NISM Certifications · NISM-Series-XV: Research Analyst

Terminology in Equity and Debt Markets: formula sheet

Full chapter guide

Key formulas

Market capitalisation: Market cap = Share price × Number of shares outstanding; Free-float market cap uses only shares available for public trading, not promoter holdings.
Primary vs secondary: who gets the money: Primary: money to issuer | Secondary: money to selling investor; The most tested distinction.
Rights entitlement: New shares offered = Existing shares × Rights ratio; For example, a 1:4 ratio means one new share for every four held.
Stock split effect: New face value = Old face value ÷ Split factor; New number of shares = Old number × Split factor; Total share capital and market cap do not change by the split itself.
Earnings per share: EPS = (Net profit − preference dividend) ÷ weighted average equity shares; Basic EPS uses profit available to equity shareholders.
Price-to-earnings: P/E = Market price per share ÷ EPS; Equivalent: Market cap ÷ Net profit. Earnings yield is the inverse, EPS ÷ Price.
Book value per share: Book value per share = Net worth ÷ Number of equity shares; Net worth = share capital + reserves and surplus.
Price-to-book: P/B = Market price per share ÷ Book value per share; Uses balance sheet value, so it suits asset-heavy firms such as banks.
Dividend yield: Dividend yield = DPS ÷ Market price × 100; Falls when the price rises, if DPS is unchanged.
Dividend payout ratio: Payout ratio = DPS ÷ EPS × 100; Retention ratio = 1 − payout ratio.
Market capitalisation: Market cap = Market price × Shares outstanding; Value of equity only, not debt.
Enterprise value: EV = Market cap + Total debt − Cash and cash equivalents; Debt minus cash is net debt. Some definitions also add minority interest and preference capital.
EV/EBITDA: EV/EBITDA = Enterprise value ÷ EBITDA; Numerator is whole-firm value, so the denominator must be a pre-interest measure.
Profit on a long position: Profit = (Sell price − Buy price) × Quantity; Ignore brokerage and taxes unless the question includes them.
Profit on a short sale: Profit = (Sell price − Buy-back price) × Quantity; Profit arises when the buy-back price is lower. A price rise causes a loss.
Settlement date under T+1: Settlement day = Trade day (T) + 1 working day; Count working days only. Exchange holidays and weekends are skipped.
Buy limit order rule: Executes at limit price or lower; A sell limit executes at the limit price or higher.
Stop loss trigger rule: Order is dormant until the trigger price is touched; Trigger price is not the same as the limit price in a stop loss limit order.
Margin as a share of trade value: Margin amount = Margin % × Trade value; Use this when a question gives a margin percentage and a trade value.
Discount instrument return: Return = Face value − Issue price; Applies to T-bills, CPs and CDs. There is no coupon. You earn the gain on redemption.
Money market cut-off: Money market: original maturity ≤ 1 year; Bond market: maturity > 1 year; Use this as the first sorting test for any instrument.
T-bill tenors: 91 days, 182 days, 364 days; Issued by the Central Government at a discount. No coupon.
Coupon amount: Annual coupon = Coupon rate × Face value; For a 7% bond of face value ₹1,000, the annual coupon is ₹70.
Bond price: Price = Σ [C ÷ (1 + y)^t] + F ÷ (1 + y)^n; C = coupon per period, y = yield per period, F = face value, n = number of periods. Price is the present value of all cash flows.
Coupon: Annual coupon = Coupon rate × Face value; Always calculated on face value, never on market price.
Current yield: Current yield = Annual coupon ÷ Current market price; Ignores capital gain or loss and time value of money.
Approximate YTM: YTM ≈ [C + (F − P) ÷ n] ÷ [(F + P) ÷ 2]; A shortcut estimate only. The exact YTM needs trial and error or a calculator.
Modified duration: Modified duration = Macaulay duration ÷ (1 + YTM ÷ k); k = coupon payments per year. Use YTM as a decimal.
Price change from duration: % change in price ≈ − Modified duration × change in yield (in %); Good for small yield changes. Convexity corrects the error for large changes.
Duration rules: Zero-coupon bond: Macaulay duration = maturity; For coupon bonds, Macaulay duration is less than maturity. Higher coupon or higher yield usually means lower duration. Longer maturity usually means higher duration.
Yield ranking: Discount bond: coupon rate < current yield < YTM. Premium bond: coupon rate > current yield > YTM; At par, all three are equal.
Credit spread: Credit spread = Yield on corporate bond − Yield on government security of similar maturity; Compare same maturity. Spread is usually quoted in basis points.
Basis point: 1 basis point = 0.01%; 100 basis points = 1%; Convert before comparing. A 50 bp change is 0.50%.
Price-yield relationship: Yield ↑ ⇒ Bond price ↓; Yield ↓ ⇒ Bond price ↑; This inverse link is the core of interest rate risk.
Repo vs reverse repo direction: Repo: RBI lends to banks. Reverse repo: RBI borrows from banks; Always read the direction from the RBI's side.
Investment grade cut-off: Investment grade = BBB- and above; below BBB- = speculative grade; AAA is highest; D means default.

