Financial Markets and Instruments

Modigliani-Miller (M-M) Theory states that in perfect markets, dividend policy has no effect on the value of a firm. Investors are indifferent between dividends and capital gains because they can create their own dividend policy by selling shares if needed. The firm's value depends only on its investment decisions and earning power, not on how it distributes profits.

Financial leverage involves using debt financing to magnify returns. When a company borrows at a lower cost than its return on investment, it increases the return on equity for shareholders. This is because the same equity investment now controls more assets, generating higher proportional returns.

Cost of capital represents the required rate of return for investors, a cut-off rate for projects, or interest expectations, but it is not a regulatory fee paid to a securities board like SEBI.

Financial leverage refers to the use of fixed-income securities like bonds and debentures in a company's capital structure. By using debt financing, a firm can magnify returns to shareholders while also increasing risk, as fixed interest obligations must be met regardless of profitability.

Commercial paper is an unsecured money market instrument issued in the form of a promissory note, typically by highly rated corporate borrowers to raise short-term funds. It serves as an additional investment instrument for the investing community, offering a higher return than traditional short-term instruments while carrying minimal credit risk due to the high creditworthiness of issuers.

 The factors to be considered while designing capital structure are risk, return, flexibility, transferability, capacity, control, agreement.

Option 4 is correct.

Correct answer - They belong to unorganised sector and are not governed by any set of guidelines

Correct Answer: SEBI.  In 1996, SEBI, the regulator of mutual funds in India, formulated the Mutual Fund Regulation which is a comprehensive regulatory framework. 

 Exchange traded funds : These are open-ended exchange traded funds that are designed to track specific indices.

In bonds only interest is paid as a return on investment. It may be fixed or variable interest rate which is specified in the certificate.

All statements A, B, and C about money are correct. Statement A references near-money assets, B is the classic functional definition, and C describes modern monetary characteristics. Since no statement is incorrect, 'None of the above' (D) is the right answer.

SEBI regulations mandate that transfers between mutual fund schemes must be done at current market rates (determined by NAV). This protects existing investors from unfair cross-subsidization where assets could be moved at artificial prices. Transfers at cost price or fixed premiums could create advantages/disadvantages for different investor groups.

Interest rate swaps are derivative instruments that allow fixed income managers to hedge against interest rate fluctuations by exchanging fixed-rate payments for floating-rate payments (or vice versa). This directly reduces interest rate risk in debt portfolios. The option contains a typo: 'interest tate swaps' should be 'interest rate swaps'.