40 + Capital Market Interview Questions & Answers

Do you feel nervous before sitting for an interview that relates to capital market? If yes then you must go through Capital market interview questions that can make things work perfectly well for you.
The concept of the Capital market is quite tricky, and you need to stay very attentive to understand the concepts of the capital market clearly. There are certain tips you need to follow while preparing for the Capital market interview questions in 2025.
In this article, you will learn about the complete concept of the Capital market to make things work perfectly well in your favour. Here, proper planning holds the key. So, let’s explore the facts one after the other to have a clear insight into it.

List Of Capital Market Interview Questions & Answers For 2025

There are several important capital market interview questions that you should know from your end. Some of the key capital market interview questions that you should know from your end with clarity are as follows:-

1. What Is The Capital Market?

The capital market is a financial market where long-term securities, such as stocks, bonds, and other financial instruments, transaction takes place. It facilitates the raising of capital for businesses, governments, and institutions by connecting investors (those with surplus funds) to entities needing funds for expansion, projects, or operations. It is one of the most crucial capital market interview questions that you can face in an interview.

Key Features of Capital Markets:

• Primary Market: Where new securities are issued (e.g., initial public offerings or bond issuances) to raise fresh capital.
• Secondary Market: Where existing securities are traded among investors (e.g., stock exchanges like NYSE or NASDAQ).
• Instruments: Includes equities (stocks), debt securities (bonds), derivatives, and other investment vehicles.
• Participants: Investors (individuals, institutions), companies, governments, brokers, and financial intermediaries.
• Purpose: Enables capital allocation, wealth creation, and economic growth by providing a platform for investment and funding.

Capital markets are distinct from money markets, which deal with short-term debt and liquid instruments. They play a critical role in economic development by channeling savings into productive investments.

2. How Does A Company Raise Funds Using The Capital Market?

A company raises funds using the capital market by issuing securities in the primary market to investors. Here’s how it works:

• Issuing Equity (Stocks):
  • Initial Public Offering (IPO): A private company goes public by selling shares to investors, raising capital in exchange for ownership stakes.
  • Follow-on Public Offering (FPO): An already public company issues additional shares to raise more funds.
  • Investors buy shares, providing the company with capital, while shareholders gain ownership and potential dividends or capital gains.
• Issuing Debt (Bonds):
  • Companies issue bonds or debentures to borrow money from investors.
  • Investors purchase bonds, lending money to the company, which promises to pay interest periodically and return the principal at maturity.
• Private Placements:
  • Companies sell securities (stocks or bonds) directly to a select group of institutional or accredited investors, bypassing public markets for faster fundraising.
• Other Instruments:
  • Companies may issue convertible bonds, preferred shares, or other hybrid securities to attract specific investors.

3. What Are The Major Elements & Components Of The Capital Market?

There are several major elements & components of the capital market that you must be well aware of. Some of the key major elements and components of the capital market are as follows:-

1. Markets

• Primary Market:
  • Where new securities (stocks, bonds) are issued and sold for the first time.
  • Companies, governments, or institutions raise fresh capital through Initial Public Offerings (IPOs), bond issuances, or private placements.
• Secondary Market:
  • Where previously issued securities are traded among investors.
  • Examples include stock exchanges (e.g., NYSE, NASDAQ, BSE) where stocks and bonds are bought and sold, providing liquidity to investors. It is important capital market interview questions that you need to know.

2. Financial Instruments

• Equity Securities:
  • Common Stocks: Represent ownership in a company with voting rights and potential dividends. It is one ofg the most important Capital market interview questions to look forward from your end.
  • Preferred Stocks: Offer fixed dividends with priority over common stockholders but typically no voting rights.
• Debt Securities:
  • Bonds: Issued by corporations, governments, or municipalities, representing a loan with periodic interest payments and principal repayment at maturity.
  • Debentures: Unsecured bonds backed by the issuer’s creditworthiness.

3. Participants

• Issuers:
  • Corporations, governments, and institutions that issue securities to raise funds.
• Investors:
  • Individual Investors: Retail investors purchasing securities for personal portfolios.
  • Institutional Investors: Mutual funds, pension funds, insurance companies, and hedge funds investing large sums. Capital market interview questions preparation can make your task easier.

4. What Are The Major Roles Played By Consultants In The Capital Market?

Consultants play critical roles in the capital market, providing specialized expertise to issuers, investors, and intermediaries. Their major roles include the following:-

Advising on Capital Raising:

• Assist companies in structuring and executing fundraising strategies, such as Initial Public Offerings (IPOs), follow-on offerings, or bond issuances.
• Provide guidance on optimal timing, pricing, and type of securities to issue based on market conditions and company needs.

Financial and Strategic Advisory:

• Help issuers prepare financial models, business plans, and valuations to attract investors.
• Advise on mergers, acquisitions, or restructuring, ensuring alignment with capital market opportunities. It is an important capital market interview questions to take care off.

