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Financial Planning Academy

Investment Planning

Part 1

1) Which of the following costs best describes the cost of foregone income that results from making an economic decision to use funds to purchase a piece of equipment?

(a)

Cost of Capital

(b)

Fixed Cost

(c)

Marginal Cost

(d)

Opportunity Cost

2) A mutual fund that invests in Indian Equities, foreign equities, Indian Corporate Bonds, Indian Government Gilts is subject to the following risks? 1.Business Risk, 2.Default Risk,

3. Systematic Risk,

4. Interest Rate Risk.

(a)

1 & 3 only

(b)

1,3 & 4 only

(c)

3 & 4 only

(d)

1,2,3 & 4

3) Which of the following statements concerning technical stock market indicators is/are correct?

1.

The stock market is considered strong when the volume of the market is increasing in a rising market.

2.

The market’s direction will change when the percent of odd-lot short sales significantly increases or decreases.

3.

Prices crossing the moving average line would be an indication of the change in the market.

(a)

1 only

(b)

1 & 2 only

(c)

2 & 3 only

(d)

1,2 & 3

4) If a new issue was offered to the public at 15 times earnings but the market was pricing similar shares at 19 times, this would be

(a)

Appalling proposition to the investor

(b)

The investor cannot take a position

(c)

An example of low gearing

(d)

Bargain not to be missed

take a position (c) An example of low gearing (d) Bargain not to be missed Financial

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5) Mr. X buys 50 RIL October Rs. 350 call options for Rs. 15. The current share price is Rs. 345. The break-even share price, ignoring transaction costs is Rs

(a)

350

(b)

360

(c)

365

(d)

None of the above

6) Investor complaints relating to the following Capital Market issues will not be entertained by SEBI:

(a)

A company declaring no dividend on equity for the fourth consecutive year.

(b)

A company has declared dividend but not paid the same after six months of declaration.

(c)

A company not paying the redemption proceeds on debentures issued by the company, one year after maturity date.

(d)

None of the above cases.

7) If a bond is selling at a premium:

(a)

It is an attractive investment

(b)

Its coupon rate is below market rate

(c)

Its current yields is lower than the coupon rate

(d)

Its realized compound yield will be less than the yields to maturity

8) A portfolio manager can hedge a share portfolio by

(a)

Buying call options

(b)

Selling call options

(c)

Buying index options

(d)

Selling put options

9) Which of the following is NOT a characteristic of a balance fund?

(a)

It is less risky than growth funds

(b)

It is more risky than income funds

(c)

It must invest in both equity and bonds in equal amount

(d)

It provides both growth and income objectives

10) Beta is a measure of:

(a)

Geometric average return

(b)

Holding period return

(c)

Systematic risk

(d)

Unsystematic risk

(b) Holding period return (c) Systematic risk (d) Unsystematic risk Financial Planning Academy 2

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11) If the current share price is S and the set exercise price is X, the intrinsic value of the call option is

(a)

Max (O, S-X)

(b)

Max (O, X-S)

(c)

Min (O, S-X)

(d)

Min (O, X-S)

12) The CAPM is a model that:

(a)

Determines the geometric return of a security.

(b)

Determines time-weighted return

(c)

Explain return in terms of risk.

(d)

Explains systematic risk

13) SAIL is an AAA rated issuer of Corporate Bonds in the International Debt markets. The issue price of a typical SAIL corporate bond is affected by all the following EXCEPT the

(a)

Face value, coupon rate, and maturity of the bond.

(b)

Firm’s required return on debt.

(c)

Percentage of debt in the firm’s capital structure.

(d)

Required return on the firm’s competitors’ bonds.

14) RPL is raising funds through a bond issuance to fund a new power plant at Noida, UP. They are issuing Two Year maturity, Zero-coupon bond with face value of Rs 1000 and yield of 4%. What price would you pay for this RPL Zero-coupon bond today?

(a)

Rs. 920.00.

(b)

Rs. 924.56.

(c)

Rs. 925.95.

(d)

Rs. 960.00.

15) The best method of valuing a share is:

(a)

Book value based on net tangible assets.

(b)

Liquidation value based on the proceeds of liquidation of the company.

(c)

Present value of all the dividends to be received from holding that share.

(d)

Apply the P / E ratio to expected earnings per share.

16) Public Issue through the book building process is better than I.P.O at fixed price because

(a)

High fixed price will result in under subscription leading to loss to the investor.

(b)

It helps the issuer to ascertain the exact price at which the investor is willing to subscribe.

(c)

Low fixed price will result in over subscription leading to loss to the issuer.

(d)

All of the above

will result in over subscription leading to loss to the issuer. (d) All of the above

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17) Equal amount of investment is made in portfolio consisting of securities X and Y. Standard deviation of X is 12.43%. ; Standard deviation of Y is 16.54%. ; Correlation

coefficient is 0.82. ; The interactive risk of the portfolio, measured by covariance is

(a)

145.64

(b)

156.22

(c)

168.59

(d)

172.56

( Hint Covariance = Correlation Coefficient * SD of X* SD of Y)

18) The risk free return of Security A is 8%. In addition to it, you expect that the return on market would be 14%. The expected return of Security A with beta of 0.70 is

(a)

12.2%.

(b)

15.4%.

(c)

17.8%.

(d)

18.2%.

( Hint = {Rf + ( Rm – Rf)*Beta})

19) Portfolio A had a return of 12% in the previous year, while the market had an average return of 10%. The standard deviation of the portfolio was calculated to be 20%, while

the standard deviation of the market was 15% over the same time period. If the correlation between the portfolio and the market is 0.8, what is the Beta of the portfolio A?

