FB Practice Test 1 Set 1 Solutions

Finance & Banking

Practice Test 1 - Set1 - Solution

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Please click on the particular cell to see the calculation 1 Option 1 Option 2 Option 3 Option 4

Solution

Which of the following type of compounding will be most beneficial from a lender's perspective, for a given interest rate? Compounded daily Compounded semi-annually Compounded quarterly Compounded annually Greater the frequency of compounding, greater the effective return or yield. Therefore, daily compounding will yield highest interest to Bank. Sharma traders wants to borrow Rs. 10 lakhs for 3 years, for his business requirements. He approached 3 banks who quoted him 3 different rates, with different compounding.

2

Option 1 Option 2 Option 3 Option 4

Solution

3 Option 1 Option 2 Option 3 Option 4

Find out which one would be the best choice for Sharma traders. SYM Bank AVG Bank IDNC Bank IDNC and AVG Both will cost same Bank IDNC Bank AVG Bank SYM Bank Out of the three options, least interest is paid in case of SYM bank. An investment in land requires an initial outlay of INR 2 million. It promises to pay INR 2.18 million in one year. What is the net present value (NPV) of the investment. Assume a market interest rate of 10%. INR (18,181.82) INR 18,181.82 INR 361,818.18 INR (361,818.18) Initial outlay

Solution

Solution

4

Option 1 Option 2 Option 3 Option 4

Solution

After 1 year Interest Rate Present Value (2180000/((1+0.1)^1)) NPV (Present Value - Initial Outlay) Saurabh has bought a life insurance endowment policy for 15 years. He has to pay an annual premium of INR 60,000 for 15 years. He will receive INR 15 lakhs on maturity. He will also receive INR 20,000 after every 4 years, as 'cash back' bonus. What returns will he get on this policy? If he is getting an interest of 9% on other investment avenues, will it be advisable for him to go for this insurance policy? Note: Saurabh wants to use insurance as a pure investment product. No, as he will get a return of 7.80% on insurance policy No, as he will get a return of 7.92% on his insurance policy Yes, as the return he will get, is 9.8% Yes, as the return he will get, is 8% Year 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 IRR Since IRR is less than 9%, NPV for this investment at a discount rate of 9% (the alternative investment) would be negative and Saurabh should not invest in insurance policy.

Option 3

You have bought shares of Infosys at a price of Rs. 3200. You are exposed to market risk. Now, what can you infer from this? You may incur losses due to change in share price. You may incur losses due to change in market interest rates. You may incur losses due to change in exchange rates.

Option 4

You may incur losses due to change in brokerage rates charged by brokers.

5 Option 1 Option 2

Solution

If prices fall below the purchased price, you will incur loss. This is known as equity risk/market risk. Following are the returns of 4 stocks, for the past five years. Manoj, an investor, wants to invest in a stock which will give him good returns with minimum risk. Can you suggest in which of the following stocks, should Manoj invest?

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Option 1 Option 2 Option 3 Option 4

Stock Stock Stock Stock

A B C D

Solution

Year 1 Year 2 Year 3 Year 4 Year 5 Average Standard Deviation

7

Option 1 Option 2 Option 3 Option 4

Solution

Ronak is a wholesaler who stocks goods in his godown. He wants to protect himself from the risk of loss, due to fire or any natural calamity. So he decided to purchase insurance. What should be the maximum amount he should be willing to pay as annual premium? It is observed that on an average, he suffer such loss once in 4 years and the average loss amount is INR 1 lakh. INR 25,000 INR 1 lakh INR 10,000 INR 4 lakhs The probability of loss is once in 4 years i.e. 0.25. The quantum of loss = INR 1 lakh. Hence, maximum amount of premium he would be willing to pay = INR 1 lakh * 0.25 = INR 25,000.

