Mock Question i II III IV V

Sample Questions

For

CFP

CM

Certification Education

Program

(Module I, II, III, IV, V)

Financial Planning Standards Board (FPSB), India

312, Turf Estate, Off Dr. E. Moses Road, Mahalaxmi, Mumbai . 400011

MODULE I: Introduction to Financial Planning

Questions

1. The new Senior Citizen’s Savings Bond Scheme offers ________ % Interest.

a. 8.5 b. 9 c. 9.25 d. 8.75

2. The maximum amount that can be invested in Public Provident Fund is Rs._____ (1 Mark)

a. 70000 b. 60000 c. 80000 d. 90000

3. _____________ is regulated by the Reserve bank of India.

A. Bank Deposit Rates; B. Bank Lending Rates; C. Certificate of Deposit Rates (1 Mark)

a. A b. B c. C d. None

4. The investment objective of equity funds usually is _________

a. Long Term Capital Appreciation b. Safety of Principal

c. Regular Income

d. Capital Appreciation and Regular Income

5. _________ is / are governed by SEBI. (1 Mark)

a. Mutual Funds b. Stock Brokers c. Portfolio Managers d. All of the above

6. A person can be qualified as an Associate Financial Planner after he/she passes modules of the CFP Certification Course. (1 Mark)

a. 6 b. 2 c. 3 d. 5

7. The first step of the financial planning process is ___________. (1 Mark)

a. Evaluating the various Alternatives b. Data gathering and goal setting

c. Establishing the Client Planner relationship d. Plan Review

8. How many years will it take for a sum of Rs.10000 to double if the rate of return is 9% p.a.?

(2 Marks) a. 9.5 b. 8.5 c. 10 d. 9 e. 8

9. If the post tax rate of return on an investment is 8% and the inflation rate is 5% the real rate of return is___ (2 Marks)

a. 3.5% b. 3.0% c. 2.86% d. -3.0% e. 2.74

10. Seema and Arun are co-applicants of a mortgaged house. They are on the verge of a divorce. The Housing Finance Company will ___________. (2 Marks)

a. not interfere as long as the EMIs are being paid on time b. repossess the house after divorce

c. insist on the house being transferred to one of them d. mediate reconciliation between the couple.

e. Increase the interest rate in order to compensate for the increased risk

11. Domestic GOI bond holders (holding them up to Maturity) have to deal with ___________ risk. (2 Marks) a. Volatility b. Default c. Inflation d. Price e. Currency 12. Refinancing is ______________. (2 Marks)

a. Borrowing at lower cost in order to pay off higher cost debt b. Repaying debt by selling off assets

c. Lending at a higher rate of interest d. Scrutinizing your receivables e. None of the above

13. ________________ Asset Allocation is not a text book Asset Allocation Model. (2 Marks)

a. Tactical b. Discretionary c. Strategic d. All of the above e. None of the above

14. Jack and Jill approach you to be their Financial Planner their funds are limited and their needs are many.

Some of their needs are: a) To start an investment plan for funding their child.s education; b) To set up a Testamentary Trust for their child; c) To set up a contingency fund amounting to 3 months of living expenses d) To start saving for retirement; e) To purchase life and health insurance.

Arrange these needs in the descending order of priority. (2 Marks) a. c e a d b b. d e b c a c. b d e a c d. b e a c d

15. For a nominal interest rate of 6% payable monthly, quarterly, and semi-annually, the effective rates respectively would be _______________. (2 Marks)

a. 6.04, 6.02, 6.01 b. 6.16, 6.13, 6.09 c. 6.10, 6.07, 6.03 d. 6.11, 6.08, 6.06

16. A 10 year 9 % Bond (Face Value of Rs.100, interest payable annually) maturing 3 years from today is available at a YTM of 5.8%. Therefore the current price is _________ (2 Marks)

a. 102.50 b. 104.09 c. 108.69 d. 110.78

17. Sanjeev invests Rs.5000 in a Bank Deposit today @ 8% p.a compounded monthly. He hopes that this investment will enable him to fund his college education (estimated to cost Rs.9000), which

commences after 4years. What will be the value of this investment in four years? (4 Marks)

a. 6802 b. 6870 c. 6878 d. 6925

18. Sudha invests Rs.5000 per year (at the beginning of each year) for 5 years @ 5% p.a. in a bank deposit. She then withdraws the accumulated sum over a period of 3 equal annual installments. What is

the value of the deposit at the end of 5 years and the quantum of withdrawal each year? (4 Marks)

a. 28505, 9954 b. 29010, 10656 c. 29568, 11054 d. 28804, 10042

19. Amar wants to purchase Car 5 years from now. His investments are currently worth Rs.50, 000/- and he intends to contribute Rs.10, 000/- at the beginning of every six months period to fund his purchase. Assuming that the annual investment rate of return is 8% compounded semi annually, what

will be the value of the investment in five years time? (4 Marks)

a. 1,98,875 b. 1,95,555 c. 1,97,240

20. Neeta wants to accumulate Rs.1, 50,000 in three years time for a one-month trip to the USA. Assuming she can get an 8% annual return on her investments, compounded quarterly, how much must she invest today in order to achieve her goal? (4 Marks)

b. 119487 c. 118274

21. John has estimated that the following will be his outgoings over the next few years:

End of Year Cash Outflow 1st Rs.10000 2nd Rs.15000 3rd Rs.12000 4th Rs.13500 5th Rs.11000

