Finance Questions

Q1) What is the concept behind time value of money?

A1) The time value of money is the value of money figuring in a given amount of interest earned over a
given amount of time.

Q2) Would you rather have Rs.10,000 today or three years from now?
A2) three years from now

Q3) Determine Future Value Compounded Annually: What is the future value of $34 in 5 years if the
interest rate is 5%? (i=.05); ( 1.05 ) 5 = 1.2762815
A3)

Q4) Define annuity

A4) An annuity is a recurring payment, usually monthly or annually, that an organisation pays in return
for a lump sum payment.

Q5) Explain the concept of present value (PV)?

A5) Present value is the value on a given date of a future payment or series of future payments,
discounted to reflect the time value of money and other factors such as investment risk.

Q6) Define discounted cash flow

A6) Discounted Cash Flow (DCF) is, what amount someone is willing to pay today, in order to receive the
anticipated cash flow of future years.

Q7) True or false:-

The DCF method converts future earnings to today's money.
A7) True

Q8) Explain the process of calculating DCF. What is the relevance of the same?
A8) Discounted Cash Flow calculation investment is calculated by estimating: the cash that you will have
to pay out, and the cash which you expect to receive back. The timeframes that you expect to receive
the payments must also be estimated.
Each cash transaction must then be recalculated, by subtracting the opportunity cost of capital between
now and the moment when you will pay or receive the cash.
For example, if inflation is 6%, the value of your money would halve every ±12 years. If you expect that a
particular asset will provide you an income of $30.000 in 12 years from now, that income stream would
be worth $15.000 today if inflation was 6% for the period. We have now discounted the cash flow of
$30.000: it is only worth $15.000 for you at this moment.

Q9) What do you understand by the term Risk?

A9) In all countries, laws and regulations require companies and financial institutions to develop and
maintain proper books and accounting records. It is generally recognized that 'Accounting Risks' can
arise from the failure of management:
Q10) What are the different kinds of risks?
A10) Some examples:
• credit risk liquidity risk,
• capital adequacy risk,
• foreign exchange risk,
• market risk,
• settlement risk

Q11) Define the following:-

• credit risk - redit risk is the risk of loss due to a debtor's non-payment of a loan or other line of
credit (either the principal or interest (coupon) or both)
• liquidity risk - In finance, liquidity risk is the risk that a given security or asset cannot be traded
quickly enough in the market to prevent a loss (or make the required profit).
• foreign exchange risk - Probability of loss occurring from an adverse movement in foreign
exchange rates.
• market risk - . The risk that because general market pressures will cause the value of an
investment to fluctuate, it may be necessary to liquidate a position during a down period in the
cycle. Market risk is highest for securities with above-average price volatility and lowest for
stable securities such as Treasury bills.
• settlement risk - Settlement risk is the risk that a counterparty does not deliver a security or its
value in cash as per agreement when the security was traded after the other counterparty or
counterparties have already delivered security or cash value as per the trade agreement.

Q12) How are derivatives used to minimize risk?

A12) Deriatives can be used to minimize risk in the following ways:
1. Future Exchanges
Arrange the derivatives through future exchanges. You may need to put in a lot of work here. You must
keep track of all adjustments in the market worth of the underlying asset.
2. Asset and Liability Driven Transactions
The transactions should be driven by asset and liability management. You should not speculate based on
future forecasts.
3. Derivative Policy
A good derivative policy focuses more on cost management and less on forecasting. It should aim for
cutting down expenses and costs.

Q13) Name two commodity exchanges in India?

A13) Multi commodity exchange (MCX)
National Multi commodity exchange of India Ltd (NMCE)

Q14) What determines the price of a share?

A14) If a company is publicly traded, the company itself does NOT decide the price of its shares, the
market does. A share of stock trades for what an investor is willing to pay for it. Thus, if many investors
are interested in buying a stock, its share price will rise. If there isn't much interest, its price will fall.
Basic supply and demand.
Q15) What is BSE 30
A15) BSE Sensex or Bombay Stock Exchange Sensitive Index is a value-weighted index composed of 30
stocks started in 01 of jan, 1986. It consists of the 30 largest and most actively traded stocks,
representative of various sectors, on the Bombay Stock Exchange. These companies account for around
one-fifth of the market capitalization of the BSE.

Q16) What is NIFTY50

A16) Nifty Fifty was an informal term used to refer to 50 popular large cap stocks on the New York Stock
Exchange

Q17) What is the advantage that a mutual fund have over investment and shares?

