Sample set

1. With continuous compounding at 10 % for 30 years, the future value of an initial investment
of Rs.2,000 is closest to
a) Rs.34,898
b) Rs.40,141
c) Rs1,64,500
d) Rs.3,28,282

2. An investor deposits Rs.100 in a bank account for 5 years at 8% interest. Find out the
amount which he will have in his account if interest is compounded annually.
a) Rs.146.93
b) Rs.154.19
c) Rs.194.18
d) Rs.169.14

3. Which of the following has the largest future value if Rs.1000 is invested today?
a) 5 years with a simple annual interest rate of 10%
b) 10 years with a simple annual interest rate of 8%
c) 8 years with a compound annual interest rate of 8%
d) 8 years with a compound annual interest rate of7%
Solution: Solution:
4. The expression 1+ (1 + 𝑟)^𝑡 is called the …………………………………., which measures the
present value of 1 rupee received in t years.
a) Compound factor
b) Discount factor
c) Forward rate
d) None of the above
5. The net present value equals:
a) PV –investments
b) PV +investments
c) PV /investments
d) None of the above
6. I) A safe rupee is worth more than a risky rupee
II) Net present value is the addition that the investment makes to your wealth
Which of the above statements are /is false?
a) Only I
b) Only II
c) Both I and II
d) None of the above
7. The …………………………….. converts cash inflows and outflows for different years into their
respective values at the same point of time.
a) Compounding technique
b) Discounting technique
c) Investment technique
d) None of the above.
8. I) The compounding rate is used in project evaluation to determine the present value of past
investment / cash flow.
II) The capitalising rate is applied in the reverse process of discriminating present value of
future cash flows. Both considers the time value of money.
Which of the above statements is/are true?
a) Only I
b) Only II
c) Both I and II
d) None of the above
9. I) Opportunity cost is the return of a foregone option plus the return on your chosen option.
II) You must assess the relative risk of each option in addition to its potential returns.
Which of the above statements are /is false?
a) Only II
b) Only I
c) Both I and II
d) None of the above
10. Perpetuity is:
a) Cash flows/PV
b) Cash flows-PV
c) Cash flows / FV
d) None of the above

11. Following are examples of a Perpetuity except:

a) UK’s government bond, known as a Consol
b) preferred stock
c) monthly home mortgage payments
d) none of the above

12. I) these financial products find use primarily for retirees.

II) Annuities provide monthly payments made by the investor over a period.
III) Annuities can be structured into different kinds of instruments - fixed, variable,
immediate, deferred income.
Which of the above statements is/are true?
a) Only I
b) Only II
c) Only II
d) All of the above

13. ……………………………………………….. in which payments begin immediately after the payment of

a lump sum.
a) Deferred income annuities
b) Immediate income annuities
c) Fixed annuities
d) Variable annuities
14. …………………………………………………. calculates the true value of the company by assessing its
dividend pay out to its shareholders. Here the dividend is the representation of the actual
cash flow of the company.
a) Dividend discount model
 b) Discounted cash flow model
c) Relative valuation model
d) Comparable valuation model

15. State which of the statements is/are true?

I) all stocks in an equivalent risk class are priced to offer the same expected rate of return
II) the value of a share equals the PV of future dividends per share.
a) Only I
b) Only II
c) Both I and II
d) None of the above
16. The discount rate is also known as:
a) Market capitalization rate
b) Cost of equity capital
c) Opportunity cost of capital
d) All of the above

17. The value of ABC Company’s shares is Rs. 10 and dividend of Rs. 3 per share. It is expected
that market value of share will in increase 5 percent. What is fair value of this share for one
year if discount rate is 8 percent?
a) Rs. 11.50
b) Rs. 12.50
c) Rs 10.75
d) Rs.13.80

Solution: V= D₁[1/(1+i)¹]+ P₁(1+g) ₁[1/(1+i)¹]=2.778+9.7222=12.50

18. The Company issues preferred stock that pays a dividend of Rs. 5.50 indefinitely. Investors
could invest their money at 8%. For how much will the preferred stock sell?

a) Rs 89.50
b) Rs.58.75
c) Rs.68.75
d) Rs.64.35

Solution: V= D/i

=5.5/.08= Rs.68.75

19.The required rate of return of investors is 14%.Assume the D1 (next expected dividend)is Rs.3.5.
Compute the price at which the shares will sell is the investors expect the earnings/dividends to
grow at 12%.

a) Rs.135
b) Rs.140
c) Rs.175
d) Rs.155
Solution: 𝑃0 =𝐷1(r-g)= 3.5/(0.14-0.12)=175

20. A coupon bond pays annual interest, has a par value of $1,000, matures in 4 years, has a coupon
rate of 10%, and has a yield to maturity of 12%. The current yield on this bond is ___________.

a) 10.65%
b) 10.45%
c) 10.95%
d) 10.52%
Solution: FV = 1000, n = 4, PMT = 100, i = 12, PV = 939.25; $100/$939.25 = 10.65%.

21. which of the following statements hold true?

I) Consumer price index measures the number of rupees that it takes to pay for a typical
family’s purchase
II) The change in the CPI from one year to the next measures the rate of inflation
a) Only I
b) Only II
c) Both I and II
d) None of the above

22. The interest rates on ………………………… bonds are the bench marks for all interest rates.

a) Government bonds
b) Corporate bonds
c) Euro bonds
d) None of the above

23. The French government bonds are known as ………………………. and they pay interest and principal
in euros €.

a) Gilts
b) OATs
c) BTPs
d) None of the above

24. .………………………………………is the total return anticipated on a bond if the bond is held until it
matures.

a) Yield to Maturity
b) Book yield
c) Redemption yield
d) All of the above

25. A lower credit rating ………………………..a bond's volatility because higher interest rates will hurt a
company in poor financial shape more than one in good financial health.

a) Decreases
b) Makes no difference
c) Increases
d) None of the above
26 .When variance is estimated from a sample of observed returns, the squared deviations are
added and are divided by:

a) N-1
b) N+1
c) 𝑁2
d) None of the above
27. The market portfolio is made up of individual stocks and its variability doesn’t reflect the average
variability of its components.

I. Diversification works because prices of different stocks move exactly together

II. The risk that can be eliminated potentially by diversification is called market risk.

Which of the above statement/s are/is false?

a) Only I
b) Both I and II
c) Both II and III
d) All of the above.

28. Risk of two securities with different expected return can be compared with:

a) Coefficient of variation
b) Standard deviation of securities
c) Variance of Securities
d) None of the above