If John wants to cater to these cash outflows, how much should he have today, assuming an annual rate of return of 5%? (4 Marks) a. 54126 b. 53220 c. 52483 d. 50483

22. Mr. John has purchased 100 convertible debentures of Essar Oil on 1/1/94 at Rs.500 each. 40% of the value of the debentures is convertible into one share of Rs.50 each after seven years. Mr. John exercised his option on 1/4/2001 and received 100 shares. Compute the cost of acquisition of these shares. (4 Marks)

a. 200 b. 205 c. 195 d. 185

23. Mohan invested Rs. 420000 for 7 years @ 7% where it was compounded annually for the first

5years and quarterly for the last 2 years. What did he receive on maturity? (4 Marks)

a. 676774 b. 776774 c. 931095 d. 609870

SOLUTIONS

4. a. Long Term Capital Appreciation

5. d. All of the above

6. b. 2

7. c. Establishing the Client Planner relationship

8. e. 8

Working Note: Use Rule of 72 i.e. r = 72/n Therefore, n = 8 years

9. c. 2.86%

Working Note: Inflation adjusted return: (1+r/1+i). 1; Therefore, (1+0.08/1+0.05). 1 =2.86%

10. a. Not interfere as long as the EMIs are being paid on time

11. c. Inflation

12. a. Borrowing at lower cost in order to pay off higher cost debt 13. b. Discretionary 14. a. c e a d b 15. b. 6.16, 6.13, 6.09

Working Note: Use. Future Value. Function to get the rates. For monthly compounding: If PV=Re.1 i=6%/12 n = 1*12 Therefore FV = 1.0616 and therefore rate = 6.16%. Similar calculations for quarterly and semi annual compounding.

16. c. 108.69

Working Note: Use YTM Function to get the price.

17. c. 6878

Working Note: Use Future Value Function where PV = Rs.5000; r = 8%/12; n = 48; Therefore, FV=Rs. 6878/-

18. b. 29010, 10656

Working Note: Use Future Value function to get the value of deposit at the end of 5 years. PMT = Rs.5000 i= 5% n = 5 years Future Value = Rs.29010. Then Use PMT Function to find the annual withdrawal where PV = Rs.29010 r = 5% n = 3 therefore PMT = Rs. 10656.

19. a. 1,98,875

Working Note: PV = Rs.50, 000 Rate of Return = 8%/2 = 4%; No. Of compounding periods = 10; Type of Annuity: Immediate; Annuity Amount = Rs.10, 000;Therefore the Future Value at the end of five years = Rs.1, 98,875

20. c. 118274

Working Note: PV = To be found Rate of Return = 8%/4 = 2%; No. of compounding periods = 12; Future Value at the end of three years = Rs.1, 50,000/-; Therefore the amount to be invested today is Rs. 118273.98

21. b. 53220

Family expenses after death of Mr. Joshi will be 3 Lakh (4 Lakh at present less 1 Lakh of Mr. Joshi’s personal expenses) for 40 years. At

3% discount the present value of 3 Lakh for the next 40 years is 69.35 Lakh. Current investment is 20 Lakh + funeral cost will be 1 Lakh.

So Mr. Joshi’s insurance will be (69.35 –20+1) = 50.35 Lakh

22. a. 200

Working Note: Initial Cost: Rs.50000. 40% thereof = Rs.20000. Mr. John gets 100 shares on conversion; Therefore cost per share = Rs.200.

23. a. 676774

Working Note: Use FV Function; Stage I: PV = Rs. . 420000; r = 7%; n = 5 years; Therefore FV= Rs. 589072; Stage II: PV = Rs. . 589072; I =

Module II: Risk Management & Insurance Planning

Questions

1. The process of due diligence conducted by an insurance agent is known as ___ (1 Mark)

a. Underwriting b. Investigation c. Inspection d. Site check

2. Which type of insurance is not easily available in India? (1 Mark)

a. Officers Liability

b. Disability Income Protection c. Health

d. Life

3. Insurable Interest can exist between a Member of Parliament and his (unrelated) party workers. (1 Mark) a. True b. False c. Data insufficient