Regulatory Compliance and Due Diligence:

• Guide companies through regulatory requirements (e.g., SEC, SEBI) for issuing securities, including drafting prospectuses and disclosures.
• Conduct due diligence to ensure accuracy of financial statements and compliance with legal standards.

Market Analysis and Investor Targeting:

• Analyze market trends, investor sentiment, and economic conditions to inform issuance strategies. Capital Market interview questions encircles within the matter of market analysis.
• Identify and target suitable investors (e.g., institutional, retail) for securities offerings.

Underwriting Support:

• Collaborate with investment banks to structure offerings, assess risks, and determine pricing.
• Provide insights to underwriters on market demand and investor appetite.

Risk Management Consulting:

• Advise on hedging strategies using derivatives or other financial instruments to mitigate market risks.
• Assess and manage risks related to market volatility, interest rates, or currency fluctuations.

Investor Relations and Communication:

• Develop strategies for communicating with shareholders and analysts to maintain transparency and market confidence.
• Assist in preparing roadshows, investor presentations, and earnings reports.

5. What Are The Limitations Of Capital Budgeting?

Capital budgeting refers to the process of evaluating and selecting long-term investment projects, such as acquiring assets, launching new products, or expanding operations, to maximize a company’s value. While it is a critical financial management tool, it has several limitations that can affect decision-making. Below are the major limitations of capital budgeting:

1. Uncertainty and Risk in Future Projections

• Description: Capital budgeting relies on forecasting future cash flows, costs, and market conditions, which are inherently uncertain.
• Impact: Inaccurate assumptions about demand, inflation, or economic trends can lead to overestimating or underestimating returns, resulting in poor investment decisions.
• Example: A company may project high sales for a new product, but unforeseen market shifts or competition can reduce actual returns.

2. Reliance on Estimates and Assumptions

• Description: Techniques like Net Present Value (NPV), Internal Rate of Return (IRR), or Payback Period depend on estimated inputs, such as discount rates, project lifespan, or revenue growth.
• Impact: Small errors in these estimates can significantly alter outcomes, leading to suboptimal project selection.
• Example: An incorrect discount rate can make a project appear profitable (or unprofitable) when it is not.

3. Time Value of Money Challenges

• Description: Capital budgeting methods like NPV account for the time value of money, but selecting an appropriate discount rate is subjective and complex.
• Impact: Using a discount rate that is too high or too low can misrepresent a project’s viability, skewing investment decisions.
• Example: A company using a high discount rate may reject a project with long-term benefits, favoring short-term gains.

6. What Are The Techniques Available For Capital Budgeting?

Capital budgeting involves evaluating and selecting long-term investment projects to maximize a company’s value. Several techniques are used to assess the viability of projects, each with its own approach and application. Below are the major capital budgeting techniques:

1. Net Present Value (NPV)

• Description: Calculates the present value of a project’s future cash flows, discounted at the company’s cost of capital, minus the initial investment.
• Formula:

• Decision Rule: Accept if NPV > 0 (project adds value); reject if NPV < 0.
• Advantages:
  • Accounts for the time value of money.
  • Considers all cash flows over the project’s life.
  • Directly measures value creation.
• Disadvantages:
  • Requires accurate cash flow and discount rate estimates.
  • Complex for non-financial managers to understand.

Internal Rate of Return (IRR)

• Description: The discount rate at which the NPV of a project equals zero, representing the project’s expected rate of return.
• Formula:

• Decision Rule: Accept if IRR > cost of capital; reject if IRR < cost of capital.

Advantages:

• Easy to interpret as a percentage return.
• Accounts for time value of money.

Disadvantages:

• Can give multiple IRRs for non-conventional cash flows (e.g., alternating positive/negative flows).
• May lead to incorrect decisions when comparing mutually exclusive projects.

Payback Period

• Description: Measures the time required to recover the initial investment from a project’s cash flows.
• Formula:

• Decision Rule: Accept if the payback period is less than a predetermined threshold; reject otherwise.
• Advantages:
  • Simple and easy to calculate.
  • Useful for assessing liquidity and risk (shorter payback = less risk).
• Disadvantages:
  • Ignores cash flows after the payback period.
  • Does not account for the time value of money.
  • Arbitrary cutoff period.

4. Discounted Payback Period

• • Description: Similar to the payback period but discounts future cash flows to their present value before calculating the time to recover the initial investment.

• Formula

• Decision Rule: Accept if the discounted payback period is less than a target period.

Advantages:

• Accounts for the time value of money, unlike the regular payback period.
• Focuses on liquidity and risk.

Disadvantages:

• Still ignores cash flows after the payback period.
• Subjective cutoff period.

Profitability Index (PI) or Benefit-Cost Ratio

• Description: Measures the ratio of the present value of future cash flows to the initial investment, indicating the relative profitability of a project.
• Formula:

• Decision Rule: Accept if PI > 1; reject if PI < 1.
• Advantages:
  • Accounts for time value of money.
  • Useful for ranking projects when capital is constrained.
• Disadvantages:
  • May not be reliable for mutually exclusive projects with different scales.
  • Relies on accurate cash flow and discount rate estimates.

