Beruflich Dokumente
Kultur Dokumente
NCFE’s
NFLAT
(NATIONAL FINANCIAL LITERACY
ASSESSMENT TEST)
by
Manju Goel
l Students can register for the test through their schools only. No
direct registration available.
l The examination consists of 75 questions to be completed in
1 hour.
l There is no passing mark for this test and all students will receive
a certificate.
l Please note that there is negative marking of 25% for wrongly
attempted questions, i.e., – 0.25 for 1-mark questions, – 0.5 for
2-marks questions, – 0.75 for 3-marks questions, etc.
l Particulars to be noted : Please note carefully your Roll Number,
Date of Exam., Time and Venue for the examination given in the
hall ticket/ admit card.
l Punctuality in Attendance : You should be present at the
examination hall before the time given in the hall ticket/ admit
card. Candidates arriving late will not be permitted to enter the
Examination Hall.
l Hall ticket /admit card to be surrendered: Bring this hall ticket/
admit card in original with a passport size photo duly pasted &
attested by the head of the institution (with school stamp).You will
not be permitted to appear for the examination if you do not bring
the hall ticket/ admit card as instructed. You should hand over
your hall ticket/ admit card to the invigilator in the examination
hall.
l Compliance with instructions : You should scrupulously follow
the instructions given by test administrator and the invigilators at
all the stages of the examination. If you violate the instructions
you will be disqualified and may also be asked to leave the
examination hall.
l Use of Books, Notes and Copying or Receiving/Giving
Assistance Not Allowed : No calculator, separate or with watch,
Test Details
Duration of Examination : 1 hour
Medium of Examination : English and Hindi
Number of Questions : 75
Type of Questions :
Combination of 1 mark, 2 marks and 3 marks
questions 4 options (alternatives) for each question
Negative marking of 25% for wrongly attempted
questions, i.e., – 0.25 for 1-mark questions, – 0.5 for
2-marks questions, – 0.75 for 3-marks questions, etc.
5. Basics of Banking
P Know what are banks and the transaction related facilities
offered by banks
P Know about the types of bank accounts
Savings account
Current account
Fixed deposit account or term deposit account
Recurring Deposit account
Special Bank Term Deposit Scheme
P Compare different types of accounts
P Know the eligibility criteria for opening a bank account
Permanent Account Number (PAN) and its importance in
opening of Bank accounts
P Understand the features of Cheques
Know what is account payee cheque (two parallel lines at
left hand corner of a cheque)
Signing a cheque and validity period of a cheque
Understand the precautionary measures while using a cheque
Understand how can we get money by depositing a cheque
P Know what is Demand Draft?
Features of Demand Draft
Highlight the difference between Demand Draft and Cheques
P Know the features of ATM
Benefits of having an ATM card
Know what is ATM Pin and precautions pertaining to usage
of ATM cards
P What is E-banking or internet banking
Benefits of E-banking
How to use the facility of E-banking and precautions
pertaining to E-banking
P What is Tele-banking
How to register for Tele-Banking
Precautions pertaining to Tele-Banking
P Know about functions and powers of Reserve Bank of India,
the banking sector regulator
P Know about the spam mails and precautions one needs to take
6. Introduction to Stocks and Bonds
P Understand what is Equity Stocks or equity shares
Know what is face value of each share
When are shares at a premium and at a discount
What is dividend
CONTENTS
1. Money Matters :
Smart Goals and Financial Analysis ... ... 11 – 21
2. Budgeting : Balancing
the Means and the Ends ... ... 22 – 31
3. Understanding Insurance
and Risk Management ... ... 32 – 42
1
MONEY MATTERS : SMART GOALS
AND FINANCIAL ANALYSIS
Key Points
l Meaning of money : Money is something which is freely
used and generally accepted as medium of exchange and as a
unit of account.
l Functions of money : Money performs four major functions:
– Medium of exchange
– Measure of value
– Standard of deferred payments
– Store of value
l Wealth and money : Wealth is a measure of the value of all
the assets of worth owned by a person, community or country.
It includes goods such as cars, homes, bread for which anybody
is willing to pay. It also includes any services anybody is willing
to hire, such as, medical, education etc. Money is a tool which
is used to exchange goods and services.
l Assets : Any item of economic value owned by an individual
or corporation, especially that which could be converted to
cash.
l Liabilities : Any type of borrowing from persons or banks for
improving a business or personal income that is payable during
short or long time, e.g., interests payable, salaries payable,
unclaimed dividend, short and long-term loans etc.
l Net worth : Net worth is the total assets minus total outside
liabilities of an individual or a company.
11
12
3.
The term ‘net worth’ refers to
(a) Total assets
(b) Total liabilities
(c) Total assets minus total outside liabilities
(d) Total assets plus total outside liabilities
4.
