Nism x b - Investment Adviser Level 2 - Case Studies...
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
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TEST DETAILS – The NISM Series XB – Investment Adviser Certification (Level 2) exam is a 100 mark exam with 60% as passing marks. The question paper will consist of 36 multiple choice questions of 1 mark each and 8 Case Studies having 4 multiple choice questions of 2 marks each ( A total of 36 + 32 = 68 questions). There is 0.25% negative marking. The time duration is 120 Minutes.
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NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
CASE STUDY NO. 1 Mr. Darshan is employed in a private firm and earns Rs 8 lakhs per year. Out of this he spends Rs 7 lakhs per year. His stock broker has recommended an investment which promises a return of 13%. He plans to invest Rs 40,000 in this and for this he will need a leverage of 1.5 to finance the investment. He can borrow at 9% pa. He has life insurance policies of Rs 35 lakhs. He has an outstanding housing loan of Rs 30 lakhs. His other assets, excluding his residential house are worth Rs 90 lakhs. He also has investments in other sources and he expects his investments to grow at 9% over the long term. The inflation rate is likely to be around 7.5%. Mr. Darshan is currently of 42 years and wishes to retire at 60 and his life expectancy is 70 years.
Q 1.1 – If Mr. Darshan implements his plan of investments using leveraged money for the new investment, what will be his return on equity ?
1. 2. 3. 4.
16% 19% 20% 22%
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
Correct Answer : 19%
Explanation : He plans to invest Rs 40,000. If ‘X’ is his investment then 1.5X will be the borrowed money ( 1.5 leverage ) X + 1.5 X = Rs 40,000 2.5 X = Rs 40,000 X = Rs 40,000 / 2.5 X = Rs 16000 So Rs 16000 will be his funds and Rs 24000 ( 40000 – 16000) will be borrowed funds. On the total new investment of Rs 40000, he will receive 13% return ie. Rs 5200 On borrowed funds of Rs 24000 he will pay 9% ie. Rs 2160 So his net income will be Rs 3040 ( 5200 – 2160 ) So on his investment of Rs 16000 (own funds), he has earned Rs 3040 which is 19% return. ( 3040 / 16000 ) x 100 = 19. ( Note: we multiply the answer by 100 to convert the decimal factor into Percentage %)
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
Mr. Darshan is employed in a private firm and earns Rs 8 lakhs per year. Out of this he spends Rs 7 lakhs per year. His stock broker has recommended an investment which promises a return of 13%. He plans to invest Rs 40,000 in this and for this he will need a leverage of 1.5 to finance the investment. He can borrow at 9% pa. He has life insurance policies of Rs 35 lakhs. He has an outstanding housing loan of Rs 30 lakhs. His other assets, excluding his residential house are worth Rs 90 lakhs. He also has investments in other sources and he expects his investments to grow at 9% over the long term. The inflation rate is likely to be around 7.5%. Mr. Darshan is currently of 42 years and wishes to retire at 60 and his life expectancy is 70 years.
Q 1.2 - The company in which Mr. Darshan was planning to invest on the basis of his stock brokers recommendation and in which he would have got 13% return, is now offering only 9% return. What will be his returns now ? 1. 2. 3. 4.
0% 6% 9% 9.6%
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
Correct Ans : 9%
Explanation : On his total investments of Rs 40,000 he will now receive 9% ie Rs 3600 On borrowed funds of Rs 24000 he pays 9% ie. Rs 2160 So his net income will be Rs 1440 on his investment of Rs 16000 This is 9% return ( 1440 / 16000 ) x 100 factor into Percentage %)
( Note: we multiply the answer by 100 to convert the decimal
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
Mr. Darshan is employed in a private firm and earns Rs 8 lakhs per year. Out of this he spends Rs 7 lakhs per year. His stock broker has recommended an investment which promises a return of 13%. He plans to invest Rs 40,000 in this and for this he will need a leverage of 1.5 to finance the investment. He can borrow at 9% pa. He has life insurance policies of Rs 35 lakhs. He has an outstanding housing loan of Rs 30 lakhs. His other assets, excluding his residential house are worth Rs 90 lakhs. He also has investments in other sources and he expects his investments to grow at 9% over the long term. The inflation rate is likely to be around 7.5%. Mr. Darshan is currently of 42 years and wishes to retire at 60 and his life expectancy is 70 years.
Q 1.3 – What is the discount rate for working out Mr. Darshan’s Insurance plan ? 1. 2. 3. 4.
1.395% 1.501% 2.000% 1.756%
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
Correct Answer : 1.395 %
Explanation : To find the Discount Rate means we have to calculate the inflation adjusted rate of return or Real rate of Return. The Formula is [ { (1 + rate of return) / ( 1 + Inflation Rate )} – 1 } ] x 100 = { ( 1 + 0.09 ) / ( 1 + 0.075 ) } – 1 x 100 = ( 1.09 / 1.075 ) – 1 x 100 = 1.0139 – 1 x 100 = 1.395 %
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
Mr. Darshan is employed in a private firm and earns Rs 8 lakhs per year. Out of this he spends Rs 7 lakhs per year. His stock broker has recommended an investment which promises a return of 13%. He plans to invest Rs 40,000 in this and for this he will need a leverage of 1.5 to finance the investment. He can borrow at 9% pa. He has life insurance policies of Rs 35 lakhs. He has an outstanding housing loan of Rs 30 lakhs. His other assets, excluding his residential house are worth Rs 90 lakhs. He also has investments in other sources and he expects his investments to grow at 9% over the long term. The inflation rate is likely to be around 7.5%. Mr. Darshan is currently of 42 years and wishes to retire at 60 and his life expectancy is 70 years.