7. What Is NPV?

Net Present Value (NPV) is a capital budgeting technique used to evaluate the profitability of a long-term investment or project by calculating the present value of all future cash flows, discounted at a specific rate, minus the initial investment. It measures the value a project adds to a company, accounting for the time value of money. This is one of most important Capital market interview questions that can be asked to you during the interview.

Example:
A company invests Rs 10,000 in a project with expected cash inflows of Rs4,000 annually for 3 years. The discount rate is 10%.

Conclusion: Since NPV < 0, the project should be rejected as it does not generate sufficient returns to cover the cost of capital.

8. What Are The Advantages Of NPV?

Net Present Value (NPV) is a widely used capital budgeting technique that evaluates the profitability of long-term investments by calculating the present value of future cash flows, discounted at a specific rate, minus the initial investment. Its advantages make it a preferred method for decision-making in the capital market. Below are the major advantages of NPV:

1. Accounts for the Time Value of Money

• Explanation: NPV discounts future cash flows to their present value, recognizing that money today is worth more than money in the future due to its earning potential.
• Benefit: Provides a realistic assessment of a project’s worth by factoring in the opportunity cost of capital, ensuring accurate profitability evaluation.

2. Considers All Cash Flows

• Explanation: NPV incorporates all cash inflows and outflows over the entire life of the project, unlike methods like Payback Period, which ignore cash flows beyond a certain point.
• Benefit: Captures the full financial impact of the project, leading to more comprehensive and informed investment decisions.

3. Directly Measures Value Creation

• Explanation: A positive NPV indicates the project generates returns above the cost of capital, adding to the company’s value and shareholder wealth.
• Benefit: Aligns with the goal of maximizing firm value, making it a reliable metric for evaluating projects in the capital market. This is one of the most important capital market interview questions.

4. Facilitates Comparison of Mutually Exclusive Projects

• Explanation: NPV provides a clear monetary value, allowing decision-makers to compare projects of different scales or durations objectively.
• Benefit: Helps select the project that adds the most value, even when projects differ in size, timing, or cash flow patterns.

9. What Are The Disadvantages Of NPV?

Net Present Value (NPV) is a capital budgeting technique that evaluates a project’s profitability by discounting future cash flows to their present value and subtracting the initial investment. Despite its strengths, NPV has several disadvantages:

• Reliance on Estimates: NPV depends on forecasted cash flows, discount rates, and project lifespans, which can be inaccurate, leading to misleading results.
• Sensitivity to Discount Rate: Small changes in the discount rate (e.g., cost of capital) can significantly alter NPV, affecting project viability.
• Complexity: The method requires understanding discounting and time value of money, which can be challenging for non-financial managers.
• Ignores Non-Financial Factors: NPV focuses on cash flows, often overlooking qualitative aspects like environmental impact or strategic fit.
• Scale Bias in Comparisons: NPV may favor larger projects with higher absolute returns over smaller, more efficient ones when comparing mutually exclusive projects.
• Reinvestment Assumption: Assumes cash flows are reinvested at the discount rate, which may not reflect real-world opportunities.
• Resource-Intensive: Requires detailed data and time, which can be costly and impractical for smaller firms.

10. Explain The Payback Period Technique For The Evaluation For Capital Expenditure Proposal?

The Payback Period is a capital budgeting technique used to evaluate capital expenditure proposals by measuring the time required to recover the initial investment from a project’s cash flows. It is a simple and intuitive method, focusing on liquidity and risk, making it particularly useful for assessing how quickly a company can recoup its investment in the context of capital market-funded projects.

Explanation of the Payback Period Technique

Definition:

The Payback Period is the duration (usually in years) it takes for the cumulative cash inflows from a project to equal the initial cash outflow (investment). It helps determine the speed of capital recovery, which is critical for firms raising funds through equity or debt in the capital market.

Steps to Calculate:

1. Identify the Initial Investment: Determine the total upfront cost of the project
2. Estimate Annual Cash Flows: Forecast the net cash inflows expected each year from the project. These are typically after-tax cash flows.
3. Calculate Cumulative Cash Flows:
   • For even cash flows (same amount each year), divide the initial investment by the annual cash flow to find the payback period.
   • For uneven cash flows, sum the cash inflows year by year until the cumulative total equals or exceeds the initial investment.
4. Determine the Payback Period:
   • If the cumulative cash flow matches the investment exactly at the end of a year, that year is the payback period.
   • If the investment is recovered between years, interpolate to find the fractional year.

Formulas:

• For Even Cash Flows:

• For Uneven Cash Flows:

Source( Investopedia )

Decision Rule:

• Accept: If the payback period is less than or equal to a predetermined target period (e.g., 3 years).
• Reject: If the payback period exceeds the target period.
• The target period is set based on the company’s liquidity needs, risk tolerance, or industry standards.

