Financial markets and instruments: previous-year questions
36 real UPSC Prelims questions (2011–2026) with the official answer and a clear explanation. 21 of them came in the last five papers.
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Questions per year, counted from the official papers.
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A bond whose proceeds are used only to finance or refinance a combination of both environmental and social projects is called :
Answer (c) & explanation
This is a sustainability bond (c). Under the ICMA principles followed worldwide, a bond that funds a mix of environmental and social projects is a sustainability bond. Option (a) is wrong: a green bond funds only environmental projects, like solar power. Option (b) is wrong: a social bond funds only social projects, like affordable housing. Option (d) is wrong: a sovereign bond is any bond issued by a national government, whatever its use.
Notice India's practice: India has issued Sovereign Green Bonds since January 2023, with the money going to projects like metro rail and renewable energy. A sustainability-linked bond is different: its money can go anywhere, but its interest rate depends on meeting ESG targets.
"Green Bond" is the most familiar term. The words "both environmental and social" point to the combined label.
Answer as per the official UPSC answer key.
Which of the following statements about M1xchange's role in Micro, Small & Medium Enterprises (MSMEs) financing is/are correct ?
- 1. M1xchange provides collateral based loans to MSMEs.
- 2. M1xchange facilitates discounting of invoices and Bills of Exchange for MSMEs.
- 3. M1xchange functions as a credit rating agency for MSMEs.
Select the answer using the code given below :
Answer (b) & explanation
Only statement 2 is correct (b). Statement 2 is right: M1xchange is an RBI-licensed TReDS platform (Trade Receivables Discounting System) where an MSME's invoices and bills of exchange are discounted. Statement 1 is wrong: it does not give collateral-based loans; financing is without collateral, backed by the big buyer's credit. Statement 3 is wrong: it is not a credit rating agency. So options (a), (c) and (d) fail.
Notice how TReDS works: an MSME uploads an invoice raised on a large buyer, and banks bid to discount it, so the MSME gets cash fast. The other platforms are RXIL and Invoicemart. Companies with turnover above ₹250 crore and CPSEs must join TReDS, easing delayed payments to MSMEs.
Answer as per the official UPSC answer key.
Which of the following statements about insurance in aviation sector is/are correct ?
- 1. 'Aviation Hull Insurance' covers the physical aircraft, including the body, engine, and on-board equipment.
- 2. Under the Montreal Convention, adopted in 1999 by over 130 countries, including India, airlines are strictly liable to pay compensation to the family/nominee of every deceased passenger without requiring the family to prove fault.
Select the answer using the code given below :
Answer (c) & explanation
Both statements are correct (c). Statement 1 is right: hull insurance covers the aircraft itself, its body, engines and on-board equipment. Statement 2 is right: under the Montreal Convention, 1999, which India joined in 2009, the airline is strictly liable for a passenger's death or injury up to a set limit, so the family need not prove fault for that first tier. So options (a), (b) and (d) fail.
Notice the tiers: above that limit, the airline can escape further payment only by proving it was not negligent. The convention replaced the older Warsaw Convention (1929). In India, it is applied through the Carriage by Air Act, 1972. Passenger and third-party claims fall under liability insurance, not hull cover.
Answer as per the official UPSC answer key.
Which of the following statements about Crowdfunding is/are correct ?
- 1. Crowdfunding is solicitation of funds (small amount) from multiple investors through a web-based platform or social networking site for a specific project.
- 2. Small and Medium Enterprises (SMEs) are able to raise funds at lower cost of capital without undergoing rigorous procedures.
Select the answer using the code given below :
Answer (c) & explanation
Both statements are correct (c). Statement 1 is right: crowdfunding means raising small sums from many investors through an online platform or social media for a specific project. Statement 2 is right: it lets start-ups and SMEs raise money at a lower cost and with fewer procedures than a bank loan or public issue. Both lines come almost word for word from SEBI's 2014 consultation paper. So options (a), (b) and (d) fail.
Notice the types: donation-based (like Ketto for medical bills), reward-based, debt-based (peer-to-peer lending, regulated by the RBI since 2017), and equity-based. SEBI has not yet allowed equity crowdfunding in India, warning platforms against it.