(a)

0.94

(b)

1.07

(c)

1.31

(d)

1.91

Beta=[(S.D of security / S.D of Market) *Coefficient of correlation]

20) Sonu Nigam has two Mortgage Loan options before him. The interest rate, and other conditions are the same for both, except that one has a repayment term of 15 years and the other has a repayment term of 30 years. Anil wants to evaluate the EMIs for both terms. All other conditions being the same, repaying a loan in 15 years instead of 30 would require EMIs that are

(a)

Half the size of the 30-year loan payments.

(b)

Less than twice as large as the 30 year loan payments.

(c)

More than twice as large as the 30 year loan payments.

(d)

Twice as large as the 30 year loan payments.

Ex: Suppose a loan of Rs 1,00,000 Interest = 8% EMI for 15 Years=Rs 11682.95 EMI for 30 Years=Rs 8882.74 Rs 11682.95 < 2 * 8882.74

= 8% EMI for 15 Years=Rs 11682.95 EMI for 30 Years=Rs 8882.74 Rs 11682.95 < 2

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21) You are running a Dividend Yield Fund for a leading Mutual Fund House. The most recent dividend of All Is Fine Business Services common stock was Rs 2.35. The dividends are expected to grow at 4 percent indefinitely. If you are looking at a 12

percent return, how much will you be willing to pay for one share of All Is Fine Business Services?

(a)

Rs. 24.79.

(b)

Rs. 29.38.

(c)

Rs. 29.38.

(d)

Rs. 30.55.

P.V of a Stock=[(Dividend*(1+growth rate)] / (Return- growth rate)

22) Ram is an owner of an apartment complex with 300 units, each of which can fetch Rs. 1000 p.m. as rentals. The apartment complex has an average occupancy rate of 75%. The expenses for maintaining, up keeping the apartment comes to around Rs. 10 Lakh

p.a. Based on the concept of capitalized earning approach and assuming that you require a capitalization rate of 10%, how much is the complex worth now?

(a)

Rs. 1.50 crore

(b)

Rs. 1.70 crore

(c)

Rs. 2.00 crore

(d)

None of the above.

Annual rent receivable =300*(1000*12)*0.75 (A) Annual upkeep & maintenance =Rs 10 lakhs (B) Net income annually=Rs 17,00,000 (A-B) Capitalization rate=10% Value of the complex=Net income / Capitalization rate

17,00,000 (A-B) Capitalization rate=10% Value of the complex=Net income / Capitalization rate Financial Planning Academy 5

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Part 2

Q1. Which of the following is/are not a method(s) to evaluate the attractiveness of investments? I. Net present value.

II. Internal rate of return.

III. Sum of digits.

IV. Payback period.

A. I

B. I, II

C. III

D. III, IV

Q2. Calculate the price earnings ratio (PER) of the stock of Company A, with the following information:

Price = 4.00 Profit before tax = 66.0 million Profit after tax = 48.0 million Paid up Capital = 120 million At par value of 0.50 per share

A. 7.3

B. 10.0

C. 20.0

D. 14.5

PER= Market Price / EPS Profit after tax = 48 m No. of shares = 120 m / 0.50 = 240 m EPS = 48m / 240 m = 0.20 PER = 4 / 0.20 = 20x

Q3. Company A has announced a 20% increase in net profit over the previous year. The stock price however fails to respond to the news and remains unchanged. This phenomenon reflects:

A. Weak form of market efficiency.

B. Semi-strong form of market efficiency.

C. Strong form of market efficiency.

D. Investors are selling on fact.

of market efficiency. C. Strong form of market efficiency. D. Investors are selling on fact. Financial

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Q4. Which of the following factors will lead to a higher discount rate and therefore a fall in stock prices?

I. Increase in interest rates.

II. Increase in political risk.

III. Lower dividend rate.

IV. Lower EPS growth rate.

A. I, II

B. I, III

C. I, IV

D. III, IV

Q5. A corporation proposes to issue a 5 year bond with a coupon rate of 8.0%. The

prevailing yield to maturity of bonds with similar risk and term is 10.0%. The bond will

sell at

to its face value.

A.

A premium.

B.

A discount.

C.

At par.

D.

A price predetermined.

(N = 5 Pmt = 80 I = 10% FV = 1,000 Compute PV = 924.18, a discount to face value)

Q6. Intervention by RBI in the money market through buying of government securities has resulted in MIBOR rates falling across the board. If a unit trust bond fund marks to market all its bonds, the price of the unit trust fund should

A.

Remain unchanged.

B.

Declare a dividend.

C.

Appreciate.

D.

Depreciate.

Q7. Which among the following is/are advantages of investing in unit trust funds?

I.

Management is professional.

II.

Diversification from a larger portfolio of stocks.

III.

Affordability.

IV.

Ease of conversion – liquidity.

A.

I

B.

I, II

C.

I, II, III

D.

All of the above.

– liquidity. A. I B. I, II C. I, II, III D. All of the above.

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Q8. An investor invested 1,200 in Fund A – an equity growth fund. The prices quoted by the XYZ AMC were as follows:

Buy

Sell

0.95

1.00

When the investor received his statement, he found that he had bought 1,188 units. Which of the following is a plausible reason?

A. The stock market appreciated.

B. The stock market depreciated.

C. The unit trust company uses forward pricing.

D. The unit trust company uses same day pricing.

HINT:-

1,200 / 1.00 = 1,200 units against 1,188 units The unit trust company uses forward pricing.

Q9. Which of the following are major reasons for making real estate investments? I. Reasonably liquid.

II. Comparatively higher leverage.

III. Good hedge against inflation.

IV. Higher capital gains.

A. I, II

B. II, III

C. III, IV

D. I, IV

Q10. Given the following information, what would be a reasonable rental for House D?