For banks, a bank deposit is a/an
(a) Asset (b) Liability
(c) Capital (d) Net worth
5.
In SMART goals of financial planning, the acronym ‘A’
refers to
(a) Accountable (b) Achievable
(c) Avoidable (d) Admirable
6.
When you put your spare change into your child’s piggy
bank, money is serving as a
(a) Medium of exchange
(b) Measure of value
(c) Store of value
(d) Standard of deferred payments
7.
In the SMART goal acronym for promotional objectives,
the ‘S’ stands for
(a) Special (b) Successful
(c) Sales (d) Specific
8.
Which of the following statements is correct regarding profit
maximisation as the primary goal of a firm?
(a) Considers the firm’s risk level
(b) Will not lead to increasing short-term projects at the
expense of lowering the expected future profits
(c) Does consider the impact on individual shareholder’s
earning per share (EPS)
(d) Is concerned more with maximising net income than
the stock price
9.
Which is the most important of the three financial management
decisions?
(a) Asset management decision (b) Accounting decision
(c) Investment decision (d) Financing decision
13
14
24. Reeta is the only earning member in the family. She has to
support for husband and two children. Her total household
expenditure per month is `8500. By the end of the month
she faces a deficit of `2000. What is her monthly income?
(a) `5000 (b) `6500 (c) `7000 (d) `8500
25. Mr. Mehta’s total income and expenditure detail is given
below.
Month’s total income = `15000
Month’s total expenses = `19000
What does his balance tell him?
(a) His balance is positive (b) His balance is negative
(c) His balance is zero (d) His balance is increasing
26. The pay actually received by an employee after deducting
taxes and Provident Fund contributions and after adding
bonuses (if any) gives.
(a) Gross pay (b) Basic pay
(c) Take home pay (d) Deductions
27. As you just start working and begin to earn, your aim at
this stage should be
(a) To enjoy your money with your friends
(b) To watch a movie every week in the theatre
(c) To throw parties fortnightly
(d) To build a strong financial foundation
28. Money possesses the characteristic of general acceptability.
Which is not the feature of money?
(a) Divisibility
(b) Durability
(c) Portability
(d) Lack of common measure of value
29. Read the following statements carefully and tell which is a
SMART goal.
(a) I will arrange all the money myself
(b) I want to go somewhere with my friends during
summer vacation
(c) I will save `100 and buy lottery tickets
(d) I need to save `1000 for my trip to Shimla
17
30. Read the following statements and tell which is not a SMART
goal?
(a) I want to go to Nainital with friends during the summer
vacation
(b) I will save `100 per month for the next five months
(c) I want to save the money by first week of March
(d) I will arrange the money myself
31. For a commodity being considered as money it must be
easily recognised. It should have certain distinct marks so
as to avoid mistake by the receiving person. Which feature
of money does it indicate?
(a) Portability (b) Stability
(c) Homogeneity (d) Cognisability
32. Observe the picture carefully. What type of money is this?
18
34. The value of all goods and service are measured and expressed
in terms of money e.g. a shirt may cost `500 a chair `600, a
book `100, a pen `10 and so on. Which function of money
does it indicate?
(a) Measure of value
(b) Store of value
(c) Transfer of value
(d) Medium of exchange
35. What enables the consumers in making payments for goods
and services for their requirements?
(a) Income (b) Money
(c) Wealth (d) Savings
36. In the modern economic system, credit plays a key role and
money constitutes the basis of credit. Which of the following
is not a credit instrument?
(a) Cheques (b) Bills of exchange
(c) Draft (d) Property
37. The information furnished below is of Mr. Puri. You need to
calculate the net worth of Mr. Puri by identifying the items
as assets and liabilities.
(in `)
Savings bank account balance 50,000
Car 2,50,000
House 25,00,000
Home loan outstanding 12,00,000
Payment to maid due 2,000
Gold jewellery 50,000
School fees due 5,000
Electricity bill pending 2,000
Furniture 12,500
(a)
`15,02,500 (b)
`15,32,090
(c)
`15,53,500 (d)
`16,53,500
19
Answers
1. (b) 2. (a) 3. (c) 4. (b) 5. (b)
6. (c) 7. (d) 8. (d) 9. (c) 10. (b)
11. (a) 12. (c) 13. (d) 14. (a) 15. (c)
16. (c) 17. (c)
18. (b) Explanation : Net worth = Asset – Liabilities (wealth
is determined by net worth)
19. (d) 20. (b) 21. (d) 22. (d)
23. (c) Note : Income > Expenditure ⇒ Surplus
Income < Expenditure ⇒ Deficit
24. (b) Note : Expenditure – Deficit = Income
25. (b) Note : Positive balance = Income is more than expenses
Negative balance = Income is less than expenses
20
26. (c) 27. (d) 28. (d) 29. (d) 30. (d)
31. (d)
32. (a) Note : Standard money is legal tender money in the sense
that no one can refuse it to accept e.g. notes and
coins.