4. A person over the age of 60 generally requires _______ Insurance more urgently. (1 Mark)

a. Life

b. Professional Indemnity c. Long term Care

5. Insurance brokers are governed by _________ (1 Mark)

a. IRDA b. SEBI

c. Both IRDA & SEBI

6. As per IRDA Regulations, a reinsurance broker must have a minimum paid-up capital of INR _____ lakhs. (1 Mark)

a. 250 b. 200 c. 50

7. Third Party Administrators directly reimburse the Policyholders for any expenses incurred.

(1 Marks) a. True

b. False

c. Data Insufficient

8. A young unmarried individual (aged 20-23 years) with no dependents should ideally opt for the following insurance first. (1 Mark)

a. Property b. Life c. Health

9. As per IRDA, the incontestable clause comes into effect after ____ years. (1 Mark) a. 2 b. 3 c. 4 d. 5

10. Householders cover does not include damage/loss to _______. (1 Mark)

a. Building b. Home Contents c. Burglary d. Jewelry

11. An insurance contract is an aleatory contract. (1 Mark)

a. True b. False

12. ______________insurance is a Tariff Product. (1 Mark)

a. Life b. Health c. Motor

13. An Insurance Agent must disclose his/her commission to the client in an upfront manner. (1 Mark)

a. True b. False

14. Insurance Contracts adhere to Principles laid down in the _____________. (1 Mark)

a. Contract Act

b. Securities Contracts Regulation Act c. IRDA Act

15. The application of the law of Contract does not apply to ______ contracts.

A. Insurance; B. Stock market; C. Property Deals (2 Marks)

a. A b. B c. C

d. None of them

16. Insurance can be ________ contracts.

A. Benefit; B. Indemnity; C. Negotiated (2 Marks)

a. Either B or C b. Only A c. Only B

17. Ram insures his home worth Rs.50 lakhs for Rs.30 lakhs. The house is destroyed in a fire and he suffers losses worth Rs. 20 lakhs. How much will he receive from the Insurance Company? (2 Marks)

b. 16 lakhs c. 12 lakhs

18. Abraham, 30 years and married, works for a firm, which provides him with medical cover. He already has his own home and savings of Rs.42 lakhs, which are well invested. In the next twenty years he will be able to save up enough to fund his retirement and his children’s education. Which of the

following might be the most important insurance for him? (2 Marks)

a. Medical Cover

b. Temporary Total Disablement Cover c. Property Insurance

d. Life Cover

19. The following is not a principle essential for a valid contract: A. Offer and acceptance

B. Consideration

C. Coerced consents are acceptable. (2 Marks)

a. Only B b. A & C c. Only C

20. Whenever an insurer partly reinsures the risk with a re-insurer, it is a case of; A. Risk Retention

B. Risk Transfer

C. Risk Avoidance (2 Marks)

a. A & B b. A c. B d. B & C

21. Two ways of assessing life insurance needs is a need-based approach and the other is the income replacement method. What in your judgment would be the life cover required for Mr. Joshi on the basis of each of the two approaches. Mr. Joshi is the sole income earner in the family. Mrs. Joshi is a homemaker. They are aged 40 and 36 respectively. Life expectancy for both of them is another 40 years. They have no children. Other information you have is: Current investment port folio - Rs.20 lakh; Estimated final Expenses - Rs. 1 lakh.; Present annual expenses-Rs. 4 lakh (including a lakh of Mr. Joshi 's personal expenses) ; Mr. Joshi 's post-tax income in hand-Rs.3.5 lakh.; Assume a post tax, post inflation return/discounting factor of 3%.. Calculate the insurance requirement under the Need Based method. (4 Marks)

a. Rs.46.50 lakhs b. Rs.75.10 lakhs c. Rs.69.50 lakhs d. Rs.50.35 lakhs

22. A group of 50000 persons each aged 35 years wishes to apply for Term Insurance for a one year period for a sum of Rs.2 lakhs. If the mortality tables show that out of 50 lakh people 30000 die within

a year, find the premium to be paid by each of the 50000 applicants. (4 Marks)

a. 1250 b. 1300 c. 1350 d. 1200

Solutions

1. a. Underwriting 2. b. Disability Income Protection

3. b. False 4. c. Long term Care 5. a. IRDA 6. b. 200 7. b. False 8. c. Health 9. a. 2 10. a. Building 11. a. True 12. c. Motor 13. b. False 14. a. Contract Act 15. d. None of them 16. a. Either B or C 17. c. 12 lakhs 18. d. Life Cover 19. c. C only 20. a. A & B 21. d. Rs.15.4 lakhs

Working Note: Family.s expenses after death of Mr.Joshi will fall to Rs.3 lakh (4 Lakh at present less 1 Lakh of Mr. Joshi’s personal

expenses) for 40 years. At 3% discount the present value of 3 Lakh for his next 40 years is 69.35 Lakh. Current investment is 20 Lakh +

funeral cost will be 1 Lakh. Mr. Joshi’s Insurance will be (69.35 –20 + 1) = 50.35 Lakh.

22. d. 1200

Working Note: Mortality rate = 30000/5000000 = 0.06; No. of persons in the group who are likely to die in a year = 50000*0.06 = 300; the total amount of claim payable 200000*300 = 6000000; Premium per person = 6000000/50000 = Rs.1200.