Comparable Houses in Subang Jaya

Net Monthly Rental Income ()

Market Value ()

Market

 

Capitalization

Rate

   

(%)

House A

 

1500

327272

5.50

%

House B

 

1400

336000

5.00

%

House C

 

1250

285714

5.25

%

House D

 

?

280000

 

A.

1,175.00

B.

1,225.00

C. 15,300.00

 

D. 14,700.00

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HINT :- House A = (1,500 x 12) / 327,272 = 5.50% House B = (1,400 x 12) / 336,000 = 5.00% House C = (1,250 x 12) / 285,714 = 5.25% House D = get average = (5.50% + 5.00% + 5.25%) / 3 = (15.75% / 3) = 5.25% (Net Monthly Rental x 12) / 280,000 = 5.25% Net Monthly Rental x 12 = 5.25% x 280,000 = 14,700 Net Monthly Rental therefore is 14,700 / 12 = 1,225

Q11. Diversification is most effective when the returns on securities are:

A. Positively correlated.

B. Zero correlated.

C. Negatively correlated.

D. High correlation.

Q12. The returns on Stock A and Stock B have a correlation coefficient of –1. When the price of Stock A appreciates by 12%, how will Stock B’s price perform?

A.

Appreciate by 12%.

B.

Depreciate by 12%.

C.

Stay unchanged.

D.

Depreciate by 6.0%.

Q13. A preference share has preference over a common stock for the reason that in a liquidation scenario, it ranks above

A.

Bank loans.

B.

Bonds.

C.

Convertible bonds.

D.

Common stocks.

Q14. A call warrant with a strike price of 2.30 is currently trading at 2.00. The underlying stock price is quoted at 4.40. What is the time value of the warrant?

A. 0.00

B. 0.30

C. 2.10

D. 2.40

HINT: - Call Value = Time Value + Intrinsic Value Intrinsic Value (IV) = Stock Price – Strike Price IV = 4.40 – 2.30 = 2.10 (deep in-the-money warrant) The deep in the money warrant has zero Time Value

– 2.30 = 2.10 (deep in-the-money warrant) The deep in the money warrant has zero Time

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Q15. Company A has just declared a 1:2 Bonus Issue followed by a 2:5 Rights Issue at

1.10 per share. (The bonus shares are entitled to the Rights.) The current market price of Stock A is 5.80 per share. Calculate the ex-all Cost.

A. 2.98

B. 3.00

C. 3.04

D. 3.08

HINT: - Above question can be solved with the Eg. Mr. X has 10 Shares of Company A

Company A has just declared a 1:2 Bonus Issue, that is after Bonus Issue his holding in the company would 15 shares ( 10 + 5 bonus shares)

Now Company A declares Right Issue as 2:5, that is Mr.X would be eligible for 6 shares

(15 shares* 2/5 ratio), @ 1.10 per share. Total cost for Mr.X would be Rs.6.6 /-.

Now total holding would be 21 shares (15 + 6shares )

Total Cost of Company A would be Rs 64.60/- (10Shares@ 5.8 per share + 6.6 shares)

Now Cost per share of company a will be 64.6/21 shares Rs. 3.08/-

share + 6.6 shares) • Now Cost per share of company a will be 64.6/21 shares

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Part 3

At the beginning of the year Anurag decided to take Rs 50000 In savings out of bank deposits and invest it in a portfolio of stocks and bonds; Rs 20000 was placed into common stocks and Rs 30000 into corporate bonds. A year later, Anurag’s stock and bond holdings were worth Rs 25000 and Rs 23000 respectively. During the year Rs 1000 cash dividend was received on the stocks and Rs 3000 in coupon payments was received on the bonds. The stock and bond income was not reinvested in Anurag’s portfolio.

1 Find out the return on Anurag’s stock portfolio?

(a)

(b)

(c) 30%

(d) 25%

30.5%

28.9%

2 What was the return on Anurag’s bond portfolio?

(a)

10%

(b)

8.95%

(c)

–13.3%

(d)

–12.5%

3 Find out the return on Anurag’s total portfolio during the year?

(a)

3%

(b)

4%

(c)

4.5%

(d)

5%

Determine the expected return on the following

SECURITIES

NO OF SHARES

COST PRICE

EXPECTED YEAR END PRICE

A

200

100

140

B

150

75

78

C

300

125

140

D

100

65

95

4

What is the return on Security B

 

(a)

4%

(b)

5%

(c)

2%

(d)

3.5%

is the return on Security B   (a) 4% (b) 5% (c) 2% (d) 3.5% Financial

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5 The expected return on Security C is

(a)

10.5%

(b)

12%

(c)

6%

(d)

8%

6

Determine the return on security A

(a)

40%

(b)

20%

(c)

28%

(d)

30%

7

What is the return on the portfolio?

(a)

20%

(b)

21%

(c)

18%

(d)

19%

Shown here are the following data on two companies in the same industry.

COMPANY

Market

Price

per

Dividend per Share

Earnings per share

share

A

Ltd

60

10.00

17.50

B

Ltd

40

12.00

22.00

8

What is the dividend yield of A Ltd

 

(a)

16.67%

(b)

15.00%

(c)

16.50%

(d)

17%

9 What is the dividend yield of B Ltd

(a)

32%

(b)

25.50%

(c)

28.00%

(d)

30%

10 P/E Ratio of A Ltd is

(a)

3.43

(b)

3.80

(c)

3.40

(d)

3.00

30% 10 P/E Ratio of A Ltd is (a) 3.43 (b) 3.80 (c) 3.40 (d) 3.00

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11 P/E Ratio of B Ltd is

(a)

1.82

(b)

2.00

(c)

1.50

(d)

1.60

12 Rahul Mehra proposes to purchase a property for giving it on rent. He expects to

receive Rs 55000 in net receipts each year for six years and to sell the property for Rs 8,50,000 at the end of the six-year period. If the expected return is 15% what would be the value of the property?