33. (b) 34. (a) 35. (b) 36. (d)
37. (d) Note : Net worth = Total assets – Liabilities
= `2862500 – `1209000
= `1653500
38. (c) 39. (d)
40. (c) Explanation : Under barter system it was difficult to store
values. In the absence of money, the individuals had to
store wealth in the form of goods like horses, wheat, rice etc.
The value of stored commodities changed in the due
course of time.
21
2
BUDGETING : BALANCING
THE MEANS AND THE ENDS
Key Points
l Wants and needs : Needs are basic necessities one cannot
wish away, e.g., in summer fan becomes a need. Whereas wants
make our life comfortable, e.g., an Air Conditioner makes life
more comfortable in summer.
l Income : The amount of money or its equivalent received
during a period of time in exchange for services rendered,
from the sale of goods or property or as profit from financial
investments.
l Sources of income : Different sources of income are :
– Income from salaries
– Income from capital gains
– Income from house property
– Income from profits or gains of business
– Income from other legal sources
l Business : Any economic activity carried on for earning
profits.
l Professional income : It is the earned income and is classified
as ordinary income for tax purposes.
l Investment income : The income one derives from capital
gains, dividends and other activities related to the purchase and
sale of securities.
l Capital gain : Profit from the sale of property or an investment.
l Active income : Income for which services have been
performed, e.g., wages, salaries, tips, commissions etc.
22
24
26
22. Shamit has `2000 in his pocket. He goes to the market and
after looking at a beautiful dress, she is tempted to buy
it. But, suddenly she realised that next month she has to
purchase a textbook on ‘Finance’ and she has to pay the
school fees of `1500. Therefore, she did not buy the dress
and saved the money for future use. Can you tell what type
of gratification does it show?
(a) Instant gratification (b) Delayed gratification
(c) Regular gratification (d) Shopping gratification
23. Deepak has `500 a week to spend on food and clothing.
The price of food is `10 and the price of clothing is
`25. Which of the following pairs of food and clothing are
in Deepak’s choice set?
(a) 20 units of clothing and 50 units of food
(b) 0 units of clothing and 500 units of food
(c) 50 units of clothing and 50 units of food
(d) 10 units of clothing and 25 units of food
24. An increase in the value of a capital asset (Real estate or
investment) that gives it a higher worth than the purchase
price is called
(a) Financial gain (b) Capital gain
(c) Property gain (d) Business gain
25. An income received on regular basis with little effort required
to maintain it is known as
(a) Active income (b) Professional income
(c) Business income (d) Passive income
26. It is important to analyse the cash flow statement, to draw
an optimum savings plan and then draw a judicious budget
in order to achieve
(a) Budget goal (b) Financial planning
(c) SMART goal (d) Business goal
27. Which is not the key point of financial goal setting?
(a) Set simple, measurable goals
(b) Set realistic time line for goal
(c) Commit to achieving goals
(d) Planning financial goals casually
27
28
29
Answers
1. (d) 2. (b) 3. (a) 4. (b) 5. (a)
6. (b) 7. (c) 8. (c) 9. (b) 10. (a)
11. (c) 12. (a) 13. (b)
14. (b) Explanation : The opportunity cost of any good is the next
best alternative good or activity that is sacrificed. It is
the cost of forgone alternative, therefore, it is also known as
alternative cost.
15. (b) 16. (a) 17. (d) 18. (c)
19. (a) 20. (b) 21. (d) 22. (b)
30
31
3
UNDERSTANDING INSURANCE AND
RISK MANAGEMENT
Key Points
l Insurance : A mechanism wherein the insurer undertakes to
indemnify the insured in the event of loss.
l Premium : The amount paid by the insured to the insurer for
covering the risk.
l Insurance policy : The formal document or agreement in
writing, setting out the terms and conditions related to the
insurance.
l Indemnity : Refers to compensating for loss or security for loss.
l Pure risks : These are unpredictable risks, e.g., fire, theft,
strike etc.
l Predictable risks : These can be predicted and can also be
insured for covering the future losses, e.g., seasonal changes in
demand, change in technology etc.
l Risk : Risk is the possibility of suffering harm or loss due to
some unfavourable occurrence.
l Investment risks : Probability or likelihood of occurrence
of losses relative to the expected return on any particular
investment.
l Sum insured : It is the maximum amount that an insurance
company will pay to someone who makes a claim.
l Risk management : Management of the pure risks to which a
company might be subject.
l Deductions or deductible : Amount of loss that the insured
pays before the insurance kicks in or starts.
