NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1)

Introduction to the Indian Financial Markets: formula sheet

Full chapter guide

Key formulas

Four components: Financial system = Markets + Institutions + Instruments + Services; Classify any item into one of these four first.
Market split by maturity: Money market: short-term, up to 1 year | Capital market: long-term, beyond 1 year; Money market examples: T-bills, CP, CDs. Capital market: equity shares, bonds, debentures.
Capital market split: Primary market = new issue | Secondary market = trading of existing securities; An IPO is primary. A trade on the exchange between two investors is secondary.
Core flow: Savers (surplus units) → financial system → Borrowers/investors (deficit units); Channelling savings into investment is the central function.
T-bill price (discount basis): Price = Face value ÷ (1 + yield × days ÷ 365); T-bills are zero-coupon. Price is below face value. Yield is quoted per year on a 365-day basis.
Discount instrument return: Yield = (Face value − Price) ÷ Price × 365 ÷ days; Use the price paid in the denominator, not face value. This applies to T-bills, CP and CDs.
Standard T-bill tenors: 91 days | 182 days | 364 days; Issued at a discount, redeemed at face value.
Call, notice and term money: Call = overnight (1 day) | Notice = 2 to 14 days | Term = over 14 days; All three are unsecured borrowing and lending, mainly among banks and primary dealers.
Repo cost: Repurchase price = Sale price × (1 + repo rate × days ÷ 365); The seller of securities is the borrower of cash. Interest accrues at the repo rate for the days of the loan, on a 365-day basis.
Who receives the money: Primary market: money goes to the issuer. Secondary market: money goes to the selling investor.; This is the quickest test to separate the two markets in any MCQ.
IPO vs FPO: IPO = first public offer by an unlisted company. FPO = further public offer by an already listed company.; Both are public issues and both raise fresh capital for the issuer.
Rights issue: Offer only to existing shareholders, in proportion to shares held.; Example: a 1:5 rights issue gives 1 new share for every 5 held.
Book building: Price band, then bids, then cut-off price discovered from demand.; Contrast with a fixed price issue, where the price is stated upfront.
Settlement cycle: Settlement date = trade date + 1 working day (T+1) for equity cash market.; Settlement is on a rolling basis, so each day's trades settle after one working day.
Rights entitlement: New shares entitled = shares held × (new shares ÷ old shares in the ratio); Apply it to whole shares only. Fractions are handled as per the issue terms.
T-bill pricing: Price = Face value ÷ (1 + yield × days ÷ 365); T-bills are issued at a discount and redeemed at face value. The gain is the difference. Use the formula only if the question gives a yield and days.
Annual coupon: Coupon = Face value × coupon rate; G-secs and most bonds pay half-yearly, so each payment is half the annual coupon.
Current yield: Current yield = Annual coupon ÷ Market price × 100; Uses market price, not face value. It ignores gain or loss on maturity.
Instrument classification: T-bills: up to 1 year, no coupon | Dated G-secs and SDLs: over 1 year, usually fixed coupon; Know the tenor and coupon rule. Most definition questions test this.
Price and yield: Yield ↑ ⇒ Price ↓ and Yield ↓ ⇒ Price ↑; Applies to all fixed-rate bonds.
Long futures profit: Profit = (Settlement price − Entry price) × Lot size; The buyer gains when price rises. The seller (short) has the opposite result: (Entry price − Settlement price) × Lot size.
Call option buyer payoff at expiry: Payoff = Max(Spot − Strike, 0) − Premium; Maximum loss is the premium paid. Profit is unlimited in theory.
Put option buyer payoff at expiry: Payoff = Max(Strike − Spot, 0) − Premium; Maximum loss is the premium paid. Profit is limited because the price cannot fall below zero.
Option seller (writer) position: Writer's profit = Premium received − Buyer's payoff before premium; The writer's gain is capped at the premium. Loss can be large, and for a call it is unlimited in theory.
Hedge ratio by number of lots: Lots = Value of holding ÷ (Futures price × Lot size); Gives the approximate number of lots to sell to hedge a stock portfolio with a one-to-one hedge. Round to a whole number.
Broker: Broker = member of exchange who executes trades for clients; Earns brokerage. Does not hold your securities; the depository does.
Depository and DP: Depository → Depository Participant → Investor; Two depositories in India: NSDL and CDSL. The investor's demat account is opened through a DP, not directly with the depository.
Clearing corporation: Clearing corporation = determines obligations + guarantees and settles trades between members; Acts as the counterparty guarantee for trades on the exchange. Works with clearing members, not retail investors.
Custodian: Custodian = safekeeping + settlement support for institutional clients; Typical clients: FPIs, mutual funds, banks and other institutions.
RTA: Registrar and Transfer Agent = maintains records of investors and processes applications, allotments and transfers; Appointed by issuers and mutual funds.
SEBI's remit: SEBI → stock exchanges, depositories, brokers, mutual funds, PMS, AIFs, research analysts, investment advisers, public issues; The securities market and its intermediaries. Investment advisers are registered with SEBI.
RBI's remit: RBI → banks, NBFCs, money market, government securities market, foreign exchange, payment systems, monetary policy; RBI is the central bank and the manager of public debt for the government.
IRDAI's remit: IRDAI → insurance companies and insurance intermediaries; Life, health and general insurance come here, not to SEBI.
PFRDA's remit: PFRDA → National Pension System and pension funds under its scheme; NPS is regulated by PFRDA, even though it holds equity and debt.
Government's role: Government/Parliament → make laws and policy; regulators → make rules under those laws; Ministry of Finance sets policy. Regulators frame detailed regulations.

