NCFE’s
NFLAT
(NATIONAL FINANCIAL LITERACYASSESSMENT TEST)
for the students of Classes 8, 9 and 10
This book provides : ® Syllabus for the Test
® General Instructions for the Test
® Chapter-wise key notes
® Chapter-wise Question Bank
with Answers and Explanations
by
Manju Goel
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General Instructions About the Test
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
pagers, cellphones, books, slide rules, foot rules, notebooks or written notes will be allowed inside the examination hall. Any candidate who is found either copying or receiving or giving assistance will be disqualified.
l Do not leave your seat unless you are allowed.
l Use of Stationery : You must bring a ball point pen with you. l Rough work to be done on the sheet provided : You should
do all the necessary rough work on sheet provided only. After the test is over, you should hand over the sheet, given for rough work to the invigilator before leaving the examination hall. l Travelling Allowance not admissible : No travelling allowance
or other expenses in connection with the examination will be paid.
l The travelling, boarding & lodging expenses for attending the Grand Award Ceremony will be reimbursed to all award winners as per NCFE norms.
l NCFE’s decision in this regard shall be final and binding on all the participants.
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.
Detailed Test Syllabus
1. Money Matters : Smart Goals and Financial Analysis
P Understand the concept of Money
P Money as medium of exchange and as medium of storage P Understand the concept of Net-worth
Know the difference between money and wealth
Difference between Assets and Liabilities
Understand the relation between assets and income; liabilities and expenses; and calculation of net worth
P Understand importance of financial goals in personal financial planning (S.M.A.R.T. goals)
Understand the meaning of each term in S.M.A.R.T. goals: Specific, Measurable, Attainable, Realistic and Time bound
2. Budgeting : Balancing the Means and the Ends
P Know the different sources of income
Understand the difference between professional income and
investment income – active income and passive income P Understand your expenditures
Understand regular and lump sum expenses
Understand discretionary and non-discretionary expenses
P Deficit: Concept and calculation of deficit given income and expense numbers
P Surplus: Concept and calculation of surplus given the income and expense numbers
P Know about savings
Understand the need for saving
Understand the difference between saving and investing P What is Cash-flow Statement
Understand the structure of cash flow statement – what items
are included
Understand the purpose of a cash flow statement Know the different heads under the cash flow statement P Know the essence of Budget: meaning, purpose and different
heads under budget P What is Opportunity Cost
P Understand the difference between instant gratification and delayed gratification
3. Understanding Insurance and Risk Management
P The concept of insurance:
Understand the difference between “pure risk” and
“investment risks”
Ways to manage risk: Avoid, Reduce, Retain, Share & Transfer
Understand the concepts of spreading the risks and sharing of losses
Know that insurance premium is an expense
P Understand various insurance products
Know the terminology of insurance: Indemnity, Sum assured, Premium, Risk cover, Human life value and Deductions
Life insurance
Term plan – the pure insurance
Hybrids - combination of insurance and investment:
Endowment plan, Money back plan, Whole life plan, ULIPs and Pension plans (accumulation and distribution products)
Critical illness
General insurance: Vehicle insurance, Medical insurance,
Disability insurance and Property insurance
Know the differences in the features of various products
Know about functions and powers of IRDA, the insurance regulator in India
4. Understanding Investments
P Understand the importance of Investment
Understand diversification as a risk mitigation tool
Learn about liquidity: definition, need and concept of Impact Cost
Learn about growth of money / concept of “returns”
P Learn what is Inflation
Understand the short-term and long-term impact of inflation on personal finances
Understand the concept of real rate of returns
Understand the terms: CPI, WPI
P Understand Time Value of Money P Understanding Interest
Simple Interest, Compound Interest, Annualized Interest
Know the equations to calculate simple interest and compound interest
Understanding the impact of different compounding frequencies
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
What is the market value of each share and how is it
determined
Know what is Earnings per share (EPS) and how is it calculated
Know what is Price to Earnings Ratio (P/E ratio) and how is
it calculated
P Understand what are Bonds and debentures
P What are different types of bonds / debentures: Issuers, Term to maturity, Interest rate – fixed or floating, Secured / unsecured, Convertible / non-convertible, Understand credit risk and credit rating
P Know about functions and powers of Securities and Exchange Board of India, the securities market regulator in India
P What are stock exchanges, their main functions and stock exchanges in India
P Understand what is Primary Market and Secondary Market P Understand how a company gets traded on Stock Exchanges
Know about Initial Public Offer and how companies are listed on stock exchange
Learn about dematerialization of shares: Demat account and
depositories in India
P Learn about the screen based trading system in India P Stock market indices such as Nifty and Sensex.