Answer as per the official UPSC answer key.
With reference to different Committees in India, consider the following details :
| Sl. No. | Committee | Objective | Organization under which it was formed
| 1. | R.N. Malhotra Committee | Comprehensive reforms of Insurance sector in India | Insurance Regulatory and Development Authority of India
| 2. | L.C. Gupta Committee | Preparing a roadmap for the introduction of derivatives trading in India | Securities and Exchange Board of India
| 3. | Urjit R. Patel Committee | Preparing a roadmap for reforming bank lending to the Housing sector | Reserve Bank of India
| 4. | Y.H. Malegam Committee | Preparing a roadmap for reforms in Microfinance sector in India | Reserve Bank of India
In which of the above rows are all the details correctly matched ?
Answer (d) & explanation
Rows 2 and 4 are correct (d). Row 2 is right: the L.C. Gupta Committee (SEBI, 1996-98) prepared the roadmap for derivatives trading. Row 4 is right: the Y.H. Malegam Committee (RBI, 2010-11) reviewed microfinance after the Andhra Pradesh crisis. Row 1 is wrong: the R.N. Malhotra Committee (1993) was set up by the Government of India; IRDA itself was born from its report in 1999. Row 3 is wrong: the Urjit Patel Committee (RBI, 2014) designed the inflation-targeting framework, not housing loans. So options (a), (b) and (c) fail.
Notice the outcome of the Patel Committee: CPI-based inflation targeting of 4% ± 2% and a six-member Monetary Policy Committee (2016).
row 1 has the right subject but the wrong parent. A regulator cannot set up the committee that recommended its own birth.
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Answer as per the official UPSC answer key.
Which of the following statements about Real-World Assets (RWA) Tokenization are correct ?
- 1. Tokenization is the process of turning real world assets into digital tokens using blockchain technology.
- 2. Tokenization of real world assets offers 24x7 access, promoting financial inclusion.
- 3. Tokenization of real world assets will allow the access to high growth investment opportunities for individuals in India.
Select the answer using the code given below :
Answer (a) & explanation
All three statements are correct (a). Statement 1 is right: tokenization turns a real asset, like a building, bond or gold, into digital tokens recorded on a blockchain. Statement 2 is right: tokens can be traded 24x7, which widens financial inclusion. Statement 3 is right: small, fractional tokens let ordinary individuals get into high-growth investments that once needed crores. So options (b), (c) and (d) fail.
Notice the risks: unclear regulation, cyber threats and weak investor protection. In India, related steps include Fractional Ownership Platforms and REITs and InvITs, which already let small investors own slices of real estate and infrastructure. The RBI is also testing tokenized deposits and government securities in sandbox pilots.
Answer as per the official UPSC answer key.
With reference to investments, consider the following :
- I. Bonds
- II. Hedge Funds
- III. Stocks
- IV. Venture Capital
How many of the above are treated as Alternative Investment Funds?
Answer (b) & explanation
Only two are Alternative Investment Funds (b). Under SEBI's AIF Regulations, 2012, an Alternative Investment Fund is a privately pooled fund that collects money from rich or institutional investors and invests it under a set policy. Item IV is right: venture capital funds fall in Category I. Item II is right: hedge funds fall in Category III, as they use complex trading and borrowing. Items I and III are wrong: bonds and stocks are ordinary securities that anyone can buy on the market; they are not funds at all.
Notice the three categories: Category I (venture capital, SME and infrastructure funds), Category II (private equity, debt funds) and Category III (hedge funds). The minimum investment is usually ₹1 crore.
bonds and stocks are "investments", but the question asks about funds.
Answer as per the official UPSC answer key.
Consider the following statements :
- I. The Reserve Bank of India mandates all the listed companies in India to submit a Business Responsibility and Sustainability Report (BRSR).
- II. In India, a company submitting a BRSR makes disclosures in the report that are largely non-financial in nature.
Which of the statements given above is/are correct?