11. What Is The Difference Between IRR And ARR?

12. What Are Zero-Coupon Bonds?

Zero Coupon Bonds are debt securities that do not pay periodic interest (coupons) during their term. Instead, they are issued at a deep discount to their face value and redeemed at maturity for their full face value, with the difference representing the interest earned by the bondholder. These bonds are a key instrument in the capital market, used by issuers to raise funds and by investors for specific financial goals. It is an important Capital market interview questions that you must know from your end.

13. What Are Deep Discount Bonds?

Deep Discount Bonds are a type of bond issued at a significantly lower price than their face value (par value) and typically do not pay periodic interest (coupons). They are redeemed at maturity for their full face value, with the difference between the purchase price and the face value representing the investor’s return.
Deep discount bonds are similar to zero coupon bonds but are characterized by an even larger discount, often reflecting higher yields or longer maturities. They are an important instrument in the capital market, used by issuers to raise funds and by investors for long-term investment goals.

14. Explain How You Would Value A Company.

Valuing a company is a critical process in the capital market, used for investment decisions, mergers and acquisitions, fundraising, or strategic planning. It involves estimating the economic worth of a business based on its financial performance, market position, and future potential. Several methods are commonly used, each with its own assumptions and applications.

Key Approaches to Valuing a Company

The three main valuation methods are:

1. Discounted Cash Flow (DCF) Analysis (Income-Based Approach)
2. Comparable Company Analysis (CCA) (Market-Based Approach)
3. Precedent Transaction Analysis (Market-Based Approach)

Additional methods, such as Asset-Based Valuation, may be used in specific cases (e.g., liquidation scenarios). Each method is suited to different contexts, and often, multiple methods are used to cross-validate the valuation.

15. What Is The Difference Between Debt & Equity?

There are several points of difference between debt and equity. Some of the core points of difference are as follows:-

16. What Are The Different Types Of Derivatives?

In the capital market, derivatives are financial instruments whose value is derived from an underlying asset or benchmark. The main types of derivatives are:

• Futures: Standardized contracts to buy or sell an asset at a set price on a future date, traded on exchanges. Example: Stock index futures.
• Options: Contracts giving the holder the right, but not the obligation, to buy (call option) or sell (put option) an asset at a specified price before or at expiration. Example: Equity options.
• Forwards: Customized contracts between two parties to buy or sell an asset at a future date for a price agreed upon today, traded over-the-counter (OTC). Example: Currency forwards.
• Swaps: Agreements to exchange cash flows or other financial instruments over a period, typically OTC. Common types include:
  • Interest Rate Swaps: Exchanging fixed-rate interest payments for floating-rate payments.
  • Currency Swaps: Exchanging principal and interest in different currencies.
  • Credit Default Swaps (CDS): Protection against default on a debt instrument.
• Warrants: Similar to options, but typically issued by the company itself, giving the right to buy the company’s stock at a specific price before expiration.
• Convertible Bonds: Bonds that can be converted into a predetermined number of the issuer’s shares.

Each type serves purposes like hedging, speculation, or arbitrage, depending on the investor’s strategy.

17. When Should A Company Buy Back Stocks?

There are certain scenarios when a company can decide to buy back its stocks from the capital market. This is one of the important capital market interview questions you should be well prepared for.

• Undervaluation: The stock price is significantly below its intrinsic value, signaling a good investment opportunity. Example: If a company’s P/E ratio is lower than industry peers despite strong fundamentals.
• Excess Cash: The company has surplus cash with no better investment opportunities, such as acquisitions or R&D, and wants to return value to shareholders.
• Signal Confidence: Management believes the stock is undervalued and wants to signal optimism about future performance to the market.
• Offset Dilution: To counteract the dilutive effect of issuing new shares for employee stock options or acquisitions.
• Improve Financial Ratios: To boost metrics like earnings per share (EPS) or return on equity (ROE) by reducing the number of outstanding shares.
• Capital Structure Optimization: To adjust the debt-to-equity ratio, especially if the company wants to increase leverage or reduce equity weight.
• Market Conditions: When market conditions are favorable, such as during periods of low interest rates or high liquidity, making buybacks cost-effective.

18. Which One Is Higher Cost Of Debt Or Equity?

The cost of equity is generally higher than the cost of debt in most cases. Here’s why:

• Risk Perspective:
  • Debt: Lenders have a higher claim on the company’s assets and receive fixed interest payments, making debt less risky. The cost of debt is typically calculated as the after-tax interest rate (e.g., yield to maturity on bonds), which is lower due to tax deductibility of interest (Cost of Debt = Interest Rate × (1 – Tax Rate)).
  • Equity: Shareholders bear more risk as they are paid dividends or capital gains only after debt obligations are met, and there’s no guaranteed return. The cost of equity is higher, often estimated using models like the Capital Asset Pricing Model (CAPM), where Cost of Equity = Risk-Free Rate + Beta × Market Risk Premium.
• Typical Values:
  • Cost of Debt: Often ranges from 3% to 8% (after-tax), depending on the company’s credit rating and market conditions. For example, a company with a 6% bond yield and a 25% tax rate has a cost of debt of 4.5%.
  • Cost of Equity: Usually ranges from 8% to 15% or higher, reflecting the higher expected returns demanded by investors. For instance, if the risk-free rate is 2%, beta is 1.2, and the market risk premium is 6%, the cost of equity is 9.2%.
• Capital Structure Influence:
  • Debt is cheaper because it’s a contractual obligation with tax benefits, but excessive debt increases bankruptcy risk, indirectly raising costs.
  • Equity is more expensive as it involves sharing ownership and potential upside, but it doesn’t require fixed payments, reducing financial risk.