P Know what are the Bear and Bull Phase in Stock Market P Understand the do’s and don’ts in stock market investing
7. Investments : The wider Spectrum
P Learn about different products or asset classes for investment P Understand Mutual Funds
Understand the different types of mutual fund in the context of structure, features, advantages and risks: Equity funds, Debt funds, Balanced funds, Tax saving funds, Open ended funds and Closed ended fund
Understand various facilities offered by mutual funds: Growth plans and Dividend plans
Know the differences between various mutual fund products
and options
Understand Net Asset Value (NAV) and calculation using simple numbers
P Know the difference between direct investing and investing through mutual funds
P Know what is Public Provident Fund (PPF) and understand its features
P Learn about the National Savings Certificate (NSC)
P Learn about Post Office Monthly Income Scheme (POMIS) P Compare the different fixed income investment options
P Learn about investing in Real Estate: Products available and the associated risks & rewards
P Understand Ponzi schemes and unregulated products
8. Beyond Savings : Borrowing
P Know when to Borrow
Know the parameters of Equated Monthly Installment (EMI): Amount of Loan, Loan Period and Rate of Interest
Understand the concept of amortization
Know what is the cost of borrowing and how much one
should borrow (the 70-30 Rule)
P Credit Cards: Advantages, disadvantages and precautions to be taken w.r.t. credit cards
P Understand what are Loans
Different types of loans: Housing, Vehicle, Consumer,
Personal and Education Loan
Know various features of loans:
Term, Rate of interest (fixed vs. floating), Processing charges, Secured vs. unsecured loans, Pre-termination, Termination charges, Partial pre-payment and the charges
Understand the difference between good loans and bad loans Understand the concept of credit score (CIBIL score)
9. Retirement as a Financial Goal
P Understand the two phases of retirement: Accumulation and Distribution
P Understand the importance of retirement goal
Revisiting the impact of inflation
Defined benefit v/s defined contribution
P Understand the difference between other goals and retirement
Option of loan is not available to fund retirement goal Understand the features of NPS and NPS Swavalamban
P Know about functions and powers of PFRDA, the pension sector regulator in India
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
4. Understanding Investments ... ... 43 – 54
5. Basics of Banking ... ... 55 – 66
6. Introduction to Stocks and Bonds ... ... 67 – 76 7. Investments : The wider Spectrum ... ... 77 – 85 8. Beyond Savings : Borrowing ... ... 86 – 95
9. Retirement as a Financial Goal ... ... 96 – 103
MONEY MATTERS : SMART GOALS
AND FINANCIAL ANALYSIS
K
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ointsl 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.
1
l SMART goals : SMART is an acronym for the 5 steps
in personal financial planning i.e., Specific, Measurable, Achievable, Realistic and Time Bound.
l Financial planning : It is the process of meeting goals of life
through the proper management of funds and finances.
l Specific : The objectives of the goal should address the five Ws,
i.e. who, what, when, where and why. The goal must specify what needs to be done within the time frame for completion.
l Measurable : Goal objectives should include numeric or
descriptive measures which define quantity, quality, cost, etc. The goal should focus on elements such as observable actions, efficiency, outcomes etc.
l Achievable : The goal objectives should not be beyond reach.
In order to achieve the goal the steps should be planned wisely within a time frame.
l Realistic : A goal must represent an objective towards which
you are both willing and able to work. The goal should be high and realistic because a high goal is easier to reach than a low one. The low goal exerts low motivational force.
l Time bound : The goal should be grounded within a time
frame because with no time frame there is no sense of urgency. It results in tension between the current reality and the vision of the goal. The goal is unlikely to produce a relevant outcome without such tension.
Multiple Choice Questions
1. Which is the most liquid form of wealth? (a) Commodity (b) Money (c) Services (d) Bank deposit
2. One of the primary functions of money is (a) Store of value
(b) Transfer of value (c) Basis of credit
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
10. For the success of every business enterprise, it is essential
to have a suitable
(a) Commodity planning (b) Financial planning (c) Population planning (d) State planning
11. An example of fixed capital used by any organisation is (a) Land & building (b) Wages & salaries
(c) Rent (d) Taxes
12. Which is not the appropriate financial goal of a firm? (a) Stakeholder maximisation
(b) Earning Per Share (EPS) maximisation (c) Shareholder wealth minimisation (d) Profit maximisation
13. Which of the following assets is not an intangible asset? (a) Patent (b) Brand name
(c) Goodwill (d) Inventory
14. Yash and Vijay know the value of the commodities they possess. But they want to know that who is richer among the two. Can you help them in knowing this on the basis of the following options? (Tick the most suitable option.)