Q 1.4 – What is Mr. Darshan’s human life value ? 1. 2. 3. 4.
Rs. 1,39,77,987 Rs. 1,26,62,575 Rs. 2,14,74,744 Rs. 2,22,78,634
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
Correct Ans : Rs 1,26,62,575
Explanation : The various steps to find the Human Life value are : Step 1 – Finding the present value of all the future earnings in today’s term. We have to use Excel for the calculations. (Use of Excel is allowed in exams).
-
In EXCEL, Click on ‘Fx’ and choose ‘PV’ ie. Present Value and OK
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
In Rate we have to enter the Real Rate of Return which has been calculated in Q 1.3 ie 0.0139 Nper is the no. of payments ie. Retirement Age less Current Age ( 60-42 ) Pmt – His current income ie. Rs 8,00,000 which is going to occur every year
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
The Answer comes to Rs. 1,26,62,575 /= This means he needs an insurance cover of the above amount.
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
CASE STUDY NO. 2 The public issue of Secure Industries Ltd is priced at Rs 75. The book value of its equity shares is Rs 24. The current Earning per share is Rs 7 and this is likely to rise by 10 % next year. Mr. Kushal who regularly invests in IPO’s wishes to invest in this IPO using outside finance(loan) in which he will get a leverage of 2 times at a finance cost of 2.5% for the period till the shares are allotted.
Q 2.1 – Calculate the historic Price to Book value at which the IPO is bought out. 1. 2. 3. 4.
3.63 3.12 4.00 3.21
Correct Ans : 3.12
Explanation : The formula for Historic Price to Book ie P/B ratio is Market Price Per Share / Book Value Per Share = 75 / 24 = 3.125
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
The public issue of Secure Industries Ltd is priced at Rs 75. The book value of its equity shares is Rs 24. The current Earning per share is Rs 7 and this is likely to rise by 10 % next year. Mr. Kushal who regularly invests in IPO’s wishes to invest in this IPO using outside finance(loan) in which he will get a leverage of 2 times at a finance cost of 2.5% for the period till the shares are allotted.
Q 2.2 – Calculate the forward Price to Earning (PE) Ratio for this IPO.
1. 2. 3. 4.
8.30 8.77 9.74 10.88
Correct Ans : 9.74
Explanation : The formula for Forward PE ratio is – Current Price / Forward Earnings = 75 / (7 x 1.1) = 75 / 7.70 = 9.74
[ 10% growth in Rs 7 ]
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
The public issue of Secure Industries Ltd is priced at Rs 75. The book value of its equity shares is Rs 24. The current Earning per share is Rs 7 and this is likely to rise by 10 % next year. Mr. Kushal who regularly invests in IPO’s wishes to invest in this IPO using outside finance(loan) in which he will get a leverage of 2 times at a finance cost of 2.5% for the period till the shares are allotted.
Q 2.3 - If Secure Industries Ltd allots the shares in the ratio 4 for 10, what will be the cost for these shares for Mr. Kushal ? 1. 2. 3. 4.
75.41 81.63 79.80 78.12
Correct Ans : 78.12
Explanation : Leverage-> 2 times (Means for every Rs.100 with the investor, a loan of Rs.200) ie. 1/3 is self money and 2/3 is loan taken. Allotment ratio is 4:10, ie. for every 10 shares applied, he will get 4 shares. To apply for 10 shares he will need Rs 750 (Rs 75 x 10) Loan Amount = 750 x 2/3 = Rs 500 Interest Cost = 500 x 2.5% = Rs 12.50 Total cost = Value of shares allotted + Interest cost = 4 x 75 + 12.50 = 312.50 Cost Per Share = 312.50 / 4 = 78.12
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
The public issue of Secure Industries Ltd is priced at Rs 75. The book value of its equity shares is Rs 24. The current Earning per share is Rs 7 and this is likely to rise by 10 % next year. Mr. Kushal who regularly invests in IPO’s wishes to invest in this IPO using outside finance(loan) in which he will get a leverage of 2 times at a finance cost of 2.5% for the period till the shares are allotted.
Q 2.4 – The shares of Secure Industries Ltd are expected to list at Rs 77.50. In such a scenario, what should be the minimum allotment so that Mr. Kaushal does not suffer a loss ?
1. 2. 3. 4.
50% 58.50% 60% 75%
Correct Ans : 50%
Explanation : Shares are issued at Rs 75 and listing is at Rs 77.50 This means the cost of finance should not be more than Rs 2.50 per share His cost of finance is Rs 12.50 ( as solved earlier ) 12.50 / 2.50 = 5 So he should get atleast 5 shares from the 10 shares applied which means a 50% allotment ratio
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
CASE STUDY NO. 3
Mr. Gupta, an Indian resident invests in Mutual Funds regularly. He has an ongoing SIP which is currently valued at Rs 2,00,000. In this SIP he is contributing Rs 25000 pm and this will continue for 12 more months. The yield on SIP is estimated to be 1% pm. As Mr. Gupta is expecting some monies and so he is planning to start a new SIP of Rs 12000 pm for 18 months. This new SIP can yield 1.25% pm. Mr. Gupta has a son named Pranav. Mr. Gupta plans to send Pranav to USA for higher studies in the field of medical sciences. The expenses for such studies is Rs 20,00,000 and this will go up by 10% pa over the next 5 years. The rupee is also likely to depreciate by 3% against the USD during this period.
