Security Market in India: UPSC Previous Year Questions (Indian Economy)

Explanation

Option 1 is correct: Insurance companies in India can trade in both Corporate Bonds and Government Securities (G-Secs). The Insurance Regulatory and Development Authority of India (IRDAI) allows insurance companies to invest in Government Bonds, Corporate Bonds, and Infrastructure Bonds, subject to prescribed limits.

Option 2 is correct: Pension funds are allowed to invest in both government securities (G-Secs) and corporate bonds. For example, the Pension Fund Regulatory and Development Authority (PFRDA) permits pension funds under the National Pension System (NPS) to invest in Government Bonds, State Development Loans (SDLs), and Corporate Debt. Since pension funds focus on long-term stability, they often prefer G-Secs, which offer secure and steady returns for retirement benefits.

Option 3 is correct: Retail investors can trade in both corporate bonds and government securities. The RBI’s Retail Direct Scheme enables individuals to directly buy and sell government securities. Corporate bonds are available for trading on the debt segments of BSE and NSE, and retail investors can access them through debt mutual funds, bond markets, and stock exchanges.

Explanation

A financial instrument is a contractual agreement that creates a financial asset for one party and a corresponding financial liability or equity instrument for another party. Options 1 and 3 are correct:

Exchange-Traded Funds (ETF) are considered financial instruments as they represent a portfolio of assets (stocks, bonds, or commodities) and are traded on stock exchanges. They are intangible assets that provide claims to future cash flows or ownership interests. A currency swap is a financial instrument used in international finance. It involves the exchange of principal and interest payments in different currencies between two parties, helping manage foreign exchange risks. Option 2 is incorrect: Motor vehicles are not financial instruments. They are physical assets used for transportation and do not represent any contractual claim to future cash flows or monetary value in financial markets.

Explanation

The United States government issues Treasury Bonds (T-Bonds) as a way to borrow money. These bonds are considered one of the safest investments globally because they are backed by the full faith and credit of the US government.

Statement I is incorrect: Even in a case of a default by the U.S. government, U.S. Treasury bondholders retain their legal right to payment. A default would generally cause delays or restructuring but would not cancel bondholder claims. The U.S. government remains legally obligated to repay its debts, and investors can seek legal remedies, though enforcement is complex for sovereign debt. If the government misses payments, both American and foreign bondholders can sue in U.S. courts, such as district courts or the U.S. Court of Federal Claims, to enforce their claims.

Statement II is correct: US Treasury Bonds are not backed by physical assets like gold, land, or commodities. Instead, their value rests on the trust and faith in the US government’s financial stability and its ability to repay debts through taxation and economic growth. The US dollar’s status as the world’s re-serve currency further reinforces this trust, but there are no tangible assets pledged against US debt.