(a)

Rs 800000

(b)

Rs 756700

(c) RS 575625

(d) Rs 448678

13 For an asking price of a property at Rs 9,50,000 with an estimated net income of Rs

a market yield of 12%, calculate the value of the property on

1,25,000

at

capitalization approach.

(a)

10,42,000

(b)

12,56,000

(c)

9,88,888

(d)

8,98,850

14 With the following data shown in the table below, compute the risk on the portfolio.

SECURITY

Std Deviation

Proportion

 

A

14.5%

60%

 

B

18.5%

40%

 

Corr Coeff

   

0.91

(a)

14.50

(b)

15.74

(c)

16.31

(d)

14.78

Coeff     0.91 (a) 14.50 (b) 15.74 (c) 16.31 (d) 14.78 Financial Planning Academy 13

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Calculate for security X and Y based on the data given below

Probability

Security X

Security Y

0.1

40

40

0.2

20

30

0.4

0

15

0.2

-5

0

0.1

-10

-20

15

What us the rate of return on Security X

(a)

6%

(b)

5.5%

(c)

6.5%

(d)

5.

16

What is the return on security Y

(a)

12%

(b)

14%

(c)

15%

(d)

13%

17 Calculate Standard deviation(risk) on the portfolio assuming 50% weight of each security.

(a)

18.83

(b)

17.50

(c)

15

(d)

15.20

(e)

17.00

18

Calculate Standard deviation of X

(a)

14.8%

(b)

14.5%

(c)

13.8%

(d)

15.25%

19 Calculate Standard deviation of Security Y

(a)

16.00%

(b)

16.55%

(c)

18.50%

(d)

17.25%

20 Calculate the Covariance

(a)

220

(b)

212

(c)

216

(d)

220

17.25% 20 Calculate the Covariance (a) 220 (b) 212 (c) 216 (d) 220 Financial Planning Academy

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21 For the Financial Year 2007-2008 what is true about the dividend on equity schemes?

(a)

The recipient is required to pay tax at normal rates.

(b)

The recipient is not required to pay any tax on dividends.

(c)

The distributing company is required to pay distribution tax.

(d)

None of these.

22

For the Financial Year 2007-08, what is true about dividends on debt schemes?

(a)

The distributing company is required to pay dividend distribution tax.

(b)

The recipient has to pay tax on dividend received by him.

(c)

The recipient is required to pay tax at marginal rates.

(d)

None of these.

23

Which of the following statements is true.

(a)

Price of an option is called as premium.

(b)

A short call is buying a call possibly with the hope of selling it back later at lower price.

(c)

A short call is selling a call possibly with the hope of buying it back at higher price.

(d)

A short call is selling a call possibly with the hope of buying it back later at lower price.

(e)

Both (a) and (d)

24

Which of the following statement is not true?

(a)

Buying a call option allows the taker to profit from an increase in the price of

underlying securities

(b) Buying a call option allows the taker to profit from a decrease in the price of

underlying securities.

(c) Call options whose strike price exceeds the spot price are called IN THE MONEY

options.

(d) Call options whose spot price exceeds the exercise price are called IN THE

MONEY options.

(e)

Both (b) and (d)

25

Which of the following statements are true about future contracts?

(a)

Forward prices are normally higher than spot prices.

(b)

Usually the positions are marked to market.

(c)

Daily settlement takes place.

(d)

Both (a) and (b)

(e)

(a),(b) and (c)

26

Intrinsic value is

(a)

Difference between original and current share price.

(b)

Difference between original and strike price.

(c)

Difference between strike and current share price.

(d)

None of these

(c) Difference between strike and current share price. (d) None of these Financial Planning Academy 15

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27

A stock currently sells at 120. The put option to sell the stock sells at Rs134 costs

Rs 18 .The time value of the option is---------

(a)

Rs 18

(b)

Rs 4

(c)

Rs 14

(d)

Rs 12.

28 An In-The-money option would generate

(a)

Positive cash flow

(b)

Pre determined amount of cash flow

(c)

No cash flow

(d)

Negative cash flow

29

A put option gives the ------------ the right to but not the obligation to --------------the

underlying asset at a specified price.

(a)

Seller, buy

(b)

Seller, sell

(c)

Owner, buy

(d)

Owner, sell

30

By buying index futures one can make------------------------

(a)

Unlimited profits or loss since market may go up or down.

(b)

Limited profit but unlimited losses.

(c)

Limited profits or losses.

(d)

Unlimited profit but limited loss.

31

A call option

at a strike price of Rs 176 is selling at a premium of Rs 18. At what

price will it break even for the buyer of the option?

(a)

Rs 196

(b)

Rs 204

(c)

Rs 187

(d)

Rs 194

32

Typically option premiums is

(a)

Less than the sum of intrinsic value and time value.

(b)

Greater than the sum of intrinsic value and time value.

(c)

Equal to the sum of intrinsic value and time value

(d)

Independent of intrinsic value and time value

33

Spot value of S&P CNX Nifty is 1200. An investor bought a one –month S&P Nifty

1220 call option for a premium of Rs 10. The option is

(a)

In-the money

(b)

At –the- money

(c)

Out-of-money

(d)

None of these

In-the money (b) At –the- money (c) Out-of-money (d) None of these Financial Planning Academy 16

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34

For knowledge companies, the core activity must provide-------of the total income in

the preceding------- years

(a)

Not less than 51%;3

(b)

Not less than 75%;3

(c)

Not less than 75%;2

(d)

Not less than 51%;2

35

For listing, the company must submit to------audited balance sheets for the past----

years.