19. What Is Monetary Policy?

Monetary Policy is the process by which a central bank (e.g. the Reserve Bank of India) manages a country’s money supply, interest rates, and overall economic activity to achieve macroeconomic objectives like controlling inflation, stabilizing currency, promoting employment, and fostering sustainable growth. Capital Market interview questions can make your life difficult if you are not prepared for them.

Key Objectives:

• Price Stability: Keeping inflation low and stable (e.g., targeting 2% inflation in many economies).
• Full Employment: Supporting job creation to minimize unemployment.
• Economic Growth: Encouraging sustainable GDP growth.
• Exchange Rate Stability: Maintaining a stable currency value in international markets.

20. What Is Underwriting, And What Is Its Role?

Underwriting is the process by which a financial institution, such as an investment bank or insurer, evaluates, assumes, and manages the risk associated with issuing securities or providing insurance. Capital market interview questions comprise of this question as well.
In the context of capital markets, underwriting primarily refers to the process of facilitating the issuance of securities (stocks or bonds) by a company or government to raise capital. The underwriter assesses the issuer’s financial health, determines the terms of the offering, and ensures the securities are sold to investors.

Role Of Underwriting In Capital Markets

Underwriting plays a critical role in the issuance of securities and the functioning of capital markets. Its key roles include:

• Risk Assessment and Due Diligence:
  • The underwriter evaluates the issuer’s financial statements, business model, market conditions, and risks to determine the viability of the securities offering.
  • Ensures compliance with regulatory requirements (e.g., SEC regulations in the U.S. or SEBI in India).
  • Example: Before an IPO, underwriters analyze the company’s revenue, debt, and growth prospects to set a fair share price.
• Pricing and Structuring the Offering:
  • Determines the price at which securities (stocks or bonds) will be offered to investors, balancing the issuer’s need for capital with market demand.
  • Structures the offering, deciding whether it’s an equity issue (stocks), debt issue (bonds), or hybrid instrument.
  • Example: For a bond issue, underwriters set the coupon rate based on the issuer’s credit rating and market interest rates.
• Guaranteeing Funds to the Issuer:
  • In a firm commitment underwriting, the underwriter purchases the entire issue from the issuer and resells it to investors, guaranteeing the issuer receives the agreed-upon funds regardless of whether all securities are sold.
  • This reduces the issuer’s risk of raising insufficient capital.
  • Example: In an IPO, the underwriter buys all shares from the company and sells them to the public, assuming the risk of unsold shares.

21. What Are The Key Differences Between Commercial And Investment Banking?

Below is a table summarizing the key differences between Commercial Banking and Investment Banking based on their functions, clients, revenue sources, risks, and other factors:

22. What Is A Convertible Bond?

A convertible bond is a type of hybrid debt security issued by a company that combines features of a traditional bond with an option to convert the bond into a predetermined number of the issuer’s equity shares (common stock) at specific times during its life, typically at the bondholder’s discretion. This is one of the most important capital market interview questions that you need to answer at the time of the interview.

23. What Is The Formula For Calculating Working Capital?

Working Capital represents the liquidity available to a business for its day-to-day operations, calculated as the difference between current assets and current liabilities.

Formula for Working Capital:

Working Capital = Current Assets – Current Liabilities

Components:

• Current Assets: Assets expected to be converted into cash or used within one year, including:

• • • Cash and cash equivalents
    • Accounts receivable
    • Inventory
    • Short-term investments
    • Prepaid expenses

• Current Liabilities: Obligations due within one year, including:

• • Accounts payable
  • Short-term debt
  • Accrued expenses
  • Taxes payable

24. Explain the Profitability Index.

The Profitability Index (PI), also known as the Profit Investment Ratio or Value Investment Ratio, is a capital budgeting tool used to evaluate the attractiveness of an investment or project. It measures the relationship between the present value of future cash inflows and the initial investment cost, indicating the value created per unit of investment.
The Profitability Index is the ratio of the present value (PV) of future cash flows to the initial investment (or cost of the project). A PI greater than 1 suggests that the project is expected to generate value, making it a potentially worthwhile investment.