32
36
37
Answers
1. (c) 2. (b) 3. (b) 4. (d)
5. (d) Explanation : Comprehensive car insurance is for damage
to the policy holder’s car that does not involve a collision
with another car. It covers the risks like fire, theft, explosion,
earthquake, civil commotion etc.
6. (c) 7. (b) 8. (b)
9. (b) Explanation : No claim bonus is a benefit for those who
have not claimed insurance during the preceding year of
cover. It means the premium they would pay in the following
year would be lower.
10. (d)
40
11. (c) 12. (d) 13. (a) 14. (b) 15. (a)
16. (d) 17. (c) 18. (d) 19. (d) 20. (d)
21. (a) Explanation : The principle of subrogation applies to all
insurance contracts which are contracts of indemnity.
22. (a) Explanation : The principle of indemnity is applicable in case
of fire.
23. (d) Explanation : Heterogeneity is opposite of homogeneity. It is
fundamental characteristic of services which results in variation
from one service to another or from one customer to another.
24. (c) 25. (c)
26. (c) Explanation : It is a contract whereby one party promises to
save the other from loss caused to him by the conduct of the
promisor himself or by the conduct of any other person.
27. (a) Explanation : Re-insurance refers to that insurance in which
an insurance company gets its risk insured from another
insurance company.
28. (a) Explanation : The term ‘Assurance’ is used in life insurance
policy. It means that the policy holder is assured of receiving
money from insurance company whether alive or dead (to his
heirs.)
29. (c) Explanation : It refers that the insured can get only the
compensation against actual loss and he cannot make profit
out of insurance.
30. (b) Explanation : It refers that if the same subject matter, except
life, is insured by more than one insurer, the actual loss will
be shared among all insurers.
31. (d) Explanation : It includes insurance contracts other than life
insurance contracts like insurance for theft, fire, accident etc.
32. (d)
33. (c) Explanation : In this, the insurance company compensates
the loss suffered by the insured employer on account of the fraud,
dishonesty etc.
34. (d) 35. (b)
41
42
4
UNDERSTANDING INVESTMENTS
Key Points
l Investment : In finance, an investment is a monetary asset
purchased with the idea that the asset will provide income in
future.
l Liquidity : The degree to which an asset or security can be
bought or sold in the market without affecting the asset’s price.
l Impact cost : It is the cost of executing a transaction on the
stock exchanges. Market impact cost is a measure of market
liquidity that reflects the cost faced by a trader of security.
l Risk mitigation : It is defined as taking steps to reduce
adverse effects of something. Four types of risk mitigation
tools, unique to business continuity, are
– Risk acceptance
– Risk avoidance
– Risk limitation
– Risk transference
l Inflation : The rate at which the general level of prices for
goods and services is rising and, consequently, the people’s
purchasing power is falling.
l Time value of money : Time value of money is the principle
that a certain currency amount of money today has a different
buying power than the same currency amount of money in the
future. This is because of the interest earned or inflation accrued
over a given period of time.
l Simple Interest : It is the interest calculated only on the
principal regardless of the interest earned so far. The formula
for simple interest is:
43
prt
I=
100
where, I is the simple interest
p is the principal
r is the rate of interest
t is the period of time
l Compound interest : It is calculated on the initial principal
and also on the accumulated interest of previous periods of a
deposit or loan. Compound interest formula is as follows :
nt
r
A = P 1 +
n
where, P = Principal amount
r = Annual rate of interest
t = Number of years the amount is deposited or
borrowed for
A = Amount of money accumulated after n years,
including interest
n = Number of times the interest is compounded per
year
l Annualised interest : The effective annual interest rate is
the rate of interest that investor earns in a year after accounting
for the effects of compounding. It is calculated with the help of
following formula.
( )
n
A = 1 + i n − 1
where, i = the stated annual interest rate
n = the number of compounding periods in one year
l Consumer Price Index (CPI) : CPI measures changes in the
price level of a market basket of consumer goods and services
purchased by households. The annual percentage change in a
CPI is used as a measure of inflation.
Updated cost
CPI =
Base period cost
44
15. When prices rise very fast at double or triple digit rate it is
called
(a) Creeping inflation (b) Walking inflation
(c) Hyper inflation (d) Running inflation
16. The method of estimating an investment’s doubling time
(in finance) is known as
(a) Rule 50 (b) Rule 60
(c) Rule 72 (d) Rule 144
17. With the rising prices, profit expectations
(a) Increase (b) Decrease
(c) Remain same (d) Stop
18. The disadvantage of inflation includes
(a) Hoarding (b) Fall in quality
(c) Reduction in saving (d) All of the above
19. On January 1, 2007, a short time investment was purchased
for `10,000. On December 31, 2007, the market value was
`12,000. On March 1, 2008, the security was sold for `3,000
loss. The amount reported on the 2008 cash flow statement
as a result of sale is
(a) `8000 cash inflow (b) `7000 cash inflow
(c) `4000 cash inflow (d) `3000 cash inflow
20. Income and expenditure accounts is a summary of all incomes
and expenses relating to the
(a) Previous accounting year
(b) Current accounting year
(c) Future accounting year
(d) Two year accounts
21. Mr. Kapoor : What is the matter? You look very much
disturbed. Is something bothering you?