A17) Advantages of Mutual Funds:

• Professional Management - The primary advantage of funds (at least theoretically) is the
professional management of your money. Investors purchase funds because they do not have the
time or the expertise to manage their own portfolio. A mutual fund is a relatively inexpensive
way for a small investor to get a full-time manager to make and monitor investments.
• Diversification - By owning shares in a mutual fund instead of owning individual stocks or
bonds, your risk is spread out. The idea behind diversification is to invest in a large number of
assets so that a loss in any particular investment is minimized by gains in others. In other words,
the more stocks and bonds you own, the less any one of them can hurt you (think about Enron).
Large mutual funds typically own hundreds of different stocks in many different industries. It
wouldn't be possible for an investor to build this kind of a portfolio with a small amount of
money.
• Economies of Scale - Because a mutual fund buys and sells large amounts of securities at a
time, its transaction costs are lower than you as an individual would pay.
• Liquidity - Just like an individual stock, a mutual fund allows you to request that your shares be
converted into cash at any time.
• Simplicity - Buying a mutual fund is easy! Pretty well any bank has its own line of mutual
funds, and the minimum investment is small. Most companies also have automatic purchase
plans whereby as little as $100 can be invested on a monthly basis.

Q18) What do you mean by the term diversification of risk? What is its relevance?
A18) Diversification of risk is allocation of proportional risk to all parties to a contract, usually through a
risk premium, also called risk allocation.

Q19) Define Futures and Options.

A19) Futures and options are financial instruments that allow you to protect yourself against fluctuating
prices. Futures markets and options on futures contracts are a kind of price insurance, where you
effectively pay extra (like an insurance premium) to reduce the risk of losing a lot.
Q20) What are Call and Put options? What is their relevance?
A20) A call option is a financial contract between two parties, the buyer and the seller of this type of
option. It is the option to buy shares of stock at a specified time in the future. Often it is simply labeled a
"call". The buyer of the option has the right, but not the obligation to buy an agreed quantity of a
particular commodity or financial instrument (the underlying instrument) from the seller of the option at
a certain time (the expiration date) for a certain price (the strike price). The seller (or "writer") is
obligated to sell the commodity or financial instrument should the buyer so decide. The buyer pays a fee
(called a premium) for this right.
A put option (sometimes simply called a "put") is a financial contract between two parties, the seller
(writer) and the buyer of the option. The buyer acquires a short position with the right, but not the
obligation, to sell the underlying instrument at an agreed-upon price (the strike price). If the buyer
exercises his right to sell the option, the seller is obliged to buy it at the strike price. In exchange for
having this option, the buyer pays the writer a fee (the option premium). The terms for exercising the
option's right to sell it differ depending on option style.
Q21) Capital markets are divided into primary and secondary, what is the difference?
A21) Capital markets may be classified as primary markets and secondary markets. In primary markets,
new stock or bond issues are sold to investors via a mechanism known as underwriting. In the secondary
markets, existing securities are sold and bought among investors or traders, usually on a securities
exchange, over the counter, or elsewhere

Q22) What is an IPO?

A22) An initial public stock offering (IPO) referred to simply as an "offering" or "flotation," is
when a company issues common stock or shares to the public for the first time. They are often
issued by smaller, younger companies seeking capital to expand, but can also be done by large
privately-owned companies looking to become publicly traded. In an IPO the issuer may obtain
the assistance of an underwriting firm, which helps it determine what type of security to issue
(common or preferred), best offering price and time to bring it to market.

Q23) What was the sub prime crisis?

A23) The current Subprime crisis is not really a crisis due to over lending of banks, but situation created
due to sub prime lending. Banks don’t have enough money to lend money. The term “subprime” refers
to the credit status of the borrower (being less than ideal), not the interest rate on the loan itself. “sub
prime” is any loan that does not meet “prime” guidelines.
Q24) Define the following terms used for/meaning market infrastructure:
• Stock exchange - The term “subprime” refers to the credit status of the borrower (being less
than ideal), not the interest rate on the loan itself. “sub prime” is any loan that does not meet
“prime” guidelines.
• Clearing and settlement - The finalizing of the sale of a property, as its title is transferred from
the seller to the buyer.
• Rating agency - A credit rating agency (CRA) is a company that assigns credit ratings for issuers
of certain types of debt obligations as well as the debt instruments themselves. In some cases,
the servicers of the underlying debt are also given ratings. In most cases, the issuers of securities
are companies, special purpose entities, state and local governments, non-profit organizations,
or national governments issuing debt-like securities (i.e., bonds) that can be traded on a
secondary market. A credit rating for an issuer takes into consideration the issuer's credit
worthiness (i.e., its ability to pay back a loan), and affects the interest rate applied to the
particular security being issued.

Q25) What are bonds?

A25) A bond is a debt security, similar to an I.O.U. When you purchase a bond, you are lending money to
a government, municipality, corporation, federal agency or other entity known as an issuer.* In return
for that money, the issuer provides you with a bond in which it promises to pay a specified rate of
interest during the life of the bond and to repay the face value of the bond (the principal) when it
matures, or comes due.

Q26) “At any point in time, the price of previously issued stock is determined by the ebb and flow of
supply and demand” - True or False
A26) True