Q 3.1 – What will be the value of Mr. Gupta’s ongoing SIP in one year ? 1. 2. 3. 4.
Rs. 501677 Rs. 574606 Rs. 542427 Rs .500411
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
Correct Ans : Rs 542427
Answer Explanation : We will have to use Excel to solve these problems. Here we have to find the Future Value of his investments. In Excel, click on Fx and then on FV (ie. Future Value and then OK.
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
The Interest Rate is 1%, the number of installments are 12, the per month installments are Rs 25000 and the currently value of the SIP is Rs 200000. Inputting these values in Excel , we get :
Ans : The future value of the ongoing SIP is Rs. 542427
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
Mr. Gupta, an Indian resident invests in Mutual Funds regularly. He has an ongoing SIP which is currently valued at Rs 2,00,000. In this SIP he is contributing Rs 25000 pm and this will continue for 12 more months. The yield on SIP is estimated to be 1% pm. As Mr. Gupta is expecting some monies and so he is planning to start a new SIP of Rs 12000 pm for 18 months. This new SIP can yield 1.25% pm. Mr. Gupta has a son named Pranav. Mr. Gupta plans to send Pranav to USA for higher studies in the field of medical sciences. The expenses for such studies is Rs 20,00,000 and this will go up by 10% pa over the next 5 years. The rupee is also likely to depreciate by 3% against the USD during this period.
Q 3.2 - Mr. Gupta plans to start a new SIP of Rs 12000 pm. What will be its value at the completion of SIP period ?
1. 2. 3. 4.
Rs 214688 Rs 230876 Rs 240554 Rs 248214
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
Correct Ans : Rs 240554 Explanation : Using the FV calculations in Excel, input the following data – Interest Rate 1.25%, Installments 18 and per installment amount Rs 18000.
We get the answer Rs 240554.
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
Mr. Gupta, an Indian resident invests in Mutual Funds regularly. He has an ongoing SIP which is currently valued at Rs 2,00,000. In this SIP he is contributing Rs 25000 pm and this will continue for 12 more months. The yield on SIP is estimated to be 1% pm. As Mr. Gupta is expecting some monies and so he is planning to start a new SIP of Rs 12000 pm for 18 months. This new SIP can yield 1.25% pm. Mr. Gupta has a son named Pranav. Mr. Gupta plans to send Pranav to USA for higher studies in the field of medical sciences. The expenses for such studies is Rs 20,00,000 and this will go up by 10% pa over the next 5 years. The rupee is also likely to depreciate by 3% against the USD during this period.
Q 3.3 - What is the amount Mr. Gupta will need in five years for his son Pranav’s education ? 1. 2. 3. 4.
Rs 36,84,870 Rs 41,74,634 Rs 39,28,749 Rs 43,11,000
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
Correct Ans : Rs 36,84,870 Explanation : Here again we have to calculate the future value using Excel. The Rate is 10%. As the rupee depreciates, the cost will rise by 3%. So the total Rate will be 10 + 3 = 13% The period is 5 years The current cost is Rs 20,00,000 which is the Present Value. Inputting these data in excel we get :
Mr. Gupta will need Rs 36,84,870 in 5 years for his sons education.
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
CASE STUDY NO. 4 The PE ratio for M/s. Megasoft Ltd is 24 while the industry average PE is 15, the Price Earning to Growth (PEG) Ratio is 0.92 and the dividend yield is 4.2 . Mr. Rao is a careful and conservative investor and is thinking of investing in the shares of Megasoft Ltd.
Q 4.1 – The PEG ratio Megasoft Ltd is 0.92. This means the company is _________. 1. 2. 3. 4.
A low growth stock A high growth stock Over valued Under valued
Correct Ans : Undervalued
Explanation : The thumb rule is that if the PEG ratio is 1, it means that the market is valuing a stock in accordance with the stock's estimated EPS growth. If the PEG ratio is less than 1, it means that the stock's price is undervalued. On the other hand, stocks with high PEG ratios indicate that the stock is currently overvalued.
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
The PE ratio for M/s. Megasoft Ltd is 24 while the industry average PE is 15, the Price Earning to Growth (PEG) Ratio is 0.92 and the dividend yield is 4.2 . Mr. Rao is a careful and conservative investor and is thinking of investing in the shares of Megasoft Ltd.
Q4.2 The Dividend yield of Megasoft is quiet high. What does it signify ? 1. 2. 3. 4.
The company share price is likely to rise The company EPS is likely to rise The earning’s growth of the company could be low The dividend payout will be low
Correct Ans : The earning’s growth of the company could be low.
Explanation : When the dividend received by an investor is compared to the market price of the share, it is called the dividend yield of the share. The dividend yield of a share is inversely related to its share price. If the price of equity shares moves up, the dividend yield comes down, and vice versa. A low earnings growth company will have a relatively higher and increasing dividend yields as prices tend to fall.