Formula

Where:

25. What Are The Benefits & Demerits Of Credit Rating?

There are several benefits of credit rating that most of us are unaware off. Some of the key benefits of it are as follows:-

Benefits of Credit Rating

• Facilitates Access to Capital:
  • A high credit rating (e.g., AAA or AA) signals low default risk, making it easier for issuers to raise funds through bonds or loans at lower interest rates.
  • Example: A company with an AAA rating can issue bonds at a 4% yield, compared to 8% for a BB-rated company.
• Reduces Information Asymmetry:
  • Provides investors with an independent, standardized evaluation of credit risk, reducing the need for individual due diligence.
  • Helps investors make informed decisions about debt instruments.
• Lowers Borrowing Costs:
  • High-rated issuers benefit from lower interest rates, as investors demand less risk premium.
  • Example: A government with a strong rating can issue sovereign bonds at lower yields, reducing public debt costs.

Demerits of Credit Rating
Potential for Inaccuracy:

• Ratings may not always reflect true credit risk due to incomplete information, overly optimistic assumptions, or failure to predict sudden economic shifts.
• Example: During the 2008 financial crisis, many mortgage-backed securities rated AAA defaulted, exposing flaws in rating methodologies.

Conflict of Interest:

• Rating agencies are often paid by the issuers they rate, creating a potential bias toward higher ratings to secure business.
• Example: Agencies faced criticism for assigning high ratings to risky securities pre-2008 to maintain client relationships.

26. What Are The Differences Between Listed & Unlisted Companies?

There are several points of difference between listed and unlisted companies that you should be well aware of. Some of the key factors that you should know here are as follows:-

27. What Are The Eligibility Criteria For A Listed Company’s Public Issue?

For a listed company (already trading on a stock exchange) to undertake a public issue in most markets, it must comply with stringent eligibility criteria set by regulatory authorities and stock exchanges.

General Eligibility Criteria for a Listed Company’s Public Issue

1. Regulatory Compliance

• Existing Listing Status: The company must already be listed on a recognized stock exchange (e.g., BSE, NSE in India, NYSE, NASDAQ in the U.S.) and compliant with all listing agreements and ongoing disclosure requirements.
• Track Record of Compliance: No major violations of securities laws, exchange regulations, or corporate governance norms in recent years (typically the last 3–5 years).
  • Example (SEBI): The company must not be under investigation for fraud, market manipulation, or non-compliance with SEBI regulations.

2. Financial Performance

• Profitability (for Equity Issues): Many jurisdictions require a track record of profitability or strong financial metrics to ensure the company can sustain public investment.
  • SEBI Requirement (for IPO, applicable to FPOs in some cases):
    • Net tangible assets of at least ₹3 crore (approx. $360,000 USD) in each of the preceding three years.
    • Minimum average pre-tax operating profit of ₹15 crore (approx. $1.8 million USD) in at least three of the last five years.
    • Net worth of at least ₹1 crore (approx. $120,000 USD) in each of the preceding three years.
  • For FPOs, profitability requirements may be relaxed if the company meets other criteria (e.g., market capitalization or revenue thresholds).
• Alternative Route (SEBI): If profitability criteria are not met, the company can issue shares through the QIB route (Qualified Institutional Buyers), where at least 75% of the issue is allotted to QIBs (e.g., mutual funds, banks).

3. Minimum Public Shareholding

• Post-Issue Shareholding: Listed companies must maintain or achieve a minimum public shareholding as mandated by the exchange.
  • SEBI Rule: At least 25% of the company’s post-issue paid-up capital must be held by non-promoter (public) shareholders for companies with a post-issue market capitalization up to ₹4,000 crore. For larger companies, this can be 10% initially, with a phased increase to 25% within three years.
• Lock-in Periods: Promoters’ shares may be subject to lock-in to prevent immediate sell-offs post-issue (e.g., 20% of promoter holding locked for 3 years under SEBI).

4. Issue Size and Purpose

• Minimum Issue Size: Some regulators specify a minimum size for public issues to ensure marketability.
  • SEBI: For IPOs, the minimum issue size is typically ₹10 crore (approx. $1.2 million USD). FPOs may have similar thresholds depending on the exchange.
• Clear Purpose: The company must disclose the purpose of the issue (e.g., debt repayment, capital expenditure, acquisitions) in the offer document, ensuring funds are used for legitimate business needs.
• Utilization of Proceeds: Funds cannot be used for speculative purposes or undisclosed activities.

5. Corporate Governance

• Board Composition: The company must have a compliant board structure, including independent directors as per regulatory norms.
  • SEBI: At least half the board must be non-executive directors, with one-third (or half, if the chairman is executive) being independent directors.
• Audit Committee: A functional audit committee to oversee financial reporting and compliance.
• No Pending Litigation: No significant unresolved legal disputes or regulatory penalties that could materially affect the company’s operations or investor confidence.

28. What Is Money Laundering?

Money laundering is the process of disguising illegally obtained money (“dirty money”) to make it appear legitimate (“clean money”). It involves a series of transactions to conceal the money’s origin, ownership, or destination, allowing criminals to use illicit funds without detection. Common sources of dirty money include drug trafficking, corruption, fraud, or terrorism financing. Capital Market interview questions comprise of money laundering as well.