(a) Net worth (b) Capital (c) Assets (d) Liabilities
15. The starting point to achieve any goal is to have a plan for it. Once you have a plan, it is no more a vague goal. It becomes a SMART goal. Tick the SMART goal out of the following options :
(a) I will start saving to buy a cycle (b) I want to go to picnic
(c) I will win the cricket match alone
(d) I will buy a cricket bat some time in future
16. Which one of the following statements regarding ‘financial literacy’ is false?
(a) Objective is to make people aware of the risks and rewards of investments so that they can make an informed choice. (b) It reduces the government’s burden in protecting the
(c) India has a formal nationwide structured financial education programme.
(d) It enhances the effectiveness and integrity of financial markets.
17. Meena purchased a washing machine worth `15000. She took a loan of `7000. What is her net worth?
(a) `4000 (b) `6000
(c) `8000 (d) `1000
18. Ashish and Avinash are students of class 10th of Children Public School. One day both of them went into an argument about who is wealthier. The argument peaked up and they started to mention the things which they possessed. Ashish started first and mentioned the following things
available with him:
l Watch worth `800 l Cycle worth `2200 l Books worth `3000
l Badminton racquet worth `500
l Five comic books each worth `50. Out of five books he
borrowed two books from Deepak.
Avinash has the following things available with him.
l A mobile phone worth `5000 l A video game worth `2000
l A tennis racquet worth `500. He has lent the racquet to
Dinesh for few days.
l He borrowed two music CD from Mohan for worth
`100 each.
Here, both of them know the things available with them and their respective prices. But they do not know who is wealthier among them. Can you help both of them to know who is wealthier?
(a) Ashish is wealthier than Avinash (b) Avinash is wealthier than Ashish
(c) Both have the same worth (d) Ashish have more liabilities
19. For a thing to serve as money, it must possess the quality of (a) Divisibility (b) General acceptability (c) Durability (d) All of these
20. Assets which are in cash or can be converted into cash easily and quickly are called
(a) Fixed assets (b) Liquid assets (c) Cash assets (d) Convertible assets
21. The starting point to achieve any goal is to have a plan for it. Once you have a plan, it is no more a vague goal. It becomes a SMART goal. Out of the following which is not a SMART Goal?
(a) Specific (b) Achievable (c) Realistic (d) Tiring
22. Rohit is a 15 years old boy staying in Mumbai with his family. His family consists of his father, his mother and his sister Prisha. Rohit gets `2000 as a monthly allowance from his parents. Out of this he pays `600 as school bus fees, `400 for yoga classes and `500 for canteen. Out of the remaining amount, he uses `300 for recharge voucher for his mobile. Rest of the money he spends on stationery and ice cream etc.
His sister Prisha always gives him a birthday present but he never gave anything. But this year he wants to give her a surprise gift on her birthday which is after 2 months. But as of now, he has no savings and he does not want to borrow money. He wants to give her a dress worth `600. Can you help Rohit to attain his goal by choosing the right option?
(a) Analyze the needs (b) Follow SMART goals (c) Planning budget (d) All of these
23. Nidhi is working in a bank. Her monthly disposable income is `4000. Her household expenditure on basic necessities like food, electricity bill, rent, school fees etc. is `2700. She is having a
(a) Deficit of `1300 (b) Deficit of `6700 (c) Surplus of `1300 (d) Surplus of `6700
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
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?
(a) Standard money (b) Near money (c) Bank money (d) Pocket money
33. According to Prof. Benham, “A person will accept money in payment, not because he necessarily wants money for its own sake, but because he knows that other people in turn will accept it from him in return for the goods and services which he himself requires.” Which function of money this indicates?
(a) Measure of value (b) Medium of exchange (c) Store of value (d) Transfer of value
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
38. State which statement is false.
(a) Standard money is legal tender money (b) Bank money is optional
(c) Standard money is issued by commercial banks (d) Cheques are issued by banks
39. Money performs the function of a standard of deferred payments because
(a) Its value is relatively more stable than that of other commodities
(b) The element of durability is higher as compared to other commodities
(c) It possesses the quality of general acceptability (d) All of these
40. Under the barter system commodities were exchanged for commodities. Out of the following which is not the feature of barter system?