(a)

SEBI;3

(b)

CLB;2

(c)

NSE;3

(d)

ROC;2

36

For IPO’s by companies, the paid up equity must be more than------Cr and market cap

more than ------Cr

(a)

25;50

(b)

10;25

(c)

10;50

(d)

25;50

The Managing Director of ABC Ltd wants to float an IPO. He has come to know about Book Building and is favorably inclined. However he is also concerned about the retail investors. He does an analysis of the merits and demerits of Plain Vanilla IPO and Book Building methods.

37

Which of the following statement is true?

(a)

In book building demand for the IPO is known at the end of the issue.

(b)

In book building demand for the IPO is known at the beginning of the issue.

(c)

In book building demand for the IPO is known throughout the issue

(d)

In book building demand for the IPO Is not known.

38

Which statement is true?

(a)

In a Vanilla IPO , price discovery is better than in a book building issue.

(b)

In a Vanilla IPO, price discovery is less efficient than in a book building issue.

(c)

In a Vanilla IPO ,price discovery is throughout the issue.

(d)

In Book building, price discovery is non-existent.

39 Which statement is true?

(a) Book building is more common in developed than emerging markets.

(b)

Book building is less common in developed than emerging markets.

(c)

Book building is very common in India.

(d)

None of these

emerging markets. (c) Book building is very common in India. (d) None of these Financial Planning

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40

A bond has a face value of Rs 1000 and coupon rate of 8%. Five years are remaining

to maturity and required rate of return is 6%. What is the value of the bond?

(a) Rs 1084

(b)

Rs 1000

(c)

Rs 925

(d)

Rs 950

41

In the above question if the required rate of return is 10%,the value of bond will be

(a)

Increase by Rs 160

(b)

Decrease by Rs 160

(c)

There will be no change

(d)

Value will be Rs 950

42

In case of fixed income securities, which of the following statements is not true?

(a)

Current yield includes only the coupon if the security is sold immediately.

(b) Current yield includes both coupon & capital gain/loss if the security is sold

immediately.

(c)

YTM is the return an investor would receive if the security were held to maturity.

(d)

All are true

(e)

All are false

43

NAV of one unit of a mutual fund is Rs 11. The entry load is 4%. The cost to the

investor would be

(a)

Rs 11

(b)

Rs 11.44

(c)

Rs 10.56

(d)

Rs 11.50

44

Which of the following features are present in Exchange Traded Funds

(a)

Real Time NAV

(b)

Daily/Real Time Portfolio Disclosure

(c)

Low cost intra day trading possible

(d)

All of these

(e)

None of theses

45

Real Estate market in India is

(a)

Highly organized

(b)

Disorganized

(c)

Is Free from Government controls

(d)

Offers homogeneous product

46 What ails the Indian Housing Society?

(a)

Lack of clear titles in most cases

(b)

High stamp duty rates

(c)

Obsolete tenancy & rental control laws

(d)

All of the above

duty rates (c) Obsolete tenancy & rental control laws (d) All of the above Financial Planning

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18

Assume that you own two securities with the following expected returns and standard deviations. The proportion of holding is also indicated.

Security

Expected return %

Standard deviation

Proportion %

A

12

15

40

B

15

20

60

47

What is the risk of the portfolio when the correlation between securities is +1.0?

(a)

12%

(b)

18%

(c)

15%

(d)

6%

48

What is the risk of the portfolio when the correlation between securities is –1.0?

(a)

12%

(b)

18%

(c)

15%

(d)

6%

49

Which policy works better in Flat but Fluctuating markets?

 

(a)

Buy & Hold policy

(b)

Constant Mix Policy

 

(c)

CPPI

(d)

None of these

50

Which policy works better when the market is moving in only one direction either up

or down?

(a)

Drifting Asset Allocation

(b)

Balanced Asset Allocation

(c)

Dynamic Asset Allocation

(d)

All of these

(b) Balanced Asset Allocation (c) Dynamic Asset Allocation (d) All of these Financial Planning Academy 19

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19

Part 4

1 The bid-ask spread is best described by which one of the following statements?

(a)

It is the brokers’ commission

(b)

It is the dealers’ gross income from a transaction

(c)

It is larger for illiquid securities than it is for liquid securities

(d)

All of the above

2 How do T-Bills pay interest to their investors?

(a)

Coupon interest

(b)

Possible price appreciation above their discounted price

(c)

T-Bills pay no interest

(d)

Difference between issue price and face value

3 Which of the following are characteristics of Money Market Securities?

(a)

They are issued by the Government,municipalities and large corporations that have high –quality ratings.

(b)

All have terms to maturity that are 270 days or less

(c)

All lend to have large amounts of purchasing power risk

(d)

Both (a) and (b)

(e)

Both (b) and (c)

4 A basis point is which one of the following?

(a)

One Rupee, Re.1

(b)

One percentage point, 1percent

(c)

One paisa, Re.0.01

(d)

One one-hundredth of one percentage point, 0.01 of 1percent

5 Government Bond is best described by which one of the following statements?

(a)

It has no voting privileges.

(b)

It receives no cash dividends.

(c)

It may be resold at any time.

(d)

All of the above

6 Equity shareholders have which of the following rights?

(a)

They can legally demand information from a corporation in which they are a shareholder and thus gain access to its books.

(b)

They can vote for the common shareholders’ dividend

(c)

They can vote for the preference shareholders’ dividend.

(d)

All of the above

They can vote for the preference shareholders’ dividend. (d) All of the above Financial Planning Academy

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20

Preference shareholders receive priority over common stockholders with respect to which of the following?

7

(a)

Dividends cannot be paid to common stockholders unless the preference stockholders receive their stated dividend.