• Key Stages of Money Laundering

• Placement:
  • Introducing illicit funds into the financial system to distance them from their illegal source.
  • Example: Depositing cash in small amounts across multiple bank accounts or purchasing assets like real estate.
• Layering:
  • Creating complex transactions to obscure the money’s trail, making it hard to trace.
  • Example: Transferring funds between offshore accounts, using shell companies, or investing in financial instruments.
• Integration:
  • Reintroducing the “cleaned” money into the economy as legitimate funds for free use.
  • Example: Buying luxury goods, funding businesses, or investing in legitimate ventures.

29. What Qualities Do You Require To Become A Successful In Capital Market?

To become successful in the capital market—whether as an investor, trader, financial analyst, or other professional—requires a combination of skills, knowledge, personal traits, and habits.

1.Financial Knowledge and Analytical Skills

• Understanding of Markets: Deep knowledge of how capital markets operate, including stocks, bonds, derivatives, and market mechanisms (e.g., IPOs, trading systems).
  • Example: Knowing how to read financial statements or analyze a company’s P/E ratio.
• Analytical Ability: Skill in interpreting financial data, economic indicators, and market trends to make informed decisions.
  • Example: Using technical analysis (charts, indicators) or fundamental analysis (earnings, debt ratios) to evaluate investments.
• Economic Awareness: Staying informed about macroeconomic factors (e.g., interest rates, inflation, GDP growth) and their impact on markets.

2. Discipline and Emotional Control

• Discipline: Sticking to a well-defined investment or trading strategy, avoiding impulsive decisions driven by market noise.
  • Example: Following a stop-loss rule to exit a losing trade, even during market volatility.
• Emotional Resilience: Managing fear and greed, which can lead to panic selling or overbuying during market swings.
  • Example: Staying calm during a market crash and avoiding selling at a loss unless justified by analysis.
• Patience: Willingness to wait for the right opportunities and hold investments for long-term gains when appropriate.
  • Example: Holding a fundamentally strong stock through short-term dips.

3. Risk Management

• Risk Awareness: Understanding and assessing risks (market, credit, liquidity) associated with investments or trades.
  • Example: Diversifying a portfolio to reduce exposure to a single stock or sector.
• Position Sizing: Allocating capital wisely to minimize losses, such as not over-investing in a single asset.
  • Example: Limiting any single stock to 5% of a portfolio.
• Hedging Skills: Using tools like options, futures, or stop-loss orders to protect against adverse market movements.
  • Example: Buying put options to hedge a stock portfolio during uncertainty.

30. What Are The 3 Capital Markets?

The term “capital markets” refers to platforms where long-term funds are raised and traded through securities like stocks and bonds. Based on standard financial classifications and the context of your previous capital market questions, the three main types of capital markets are equity markets, debt markets, and derivative markets. Below is a concise explanation of each:

1. Equity Markets

• Definition: Markets where shares (stocks) representing ownership in companies are issued and traded.
• Role:
  • Primary: Companies raise capital via Initial Public Offerings (IPOs) or Follow-on Public Offerings (FPOs).
  • Secondary: Investors trade shares on stock exchanges (e.g., NSE, NYSE).
• Features: High risk/return, liquid, offers dividends/capital gains.
• Example: Trading Reliance Industries shares on BSE.

2. Debt Markets

• Definition: Markets for trading debt securities (e.g., bonds, debentures) where issuers borrow funds and pay interest.
• Role:
  • Primary: Issuance of bonds by governments or corporations.
  • Secondary: Trading bonds on exchanges or over-the-counter (OTC).
• Features: Lower risk than equities, fixed income, sensitive to interest rates.
• Example: Buying Indian government bonds or corporate bonds from Tata Steel.

3. Derivative Markets

• Definition: Markets for trading derivatives (e.g., futures, options, swaps), whose value derives from underlying assets like stocks or commodities.
• Role:
  • Primary: Issuing new derivative contracts (exchange-traded or OTC).
  • Secondary: Trading derivatives on exchanges (e.g., CME, NSE) or OTC.
• Features: Used for hedging or speculation, high leverage, complex.
• Example: Trading NIFTY index futures on NSE or a currency swap OTC.

31. Explain The Principle Of Risk & Return?

The principle of risk and return is a fundamental concept in finance and capital markets, stating that the potential return on an investment is directly proportional to the level of risk involved. In other words, higher potential returns are associated with higher risks, and lower risks typically yield lower returns. This trade-off guides investment decisions, as investors aim to balance their risk tolerance with their return objectives. Capital Market interview questions comprises of both risk and return aspects as well.
Risk:

• Risk refers to the uncertainty or variability of returns from an investment. It reflects the possibility that the actual return may differ from the expected return, including the chance of losing part or all of the invested capital.
• Types of risks include:
  • Market Risk: Fluctuations due to economic or market conditions (e.g., stock market crashes).
  • Credit Risk: Risk of default by a borrower (e.g., bond issuer failing to pay interest).
  • Liquidity Risk: Difficulty selling an asset without significant loss in value.
  • Operational Risk: Losses from internal failures or external events (e.g., fraud, system breakdowns).
  • Interest Rate Risk: Impact of changing interest rates on asset values (e.g., bond prices).