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
The PE ratio for M/s. Megasoft Ltd is 24 while the industry average PE is 15, the Price Earning to Growth (PEG) Ratio is 0.92 and the dividend yield is 4.2 . Mr. Rao is a careful and conservative investor and is thinking of investing in the shares of Megasoft Ltd.
Q 4.3 Why are the shares of Megasoft unsuitable for investments for a careful and conservative investor like Mr. Rao ? 1. 2. 3. 4.
The PE ratio is quiet high as compared to industry PE ratio The PEG ratio is lower than 1 The dividend yield is very high All of the above
Correct Ans : The PE ratio is quiet high as compared to industry PE ratio
Explanation : One has to compare the company PE ratio to the industry average PE ratio. If this is higher, it generally means the company stock is over price. Here , The PE of Megasoft is 24 and suppose the average PE ratio of software sector stocks is 20, then this means Megasoft shares are over valued.
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
CASE STUDY NO. 5
Mrs. Menon is a safe investor and invests regularly in Fixed Deposits and Bonds. She is planning to invest in a 8% bonds of XYZ Ltd. These bonds are being issued at face value but will be redeemable at a good premium of 6%. The interest is paid annually and the time duration of these bonds is 5 years. The bonds were being traded at Rs 103 after 1 year.
Q 5.1 – Calculate the YTM these bonds of XYZ Ltd on issue. 1. 2. 3. 4.
8.35% 9% 9.20% 9.80%
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
Correct Ans : 9% Explanation : YTM ie. Yield to Maturity is the total return to be earned on the money invested. Let’s assume Mrs. Menon invested Rs 100 and so she will get Rs 106 on maturity (premium of 6%) plus interest income of 8% pa. We have to calculate the Rate. Using Excel, search for Rate.
On Clicking on ‘ Go ‘ – we get :
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
Double Click on ‘Rate’ – we get :
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
Now we have to input the data :
Mrs. Menon is a safe investor and invests regularly in Fixed Deposits and Bonds. She is planning to invest in a 8% bonds of XYZ Ltd. These bonds are being issued at face value but will be redeemable at a good premium of 6%. The interest is paid annually and the time duration of these bonds is 5 years. The bonds were being traded at Rs 103 after 1 year.
Nper - the period ie. 5 years Pmt – Every year interest will be receivable ie 8% on Rs 100 ie Rs 8 Pv – The initial amount invested ie. Rs 100 Fv – The amount receivable on maturity ie. Rs 106 ( 6% premium )
We get the answer 0.0900 x 100 = 9% is the YTM on issue price.
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
Mrs. Menon is a safe investor and invests regularly in Fixed Deposits and Bonds. She is planning to invest in a 8% bonds of XYZ Ltd. These bonds are being issued at face value but will be redeemable at a good premium of 6%. The interest is paid annually and the time duration of these bonds is 5 years. The bonds were being traded at Rs 103 after 1 year.
Q 5.2 – Calculate the revised YTM these bonds of XYZ Ltd after one year ?
1. 2. 3. 4.
8% 8.1% 8.4% 9.1%
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
Correct Ans : 8.4%
Explanation : We have to find out what will be the YTM if one invests after one year in these bonds at Rs 103. Input the following data in Excel as per the same procedure of Ans 4.1 Nper - the period has now become 4 years as 1 year has passed Pmt –Rs 8 Pv – The amount invested will now be Rs 103 Fv – The amount receivable on maturity ie. Rs 106 ( 6% premium )
The Yield will now be .084 x 100 = 8.4%
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
Mrs. Menon is a safe investor and invests regularly in Fixed Deposits and Bonds. She is planning to invest in a 8% bonds of XYZ Ltd. These bonds are being issued at face value but will be redeemable at a good premium of 6%. The interest is paid annually and the time duration of these bonds is 5 years. The bonds were being traded at Rs 103 after 1 year.
Q 5.3 – Calculate the modified duration if after one year of the issue, 3.60 is the modified duration ? 1. 2. 3. 4.
3.00 3.32 3.68 4.22
Correct Ans : 3.32 Explanation : The formula to calculate modified duration is : Duration / 1 + YTM = 3.6 / 1 + 0.084 ( Here YTM is the Yield after one year as calculated above ) = 3.6 / 1.084 = 3.32
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
Mrs. Menon is a safe investor and invests regularly in Fixed Deposits and Bonds. She is planning to invest in a 8% bonds of XYZ Ltd. These bonds are being issued at face value but will be redeemable at a good premium of 6%. The interest is paid annually and the time duration of these bonds is 5 years. The bonds were being traded at Rs 103 after 1 year.
Q 5.4 – When the price was quoting at Rs 103, due to an announcement by RBI, the interest rates (yields) went up by 50 basis points. Calculate the revised price of bonds of XYZ Ltd one year after the issue.
1. 2. 3. 4.
101.35 102.44 100.20 103.74
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
Correct Ans : 101.34
Explanation : Here we have to calculate the price of bond when the interest rates rises ie. Present Value (Pv)
After clicking on OK, we get the following screen :
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
Now input the data :
Mrs. Menon is a safe investor and invests regularly in Fixed Deposits and Bonds. She is planning to invest in a 8% bonds of XYZ Ltd. These bonds are being issued at face value but will be redeemable at a good premium of 6%. The interest is paid annually and the time duration of these bonds is 5 years. The bonds were being traded at Rs 103 after 1 year.