MODULE III: Retirement Planning & Employee Benefits

Questions

1. Employees Provident Fund is applicable to firms employing over ___________ employees. (1 Mark)

a. 20

b. 15 c. 10 d. 25

2. An employee can contribute beyond ________ of his salary his salary towards EPF but he will get tax benefits u/s 80 C only up to _________. (1 Mark)

a. 11.33, 11.33 b. 10, 10 c. 12, 12 d. 8.33, 8.33

3. Pension plans eligible for benefit u/s 80 C have a tax-free commutation option up to _________ of the eligible corpus as at the vesting date. (1 Mark)

a. 30 b. 33 c. 25 d. 35

4. Contributions to an Unrecognized Provident Fund will result in:

A. Taxing of Interest Income earned by the employee on employer contributions B. Employer cannot treat the PF Contribution as a deductible business expense.

C. No Rebate u/s 80 C to the employee (1 Mark)

a. A & C b. A c. B d. B & C

5. __________% of Gratuity received on retirement by a Central Government employee is taxable.

(1 Mark) a. Ten b. Nil c. Twenty-Five d. Twenty e. Thirty-Three

6. Gratuity is categorized as a__________ Plan. (1 Mark)

a. Defined Benefit b. Defined Contribution

c. Combination of Defined Benefit and Defined Contribution

7. Pensions received from an employer are classified under ____________. (1 Mark)

b. Profits in Lieu of salary c. Income from Salaries

8. While determining the taxability of Gratuity, the term Salary usually includes____________________. (1 Mark)

a. Basic + House Rent Allowance b. Basic + Dearness Allowance c. Basic + Uniform Allowance

9. Leave Salary received during the tenure of employment is____________. (1 Mark)

a. Fully exempt

b. Exempt up to a certain ceiling c. Fully taxable

10. Real returns is defined as____________________. (1 Mark)

a. Nominal returns adjusted for inflation.

b. Nominal returns adjusted for time value of money.

11. In an inflationary period which of the following statement holds true: (1 Mark)

a. Nominal interest rates are lower than real interest rates. b. Nominal interest rates are higher than real interest rates. c. Nominal interest rates are equal to real interest rates.

12. Vinay has been an employee of a public sector undertaking for the past 15 (completed) years and is retiring on 1st December next year. His firm is not covered under the provisions of the Payment of

Gratuity Act, 1972. Amit's employer has agreed to pay him a gratuity amount of Rs. 5,00,000 on retirement. What is the tax status of this amount? (2 Marks)

a. The gratuity paid is exempt from Income Tax only to the extent of Rs. 3,50,000. b. The amount of gratuity payable to him cannot exceed Rs. 3,50,000.

c. The Income Tax Act will only allow a maximum exemption upto 15 day's wages per completed year of service. The rest is taxable.

13. What will be the effect in terms of buying power on today’s Rs.50000.00 after 15 years if inflation is 8% p.a? (2 Marks)

a. It will be worth Rs. 14584.00 b. It will be worth Rs. 16412.00 c. It will be worth Rs. 14921.00 d. It will be worth Rs. 15762.00

14. If the inflation rate is 4.9% and tax rate is 30%. The required rate of return to maintain the value of an investment is___________. (2 Marks)

a. 8% b. 9% c. 7% d. 10%

15. Seema has been an employee of a public sector undertaking (covered under the payment of Gratuity Act, 1972) for the past 20 (completed) years and is retiring on the 31st of December this year.

She hopes to invest the proceeds along with the PF proceeds, in order to fund her retirement. Her monthly salary at retirement is expected to be Rs. 20,000. The amount of gratuity that she will receive will be ___________________.

(4 Marks)

a. 241245 b. 242308 c. 243579 d. 241940

16. Mrs. Shah retired from Ace Manufacturing Co.Ltd. Mumbai on 31/12/2003. Ace is covered under the Payment of Gratuity Act, 1972. She served for 30 years and 9 months. Ace paid her a Gratuity of Rs.400000. Her monthly basic salary at the time of retirement was Rs.9000 p.m. and Dearness Allowance was Rs.4000 p.m. House Rent Allowance was Rs.1500 p.m. Mrs. Shah lives in an ownership

flat. Compute: Taxable amount of Gratuity Taxable amount of HRA. (4 Marks)

a. Gratuity: Rs. 160000; HRA: Rs.20000 b. Gratuity: Rs. 157500; HRA: Rs.16000 c. Gratuity: Rs. 170000; HRA: Rs.18000 d. Gratuity: Rs. 167500; HRA: Rs.13500