Friend : Yes, actually I am worried about my wife. She is
sick and medical care is very expensive. Now, I am also
retired and my pension cannot make up for all the expenses
that I have to incur. I do not know how to manage?
Mr. Kapoor : True my friend. One needs to make enough
provisions for some regular income in one’s old age.
48
Can you tell the suitable plan for old age financial security?
(a) Investment in property to earn rental income
(b) Purchasing tax free bonds
(c) Depositing money in Public Provident Fund for
15 years.
(d) All of the above
22. Rajul has got his first pay today. He is thrilled and has
already made plans to spend his hard earned income. But
he is wondering where should he keep his money safely. On
the other hand Bhavesh, a friend of Rajul, wants to start his
own business for which he needs funds. He is wondering
from whom he can borrow money.
What is that one place where both of these people can find
a solution to their problem?
Kanika :
l Starts investing `5000 per year from the time she is
30 years old.
l She continues to invest the same amount till the age of 60.
50
30. If interest rate rises, the present value of any future earnings
is bound to
(a) Fall (b) Rise
(c) Suffer from inflation (d) Increase in risk
31. By opportunity cost we mean the cost
(a) Which is incurred in the past before we make a decision
about what to do in the future
(b) That cannot be avoided, regardless of what is done in the
future
(c) That we forgo or give up, when we make a choice or a
decision
(d) None of these
32. Which of the following classes of risk cannot generally be
avoided or mitigated?
(a) Currency risk (b) Business risk
(c) Financial risk (d) Interest rate risk
33. Which of he following is not an economic motive for holding
money in the liquid form?
(a) Transaction motive (b) Speculative motive
(c) Saving motive (d) Precautionary motive
34. Interest paid or earned on both the original principal amount
borrowed/lent and previous interest earned is often referred
to as
(a) Simple interest (b) Compound interest
(c) Present value (d) Future value
35. A Rule of 72 says
(a) Poor countries double their standard of living every
72 years
(b) Modern countries double their standard of living every
72 year
(c) A 7.2% annual growth rate doubles the standard of
living in 10 years.
(d) A 7.2% annual growth rate increases the standard of
living by 100% in 72 years.
51
Answers
1. (c) 2. (d) 3. (d) 4. (b)
5. (b) Explanation : Because he will have to pay 33.33% tax on
the return which is compulsory.
6. (a)
7. (c) Explanation : Interest rate of 5% on 95.2 will be `4.76
(Thus 95.2 + 4.76 = 99.96)
prt
8. (b) Explanation : Simple Interest =
100
1500 × 6 × 2
=
100
= 180
nt
r
9. (d) Explanation : Compound interest is, A = P 1 +
100n
4.3
P = 1500, r = = 0.043, n = 4, t = 6.
100
4( 6)
0.043
Therefore, A = 1500 1 +
4
= 1938.84
So, the balance after 6 years is approximately `1938.8
10. (b) Explanation : Annualised interest is calculated as :
n
i
A
= 1 + − 1
n
12
.12
= 1 + −1
12
= 12.683%
11. (a) Explanation : Nominal interest rate is the periodic interest
rate multiplied by the number of periods per year. e.g. a
nominal interest rate of 12% based on monthly compounding
means a 1% interest rate per month.
5
12. (b) Note : `1000 × = `50
100
13. (b) 14. (a)
52
53
100 × 81
28. (d) Explanation : Time = years
450 × 4.5
= 4 years
29. (b) Explanation : Let rate = R% and Time = R years
1200 × R × R
Therefore, = 432
100
⇒ 12 R2 = 432
⇒ R2 = 36
⇒R=6
30. (a) 31. (c) 32. (b) 33. (c) 34. (b)
35. (c)
54
5
BASICS OF BANKING
Key Points
l Meaning of Bank : A bank is a company which collects
money from the public in the form of deposits and lends the
same to borrowers. It provides facilities for safekeeping.
l Central Bank : Central Bank serves as a leader of the banking
system and the money market. It exercises supervision and
control over all other banks in the country. In India, Reserve
Bank of India is the Central Bank.
l Commercial Banks : These are joint stock banks which
receive deposits from the public and business firms. They also
provide short-term and medium term loans to the customers.