As per answer of 5.2, the revised yield after one year is 8.4%. Add .50% to this as yields risen by 0.50% = 8.9% (Rate) Rest all inputs will be same. In Excel, we have to find Pv.
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
CASE STUDY NO. 6 Following are the assets and liabilities of Mr. Parag Assets : House costing Rs 25 lacs but now valued at Rs 40 lacs. Equity Shares – Rs 7 lacs, Debentures Rs 3 lacs, Long Term Fixed Deposits – Rs 10 lacs, Short Term Bank Fixed Deposits – Rs 2 lacs, Car Rs 4 lacs, SUV Rs 6 lacs, Open Ended Equity Schemes – Rs 6 lacs, Open Ended Debt Schemes – Rs 5 lacs, Liquid Schemes – Rs 5 lacs, Saving Bank a/c Rs 1 lac. Liabilities : Housing loan – Rs 12 lacs, Loan from friends – Rs 5 lacs, Vehicle loan Rs 4 lacs and Credit card outstanding Rs 1 lac.
Q 6.1 - What is Mr. Parag’s leverage ratio ? 1. 2. 3. 4.
20.22% 23.18% 27.30% 24.72%
Correct Answer : 24.72 % Explanation : Leverage Ratio = Total Liabilities / Total Assets. Total Liabilities = Add all the liabilities = Rs 22 lacs Total Assets = Add all the assets ( take house at current valuation ) = 89 lacs Leverage ratio = 22 / 89 = 24.72%
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
Following are the assets and liabilities of Mr. Parag Assets : House costing Rs 25 lacs but now valued at Rs 40 lacs. Equity Shares – Rs 7 lacs, Debentures Rs 3 lacs, Long Term Fixed Deposits – Rs 10 lacs, Short Term Bank Fixed Deposits – Rs 2 lacs, Car Rs 4 lacs, SUV Rs 6 lacs, Open Ended Equity Schemes – Rs 6 lacs, Open Ended Debt Schemes – Rs 5 lacs, Liquid Schemes – Rs 5 lacs, Saving Bank a/c Rs 1 lac. Liabilities : Housing loan – Rs 12 lacs, Loan from friends – Rs 5 lacs, Vehicle loan Rs 4 lacs and Credit card outstanding Rs 1 lac.
Q 6.2 – Calculate the value of Mr. Parag’s liquid assets. 1. 2. 3. 4.
Rs 10 lacs Rs 8 lacs Rs 6 lacs Rs 16 lacs
Correct Answer : Rs 8 lacs
Explanation : Liquid assets are those assets that can be easily converted into cash at short notice to meet expenses or emergencies. Liquid assets include money in savings bank account, fixed deposits that mature within 6 months, investment in short-term debt schemes of mutual funds and such other short-term assets. Some assets may be easily converted into cash but their values may fluctuate widely in the short-term, thus making them unsuitable for realising cash at short notice. Shares and open-end equity schemes fall under this category. Open-end debt schemes too have a significant market element in their valuation which makes their return volatile, and therefore unsuitable to meet the need for funds at short notice. In the above example the following are liquid assets : Short Term Bank Fixed Deposits – Rs 2 lacs Liquid Schemes – Rs 5 lacs Saving Bank a/c Rs 1 lac. Total = Rs 8 lacs are liquid assets
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
Following are the assets and liabilities of Mr. Parag Assets : House costing Rs 25 lacs but now valued at Rs 40 lacs. Equity Shares – Rs 7 lacs, Debentures Rs 3 lacs, Long Term Fixed Deposits – Rs 10 lacs, Short Term Bank Fixed Deposits – Rs 2 lacs, Car Rs 4 lacs, SUV Rs 6 lacs, Open Ended Equity Schemes – Rs 6 lacs, Open Ended Debt Schemes – Rs 5 lacs, Liquid Schemes – Rs 5 lacs, Saving Bank a/c Rs 1 lac. Liabilities : Housing loan – Rs 12 lacs, Loan from friends – Rs 5 lacs, Vehicle loan Rs 4 lacs and Credit card outstanding Rs 1 lac.
Q 6.3 – Calculate the Networth of Mr. Parag. 1. 2. 3. 4.
Rs 57 lacs Rs 72 lacs Rs 67 lacs Rs 89 lacs
Correct Answer : Rs 67 lacs.
Explanation : Networth = Assets – Liabilities As calculated in the Ans 5.1 , His assets are valued at Rs 89 lacs and Liabilities at Rs 22 lacs So his Networth is 89 – 22 = Rs 67 lacs.
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
Following are the assets and liabilities of Mr. Parag Assets : House costing Rs 25 lacs but now valued at Rs 40 lacs. Equity Shares – Rs 7 lacs, Debentures Rs 3 lacs, Long Term Fixed Deposits – Rs 10 lacs, Short Term Bank Fixed Deposits – Rs 2 lacs, Car Rs 4 lacs, SUV Rs 6 lacs, Open Ended Equity Schemes – Rs 6 lacs, Open Ended Debt Schemes – Rs 5 lacs, Liquid Schemes – Rs 5 lacs, Saving Bank a/c Rs 1 lac. Liabilities : Housing loan – Rs 12 lacs, Loan from friends – Rs 5 lacs, Vehicle loan Rs 4 lacs and Credit card outstanding Rs 1 lac.
Q 6.4 – Calculate Mr. Parag’s solvency ratio. 1. 2. 3. 4.