Answer (b) & explanation
Only statement II is correct (b). Statement II is right: the Business Responsibility and Sustainability Report (BRSR) asks for disclosures on environment, social and governance (ESG) matters, such as emissions, water, waste, employees and community. These are largely non-financial. Statement I is wrong on two counts: the BRSR is a SEBI requirement (2021), not the RBI's, and it applies to the top 1,000 listed companies by market value, not all listed companies. So options (a), (c) and (d) fail.
Notice BRSR Core, a smaller set of key indicators that needs outside assurance, being phased in for the largest firms. The idea is to stop greenwashing, meaning false claims of being green, and help investors compare companies.
two errors in one line: wrong regulator and "all". Either one is enough to reject it.
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Answer as per the official UPSC answer key.
Consider the following statements :
Statement I :
As regards returns from an investment in a company, generally, bondholders are considered to be relatively at lower risk than stockholders.
Statement II :
Bondholders are lenders to a company whereas stockholders are its owners.
Statement III :
For repayment purpose, bond-holders are prioritized over stockholders by a company.
Which one of the following is correct in respect of the above statements?
Answer (a) & explanation
Both II and III are correct and both explain Statement I (a). Statement II is right: a bondholder is a lender, and the company must pay a fixed interest whether it earns a profit or not; a stockholder is an owner and gets a dividend only if there is profit. Statement III is right: if the company closes, lenders are paid first and owners get what is left. Both reasons explain why bonds carry lower risk, so options (b), (c) and (d) fail.
Notice the trade-off: lower risk means lower returns. Stockholders can gain much more when the company grows. In India's Insolvency and Bankruptcy Code (2016), secured creditors rank high in the payout order and equity shareholders come last.
Answer as per the official UPSC answer key.
Consider the following statements :
- I. India accounts for a very large portion of all equity option contracts traded globally thus exhibiting a great boom.
- II. India's stock market has grown rapidly in the recent past even overtaking Hong Kong's at some point of time.
- III. There is no regulatory body either to warn the small investors about the risks of options trading or to act on unregistered financial advisors in this regard.
Which of the statements given above are correct?
Answer (a) & explanation
Statements I and II are correct (a). Statement I is right: by 2024, India's NSE accounted for most of the equity options contracts traded in the world, a huge boom. Statement II is right: in January 2024, India's stock market value passed Hong Kong's to become the fourth largest. Statement III is wrong: SEBI regulates the market. It warned that about 9 out of 10 small traders in futures and options lose money, and it acts against unregistered advisers and "finfluencers".
Notice the later steps: SEBI tightened F&O rules from late 2024, with bigger contract sizes and fewer weekly expiries, to cool this speculation. Options let you bet on price moves with a small upfront cost, which is why so many lose.
Answer as per the official UPSC answer key.
With reference to the Indian economy, "Collateral Borrowing and Lending Obligations" are the instruments of :
Answer (c) & explanation
CBLO was a money market instrument (c). Collateralised Borrowing and Lending Obligation (CBLO) was a short-term borrowing tool run by the Clearing Corporation of India (CCIL), using government securities as collateral, for periods from one day up to a year. Anything that lends and borrows for up to one year belongs to the money market. Option (a) is wrong: the bond market deals in long-term debt. Option (b) is wrong: the forex market deals in currencies. Option (d) is wrong: the stock market deals in shares.
Notice that CBLO was replaced in 2018 by TREPS (tri-party repo), which works the same way and is now the largest part of India's money market. Mutual funds and banks use it to park spare cash.
the word "collateral" makes one think of bonds. Look at the time period: short-term funds mean money market.
Answer as per the official UPSC answer key.
In India, which of the following can trade in Corporate Bonds and Government Securities ?
- 1. Insurance Companies
- 2. Pension Funds
- 3. Retail Investors
Select the correct answer using the code given below :
Answer (d) & explanation
All three can trade in corporate bonds and G-Secs (d). Item 1 is right: insurance companies are among the biggest long-term buyers of bonds; IRDAI rules require them to hold a share of their funds in G-Secs. Item 2 is right: pension funds, such as those under the NPS, also invest heavily in government and corporate bonds, as rules require. Item 3 is right: retail investors can buy corporate bonds on stock exchanges and G-Secs directly through the RBI Retail Direct portal, launched in November 2021.