(a) Lack of double co-incidence of wants (b) Lack of common measure of value
(c) Ease of storing wealth (d) Lack of divisibility
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
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.
BUDGETING : BALANCING
THE MEANS AND THE ENDS
K
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ointsl 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.
2
l Passive income : An income received on regular basis with
little effort required to maintain it, e.g., rent from property, pensions, dividend etc.
l Discretionary expenses : These expenses are not necessary
for the running of a business or home. These are undertaken to promote the goodwill of an organisation, e.g., expenses on entertainment or meals etc.
l Non-discretionary expenses : These expenses are not
subject to or influenced by someone’s discretion, judgement or preference, e.g., spending that is required by a budget, contract or other commitment.
l Budget : An estimate of income and expenditure for a set
period of time.
l Budget surplus : Projected income is greater than projected
expenditure.
l Budget deficit : Projected income is less than projected
expenditure.
l Cash flow statement : It shows the amount of cash generated
and used by a company in a given period.
l Necessity of budget : Budget is important to
– monitor business throughout the year – avoid losses and overspending – optimise savings
– effectively allot funds to various areas of expenditure in advance
l Opportunity cost : The cost of an alternative that must be
foregone in order to pursue a certain action. It is the benefit received by taking an alternative action.
l Instant gratification : An immediate satisfaction or pleasure
which focuses on the present. It is experienced without doing much effort, e.g., purchasing an i-phone when you want it.
l Delayed gratification : It is the ability to resist the temptation
for an immediate reward and wait for a later reward. It shows a person’s ability to modulate or control impulses.
Multiple Choice Questions
1. Which one of the following is not a function of budgeting? (a) Controlling (b) Motivating
(c) Planning (d) Decision-making
2. Which one is not a source of income? (a) Income from salaries
(b) Income from illegal activities (c) Income from house property (d) Income from capital gains
3. The budgetary deficit in India is
(a) Increasing (b) Decreasing (c) Constant (d) Stationary
4. When public revenue exceeds public expenditure, it is said to be a
(a) Deficit budget (b) Surplus budget (c) Balanced budget (d) Planned budget
5. A desire for something is known as
(a) Want (b) Demand
(c) Scarcity (d) Choice
6. The amount of money received during a period of time in exchange for services is called
(a) Payment (b) Income (c) Investment (d) Returns
7. An organisation or economic system where goods and services are exchanged for one another for money is called
(a) Company (b) Equity (c) Business (d) Trading
8. Money that is spent for need and wants is (a) Saving (b) Investment (c) Expenditure (d) Satisfaction
9. Which is not a pillar of investment?
(a) Safety (b) Consumption (c) Liquidity (d) Growth
10. Mr Kapoor earns a monthly income of `20,000. He spends
money on his family members.
Following are the areas of expenditure of monthly budget in rupees.
Medical 2500
Electricity bill 1000
Phone bill 1800
Grocery 2500
School fees of children 5000 Miscellaneous 2500 Family’s monthly budget shows
(a) Surplus (b) Deficit (c) Balance (d) Borrowings 11. Which of the following is not considered saving?
(a) Putting change in piggy bank (b) Putting money in bank
(c) Consumption plan (d) Pension plan
12. Putting money into an asset with the expectation of capital appreciation is called
(a) Investment (b) Saving
(c) Accumulation (d) Interest earnings
13. A benefit or value of something that must be given up to acquire something else is
(a) Total cost (b) Opportunity cost (c) Fixed cost (d) Prime cost
14. Ram goes to a college to study. If he would have worked in the office at the same time, then he would have earned some money. In this case, his opportunity cost would be
(a) Going to the college
(b) Going to the office to earn money (c) Sitting at home doing nothing (d) Playing in the field
15. Which of the following activities is not included in cash flow statement?
(a) Operating activities (b) Consuming activities (c) Investing activities (d) Financing activities 16. A cash flow statement reflects a firm’s
(a) Liquidity (b) Safety
(c) Durability (d) Accountability 17. Statement of cash flows is useful in determining