75% 80% 60% 65%
Correct Ans : 75%
Explanation : Solvency Ratio = Networth / Total Assets = 67 / 89 = .75 = 75% (Higher the solvency ratio, stronger the investor’s financial position)
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
CASE STUDY NO. 7
Mr. Dixit has invested Rs 100000 in a debenture which will give 11% return. He has used a leverage of 1.5 times. He borrowed money at 9% pa.
Q 7.1 Out of the Rs 1 lac invested by Mr. Dixit, how much funds were of his own ?
1. 2. 3. 4.
Rs. 50000 Rs. 40000 Rs. 45000 Rs. 30000
Correct Ans : Rs 40000
Explanation : Let X be his own funds. So X + 1.5 X = Rs 100000 2.5X = Rs 100000 X = 100000 / 2.5 = Rs 40000
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
Mr. Dixit has invested Rs 100000 in a debenture which will give 11% return. He has used a leverage of 1.5 times. He borrowed money at 9% pa.
Q7.2 What amount of interest was paid by Mr. Dixit on borrowed funds ? 1. 2. 3. 4.
Rs. 6100 Rs. 5400 Rs. 4900 Rs. 6350
Correct Ans : Rs 5400
Explanation : Out of Rs 100000, Rs 40000 are his own fund (as calculated above), the balance Rs 60000 are borrowed. The cost of borrowing is 9%. So 9% of Rs 60000 = Rs 5400
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
Mr. Dixit has invested Rs 100000 in a debenture which will give 11% return. He has used a leverage of 1.5 times. He borrowed money at 9% pa.
Q 7.3 Calculate Mr. Dixit’s net return. 1. 2. 3. 4.
Rs. 5400 Rs. 11000 Rs. 6500 Rs. 5600
Correct Ans : Rs 5600
Explanation : The interest receivable by Mr. Dixit is 11% of Rs 100000 = Rs 11000. He has to make interest payments on borrowed money of Rs 5400 (as calculated above) So his net return is Rs 11000 – Rs 5400 = Rs 5600
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
Mr. Dixit has invested Rs 100000 in a debenture which will give 11% return. He has used a leverage of 1.5 times. He borrowed money at 9% pa.
Q 7.4 What is the Return on Equity of Mr. Dixit ?
1. 2. 3. 4.
12% 14% 16% 18%
Correct Ans : 14%
Explanation : Mr. Dixit has invested Rs 40,000 of his own funds, so that’s his equity. On this he has got a net return of Rs 5600. So Return on Equity = Net Return / Own funds invested x 100 = 5600 / 40000 x 100 = 14%
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
CASE STUDY NO. 8
Following are the details of income and expenses etc of Mr. Sayyed for the month of January. Mr. Sayyed works in a company where he gets a monthly gross salary of Rs 30000 and this includes a PF contribution of Rs 3000 from the employers. He also invests Rs 3000 in PF. There are some deductions in his salary as under : Loan repayments - Rs 3500, TDS - Rs 1000 & Investments – Rs 3000 The monthly expenses of his household are Rs 17500. Mr. Sayyed also has a monthly SIP going on in which Rs 2000 are deducted directly from his bank account. He plans to use this SIP money to buy a house in his village whose current cost is Rs 3 lakhs. Mr Sayyed has received Rs 4000 as dividends from some old equity shares held by him.
Q 8.1 – The net take home salary of Mr. Sayyed for the month of January is ________ . 1. 2. 3. 4.
Rs 20600 Rs 18300 Rs 16500 Rs 19500
Correct Ans : Rs 16500 Explanation : Mr. Sayyed’s gross Salary = Rs 30000 Less –
Employer PF Contribution – Rs 3000 + Self PF contribution – Rs. 3000 + Loan repayments - Rs 3500 + TDS - Rs 1000 + Investments – Rs 3000 = Rs 13500 Rs 30000 – Rs 13500 = Rs. 16500
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
Following are the details of income and expenses etc of Mr. Sayyed for the month of January. Mr. Sayyed works in a company where he gets a monthly gross salary of Rs 30000 and this includes a PF contribution of Rs 3000 from the employers. He also invests Rs 3000 in PF. There are some deductions in his salary as under : Loan repayments - Rs 3500, TDS - Rs 1000 & Investments – Rs 3000 The monthly expenses of his household are Rs 17500. Mr. Sayyed also has a monthly SIP going on in which Rs 2000 are deducted directly from his bank account. He plans to use this SIP money to buy a house in his village whose current cost is Rs 3 lakhs. Mr Sayyed has received Rs 4000 as dividends from some old equity shares held by him.
Q 8.2 – The Saving Ratio of Mr. Sayyed is _________. 1. 2. 3. 4.