Quick revision

The money market deals in short-term funds; the capital market deals in longer-term funds.
The primary market is where securities are issued for the first time; the secondary market is where existing securities trade.
Prices in the secondary market do not bring money to the issuer; the money goes to selling investors.
Government securities are issued by the government and are generally seen as carrying no credit risk.
Bond prices and yields move in opposite directions.
A derivative gets its value from an underlying asset such as a share, index or currency.
Depositories hold securities in electronic form; depository participants are their agents for investors.
SEBI regulates the securities market; RBI regulates banks and the money and government securities markets.
IRDAI regulates insurance; PFRDA regulates pension funds under the National Pension System.
Check each question for the exact term asked: instrument, market, participant or regulator.
With negative marking, skip a question you cannot narrow down rather than guess blindly.

Common mistakes

Treating instruments and institutions as the same thing. Fix: Ask whether it is the entity (institution) or the claim being traded (instrument). A bank is an institution; a certificate of deposit is an instrument.
Placing short-term debt in the capital market. Fix: Use the maturity test. Debt up to one year, such as T-bills and commercial paper, is the money market.
Saying CP is issued by banks and CD by companies. Fix: Remember C-P is Corporate Paper and C-D is a bank Deposit.
Calling a repo an unsecured loan. Fix: A repo is backed by securities that are sold and repurchased. Call money has no collateral.
Saying the company receives money when shares are traded on the exchange. Fix: Remember that exchange trades are between investors. The company gets money only when it issues new shares.
Confusing an IPO with an FPO. Fix: Check whether the company is already listed. Not listed means IPO. Already listed means FPO.
Saying T-bills pay a periodic coupon. Fix: T-bills are zero-coupon. They are issued at a discount and redeemed at face value.
Treating SDLs as issued by the Central Government. Fix: SDLs are issued by State Governments. The RBI only conducts the auction as their debt manager.
Saying an option buyer is obliged to trade at expiry. Fix: Buyer has the right, seller has the obligation. Futures bind both sides.
Treating forwards as exchange-traded. Fix: Forwards are OTC and customised with counterparty risk. Futures are standardised and cleared by a clearing corporation.

Exam tips

Practise placing items quickly into market, institution, instrument or service. Many questions are only this test.
Memorise the maturity line of one year between money and capital markets, and be ready to apply it to named instruments.
Learn the regulator for each segment. Match-the-following questions often use this.
Watch absolute words like 'only' or 'always' in options. They are often the trap.
X-A has negative marking of 25% of the marks assigned to a question, so skip a question you cannot classify rather than guess blindly.
Expect direct identification questions. Learn the issuer-instrument pairs until automatic.
Watch the word secured. It points to repo; unsecured points to call money, CP or CD.
In yield sums, check the day count and use 365 unless the question says otherwise.