global economic shocks?

A. They allow banks to lend more aggressively during economic downturns.
B. They ensure that banks have a sufficient buffer to absorb potential losses from global instability.
C. They restrict the ability of banks to participate in international financial markets.
D. They primarily focus on managing domestic credit risk and have little impact on global shocks.

Show Explanation

Correct Answer: B. They ensure that banks have a sufficient buffer to absorb potential losses from global instability. Strong capitalisation enhances resilience.

Question 118: What is a key function of the Reserve Bank of India (RBI) in relation to capital flows?

A. To encourage unrestricted capital inflows and outflows.
B. To regulate capital inflows and outflows through various policy measures.
C. To provide subsidies to foreign investors.
D. To guarantee the returns on all foreign investments in India.

Show Explanation

Correct Answer: B. To regulate capital inflows and outflows through various policy measures. RBI manages the flow of foreign capital.

Question 119: What role does the Reserve Bank of India (RBI) play in the foreign exchange market?

A. It only facilitates transactions between buyers and sellers of foreign currencies.
B. It intervenes to manage volatility in the exchange rate of the Indian Rupee.
C. It fixes the exchange rate of the Indian Rupee against major foreign currencies.
D. It prohibits trading in certain foreign currencies.

Show Explanation

Correct Answer: B. It intervenes to manage volatility in the exchange rate of the Indian Rupee. RBI’s intervention aims to stabilize the currency.

Question 120: How does the Reserve Bank of India (RBI) use monetary policy tools in response to global economic conditions?

A. It directly controls the fiscal spending of the government.
B. It uses tools like interest rates to influence the economy, partly considering global factors.
C. It primarily focuses on regulating the stock market.
D. It has no direct response to global economic conditions.

Show Explanation

Correct Answer: B. It uses tools like interest rates to influence the economy, partly considering global factors. Monetary policy is often adjusted based on the global scenario.

Question 121: What is a crucial responsibility of the Reserve Bank of India (RBI) concerning the country’s finances?

A. Managing the fiscal deficit of the government.
B. Managing the country’s foreign exchange reserves.
C. Regulating the salaries of bank employees.
D. Promoting exports through financial incentives.

Show Explanation

Correct Answer: B. Managing the country’s foreign exchange reserves. This is a key function of the central bank.