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Option 1 Option 2 Option 3 Option 4

Solution

9 Option 1 Option 2 Option 3 Option 4

Solution

Megha has taken an education loan, for which all repayments including interest, will start after 2 years. The Bank has to show the interest earned yearly in its books. So, which of the following is/are true? Bank will credit its 'interest income' account and a corresponding debit entry will be made, in the 'interest receivable' account. The bank will not make any accounting entry until Megha actually starts repaying. When Megha pays, the bank will credit 'interest receivables' account and debit cash account. The bank will credit its 'interest income' account yearly, and a corresponding debit entry will be made in Megha's loan account. Bank will create a suspense account for interest receivables till the time Megha starts repaying. So, in order to show the interest income annually, Bank will credit the interest income account and debit the interest receivables account. After Megha starts repaying, Bank will make the nullifying credit entry in interest receivable account and debit the cash account. AXM Ltd., a software company, has bought computers worth Rs. 20 Lakhs. The payment was made through a cheque. What will be the effect in the books of AXM Ltd.? Bank account- Credited, Fixed Assets - Debited Bank account- Debited, Fixed Assets - Credited Bank account- Debited, Fixed Assets - Debited Bank account- Credited, Fixed Assets - Credited If there is an increase in assets, it is debited, and when there is a decrease asset account is credited. Here, Bank balance is an asset, so bank account will be credited as the balance is reduced. Fixed asset account will be debited as assets have increased. Use the data below to answer the following question:

10

How much is the PAT?

Option 1 Option 2 Option 3 Option 4

Solution

11

Option 1 Option 2 Option 3 Option 4

Solution

12

Option 1 Option 2 Option 3 Option 4

Solution

INR INR INR INR

122.00 122.85 120.98 120.13

million million million million

Total Revenue Less Direct cost Less Selling, General & administrative expense Less Depreciation Add Other income Earnings before interest & tax Less Interest Expenses Earning after tax Less Tax (25% of 167.2) PAT RM jewelers sold jewelry worth INR 40 lakhs, out of which 50% was sold on credit, in the last quarter. It has reported depreciation of INR 2 lakhs for this quarter. PAT for this period was 5 lakhs. Calculate the cash balance of RM jewelers, assuming no other transactions and zero opening balance. (- INR 13 lakhs) (-INR 23 lakhs) INR 27 lakhs INR 23 lakhs Cash balance= PAT + Noncash expenses - Non cash income. = (5 + 2 - (50%*40)) lakhs = (-13 lakhs) PNG Bank has total assets of INR 20,000 crore reported in the last fiscal year. This year, PNG bank earned a net profit of 1000 crores, while their interest expense was 2000 crores. What would be the total assets for this fiscal year for PNG Bank, assuming no other additions/reductions? INR INR INR INR

21,000 18,000 20,000 23,000

cr cr cr cr

Profit of INR 1000 cr will be added in owner's equity, therefore, total liabilities will increase by 1000 cr, on the asset side, this will reflect either in the cash account or the receivables account. So, total assets will also increase by the same amount. Interest expense is a part of Income statement and will be considered while calculating the Net profit, so it will not be seperately included in the Balance sheet.

ance & Banking Fundementals India

st 1 - Set1 - Solution (Last updated 6th August 2014)

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Interest Payable CI= [P*(1+r/m)^mt] - P 380746.0173 378842.8068 378749.897

-2000000

2180000 10% 1981818.18 -18181.82

Cash Flows -60000 -60000 -60000 -40000 -60000 -60000 -60000 -40000 -60000 -60000 -60000 -40000 -60000 -60000 1440000 7.805%

of 9% (the alternative rance policy.

Stock A 18% 15% 16% 11% 5% 13% 0.051

Stock B 14% 11% -5% 9% 20% 10% 0.093

Stock C 17% 22% -9% 23% 13% 13% 0.130

Stock D 9% 10% 8% 10% 7% 9% 0.012

440 200.5 67.3 7.5 2.5 167.2 3.4 163.8 41.8 122.00