Return:

• Return is the gain or loss on an investment, typically expressed as a percentage, over a specific period. It includes:
  • Income: Dividends (stocks) or interest (bonds).
  • Capital Gains: Increase in the asset’s value (e.g., stock price appreciation).
• Example: A stock yielding 5% dividends and 10% price appreciation has a total return of 15%.

32. What Is A Mutual Fund?

A mutual fund is a pooled investment vehicle that collects money from multiple investors to invest in a diversified portfolio of securities, such as stocks, bonds, or other assets, managed by professional fund managers. It enables investors to access a broad range of investments with relatively small capital, sharing the risks and returns proportionally.

33. What Is A Convertible Debenture?

A convertible debenture is a type of debt security issued by a company that combines features of a traditional debenture (a long-term, unsecured bond) with an option for the holder to convert it into a predetermined number of the issuer’s equity shares (common stock) at specific times during its life, typically at the holder’s discretion. It is a hybrid financial instrument offering both fixed-income characteristics and potential equity upside.Capital market interview questions comprise this aspect as well.

34. What Are The Differences Between Futures & Options?

There are several points of difference between Futures & Options that you must be well aware of. Some of the key points of differences that you should be well aware off are as follows:-

35. What Are Derivatives?

Derivatives are financial instruments whose value is derived from the performance of an underlying asset, index, or benchmark, such as stocks, bonds, commodities, currencies, interest rates, or market indices. They are contracts between two parties that specify conditions (e.g., price, date) under which payments or obligations are exchanged, primarily used for hedging risks, speculating on price movements, or arbitrage.

36. What Are Hedge Funds?

A hedge fund is a pooled investment vehicle that employs diverse and often aggressive strategies to generate high returns for its investors, typically targeting absolute returns (positive returns in all market conditions) rather than benchmark-relative performance. Hedge funds are managed by professional fund managers and are usually open to a limited group of accredited or high-net-worth investors. They operate with greater flexibility than mutual funds, using complex strategies, leverage, and derivatives, and are subject to lighter regulation.

37. What Is The Modigliani Miller Approach?

The Modigliani-Miller (MM) Approach, developed by economists Franco Modigliani and Merton Miller in the 1950s and 1960s, is a foundational theory in corporate finance that examines the relationship between a company’s capital structure (mix of debt and equity) and its value, as well as its cost of capital.
The MM approach asserts that, under certain idealized conditions, the value of a firm is unaffected by its capital structure, and the cost of capital remains constant regardless of the proportion of debt or equity used to finance it.
The theory is presented through two key propositions, with and without taxes, and has significant implications for financial decision-making in capital markets.

38. What Is A Prospectus?

A prospectus is a formal legal document issued by a company or entity offering securities (e.g., stocks, bonds, mutual fund units) for sale to the public. It provides comprehensive details about the issuer, the securities, and associated risks to enable investors to make informed decisions.
Required by regulatory authorities, it ensures transparency and investor protection during public offerings like Initial Public Offerings (IPOs), Follow-on Public Offerings (FPOs), or bond issuances.

39. What Is An Efficient Market Hypothesis?

The Efficient Market Hypothesis (EMH) is a financial theory asserting that asset prices in capital markets fully reflect all available information at any given time, making it impossible to consistently achieve above-average returns (beat the market) through active trading or stock picking, except by luck.
Developed by Eugene Fama in the 1960s, EMH implies that markets are “efficient” in processing information, and prices adjust instantly to new data, eliminating opportunities for excess returns without additional risk.

40. What Is The Time Value Of Money?

The Time Value of Money (TVM) is a fundamental financial concept stating that a sum of money available today is worth more than the same amount in the future due to its potential to earn interest or generate returns over time. This principle recognizes that money has a time-based value influenced by factors like interest rates, inflation, and opportunity costs. TVM is critical in capital markets, investment decisions, and financial planning, as it helps compare cash flows occurring at different times. It is also one of the important Capital Market Interview questions that you have to face during the intgerview.

Final Takeaway

Hence, these are some of the crucial capital market interview questions that you should be well aware of before the interview. Here, proper planning holds the key. The more you can prepare well for the interview, the better you can reach your goals.
You can share your views and opinions in our comment box. This will help us to know your take on this matter. Without proper and effective planning, you cannot make things work perfectly well in your way.

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ICA Edu Skills Team

Working with businesses in diverse industries. I'm passionate about helping others understand and manage their finances effectively. This blog is where I share practical tips, insightful guides, and the latest updates on accounting, taxation, GST, TallyPrime, and advanced Excel. Feel free to ask questions, leave comments.

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