17. Mr. Sachin, aged 30, wants to retire at 45. He wants to maintain his present living standard. He spends Rs.500000 a year. He is expected to live up to 75. Inflation is to be assumed at 5% and expected returns are 7% p.a. What is the real rate of return? (4 Marks)

a. 1.75 b. 1.90 c. 2.05 d. 2.15

18. Aditi is 30 years old. She deposits 25000 at the beginning of each year in deferred annuity scheme as a part of her retirement planning. How much will be in the account after 25 years if it earns 9.5% compound annual interest? (4 Marks)

a. 2474985 b. 2487216 c. 2414854 d. 2497857

19. Sumeet, aged 25 plans to retire at age 55. His life expectancy is 75. His current annual expenditure is Rs.250000. He estimates no reduction in his expenses post-retirement. If interest rate is expected to be 8.5% and inflation is 5% p.a. estimate how much will he have to save per annum in order to achieve

his target, provided he does not wish to leave an estate. (4 Marks)

a. Rs .119568 b. Rs. 125054 c. Rs. 117154 d. Rs. 120963

Solutions

7. c. Income from Salaries

8. b. Basic + Dearness Allowance

9. c. Fully taxable

10. a. Nominal returns adjusted for inflation.

11. b. Nominal interest rates are higher than real interest rates.

12. a. The gratuity paid is exempt from Income Tax only to the extent of Rs. 3,50,000.

13. d. It will be worth Rs. 15762.00

Working Note: FV = Rs. 50000; r = 8%; n = 15 years; Hence PV = Rs.15762.00.

14. c. 7%

Working Note: If 4.90% is the post tax rate of returns, then the pre tax nominal return = 4.9%* (100/70) = 7%.

15. b. 242308

Working Note: Gratuity calculation = 15/26*20000*21 = 242308.

16. d. Gratuity: Rs. 167500; HRA: Rs.13500

Working Note: Taxable amount of Gratuity: Least of: 1) Actual amount received 2) Rs.350000 and 3) 15 days salary for each year of completed service. Therefore the taxable amount of gratuity amounts to Rs. 167500 (400000-232500) Exempt amount of HRA: Least of 1) Rent paid over 10% of salary 2) 50% of salary 3) Actual amount received. Since rent paid is NIL, the entire amount of HRA viz.Rs.13500 per annum will be taxable

17. b. 1.90

Working Note: Nominal return (N) = 7%; Inflation (I) = 5 %; Real Rate = {(1+ N)/ (1+ I)} - 1 = 1.90 %

18. d. 2497857

Working Note: Use FV function; PMT = 25000 Type = 1; n = 25; r = 9.5 %; Hence FV = Rs. 2497857

19. a. Rs .119568

Working Note: In order to find the quantum of saving per annum we need to find 1) The future value of current expenditure (2) The Present Value of the corpus required in order to fund such expenditure post-retirement (3) The actual quantum of savings required (PMT).

a. Future Value of Current Expenditure : Rs.10,80,4.86; where the PV = Rs.250000 r = 5% n = 30

b. Find the Present value of Annuity Due for the next 20 years. Use inflation adjusted return. Hence PV (AD) = Rs.16, 114,541; where inflation adjusted return = 3.33 %, n = 20 years and PMT = Rs.1080486.

c. Now find the quantum to be saved per annum up to the year of retirement i.e. PMT. Hence PMT = Rs.119568; where FV = Rs.16114541; r = 8.5%; n = 30 years.

MODULE IV: Investment Planning

Questions

1. NPV is calculated in the case of a series of --- cash flows. (1 Mark)

a. Zero b. Single c. Uneven d. Even

2. The effective interest rate earned per rupee _______ as the periods of compounding increase.

(1 Mark) a. Increases

b. Decreases c. Remains same

d. Decreases for some time and then increases e. Data insufficient

3. The term “Efficient Frontier” is contained in________. (1 Mark)

a. Technical Analysis b. Modern Portfolio Theory c. Value Investing Theory

4. In India, Preference shares may be issued for a maximum number of ___________ years. (1 Mark)

a. 12 b. 15 c. 10 d. 20

5. In India, Mutual Funds have recently moved to the concept of ___________AUM calculation.

(1 Mark) a. Monthly average

b. Month end

c. Fortnightly average

6. An Asset Management Company must have a minimum corpus of Rs.______________ corers.

(1 Mark) a. 5

b. 15 c. 25 d. 10

7. _____________funds pay a Dividend Distribution tax on dividends. (1 Mark)

a. Equity b. Index c. Debt

8. A perfectly diversified portfolio will fully eliminate ______________ risk. (1 Mark)

a. Systematic b. Unsystematic

9. __________________measures the caliber of the fund manager. (1 Mark)

a. Beta b. Delta c. Alpha

10. The Present Value of a sum of money _________________ as the Discounting Rate ___________________. (1 Mark)

a. Remains same, Increases b. Decreases, Decreases c. Increases, Increases d. Increases, Decreases e. Data Insufficient

11. Classifying an investment as a long-term investment depends primarily on; (1 Mark)

a. the length of time the investor expects to hold the investment. b. the amount of the investment.

c. whether a liquid market exists for selling the investment.