(b)

In the event of bankruptcy and liquidation, the preference shareholders are paid before the common shareholders.

(c)

Preference shareholders get to elect the chairman of the corporation’s Board of Directors.

(d)

Both(a) and (b) are true, but (c) is false.

(e)

All of the above are true

8 Which one of the following equations correctly defines the dividend yield (Y) from a share of common stock?

(a)

Y= (purchase price)+(cash dividend, if any)/purchase price.

(b)

Y= (price change)+(cash dividend, if any)/purchase price.

(c)

Y= price change/purchase price.

(d)

Y= cash dividend (if any)/purchase price

9 A preference share is

(a)

Pays fixed dividend

(b)

A marketable security

(c)

A debt security

(d)

Both (a) and (b)

(e)

All of the above

10 Which of the following statements best describes the convertibility of preference shares?

(a)

Some issues of preference share may be converted into common share at the option of the investor any time and at a conversion ratio that never changes.

(b)

Some issues of preference share may be converted into common share at the option of the investor within a limited period number of years after the preferred stock is issued.

(c)

Some issues of preference shares may be converted into common share at the option

of the investor only after a specified number of years have elapsed since the preference share was initially issued.

(d)

All the above statements are true.

(e)

Preference share is never a convertible security.

11 Which of the following statements best describe corporate bonds?

(a)

Bond investors are creditors of the corporation.

(b)

The majority of bonds make coupon interest payment once per annum.

(c)

Both (a) and (b) are true

(d)

None of the above are true

once per annum. (c) Both (a) and (b) are true (d) None of the above are

Financial Planning Academy

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12

A Debenture Trust deed is best described by which one of the following statements?

(a)

It is a legal contract describing the rights of specific bondholders.

(b)

It describes the duties of the trustees.

(c)

Both (a) and (b) are true

(d)

None of the above is true

13

The quality ratings of a corporation’s bond issue are primarily determined by which of

the following?

(a)

The issuer’s financial condition and the indenture contract that governs the issuing firm.

(b)

The calculations of ratios by the firms.

(c)

The level of interest rates.

(d)

The quality of management.

14 One bond with an AA-grade rating might pay a higher yield- to-maturity than another AA-grade bond issued at a different time by the same corporation because of which of the following reasons?

(a)

Bonds with longer maturities always pay higher rates of interest than similar bonds that have shorter maturities

(b)

The bond market is sometimes irrational and evaluates the riskiness of some bond issues erroneously.

(c)

One bond issue is a secured one whereas other issue is unsecured.

(d)

All of the above

15 Which of the following bond quality ratings applies to default –free-bonds?

(a)

AAA

(b)

AA

(c)

Both (a) and (b) are default free.

(d)

None of the above is default –free

16

A

security will not earn the yield-to-maturity that was promised when the security

was purchased if which of the following conditions occurs?

(a)

The issuer defaults on either the interest or principal payments.

(b)

The investor sells the security prior to its maturity date.

(c)

Cash flows from the security paid to the investor prior to its maturity date are held in cash or spent on consumption goods rather than reinvested.

(d)

All of the above are true

(e)

None of the above is true

17

An investor that employed a naïve buy-and-hold strategy would be employing :

(a)

An active portfolio management strategy

(b)

A passive portfolio management strategy

(c)

A balanced asset allocation

(d)

None of these

management strategy (c) A balanced asset allocation (d) None of these Financial Planning Academy 22

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18 All stock market indexes are most accurately characterized by which of the following statements about the degree to which they covary together?

(a)

They are perfectly positively correlated

(b)

They are highly positively correlated

(c)

They are uncorrelated

(d)

They are negatively correlated

(e)

It is impossible to generalize, some are highly positively correlated and some are negatively correlate

In question number 19 to 22 state True or False

19 Depreciation must be omitted from a firm’s net profit in order to determine how much cash flow the firm generated

(a)

True

(b)

False

20

When a firm pays creditors the transaction does not affect the equity capital shown in

its balance sheet in any way.

(a)

True

(b)

False

21

A primary issue of bonds or stock would increase both sides of the issuing company’s

balance sheet by the same amount.

(a)

True

(b)

False

22

The retention rate equals 100 percent less the percent of the corporation’s earnings

paid out for cash dividends.

(a)

True

(b)

False

23

Which of the following ratios will increase as a firm uses more financial leverage?

(a)

The times-interest-earned ratio

(b)

The debt to equity ratio

(c)

The inventory turnover

(d)

Both (a) and (b)

(e)

Both(a) and (c)

24

Which of the following factors tends to increase the growth rate of a corporation?

(a)

External borrowings

(b)

Increasing the retention rate

(c)

Increasing the rate of return on equity

(d)

Both (a) and (b)

(e)

All of the above

the rate of return on equity (d) Both (a) and (b) (e) All of the above

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25

A company has total assets of 20,00,000. It has 7,00,000 in long-term debt. If the

stockholders’ equity is 9,00,000, what is its total debt /total assets ratio

(a)

45%

(b)

47%

(c)

59%

(d)

52%

(e)

55%

(HINT:

EQUITY=1100000)

TOTAL

ASSETS=2000000

TOTAL

DEBT

=TOTAL

ASSETS-STOCKHOLDERS’

26 A company had a total debt to total assets ratio of. 0.4, total debt of Rs.2,00,000 and

net income of Rs.30000. Determine the corporation’s return on equity?