(a) The ability to pay bills
(b) Short-term viability of a company (c) Financial activities
(d) All of the above
18. Mr and Mrs Singh have following family demands to meet. State the want which is not urgent.
(a) Payment of school fees (b) Purchase of medicine
(c) Gift for the marriage of common friend (d) Electricity bill payment
19. Satisfaction gained by more impulsive behaviour is known as
(a) Instant gratification (b) Delayed gratification
(c) Impulsive gratification (d) Behaviour gratification
20. The ability to resist temptation for an immediate reward is called
(a) Instant gratification (b) Delayed gratification (c) Temporary gratification (d) Immediate gratification 21. Budgetary control requires expenditure of time, money and
efforts. We need to draw an effective budget in order to : (a) Optimise savings
(b) Ensure that we do not spend beyond our means
(c) Effectively allot funds to various areas of expenditure in advance
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
28. The term budgetary period refers to (a) The subdivisions of the main budget
(b) The period for which the budget is prepared (c) The period for which the budget is finalised
(d) A specific year for which budget has been prepared 29. A plan expressed in financial terms may also be known as
(a) Budget (b) Final account (c) Forecast (d) Balanced score card 30. Net cash flow can be calculated by
(a) Cash inflows less cash outflows
(b) Opening balance of cash plus cash inflows (c) Cash inflows plus cash outflows
(d) Opening balance of cash plus cash inflows
31. An increase in the value of capital asset that gives it a higher worth than the purchase price is called
(a) Investment (b) Capital gain
(c) Saving
(d) Property accumulation
32. Income and expenditure account is prepared with the object of finding out
(a) Surplus of current incomes over current expenses (b) Deficit of current incomes over current expenses
(c) Both surplus and deficit of current incomes over current expenses
(d) Income of current year
33. An institution organised and operated to provide goods and services to society under the incentive of private gain is known as
(a) Business (b) Investment (c) Operational working (d) None of the above 34. Which is not the characteristic of business?
(a) Economic activity (b) Regularity of dealing (c) Narrow scope (d) Creation of utility
35. Which is not the objective of business? (a) Profit motive
(b) Limited utilisation of resources (c) Satisfaction of human needs (d) Innovation
36. Different factors which influence the choice of a suitable form of organisation includes
(a) Ease of formation (b) Capital requirement
(c) Direction and control (d) All of the above
37. In spite of best effort, sometimes financial planning fails to achieve the desired results because
(a) It involves huge cost
(b) It may result in delay in decisions (c) Of natural calamities
(d) All of the above
38. Observe the picture given below. State what does it show?
(a) Deficit budget (b) Surplus budget
(c) Balanced budget (d) Government expenses
39. Income is the money received, especially on a regular basis, for work or through investments. There are different sources of income. Observe the picture given below and state the source of income.
(a) Income from salaries (b) Income from business
(c) Income from house property (d) Income from profits
40. Which is not the example of active Income? (a) Wages and salaries
(b) Commissions
(c) Dividends and Interest (d) Income from business
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)
23. (d) Explanation: Here he will get maximum satisfaction by
spending `500
Clothing = Price × Quantity = 25 × 10 = `250 Food = Price × Quantity
= 10 × 25 = `250 (250 + 250 = 500) 24. (b) 25. (d)
26. (c) Explanation : Dreams should be translated to SMART goals if they are to be realised.
27. (d) Explanation : Setting financial goal is a smart choice and can be very rewarding. Financial goals or financial target is an objective which is expressed in or based upon money. 28. (b) Explanation : The period for which the budget is prepared is
known as budgetary period. Although, in most cases, it will be a year, whereas some companies may have either shorter or a longer period.
29. (a) 30. (a) 31. (b)
32. (c) Explanation : Income and Expenditure Account is a summary of all incomes and expenses relating to the current accounting year. It is prepared like the Trading and Profit and Loss Account.
33. (a) 34. (c)
35. (b) Explanation : Business objective is optimum utilisation of resources i.e., the best use of men, material and machinery.
36. (d) 37. (d)
38. (c) Explanation : Balanced budget is the budget in which revenues (income) is equal to the expenditure.
39. (c) Explanation : The house property consists of any building or land owned by an individual. The annual value of the property is subject to tax.
40. (c) Explanation : Passive incomes are the earnings an individual derives from a rental property, limited partnership, or other enterprises in which he or she is not actively involved.
UNDERSTANDING INSURANCE AND
RISK MANAGEMENT
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ointsl 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.