l Savings Account : Savings account is meant for the general
public to encourage thrift. It fosters the habit of savings. A
reasonable rate of interest is allowed on the credit balance in the
savings account. No overdraft facility is available.
l Current Account : It is generally opened by businessmen. A
person or a firm can open this account with a bank by depositing
a certain amount, usually `5000. There is no restriction on the
numbers of withdrawals. No interest is paid on current account.
l Recurring Deposit Account : In this type of account, a
customer is allowed to deposit a certain amount of money every
month for a specified period of time. At the end of the period,
he is given the total deposit amount alongwith interest at the
prescribed rate.
l Fixed Deposit Account : Under this account, a person makes
a deposit of money in one lump sum for a specified period of
time, say one year, three years, five years or more. Passbook
55
56
60
61
Answers
1. (a) 2. (d) 3. (d) 4. (b) 5. (d)
6. (d)
64
65
66
6
INTRODUCTION TO
STOCKS AND BONDS
Key Points
l Stocks : It is a type of security that signifies ownership in a
corporation and represents a claim on part of the corporation’s
assets and earnings.
l Equity : It is the residual claimant or interest of the most junior
class of investors in assets, after all liabilities are paid.
l Equity shares : Shares that carry no preferential or special
rights in respect of annual dividends and in the repayment of
capital at the time of liquidation of the company are called
equity shares.
l Share premium : It is the amount that is over and above par
value on the amount that has been subscribed to for a new issue
of corporate capital. It can only be used for certain specific
purposes that are laid out in the corporation’s by-laws.
l Bonds : It is a debt instrument issued for a period of more
than one year with the purpose of raising capital by borrowing.
Generally, a bond is a promise to repay the principal alongwith
interest on a specified date.
l Debentures : It is a type of debt instrument that is not secured
by physical assets or collateral. Debentures are backed only by
the general creditworthiness and reputation of the issuer.
l Dividend : A sum of money paid regularly (typically annually)
by a company to its shareholders out of its profits or reserves.
l Earning Per Share (EPS) : It is the portion of the company’s
profits allocated to each outstanding share of common stock.
The essential equation for EPS is:
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Net Income
EPS =
Total Number of Capital Stock Shares
l Price-Earnings Ratio (P/E Ratio) : It is the valuation ratio
of company’s current share price compared to its per share
earnings. It is calculated as:
Market Value Per Share
P/E Ratio =
Earnings Per Share (EPS)
l Stock exchange : It is the organized and regulated financial
market where securities are bought and sold at prices governed
by the forces of demand and supply.
l Face value of stocks or bonds : The face value of bonds
represents the principal or redemption value. Interest payments
are expressed as a percentage of face value.
l Market value of stock : The current quoted price at which
investors buy or sell a share of common stock or a bond at a
given time.
l Primary market : It is the part of the capital market that deals
with issuing of new securities. It is the market in which buyers
and sellers negotiate and transact business directly without any
intermediary such as resellers.
l Secondary market : It is also called after-market. It is
the financial market in which previously issued financial
instruments such as stocks, bonds, options etc., are bought and
sold.
l Dematerialization : It refers to the absolute and relative
reduction in the quality of materials required to serve economic
functions in society. In finance, it refers to the substitution of
paper form securities by book-entry securities.
l Demat account : In India, shares and securities are held
electronically in a Dematerialized Account (Demat Account),
instead of the investor taking physical possession of certificates.
The account is opened by the investor while registering with the
investment broker.
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9.
Look at the picture and identify the building
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Answers
1. (b) 2. (a)
3. (a) E xplanation: EPS of Company A
Net Earnings 1000
= = = 100
Outstanding Shares 10
Net Earnings 1000
EPS of Company B = = = 20
Outstanding Shares 50
You would like to own the stock of company A with an EPS of
100, whereas company B has EPS of 20
4. (a) Explanation : When the required rate of return is less
than the coupon rate, the bond sells at a premium i.e., greater
than the face value.
5. (a) Explanation : The dividend on the share of preferred stock
is `16 (16% × 100). The yield is :
Dividend 16
Yield = = = 10%
Market Price 160
6. (b) 7. (b) 8. (c) 9. (a) 10. (a)
11. (c) 12. (d)
13. (c) Explanation : Securities and Exchange Board of India (SEBI)
is authorised to regulate all merchant banks on issue activity,
lay guidelines and supervise and regulate the working of mutual
funds and oversee the working of stock exchanges in India.
14.
(b) Explanation : All securities are financial instruments.
Market Value Per Share
15. (b) Note : P/E Ratio =
Earnings Per Share (EPS)
16. (c)
17. (a) Note : Bond holders can convert these into a specified number
of shares of common stock in the issuing company or cash
of equal value.