30.15% 25.75% 33.12% 28.74%
Correct Ans : 30.15% Explanation : Monthly take home income of Mr. Sayyed in January is Rs 16500 + Rs 4000 (Dividend) = Rs 20500 Add the Investments he has made : Rs 6000 (Total PF investments) + Rs 3000 (Investments) + Rs 2000 (SIP) = Rs 11000 His total income = 20500 + 11000 = 31500 His expenses are : Loan Repayment Rs 3500 + TDS Rs 1000 + House hold expenses Rs 17500 = Rs 22000 So his net savings is Rs 31500 – Rs 22000 = Rs 9500 Saving Ratio = 9500 / 31500 x 100 = 30.15 %
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
Following are the details of income and expenses etc of Mr. Sayyed for the month of January. Mr. Sayyed works in a company where he gets a monthly gross salary of Rs 30000 and this includes a PF contribution of Rs 3000 from the employers. He also invests Rs 3000 in PF. There are some deductions in his salary as under : Loan repayments - Rs 3500, TDS - Rs 1000 & Investments – Rs 3000 The monthly expenses of his household are Rs 17500. Mr. Sayyed also has a monthly SIP going on in which Rs 2000 are deducted directly from his bank account. He plans to use this SIP money to buy a house in his village whose current cost is Rs 3 lakhs. Mr Sayyed has received Rs 4000 as dividends from some old equity shares held by him.
Q 8.3 The SIP in which Mr. Sayyed is investing can give a monthly return of 1%. Calculate the total value of his SIP investments in 3 years. 1. 2. 3. 4.
Rs 79,745 Rs 81,877 Rs 85,231 Rs 86,153
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
Correct Ans : Rs 86153 Explanation : Use Excel to do the calculations to find the Fv ie. Future Value. Select Fv in Excel –
Click OK ..
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
Input the data as under : Rate is 1% Nper – The total installments are 12 x 3 years = 36 Pmt – Per month Rs 2000 There is no lump sum investment so no Pv.
The SIP will be valued at Rs 86153.
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
Following are the details of income and expenses etc of Mr. Sayyed for the month of January. Mr. Sayyed works in a company where he gets a monthly gross salary of Rs 30000 and this includes a PF contribution of Rs 3000 from the employers. He also invests Rs 3000 in PF. There are some deductions in his salary as under : Loan repayments - Rs 3500, TDS - Rs 1000 & Investments – Rs 3000 The monthly expenses of his household are Rs 17500. Mr. Sayyed also has a monthly SIP going on in which Rs 2000 are deducted directly from his bank account. He plans to use this SIP money to buy a house in his village whose current cost is Rs 3 lakhs. Mr Sayyed has received Rs 4000 as dividends from some old equity shares held by him.
Q 8.4 Assuming that the village house which Mr. Sayyed plans to buy, appreciates by 14% pa, what will be its value after 3 years ? 1. 2. 3. 4.
Rs 426000 Rs 438114 Rs 444463 Rs 507416
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
Correct Ans : Rs 4,44,463. Explanation : Using Excel and Future Value (Fv) calculations :
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
Input the following data : Rate = 14% Nper – 3 years No Pmt Pv – The present value of the village house is Rs 300000.
The village house will valued at Rs 4,44,463 after 3 years.
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
CASE STUDY NO. 9
Mr. Mohit is a married man of age 43. He has a good job and he also saves regularly. He intends to send his daughter for higher education which will be due in 5 years. The current cost of such education is Rs 15,00,000 per annum and this is incurred at the end of each year for 2 years. The inflation is likely to be at 15% pa. His has one more daughter whose marriage is scheduled at the end of 7th year and which will cost Rs 1,00,00,000. The likely inflation is 10% pa. Mr. Mohit has saved Rs 2,00.00,000 to meet these two expenses by investing in both equity and debt which is yielding 8% pa.
Q 9.1 - How much money will Mr. Mohit need to be set aside from the corpus at the end of Year 5, to finance the daughter’s higher education? Assume the amount set apart will earn 6%interest. 1. 2. 3. 4.
Rs. 6290234 Rs. 6074532 Rs. 5737488 Rs. 5270968
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
Correct Ans : Rs 6290234
Explanation : Find FV of Education cost at the end of 5th Year:
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
Find FV of Education cost at the end of 6th Year:
Discount the FV of 6th Year cost to the end of 5th Year : Discount Rate @ 6%
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
Total education cost requirement at the end of 5th Year = 3017035.78 + 3273199.199 = Rs. 62,90,234.97
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
Mr. Mohit is a married man of age 43. He has a good job and he also saves regularly. He intends to send his daughter for higher education which will be due in 5 years. The current cost of such education is Rs 15,00,000 per annum and this is incurred at the end of each year for 2 years. The inflation is likely to be at 15% pa. His has one more daughter whose marriage is scheduled at the end of 7 th year and which will cost Rs 1,00,00,000. The likely inflation is 10% pa. Mr. Mohit has saved Rs 2,00.00,000 to meet these two expenses by investing in both equity and debt which is yielding 8% pa.
Q 9.2 – How much money will be required on account of daughter's marriage in the year it is planned?
1. 2. 3. 4.
Rs. 1,47,32,877 Rs. 1,94,87,171 Rs. 2,01,74,002 Rs. 2,33,55,444
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
Correct Ans : Rs 1,94,87,171
Explanation : Find FV of Marriage cost at the end of 7th Year:
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
Mr. Mohit is a married man of age 43. He has a good job and he also saves regularly. He intends to send his daughter for higher education which will be due in 5 years. The current cost of such education is Rs 15,00,000 per annum and this is incurred at the end of each year for 2 years. The inflation is likely to be at 15% pa. His has one more daughter whose marriage is scheduled at the end of 7 th year and which will cost Rs 1,00,00,000. The likely inflation is 10% pa. Mr. Mohit has saved Rs 2,00.00,000 to meet these two expenses by investing in both equity and debt which is yielding 8% pa.