3
l Life insurance : A contract providing for payment of a sum
of money to the person insured or following him to the person entitled to receive the same in the event of death/accident of the insured.
l Term life insurance : The insurance company pays a specific
lump sum to the designated beneficiary in case of the death of the insured.
l Endowment plan : These policies provide for period payment
of premiums and a lump sum amount either in the event of death of the insured or on the date of expiry of the policy, whichever occurs earlier.
l Money-back plan : These policies provide for periodic
payments of partial survival benefits during the term of the policy itself.
l Vehicle insurance : Under this, vehicles such as motors,
trucks, cars, etc. are insured. If the insured vehicle is lost or damaged by accident, the insurance company compensates for the actual loss or the amount of the policy, whichever is lower.
l Mediclaim insurance : This policy re-imburses expenses
of treatment during hospitalisation and other medical bills incurred on specific diseases.
l Disability insurance : This insurance policy covers the risk
of physical disability. The insured is provided compensation depending upon the type and extent of disability.
l General insurance : It provides insurance for fire, marine,
theft, accident etc. It is done mainly for properties like car, scooter, building etc.
l Property insurance : It provides protection against most
risks to property, such as fire, theft and some weather damages.
l IRDA : Insurance Regulatory and Development Authority
is an agency of the Government of India for supervision and development of the insurance sector. It regulates, promotes and ensures orderly growth of the insurance business.
l Whole life policy : This plan is mainly to create an estate for
the heirs of the policy holders as the plan basically provides for payment of sum assured plus bonuses on the death of the policy holders.
l ULIPs : A Unit Linked Insurance Plan is a product offered by
insurance companies that gives investors the benefits of both insurance and investment under a simple integrated plan.
l Pension plans : These are most suited for senior citizens.
These are individual plans that foresee future financial stability during the old age. It provides secure future to old people.
Multiple Choice Questions
1. By taking an insurance cover an individual (a) Transfers the risk to someone else (b) Reduces the certainty of major loss
(c) Converts the possibility of large loss to a small one (d) Reduces the cost of an accident
2. IRDA is associated with
(a) Railways (b) Insurance sector (c) Telecommunication (d) Banking
3. Collection of a fixed amount at a fixed interval of time by the insurance companies is called
(a) Contribution (b) Premium (c) Instalment (d) EMI
4. LIC plan in the name of ‘Anmol Jeevan’ is (a) Children’s plan
(b) Basic life insurance plan (c) Pension plan
(d) Term insurance plan
5. What is covered under a Comprehensive Car Insurance? (a) You and your car against theft or fire
(b) Accidents and also third parties
(c) Costs for replacing or repairing the car (d) All of the above
6. Can insurance of the vehicle be transferred to the purchaser of vehicle?
(b) No, it cannot be transferred
(c) Yes, by giving in writing to the insurance company (d) No, it is not required
7. For how much time an insurance for vehicle is valid after paying one time premium?
(a) Six months (b) One year (c) Two years (d) Three years
8. What is no claim bonus?
(a) A benefit for those who have claimed insurance during the current year of cover
(b) A benefit for those who have not claimed insurance during the preceding year of cover
(c) A benefit for those who have not got the vehicle insured (d) A benefit for those who sell vehicle to other party
9. Will the insurer get no claim bonus if he changes the insurance company?
(a) No (b) Yes (c) May be (d) Never
10. Generally, when is the first premium instalment paid by the
proposer?
(a) After one year (b) After six months
(c) After one month (d) Along with the proposal
11. Who is entitled to get the assured sum of the policy in case
of death of the policy holder?
(a) Daughter (b) Son (c) Nominee (d) Brother
12. What is not required for getting fire insurance policy?
(a) Details of insured property (b) Amount of insurance
(c) Amount of premium (d) Financial status of insurer
13. Which type of policy re-imburses expenses of treatment
during hospitalisation?
(a) Mediclaim insurance (b) Burglary insurance (c) Life insurance (d) ULIP
14. Vijay wants to take an insurance policy which provides for
periodic payments of partial survival benefits during the time of the policy itself. Which type of life insurance policy he should opt for ?
(a) Term life insurance
(b) Money-back life insurance plan (c) Mediclaim insurance
(d) None of the above
15. The term risk management refers to the management of
(a) Pure risks (b) Predictable risks (c) Investment risks (d) Death risks
16. Shweta is unaware of the name of the government authority
which regulates, promotes and ensures an orderly growth of the insurance business. Can you guide her by telling the right name?
(a) Insurance Regulatory and Growth Authority (b) Insurance Regular Development Authority
(c) Insurance Remote Development Authority
(d) Insurance Regulatory and Development Authority
17. Anoop purchased a car and got it insured by an insurance
company. But one day he noticed that he has lost his policy documents. In this case, can he get duplicate policy documents from the insurance company?
(a) No, he cannot get it.