18. (a) 19. (b) 20. (b)
21. (c) Explanation : A coupon payment on a bond is a periodic
interest payment that the bondholder receives during the
time between when the bond is issued and when it matures.
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INVESTMENTS : THE WIDER
SPECTRUM
Key Points
l Asset class : It is a group of securities that exhibit similar
characteristics and behave similarly in the market place. They
are subject to the same laws and regulations. The three main
classes are Equities (stocks), fixed income (bonds) and cash
equivalents (money market instruments).
l Mutual funds : It is a type of professionally managed
collective investment scheme that pools money from many
investors to purchase securities. Most mutual funds are open
ended i.e., the investors can buy or sell shares of the fund
anytime.
l Equity fund : A mutual fund that invests principally in stocks
is called ‘Equity fund’ or ‘Stock fund’. It can be managed
actively or passively.
l Debt funds : These are the funds that invest predominantly
in fixed income bearing instruments like corporate debentures,
treasury bills, commercial papers etc.
l Balanced funds : It is a mutual fund that buys a combination
of common stock, preferred stock, bonds, etc. to provide both
income and capital appreciation while avoiding excessive risk.
l Tax saving funds : These cater to the investor’s need of
minimising tax burden on the returns from investments.
l Closed end funds : It has fixed number of shares which are
publicly traded. The price of closed end share fluctuates based
on investor supply and demand .
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Answers
1. (b) 2. (c) 3. (d)
4. (b) Explanation : NAV stands for the Net Asset Value
(b) Upward trends show increase in the value
Downward trends show decrease in the value
NAV
5. (a) Note : NAV per unit =
No. of units outstanding
6. (c) 7. (a) 8. (a) 9. (b) 10. (b)
11. (d) 12. (d) 13. (d) 14. (b) 15. (a)
16. (a) 17. (b) 18. (c) 19. (c) 20. (c)
21. (a) 22. (b) 23. (b) 24. (d) 25. (c)
26. (d) 27. (d) 28. (d) 29. (c) 30. (b)
31. (d) 32. (b) 33. (b) 34. (a) 35. (a)
36. (c) 37. (b) 38. (c) 39. (c) 40. (a)
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8
BEYOND SAVINGS : BORROWING
Key Points
l Meaning of borrowing : Borrowing means receiving
something of value in exchange for an obligation to pay back
something of usually greater value at a particular time in the
future.
l Loan : Loan is an arrangement in which a lender gives money
or property to a borrower, and the borrower agrees to return it,
usually alongwith interest at some future point of time.
l Interest rate : It is the rate at which interest is paid by
borrower for the use of money that they borrow from a lender.
l Equated Monthly Instalment (EMI) : EMI is the fixed
payment amount made by a borrower to a lender at a specified
date in each calendar month. These are used to pay off both
interest and principal each month, so that over a specified
number of years, the loan is paid off in full.
l Amortization : It is the reduction of the value of an asset by
prorating its cost over a period of years. The term means the
same as depreciation.
l Credit card : Credit card is a small plastic card issued by a
bank, society etc. It gives the holder an option to borrow funds,
usually at point of sale.
l Home loan : It is a loan given by a bank, mortgaged company
or other financial institution to purchase a home.
l Personal Loan : A personal loan is made for any purpose
not specifically defined. It does not have to be secured by any
assets. The recipients use the money for general purposes.
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These are of two main types, i.e., secured personal loan and
unsecured personal loan.
l Secured personal loan : It is backed by collateral or security
in the form of home, car or any other financial asset. Lack
of payment will result in repossession of the property by the
creditor.
l Unsecured personal loan : It is not secured by anything
other than the signature of the recipient. It is usually based on
general creditworthiness of the person who borrows it.
l Education loan : It is a term loan granted to Indian Nationals
for persuing higher education in India or abroad where
admission has been secured.
l Consumer loan : It is an amount of money lent to an
individual, usually on a non-secured basis for personal, family
or household purposes. These are monitored by government
regulatory agencies for their compliance with consumer
protection regulations.
l Vehicle loan : Loans given for buying a vehicle listed under
assets of an individual or an organization.
l Fixed rate loans : These loans maintain the same interest rate
for the duration of the loan. Normally higher rates are charged
by lenders because they may lose money if market interest rates
increase.
l Floating interest rate : It is the rate of interest that is allowed
to move up and down with the rest of the market or alongwith
an index. It is also called the variable interest rate because it can
vary over the duration of the debt obligation.
l Processing charges : Loan process fee is a charge that
passes on costs to the borrowers for obtaining documentation
appraisals, employment and credit history or any other
information necessary for the lender’s underwriting department.
l Termination fee : An early termination fee is a charge levied
when a party wants to break the term of an agreement or long
term contract.