12. A period when an economy is experiencing substantial growth and a declining jobless rate is called_____________. (1 Mark)

a. Stagflation b. Deflation c. Depression d. Boom

13. In India Futures contracts in ___________ may be settled by delivery. (1 Mark)

a. Commodities b. Stocks c. Stock Index

14. A growth-oriented non-dividend paying share is bought for Rs.250 and sold for Rs. 450 after 5 years, the compound annual growth rate is: (2 Marks)

a. 14.86% b. 12.47 % c. 11.50% d. 10.71%

15. The call option strike price on a share is Rs. 500 and the current share price is Rs. 550. The call option premium is Rs. 60. The time value of the option is: (2 Marks)

a. 60 b. 10 c. 30 d. 15

16. Mr. A deposits Rs.10,000 in his own PPF account and same amount in his wife’s account. How much maximum amount can he deposit in his nephew’s name?

(2 Marks)

a. Rs. 20,000 b. Nil c. Rs. 70,000 d. Rs. 60,000

17. A Rs.100 par value bond having 10 % coupon rate will mature after 7 years. Find the value of the bond if the discount rate is 8 %. (2 Marks)

a. 109.85 b. 111.41 c. 108.75 d. 110.40

18. A 5 year annual annuity has a yield of 6%. What is the duration? (4 Marks)

a. 2.88 years b. 2.55 years c. 3.16 years d. 1.35 years

19. The price of Stellar Ltd. is currently Rs.40. The dividend next year is expected to be Rs.4.00. Required return on the stock is 12%. Find the expected growth rate under the Constant Growth model. (4 Marks)

a. 2.00 % b. 2.25 % c. 1.90 % d. 2.75 %

20. Data on two stocks is given for 2 different scenarios:

Market Return Infocomm Ltd. FMCG Ltd. 5 % 3% 7% 15 % 25 % 12 %

Find Beta of both stocks (4 Marks)

a. 1.8, 0.60 b. 2.5, 0.75 c. 1.5, 0.25 d. 2.2, 0.5

21. Data on a mutual fund is given:

Fund Name Mean Return Std. Dev. Beta

A 10 % 25 % 0.75

Market Index

16% 20% 1.00

The risk free rate is 9 %; Calculate Treynor, Sharpe and Jensen measures. (4 Marks)

a. 1.05, 0.10, 4.25 b. 1.33, 0.04, -4.25 c. 1.10, 0.15, -3.75 d. 1.46, 0.09, 3.75

Solutions

3. b. Modern Portfolio Theory 4. c. 10 5. a. Monthly average 6. d. 10 7. c. Debt 8. b. Unsystematic 9. c. Alpha 10. d. Increases, Decreases

11. a. the length of time the investor expects to hold the investment. 12. d. Boom 13. a. Commodities 14. b. 12.47 %

Working Note: Use the RATE Function in Excel. PV = Rs.250; FV = Rs.450; n = 5 years; Hence the CARG = 12.47 %

15. b. 10

Working Note: Option Premium = Intrinsic value + Time value; Intrinsic Value = Spot Rate . Strike Price = 50; Hence Time Value is 60. 50=10

16. b. Nil

Working Note: PPF investments can only be made on behalf of immediate family members.

17. d. 110.60

Working Note: Use the PRICE Function in excel. Eg. For Sett. Date use 4/1/2004 (mm-dd- yyyy). Maturity Date: 3/31/2004; Rate=Rs.10; Yield=8 %; Redemption Value = Rs.100; Frequency = 1; Hence Price is Rs.110.60

18. a. 2.88 years

Working Note: Duration of a level annuity is:

(1+Yield/Yield) . No. of payments

__________________________ (1+yield)^no of payments - 1

Hence duration = 2.88 years

19. a. 2.00 %

Working Note: Use the formula - P0 = D1 / (R- G); Where P0 = 40; D1 = 4.00; R = 12%; Hence G = 2.00 %.

20. d. 2.2, 0.5

Working Note: Beta of Infocomm is (25-3)/ (15-5) =2.2; Beta of FMCG = (12-7)/ (15-5) = 0.5

21. b. 1.33, 0.04, -4.25

Working Note: Treynor Ratio = (Rp-Rf)/ Beta; Hence 1.33; Sharpe Ratio = (Rp . Rf)/Standard Deviation; Hence 0.04; Jensen = Rp-[Rf +

B(RM .RF)];It measures the risk adjusted portfolio return. It is also known as Jensen.s Alpha; Hence -4.25