(b) No, he has to get it insured again.
(c) Yes, he can get it after paying a certain amount of money. (d) Yes, he can get it without paying any charges.
18. Which is not the advantage of having life insurance policy?
(a) Risk cover
(b) Builds the habit of thrift (c) Tax benefits
(d) Buying expensive policies
19. Principles of risk management include the feature
(a) Take human factors into account (b) Be transparent and inclusive
(c) Be part of decision-making process (d) All the above
20. Multiple ways of managing risks include
(a) Risk retention (b) Risk reduction (c) Risk avoidance (d) All of these
21. Suppose a house is insured for `2 lakh against fire. The
house is damaged by fire and the insurer pays the full value of `1 lakh to the insured. Later, the damaged house is sold for `20,000. The insurer is entitled to receive the sum of `20,000, because
(a) The insurer is subrogated (substituted) to the rights only after he has compensated the insured
(b) The insurer must not exercise the rights in the name of the insured
(c) The insurer is not entitled to the benefit (d) The insured is entitled to the benefit
22. Amit insured his house for `2 lakh against fire. The house
is partially burnt and it is estimated that a sum of `1 lakh will be required to restore into the original. The insurer is liable to pay Amit an amount of
(a) `1 lakh (b) `2 lakh (c) `3 lakh (d) `4 lakh
23. Heterogeneity is the nature of which type of business service?
(a) Banking (b) Warehousing (c) Insurance (d) All of the above
24. Which of the following is not a business service?
(a) Transport (b) Banking
(c) Production (d) Communication
25. Which of the following elements is contained by the life
insurance?
(a) Investment interest (b) Security of life (c) Profit (d) Both (a) and (b)
26. Which of the following is not covered under the ‘Contract
of Indemnity?’
(a) Marine insurance (b) Theft insurance (c) Life insurance (d) Fire insurance
27. A person gets an insurance policy for `50,00,000 on his
house from the New India Assurance Company. The company considers it to be an excessive risk coverage and it gets an insurance policy on the same house from the National Insurance Company for `40,00,000. This is the example of which type of insurance?
(a) Re-insurance (b) Double insurance (c) Theft insurance (d) None of the above
28. The word ‘Assurance’ is used for
(a) Life insurance (b) Marine insurance (c) Fire insurance (d) Theft insurance
29. A person gets insured his stock worth `60,000. At present the
value of the stock is `80,000. A fire occurs and the whole stock gets damaged. Insurance company will pay him only `60,000 and not the actual value of `80,000. In this case, which principle of insurance is applied?
(a) Principle of subornation (b) Principle of contribution
(c) Principle of indemnity (d) Principle of interest
30. A person gets his house, which is worth `18,00,000 insured
from three insurance companies. Company A for `3,00,000 Company B for `6,00,000 Company C for `9,00,000
At the time of incurrence of loss, the composition will be paid by all three insurance companies in the ratio for 1 : 2 : 3. Which principle of insurance applies here?
(a) Principle of mitigation of loss (b) Principle of contribution
(c) Principle of indemnity (d) Principle of proximate cause
31. Which of the following is not covered under General
insurance?
(a) Marine insurance (b) Fire insurance (c) Theft insurance (d) Life insurance
32. The advantages of insurance include
(a) Providing protection (b) Distribution of risk (c) Loan facility (d) All of the above
33. Under which type of insurance, the insurance company
compensate the loss suffered by the insured employer on account of the fraud, dishonesty, etc. of his employees?
(a) Health insurance (b) Theft insurance (c) Fidelity insurance (d) Marine insurance
34. Out of the following which is not used in the basic
terminology of insurance?
(a) Insured (b) Premium (c) Insurer (d) Interest
35. Which is not the characteristic of insurance?
(a) Based on good faith (b) Three parties
(c) Based on co-operative system (d) Payment of premium
36. In case of life insurance, a husband gets his wife insured.
Later on he divorces his wife. With this divorce, will he have insurable interest in his former wife?
(a) Yes, he will have (b) No, he will not have (c) May be (d) May not be
37. If a fire broke out in any godown and the owner does not
make any effort to extinguish the fire, just because the godown is insured. Will he get the insurance claim?
(a) Yes, because Godown is insured
(b) No, because Godown owner has paid the premium on time
(c) Yes, because the Godown owner has not paid the premium on time.
(d) No, because the owner has not made any effort to extinguish fire
38. Mr. Dhawan takes an insurance policy of `100,000/- for his
house. The fire broke out and the whole house burnt out. How much compensation the insurance company will pay him?