Quick revision

Equity shares represent ownership; debt instruments represent a loan to the issuer.
Market capitalisation = share price × number of shares outstanding.
P/E = market price per share ÷ earnings per share.
Dividend yield = dividend per share ÷ market price per share.
Book value per share = net worth ÷ number of shares outstanding.
Bond price and bond yield move in opposite directions.
Coupon rate is fixed on face value; yield changes with the market price paid.
A bond trading below face value is at a discount; above face value is at a premium.
A credit spread is the extra yield over a benchmark such as a government security, paid for credit risk.
Zero coupon bonds pay no periodic interest and are issued at a discount to face value.
Check whether the question asks for a rate on face value or on market price before choosing an option.

Common mistakes

Saying the company receives money when shares are bought on the exchange. Fix: Only primary market purchases fund the issuer. Exchange trades pay the seller.
Treating a bonus issue as a way of raising capital. Fix: A bonus issue capitalises reserves and brings no fresh cash in.
Using market cap instead of enterprise value in the EV/EBITDA numerator. Fix: EV/EBITDA always uses EV. Market cap ÷ EBITDA is wrong because EBITDA is earned before paying lenders.
Inverting P/E, giving EPS ÷ price. Fix: Price is on top for P/E and P/B. EPS ÷ price is earnings yield.
Saying a limit order is always executed. Fix: Remember: limit order controls price, not execution. Market order controls execution, not price.
Treating the stop loss trigger price as the guaranteed execution price. Fix: The trigger only activates the order. A stop loss market order executes at the prevailing market price, which can be worse than the trigger.
Saying T-bills pay a coupon. Fix: T-bills are zero coupon. They are issued at a discount and repaid at face value.
Treating CP and CD as the same instrument. Fix: CP is issued by companies and is unsecured. CD is issued by banks and financial institutions against deposits.
Calculating the coupon on market price instead of face value. Fix: Coupon = coupon rate × face value. Only current yield uses market price, as the denominator.
Thinking a bond's coupon rate changes when its price changes. Fix: The coupon is fixed in rupees. Price changes, so the yield earned by a new buyer changes.

Exam tips

Expect direct definition questions, so learn one-line definitions for each instrument and issue type.
Watch for trap options that swap primary and secondary market, or rights and bonus issue.
Remember that Nifty 50 and Sensex are index names, and know that indices are mostly free-float weighted.
Under negative marking of 25% of the question's marks, skip a question only if you cannot remove at least two options.
Learn each formula with price on top for P/E and P/B, and DPS over price for yield. Many wrong options are inverted forms.
Check for preference dividends and for whether debt and cash are given. These change EPS and EV.
Wrong answers cost 25% of the question's marks in this exam, so eliminate options before guessing.
Expect interpretation questions. Know that EV/EBITDA is capital-structure neutral and P/B suits banks and asset-heavy firms.