Module V . Tax & Estate Planning

Questions

1. A Resident and Ordinarily Resident Assessee is subject to tax on ________. (1 Mark)

a. Incomes received in India

b. Incomes deemed to be received in India c. Incomes earned outside India

d. All of the above

2. Adjusted Total Income is ___________________ (1 Mark)

a. Gross Total Income . Deductions u/c VI A b. Gross Total Income . Rebate u/s 80 C

c. Gross Total Income . Deducting Sec. 10 Incomes d. None of the above

3. ____________ receipts are not chargeable to Income tax A. Revenue

B. Capital

C. Receipts by way of borrowing (1 Mark)

a. A b. B c. A, B & C d. B & C

4. Contribution to Medical Insurance Premium enjoys a deduction up to INR _____ u/s 80 D.

(1 Mark) a. 14000

b. 10000 c. 11000 d. 12000

5. Sec. 88 B provides a rebate of up to _____ % in respect of tax payable in respect of senior citizens.

(1 Mark) a. 25

b. 50 c. 75 d. 100

6. Which of the following is subject to tax? (1 Mark)

a. Interest on PPF

b. Interest on Recognized EPF. c. Interest on Bank Deposits

7. _____________ is a specified employee. (1 Mark)

a. Director

b. Assessee earning over INR 50000 p.a. as Salary Income c. Person owning more than 20% voting rights

8. Since October 1, 2004, Capital Gains on the transfer of _________ are exempt from Long

Term Capital Gains Tax subject to certain conditions. (1 Mark)

a. Property b. Equity Shares c. Gold

d. Debt Mutual Funds

9. A Testamentary Trust is affected after the ________ (1 Mark)

a. Death of the Trustee b. Retirement of the Owner

c. Beneficiaries attaining the age of 18 d. Death of the owner

10. Mr. Arora has three children. He will be entitled to a maximum rebate of Rs.____________ u/s 88.

(1 Mark) a. 12000

b. 36000 c. 24000 d. NIL

11. Since October 1 2004, term capital loss on sale of equity shares can be set off against long-term capital gains to the extent of_______________. (1 Mark)

a. NIL b. 10 % c. 20 % d. 30 %

12. If a person inherits a house from his relative, the date of acquisition of the house for the purpose of capital gains will be_________________. (1 Mark)

a. the date when the relative purchased/constructed the house b. the date when he received the gift

c. any of the above, whichever is beneficial.

13. In the case of rented property, a covenant may be imposed by the___________. A. Tenant B. Landlord (1 Mark) a. A b. B c. A & B d. Neither A nor B

14. 2% Education Cess is only applicable to assessees in the highest Tax Bracket.

(2 Marks)

a. True b. False

c. Applicable only to those in the highest bracket and with income above Rs.8.5 lakhs d. Applicable only to those in the highest bracket and claiming rebate u/s 88 B or 88 C e. Applicable only to those claiming rebate u/s 88 D

15. Mr. Shah is an Indian Resident who earns some business from Mauritius. This income is________. A. Taxable subject to credit given for tax already paid in Mauritius

C. not taxable because India has a Double tax Avoidance treaty with Mauritius (2 Marks) a. A b. B c. C d. None of them

16. __________ may become members of a society. A. Individuals

B. Co-operative Societies

C. Central Government (2 Marks)

a. A b. B c. C d. A, B & C

17. Mr. Shyam leaves India for the first time on 15th April 2003 in order to take up employment in China. He comes back to India on a personal visit on 10th June 2003 and stays for 150 days in India Determine his residential status for AY 2004-05:

(2 Marks)

a. Resident b. Non Resident

c. Resident but not Ordinarily Resident d. Resident and Ordinarily Resident

18. Vishal submits the following information for AY 2005-06. (a) Net income from salary (after standard deduction) Rs. 2,50,000 (b) Loss from house property Rs. 10,000 (c) Bank interest Rs. 60,000.

Calculate his gross total income after taking into consideration the eligible set-off of losses.

(2 Marks) a. Rs.2,50,000 b. Rs.3,10,000 c. Rs.2,60,000 d. Rs.3,00,000

19. Mr. Rao, an American Citizen has parents were both born in Canada and whose paternal grandfather was born in Karachi in 1930. On 17th July 2003, he came to India to attend a nephew.s

marriage. He left India for the USA on 13th January 2004. His stay in India during the last few

years was: 2002-03 102 days, 2001-02 95 days, 2000-01 130 days, 1999-2000 40 days. What is the residential status of Mr. Rao for A.Y. 2004-05?

(2 Marks)

a. Non Resident

b. Resident and Ordinarily Resident c. Resident but not Ordinarily Resident

20. Ram has a house property whose Municipal Valuation is Rs.140000 whereas the fair rent of the house is Rs.160000 and Standard Rent is Rs.145000. Rakesh has paid municipal taxes of Rs.14000. Based on the above data, answer the following: If actual rent receivable is Rs.180000, find the Gross Annual Value of the property. (4 Marks)

a. 180000 b. 145000 c. 140000 d. 166000

21. Ram has a house property whose Municipal Valuation is Rs.140000 whereas the fair rent of the house is Rs.160000 and Standard Rent is Rs.145000. Rakesh has paid municipal taxes of Rs.14000.