(a)

8%

(b)

9%

(c)

10%

(d)

12%

(e)

14%

(HINT: RATIO IS 0.4 MEANS TOTAL ASSETS ARE RS.500000 AND EQUITY PORTION IS

RS.3,00,000)

27

outstanding=40 market price to book value =2. Determine the market price for the firm’s common stock?

stockholders’ equity=Rs.2000 shares

Assume

the

following

information:

(a)

Rs.75

(b)

Rs.100

(c)

Rs.110

(d)

Rs.115

(e)

Rs.117

(HINT :

2000/40=50 IS THE BOOK VALUE. MP TO BOOK VALUE IS=2 THEREFORE MP IS

100)

28 Which of the following is a source of funds?

(a)

An increase

in inventory

(b)

An increase in accounts receivable

(c)

An increase in investments

(d)

An increase in accounts payable

(e)

None of these

29

Assume

the correlation coefficient r between the rates of return from these two

automobile sector shares, say, A and B was +0.8. If you took a long position in A and

short position in B (or vice versa) of exactly equal value you would be perfectly hedged.

(a) True

(b) False

(HINT : IF CORRELATION COEFFICIENT IS 0.8 THEN FOR HEDGING (RS.100000) ONLY 80000 IS TO BE INVESTED)

IF CORRELATION COEFFICIENT IS 0.8 THEN FOR HEDGING (RS.100000) ONLY 80000 IS TO BE INVESTED) Financial

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30

Selling securities short is useful in which of the following statements?

(a)

Speculating

(b)

Hedging

(c)

Arbitrage

(d) All of the above

31 Why do share prices usually drop when news about decline in a company’s earnings

per share is reported?

(a)

Because a reduction in a earnings means that the firm has less money with which to pay dividends and therefore the market fears a reduction in the company’s future dividends.

(b)

Because the share market anticipates that a decreased level of earning power might be the indicator of default and perhaps even bankruptcy.

(c)

The statement is false. Share prices do not usually react about current earnings.

(d)

Both (a) and (b) are true

32

Interest-rate risk is defined by which of the following statements?

(a)

Fluctuations in the coupon interest rates from one bond issue to another.

(b)

Fluctuations in the market prices of bonds as their prices move inversely to the prevailing market interest rates.

(c)

The variability of returns as a result of fluctuations in market interest rates.

(d)

Both (a) and (b)

(e)

All of the above

33

Calculate the (i) expected rate of return for M/S X Ltd. from the following information

Rates of return (%)

Probability

-0.10

0.10

-0.20

0.25

0.20

0.30

0.50

0.25

0.30

0.10

(a)

16.5%

(b)

15.5%

(c)

14.0%

(d)

16.5%

34

Which of the following describe “Risk”?

(a)

Risk means possibility of expected return deviating from actual return.

(b)

Bond quality ratings also describe the level of default risk.

(c)

T-Bills are called risk free but they also contain some amount of interest rate risk.

(d)

Both (b) and (c) are true

(e)

All the above are true

interest rate risk. (d) Both (b) and (c) are true (e) All the above are true

Financial Planning Academy

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35

XYZ ‘s price is Rs.35 per share and its expected dividend is Rs.4.20 per share, which

is growing at the rate of 8% per annum. Determine the Required rate of return?

(a)

20%

(b)

18%

(c)

19%

(d)

19.5%

36

If ABC pays dividend of Rs.3.85 per share which is growing at a 7 percent rate per

year and is expected to grow at the same rate in future. Its required rate of return is 14.5%. Determine its share value.

(a)

52.48

(b)

49.25

(c)

54.93

(d)

55.75

(e)

47.26

(Hint : Po= D1 / r-g) (3.85 is current year’s dividend. D1 will be 3.85*1.07=4.1195)

37 A company has current earnings per share of Rs.7.Assume a dividend payout of

60%.Earnings grow at a rate of 8% per year If the required rate of return is 15 percent, what is the current share value?

(a)

64.80

(b)

65.20

(c)

63.56

(d)

68.35

(Hint : 1.Dividend Payment = EPS* Dividend payout ratio) 2.Po= D1 / r-g

38 The value of an option tends to increase as the volatility (or risk) of the underlying

asset increases:

(a)

True

(b)

False

39

If you purchase a put option, you are expecting the value of the underlying asset to :

(a)

Increase

(b)

Decrease

Use the information given below to answer the questions (40-46)

Share

Current

Exercise

 

Time

to

   

price

price

maturity

     

Call

Call

Put

Put

Premium

premium

premium

premium

3 months

6 months

3 months

6 months

A

52

50

3

4

0.35

1.05

B

40

45

1

1.25

5.5

6.00

C

35

30

6

6.3

0.45

0.65

B 40 45 1 1.25 5.5 6.00 C 35 30 6 6.3 0.45 0.65 Financial Planning

Financial Planning Academy

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Each contract is equal to 100 shares.

40 If you purchase one 3-month call contract on A, what profit or loss will you make at the maturity date if the price of A at that time is Rs.57?

(a)

Rs.200

(b)

Rs.400

(c)

Rs.460

(d)

Rs.500

(e)

Rs.560

41

If B’s price is Rs.35 at the maturity of the 6-month options, determine the value of

five 6-month put contracts at their maturity date?

(a)

Rs.2000

(b)

Rs.5700

(c)

Rs.8200

(d)

Rs.4000

(e)

Rs.3600

42

If you had purchased five 3-month

call options of C and the price of C’s share is

Rs.32 at maturity. Determine your profit or loss on the investment.

(a)

Rs.1000

(b)

Rs.1500

(c)

Rs.2000

(d)

Rs.4000

(e)

Rs.500

43

If you had purchased five 3-month puts on C, what would your profit or loss position

have been on maturity if the share’s price were Rs.32?

(a)

-Rs.225

(b)

–Rs.400

(c)

–Rs.600

(d)

Rs.400

(e)

Rs.600

44

Your client wrote five 6-month call options on B’s share. What

is his profit or loss

on the options at maturity if the price of B at that time is Rs.43?