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23. Anita earns `25,000 per month. She is the only earning
number in the family of four. Her entire income goes towards
meeting the household expenses. She wants a bank loan
i.e., Personal loan to meet the expenses of her daughter’s
marriage. Will she be able to get it from the bank?
(a) Yes, after giving or depositing collateral
(b) Yes, without any collateral
(c) No, because the loan is required for personal use
(d) No, because she is a woman
24. Kamal was a call centre employee and had taken a car loan
three years back. He left the job a year back after the illness.
After that, he could not pay the monthly instalment of the
car loan. Now, he needs a loan for starting a company of
his own. Will Kamal get the loan?
(a) Yes, as he is not sick now
(b) Yes, because he wants to open a company
(c) No, because his creditworthiness is not good
(d) No, because he wants to open a company
25. Vijay wants to buy an apartment of `50 lakhs in Delhi.
If he takes a housing loan from a bank, then the original
documents of the house will
(a) Be with him (b) Be with the broker
(c) Be with the bank (d) Be with the government
26. Sonu is crazy about bikes and wants to buy it which is
priced around `1,00,000. He plans to take a loan from the
bank for the entire amount. If the bank agrees to give him
the loan, will the bank deposit the loan amount in his bank
account or will they give him in cash?
(a) Give him cash
(b) Give him bike
(c) Deposit loan amount in his account
(d) None of these
27. What are the parameters for taking bank loan and calculating
EMI?
(a) Amount of loan (b) Loan period
(c) Rate of interest (d) All of the above
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Answers
1. (c) 2. (a)
r (1 + r )
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29. (a) 30. (d) 31. (c) 32. (b) 33. (b)
34. (b) 35. (a) 36. (b) 37. (a) 38. (c)
39. (a) 40. (a)
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9
RETIREMENT AS A FINANCIAL GOAL
Key Points
l Retirement : It is a stage in the life cycle of an individual
when one stops being an active part of the productive and
working population due to the advanced age.
l Retirement planning : In a financial context it refers to the
allocation of finances for retirement. It is the planning for the
purpose of achieving financial independence after retirement.
l Pension : Pension is a regular payment made by the State to
people above the official retirement age and to some widows
and disabled people. It is the regular income to the individual
after retirement.
l Defined benefit pension plan : It is a pension plan in
which a specified monthly benefit or payment is available on
retirement. It is predetermined on the basis of the employee’s
earnings history, tenure of service and age.
l Defined contribution : In this type of pension plan the
pension amount is dependent upon the aggregated retirement
corpus, determined by the amount of individual contribution.
l Accumulation phase : In this phase a person invests
money in an annuity for the purpose of providing income for
retirement. The more invested during the accumulation phase,
the more will be received during the annuitization phase.
l Defined benefit plan : It is a retirement account for which
your employer does all the work, including ponying up the
money and deciding where to invest it.
l Defined contribution plan : In this type of plan, you decide
how much you want to contribute, and your employer puts the
money into your individual account on your behalf.
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20. Retirement is the point where a person leaves job and cease
to work
(a) Completely (b) Partially
(c) For long period (d) For some time
21. Any plan, fund or scheme which provides retirement income
is called
(a) Retirement fund (b) Pension fund
(c) Plan fund (d) Benefit fund
22. Monthly sum that will be received by the subscriber at the
time of retirement is known as
(a) Annuity (b) Subscription
(c) Benefit (d) Deposit
23. The amount invested to receive annuity i.e., monthly pension
by the subscriber at the time of retirement is called
(a) Privatisation (b) Standardisation
(c) Annuitisation (d) Investment
24. CRA (Central Recordkeeping Agency) is the core
infrastructure for the NPS and is critical for its successful
operation. The main functions and responsibilities include
(a) Recordkeeping, administration and customer service/
functions
(b) Issuing of unique Permanent Retirement Account
Number (PRAN) to each subscriber
(c) Acting as an operational interface between PFRDA and
other NPS intermediaries
(d) All of the above
25. A single payment for the total amount due is called
(a) Total amount (b) Lump sum
(c) Single amount (d) Instalment
26. BPL stands for
(a) Below Poverty Line
(b) Bumper Population Level
(c) Below Poor Level
(d) Below Poverty Level
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Answers
1. (b) 2. (d) 3. (d) 4. (b) 5. (b)
6. (a) 7. (b) 8. (c) 9. (d) 10. (c)
11. (d) 12. (a) 13. (a) 14.
(b) 15. (d)
16. (c) 17. (d) 18. (c) 19.
(a) 20. (a)
21. (b) 22. (a) 23. (c) 24.
(d) 25. (b)
26. (a) 27. (a) 28. (c) 29.
(d) 30. (c)
31. (a) 32. (b) 33. (c) 34.
(c) 35. (c)
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