Based on the above data, answer the following: If actual rent receivable is Rs.130000, the GAV is _______________. (4 Marks) a. 145000 b. 130000 c. 129000 d. 114000

22. Ram has a house property whose Municipal Valuation is Rs.140000 whereas the fair rent of the house is Rs.160000 and Standard Rent is Rs.145000. Rakesh has paid municipal taxes of Rs.14000. Based on the above data, answer the following: If the annual rent of property is Rs.180000 and Unrealized Rent is Rs.60000, the GAV is_______. (4 Marks)

a. 145000 b. 180000 c. 120000 d. 131000

23. Ram has a house property whose Municipal Valuation is Rs.140000 whereas the fair rent of the house is Rs.160000 and Standard Rent is Rs.145000. Rakesh has paid municipal taxes of Rs.14000. Based on the above data, answer the following: If the annual rent = Rs.180000 and unrealized rent =

Rs.60000, the Net Annual Value is____________________ (4 Marks)

a. 145000 b. 131000 c. 160000 d. 180000

24. Ram has a house property whose Municipal Valuation is Rs.140000 whereas the fair rent of the house is Rs.160000 and Standard Rent is Rs.145000. Rakesh has paid municipal taxes of Rs.14000. Based on the above data, answer the following: If Ram used the house for his own residential purpose the GAV of the house will be_______. (4 Marks)

a. 145000 b. NIL c. 180000 d. 131000

25. Munir borrowed Rs.20, 00,000 @ 9% p.a. on 1/10/1998 for construction of a house property which was completed on 30/09/2003. The loan is still not repaid in full. What is the amount of deduction on account of pre-construction interest for AY 2004-05 that he can avail of Rs. _________. (4 Marks)

a. 162000 b. 810000 c. 30000

26. Munir borrowed Rs.20, 00,000 @ 9% p.a. on 1/10/1998 for construction of a house property which was completed on 30/09/2003. The loan is still not repaid in full. If this property was self-occupied then

deduction on interest paid on borrowed capital is restricted to Rs.________________. (4 Marks)

a. 150000

b. 30000 c. 162000 d. 810000

27. Munir borrowed Rs.20, 00,000 @ 9% p.a. On 1/10/1998 for construction of a house property which was completed on 30/09/2003. The loan is still not repaid in full. If the property was let out, the

deduction on borrowed capital for AY 2004-05 would be______________ (4 Marks)

a. 150000 b. 30000 c. 342000 d. 810000

Solutions

2. a. Gross Total Income . Deductions u/c VI A 3. d. B & C 4. b. 10000 5. d. 100

6. c. Interest on Bank Deposits

7. d. All of the above

8. b. Equity Shares

9. d. Death of the owner

10. c. 24000

11. a. NIL

12. a. the date when the relative purchased/constructed the house 13. c. A & B 14. b. False 15. a. A 16. d. A, B & C

17. c. Resident but not Ordinarily Resident

Working Note: A person leaving India for the first time, for employment purposes is treated as a Resident and Ordinarily Resident, only if he is Iin India for a period of over 182 days in the relevant Previous Year. In this case, Shyam is in India only for 165 days in the Previous Year. Therefore he is Resident and Not ordinarily Resident.

18. d. Rs.3,00,000

Working Note: Loss from Income from House property is allowed to be set off against salary income. Hence the GTI = Salary Income . Loss from House Property + Income from bank Deposits. Hence the Gross Total Income is Rs. 3,00,000.

19. a. Non Resident

20. a. 180000

Working Note: Mr.Rao has been in India for 181 days in AY 2004-05. While it is true that he has been in India for 367 days in the four years preceding PY 2003-04 and has been in India for over 60 days in PY 2003-04, he cannot be considered as Resident. This is because his grandfather was born in undivided India and so that makes Mr.Rao a Person of Indian Origin. PIOs are considered as Residents only if they have been in India for 182 days or more during the relevant Previous Year. As Mr.Rao has been in India for only 181 days, he is considered as a Non Resident for AY 2004-05.

GAV = Higher of Standard Rent and Actual Rent. Hence GAV is Rs.180000.

21. a. 145000

Working Note: Actual Rent = Annual Rent . Unrealized Rent i.e. Rs.120000. As the actual rent is less than the Standard Rent for a reason other than vacancy, the GAV is Rs.145000.

22. a. 145000

23. b. 131000 . Working Note: The GAV is Rs.145000. Taxes paid = Rs.14000. Therefore Net Annual Value = Rs.131000. 24. b. NIL . Working Note: NIL, as the GAV of self occupied property is NIL.

25. a. 162000

Working Note: He can apportion this pre-construction period interest in five equal installments commencing from AY 2004-05. Therefore the amount of annual deduction will be Rs.162000, i.e.810000/5) .The annual interest payments since PY 1998-99 are: Rs.90000 + Rs.180000+Rs.180000+Rs.180000+Rs.180000 = Rs.810000.

26. b. 30000

Working Note: If this property was self occupied then deduction for borrowed capital is Rs.30000.

27. c. 342000

Working Note: If the property was let out, the deduction on borrowed capital for AY 2004-05 would be 180000 as current period interest + 162000 as pre construction period interest. Total = Rs.342000.