Notice that India was among the first countries to let ordinary people open a gilt account directly with the central bank. SEBI also cut the minimum face value of corporate bonds to ₹10,000 to widen retail access.
one may think G-Secs are only for banks. Retail Direct opened them to individuals.
Answer as per the official UPSC answer key.
Consider the following :
- 1. Exchange-Traded Funds (ETF)
- 2. Motor vehicles
- 3. Currency swap
Which of the above is/are considered financial instruments ?
Answer (d) & explanation
ETFs and currency swaps are financial instruments (d). A financial instrument is a contract that gives one party a financial asset and another a liability or equity. Item 1 is right: an Exchange-Traded Fund unit is a share in a fund that tracks an index, and it trades on the stock exchange like a share. Item 3 is right: a currency swap is a derivative contract in which two parties exchange payments in different currencies. Item 2 is wrong: a motor vehicle is a physical asset. A loan taken to buy it is a financial instrument, but the car itself is not.
Notice India's CPSE ETF and Bharat 22 ETF, used by the government for disinvestment. The RBI also signs currency swap deals with other central banks, such as Japan and SAARC countries.
Answer as per the official UPSC answer key.
Consider the following statements :
Statement-I :
Syndicated lending spreads the risk of borrower default across multiple lenders.
Statement-II :
The syndicated loan can be a fixed amount/lump sum of funds, but cannot be a credit line.
Which one of the following is correct in respect of the above statements ?
No official answer (question dropped) & notes
UPSC dropped this question, so no answer was counted. Learn the idea anyway. Statement I is right: in a syndicated loan, a group of banks, led by an arranger or lead bank, lends together to one large borrower, so each bank carries only part of the default risk. Statement II is wrong: a syndicated loan can be a lump sum (a term loan), a revolving credit line that the borrower draws on as needed, or a mix of both. So, on the facts, option (c) would fit best.
Notice where this matters: big infrastructure, airline and power projects need more money than one bank should risk. The RBI's rules on large exposures also push banks to share such loans rather than lend alone.
UPSC did not evaluate this question, so no official answer exists. Use it for practice only.
UPSC dropped this question from evaluation; there is no official answer.
In the context of finance, the term 'beta' refers to
Answer (d) & explanation
Beta measures how a stock moves with the market (d). Beta tells how much a share price moves when the whole market moves. A beta of 1 means it moves in step with the market. Above 1, it swings more, so it is riskier, like many tech shares. Below 1, it is steadier, like utilities. Option (a) describes arbitrage: buying cheap on one platform and selling dear on another. Option (b) describes asset allocation. Option (c) describes basis risk, not beta.
Notice its partner, alpha: the extra return a fund manager earns beyond what beta predicts. Index funds aim for a beta of exactly 1 at low cost. Beta captures market risk only, not risks special to one company.
Answer as per the official UPSC answer key.
Consider the following statements :
Statement-I :
Interest income from the deposits in Infrastructure Investment Trusts (InvITs) distributed to their investors is exempted from tax, but the dividend is taxable.
Statement-II :
InvITs are recognized as borrowers under the 'Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002'.
Which one of the following is correct in respect of the above statements?
Answer (d) & explanation
Statement I is wrong but Statement II is correct (d). Statement I is wrong because it is reversed: interest income that an InvIT passes on to investors is taxable in their hands. Dividends are usually exempt, as long as the project company has not opted for the lower corporate tax regime. Statement II is right: the Finance Act, 2021 made InvITs and REITs borrowers under the SARFAESI Act, 2002, so lenders can enforce security against them, which makes lending to them safer.
Notice what an InvIT is: like a mutual fund for infrastructure. It pools investors' money into income-earning assets such as toll roads, power lines and pipelines, and passes on most of the income. SEBI regulates both InvITs and REITs. The government uses InvITs for asset monetisation.
Statement I swaps interest and dividend. One swap is enough to make it wrong.
Answer as per the official UPSC answer key.