Q 9.3 How much will be left in the corpus after both goals are fulfilled (assume that he does not set apart money in the 6% corpus mentioned in Q9.1)?
1. 2. 3. 4.
Rs. 68,11,877 Rs. 61,47,354 Rs. 71,96,211 Rs. 75,23,085
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
Correct Ans : Rs. 75,23,085
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
Find FV of current investment at the end of 5th Year: Rs. 29386561.54 Less: Fv of education cost at the end of 5th Year : (Rs. 3017035.78) Balance in available corpus at the end of 5th Year : Rs. 26369525.76 Find FV of current investment at the end of 6th Year: Rs. 28479087.82 {26369525.76 * (1.08)} {Formula = PV * (1+R)^N} Less: Fv of education cost at the end of 6th Year : (Rs. 3469591.15) Balance in available corpus at the end of 6th Year : Rs. 25009496.67 Find FV of current investment at the end of 7th Year: Rs. 27010256.40 {28479087.82* (1.08)} {Formula = PV * (1+R)^N} Less: Fv of marriage at the end of 7th Year : (Rs. 19487171.00) Balance in available corpus at the end of 7th Year : Rs. 7523085.40
Rs. 7523085 will be left in the corpus after both goals are fulfilled
Q 9.4 How would you describe the investment policy Mr.Mohit is using for the corpus? 1. 2. 3. 4.
Very Conservative Very Aggressive Less Conservative Less Aggressive
Correct Ans : Very Conservative Explanation : The instruments Mr. Mohit has used for his investments are yielding a very low rate of return ie. 8%, which means they carry almost no risk.
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
CASE STUDY NO. 10
Mr. Kumar has invested in both Equity Shares and Debt. The yearly expected return from Equity shares is 14% and from Debt is 8%. The co-relation between Equity and Debt returns is – 0.4 (negative). The standard Deviation of Equity shares is 9% and Debt is 4%.
Q 10.1 – Calculate the returns of Mr. Kumar if he invests 25% in Equity Shares and 75% in Debt. 1. 2. 3. 4.
14% 8% 11.5% 9.5%
Correct Ans : 9.5%
Explanation : The formula for calculating returns is : ( WE x RE ) + ( WD x RD ) WE – Weight of Equity = 0.25 RE – Return on Equity = 14 WD – Weight of Debt = 0.75 RD – Return of Debt = 8
= (0.25 x 14) + (0.75 x 8) = 3.5 + 6 = 9.5%
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
Mr. Kumar has invested in both Equity Shares and Debt. The yearly expected return from Equity shares is 14% and from Debt is 8%. The co-relation between Equity and Debt returns is – 0.4 (negative). The standard Deviation of Equity shares is 9% and Debt is 4%.
Q 7.2 – If Mr Kumar is investing 15% in equities and 85% in debt, what can you conclude from this asset allocation ? 1. 2. 3. 4.
Mr. Kumar is married and has children who are studying Mr. Kumar is a very senior person (age more than 70-75 years) and has no family support Mr. Kumar is a young married person with no children Mr Kumar is unmarried and no immediate responsibility or family to support
Correct Answer : Mr. Kumar is a very senior person (age more than 70-75 years) and has no family support.
Explanation : A portfolio which contains a very high ratio of debt and very low ratio for equities is generally for people who cannot take risks and are for very senior and with no family support.
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
Mr. Kumar has invested in both Equity Shares and Debt. The yearly expected return from Equity shares is 14% and from Debt is 8%. The co-relation between Equity and Debt returns is – 0.4 (negative). The standard Deviation of Equity shares is 9% and Debt is 4%.
Q 7.3 – Calculate the Weighted Standard Deviation of the portfolio if the weightage is Equity 75% and Debt 25%. 1. 2. 3. 4.
6.84% 7.36% 5.28% 9.22%
Correct Ans : 7.36%
Explanation : The formula for Weighted Standard Deviation is : SQUARE ROOT of WE^2 (ie Weight of Equity square) x Std Dev E^2 (ie. Std Dev of Equity square) + WD^2 (ie. Weight of Debt square) x Std Dev D^2 (ie. Std Dev of Debt square) + 2 x WE x WD x Corelation x Std Dev E x Std Dev D Substituting the values : = (0.25^2 x 9^2) + (0.75^2 x 4^2) + (2 x 0.25 x 0.75 x (-0.4) x 9 x 4) = (0.625 x 81) + (0.562 x 16) + (- 5.4) = 50.62 + 8.99 – 5.4 = 54.21 Square Root of 54.21 = 7.36 ******************************************************************************************** [ Please do mail your feedback. In case you find any errors in the question bank, please do let us know of the same on
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NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
Practice Question Banks also available for :
NISM NISM Series I: Currency Derivatives Certification Exam NISM Series V A: Mutual Fund Distributors Certification Exam NISM Series VI: NISM Series VI - Depository Operations Certification Exam NISM Series VII: Securities Operations and Risk Management NISM Series VII: Equity Derivatives Certification Exam NISM Series III A: Securities Intermediaries Compliance certification Exam NISM Series X A : Investment Adviser (Level 1) Certification Exam NISM Series X B: Investment Adviser (Level 2) Certification Exam
NCFM NCFM Financial Markets: A Beginners Module NCFM Capital Market (Dealers) Module NCFM Derivative Market (Dealers) Module
BSE Certificate on Security Market (BCSM)
NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2) CASE STUDIES
