SCA Financial Instruments — Questions and Answers
Question 1: What is a common share (ordinary share)?
- A debt instrument issued by a company
- An ownership stake in a company giving the holder voting rights and a share of profits (dividends) (Correct answer)
- A government-issued bond
- A derivative contract
Correct answer: An ownership stake in a company giving the holder voting rights and a share of profits (dividends)
A common (ordinary) share represents an ownership interest in a company. Shareholders have voting rights, receive dividends (if declared), and share in the company's assets upon liquidation, but they are last in priority behind creditors.
Question 2: What is a bond?
- An ownership stake in a company
- A debt instrument where the issuer borrows from investors and promises to repay principal with interest (Correct answer)
- A futures contract
- A type of mutual fund
Correct answer: A debt instrument where the issuer borrows from investors and promises to repay principal with interest
A bond is a fixed-income debt instrument. The issuer (company or government) borrows money from investors, promising to pay periodic interest (coupon) and return the principal at maturity.
Question 3: What is the relationship between bond prices and interest rates?
- They move in the same direction
- They are not related
- They move in opposite directions — when rates rise, bond prices fall (Correct answer)
- They are only related for government bonds
Correct answer: They move in opposite directions — when rates rise, bond prices fall
Bond prices and interest rates have an inverse relationship. When market interest rates rise, existing bonds with lower coupons become less attractive, so their prices fall. When rates fall, existing bond prices rise.
Question 4: What is a 'sukuk' in Islamic finance?
- A conventional interest-bearing bond
- A Sharia-compliant financial certificate representing ownership in an asset or project, providing returns without interest (Correct answer)
- A type of equity share
- A commodity futures contract
Correct answer: A Sharia-compliant financial certificate representing ownership in an asset or project, providing returns without interest
Sukuk are Islamic financial certificates that comply with Sharia law by avoiding interest (riba). Instead of interest, sukuk holders receive returns based on ownership or participation in an underlying asset or project.
Question 5: What is an Exchange-Traded Fund (ETF)?
- A single stock listed on an exchange
- A fund that tracks an index, sector, or asset class and is traded on an exchange like a stock (Correct answer)
- A type of bond issued by the exchange
- A futures contract on an index
Correct answer: A fund that tracks an index, sector, or asset class and is traded on an exchange like a stock
An ETF is an investment fund that holds a collection of assets (stocks, bonds, commodities) tracking an index or strategy, and whose shares are traded on a stock exchange throughout the day like individual stocks.
Question 6: What is a 'derivative' financial instrument?
- A bond issued by a government
- A financial contract whose value is derived from an underlying asset such as a stock, commodity, or currency (Correct answer)
- A type of savings account
- A certificate of deposit
Correct answer: A financial contract whose value is derived from an underlying asset such as a stock, commodity, or currency
Derivatives are financial contracts whose value depends on (is derived from) the price of an underlying asset. Common derivatives include futures, options, and swaps. They are used for hedging risk or speculation.
SCA Financial Instruments
What is a common share (ordinary share)?