(a)

Rs.625

(b)

Rs.600

(c)

Rs.400

(d)

Rs.300

(e)

Rs.200

Rs.43? (a) Rs.625 (b) Rs.600 (c) Rs.400 (d) Rs.300 (e) Rs.200 Financial Planning Academy 27

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45

If your client had written five 6 Month put option on B, what would his profit or loss

have been at the maturity of the options if the share price was Rs.43 per share?

(a)

Rs.1000

(b)

Rs.2000

(c)

Rs.1800

(d)

Rs.1500

(e)

Rs.500

46

Which of the following options are in the money?

(a)

A’s 3-month call

(b)

B’s 6 month put

(c)

C’s 6-month put

(d)

(a) And (b)

(e)

None of the above

47 If an investor is bearish on a share, buying a put option is usually better than selling short because

(a)

The holders’ losses can be no more than the put premium if the share price rises, but the short seller’s losses could be unlimited in this situation.

(b)

The short sale will become worthless after a short period of time but the put option will not become worthless.

(c)

The short seller must pay any dividends paid by the security the short seller borrowed.

(d)

Both (a) and (c)

(e)

Both (a) and (b)

48

The Black Scholes model cannot be used to determine the overall market value of a

firm.

(a)

True

(b)

False

The returns of 2 shares are as follows

Year

Returns X

Returns Y

2001

20%

30%

2002

-10%

-20%

2003

15%

18%

2004

17%

10%

2005

19%

5%

49 Calculate the covariance of returns.

(a)

220.32

(b)

–420.11

(c)

145.22

(d)

270.36

(e)

162.08

(HINT: COV(XY)={(RIX-E(R X) (RIY-E(RY )}

(c) 145.22 (d) 270.36 (e) 162.08 (HINT: COV(XY)={(RIX-E(R X) (RIY-E(RY )} Financial Planning Academy 28

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50 Calculate the correlation coefficient from the above information.

(a)

.543

(b)

.925

(c)

.869

(d)

.785

(e)

.695

(HINT: RXY=COV XY/SD X SD Y)

51

Duration of a zero coupon bond is

(a)

Equal to its term to maturity

(b)

Less than its term to maturity

(c)

More than its term to maturity

(d)

None of these.

52

What is true about the characteristics of Bond?

(a)

Long-term bonds are almost always more volatile in terms of price than short-term bonds for a given change in interest rates

(b)

Short term bonds are less vulnerable to interest rates fluctuation than long term bonds

(c)

both (a) and (b) are true

(d)

Both statements are false

53

Duration for a coupon-paying bond is always less than its term to maturity.

(a)

True

(b)

False

54

Compute the price of a bond when following information is given? Coupon – 10%semi annually, YTM –12%, Term to maturity –10 years

(a)

Rs.1051.65

(b)

Rs.1159.88

(c)

Rs.885.30

(d)

Rs.955.41

(e)

Rs.889.88

55

The Price of the bond in above question after 2 years, assuming everything else

remains the same, is

(a)

Rs.1130.55

(b)

Rs.935

(c)

Rs.780

(d)

Rs.860

(e)

Rs.898.94

(HINT: NUMBER OF YEARS WILL BE 8 INSTEAD OF 10 AS N= NUMBER OF YEARS TO MATURITY)

Rs.898.94 (HINT: NUMBER OF YEARS WILL BE 8 INSTEAD OF 10 AS N= NUMBER OF YEARS

Financial Planning Academy

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56

A bond’s duration measures which one of the following?

(a)

The time structure of a bond’s cash flows

(b)

The bond’s interest rate risk

(c)

Both (a) and (b) above

(d)

The default risk of the bond issue

(e)

None of the above

57

If the market rate of interest falls, a coupon –paying bond will

(a)

Decrease in value

(b)

Experience a decrease in duration

(c)

Experience an increase in duration

(d)

None of these

(e)

Both a and b above

58

A bond’s reinvestment rate risk:

(a)

Refers to the problem of being able to purchase another bond with the same or higher YTM when the existing bond matures or is called

(b)

Is the risk of not being able to reinvest the coupons of a bond at the bond’s YTM

(c)

Is the same as marketability risk

(d)

None of these

59 If there is an expectation of large decline in interest rates, which of the following investments should you choose?

(a)

Money market fund

(b)

Low-coupon short term bond

(c)

High coupon short term bond

(d)

Long term zero coupon bond

(e)

Short term zero coupon bond

60

Bonds with higher coupons, other things being the same

(a)

Have more interest rate risk than bonds with smaller coupons

(b)

Have less interest rate risk than bonds with smaller coupons

(c)

Have higher duration than small coupon bonds

(d)

Have lower duration than small coupon bonds

(e)

Both b and d

61

Convertible debentures are valued on the basis of:

(a)

Yield to maturity

(b)

Market value

(c)

Cost basis

(d)

Convertible portion like equity instruments and non-convertible portion as debt instrument

Convertible portion like equity instruments and non-convertible portion as debt instrument Financial Planning Academy 30

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62 The facility given by Mutual Fund to the investors wherein they can transfer on

periodic basis a specified amount from one scheme to another within a same fund family is called?

(a)

Systematic withdrawal plan

(b)

Systematic investment plan

(c)

Automatic reinvestment plan

(d)

Systematic transfer plan

63 Are Mutual funds allowed to participate in security lending?

(a)

Yes

(b)

No

64

Which of the following statements is false?

(a)

Mutual Funds are allowed to invest in overseas securities, subject to the approval of Board, without any investment cap or ceiling.

(b)

Mutual Funds are allowed to trade in derivatives for the purpose of hedging, portfolio balancing and speculation.

(c)