Consider the following markets :
- 1. Government Bond Market
- 2. Call Money Market
- 3. Treasury Bill Market
- 4. Stock Market
How many of the above are included in capital markets?
Answer (b) & explanation
Two of them belong to the capital market (b). The capital market deals in long-term funds, over one year. It includes the stock market (item 4), where shares are traded, and the government bond market (item 1), where long-dated bonds are bought and sold. The money market deals in funds for up to one year. Item 2 is wrong: call money is borrowing between banks for one day, up to 14 days for notice money. Item 3 is wrong: Treasury Bills are short-term government papers of 91, 182 and 364 days.
Notice the regulators: SEBI watches the capital market, while the RBI looks after the money market and government securities. Commercial paper and certificates of deposit are other money market tools.
both bonds and T-Bills are government paper. What decides the market is maturity, not the issuer.
Answer as per the official UPSC answer key.
With reference to the Indian economy, what are the advantages of "Inflation-Indexed Bonds (IIBs)" ?
- 1. Government can reduce the coupon rates on its borrowing by way of IIBs.
- 2. IIBs provide protection to the investors from uncertainty regarding inflation.
- 3. The interest received as well as capital gains on IIBs are not taxable.
Which of the statements given above are correct ?
Answer (a) & explanation
Statements 1 and 2 are correct (a). In an Inflation-Indexed Bond, the principal, and so the interest, is adjusted for inflation. Statement 2 is right: this protects the investor's real return from uncertain inflation. Statement 1 is right: because of this cover, investors accept a lower coupon, which saves the government money on its borrowing. Statement 3 is wrong: there is no tax break; interest and capital gains on IIBs are taxable like any other bond.
Notice that India's IIBs of 2013 were linked to the WPI, and later ones to the CPI, but they drew little interest. Other countries' versions include the US TIPS. The Sovereign Gold Bond (2015) offered a different hedge, linked to gold prices.
statement 3 adds a tax benefit that sounds attractive. Indian IIBs never had one.
Answer as per the official UPSC answer key.
Consider the following statements :
- 1. In India, credit rating agencies are regulated by Reserve Bank of India.
- 2. The rating agency popularly known as ICRA is a public limited company.
- 3. Brickwork Ratings is an Indian credit rating agency.
Which of the statements given above are correct ?
Answer (b) & explanation
Statements 2 and 3 are correct (b). Statement 2 is right: ICRA began in 1991 as the Investment Information and Credit Rating Agency and is a public limited company listed on the stock exchanges; Moody's is its major shareholder. Statement 3 is right: Brickwork Ratings was an Indian credit rating agency set up in Bengaluru, though SEBI cancelled its registration in 2022 for lapses. Statement 1 is wrong: credit rating agencies are registered and regulated by SEBI under the CRA Regulations, 1999, not by the RBI. The RBI only lists which agencies banks may use for capital rules.
Notice the other Indian agencies: CRISIL (S&P), CARE, India Ratings (Fitch) and Acuité.
ratings are used by banks, so the RBI comes to mind. The RBI only accredits agencies for bank capital rules; SEBI regulates them.
Answer as per the official UPSC answer key.
With reference to Convertible Bonds, consider the following statements :
- 1. As there is an option to exchange the bond for equity, Convertible Bonds pay a lower rate of interest.
- 2. The option to convert to equity affords the bondholder a degree of indexation to rising consumer prices.
Which of the statements given above is/are correct ?
Answer (c) & explanation
Both statements are correct (c). A convertible bond pays fixed interest but lets the holder turn it into the company's shares later. Statement 1 is right: investors value that option, so the company can pay a lower coupon than on a plain bond. Statement 2 is right: when consumer prices rise, company revenues and share prices usually rise too, so the right to convert gives some protection, a partial indexation, against inflation. A plain fixed-coupon bond loses real value as prices rise.
Notice the Indian link: Foreign Currency Convertible Bonds (FCCBs) let Indian firms borrow abroad cheaply. Compare inflation-indexed bonds, whose principal itself rises with prices, and perpetual bonds, which never mature.
Answer as per the official UPSC answer key.