(a) `80,000 (b) `100,000
(c) More than one lakh (d) Not at all (No payment)
39. A person insures his house from A and B insurance companies
for `40,000 and `60,000 respectively. If that person suffers a loss of `40,000 due to the damage of his house then he can claim
(a) `20,000 each from both the companies (b) `40,000 each from both the companies (c) `60,000 each from both the companies
(d) Both companies A and B will divide the compensation paid according to the ratio of insured amount.
40. Which is not the subject matter of marine insurance?
(a) Hull insurance (b) Cargo insurance (c) Freight insurance (d) Health insurance
41. One who does the insurance and who takes the responsibility
of risk is known as
(a) Insurer (b) Insured (c) Owner of policy (d) Third party
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.
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.
36. (b) Explanation : It refers that insurable interest is given when there is a relationship between the insured. The subject matter of insurance stands to benefit by its safety and to lose by its loss.
37. (d) Explanation : The principle of mitigation of loss suggests that insured should try to minimize the loss of his property if it is insured.
38. (b)
39. (d) Explanation : Double insurance refers to that insurance in which the same risk is insured by two or more insurance companies.
UNDERSTANDING INVESTMENTS
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ointsl 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:
I = prt
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 : A = P 1 + r
n
nt
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.
A =
(
1+ in)
n −1where, 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.
l Wholesale Price Index (WPI) : WPI is the price of a
representative basket of wholesale goods. It focuses on the prices of goods traded between corporations. The purpose of WPI is to monitor price movements that reflect supply and demand in industry, manufacturing and construction.
l Nominal interest rate : It is the periodic interest rate
multiplied by the number of periods per year. It is the rate before adjusting for inflation.
l Effective interest rate : It is the true rate of interest earned. It
is also referred to as market interest rate, the yield to maturity, the discount rate etc.
l Rule 72 : In finance, the rule of 72, rule of 70 and rule of 69 are
methods of estimating an investment’s doubling time. The rule number is divided by the interest percentage per period to obtain the approximate number of periods required for doubling.
l Rule 144 : A Securities and Exchange Commission Rule that
sets the conditions under which restricted, unregistered and controlled securities can be sold.
Multiple Choice Questions
1. Yash and Kabir are two friends. Yash is thinking of setting up a tea stall in the school fete on Sunday. But he has to buy ingredients for `60. He wants to borrow money from his friend Kabir as he has no time to write to his parents about it. He asks Kabir to lend `60 and after some time he will return `70. Kabir agrees to it. What is this extra `10 that Yash is offering to Kabir?
(a) Profit (b) Gift (c) Interest (d) Price
2. Aman : Mom, will you please give me `500? My friends
and me are planning to go to McDonalds to have burgers after school today.
Grandfather : (After overhearing the conversation) Beta,
we used to meet the total monthly expenditure of the entire household in that much of money, 20 years ago.
Boy : Really! I do not believe it.
Can you tell what is grandfather referring to? (a) Change in lifestyle (b) Increasing demand (c) Increasing expenditure (d) Inflation
3. Investment is putting money into an asset with the expectation of capital appreciation. Investment is considered necessary because
(a) It provides a cushion against inflation (b) It provides steady source of income
(c) It helps in maintaining standard of living (d) All of the above
4. The interest calculated only on the principal regardless of the interest earned so far is called
(a) Compound interest (b) Simple interest (c) Annualised interest (d) Real interest
5. A person invests in the RBI Bond, which is fully secured, yielding 8% annually, compounded half yearly with a lock-in period of 6 years and pays 33.33% tax on the return. If the average inflation during 6 years was 6% then, at the end of 6 years, the purchasing power of one’s investment will be
(a) Higher than what it was when he started (b) Lower than what it was when he started
(c) Same as what it was when he started (d) Double than what it was when he started
6. Changes in the price level of a market basket of consumer goods and services purchased by households is measured by
(a) CPI (b) WPI
(c) PPI (d) EPI
7. Assuming a 5% interest rate, `100 invested today will be worth `105 in one year (`100 multiplied by 1.05). Conversely `100 received one year from now will be of how much of worth today?
8. What will be the simple interest for 2 years at a rate of 6% on `1500?
(a) `285 (b) `180 (c) `110 (d) `95
9. An amount of `1500 is deposited in a bank paying an annual interest rate of 4.3%, compounded quarterly. What is the balance after 6 years?
(a) `1639.85 (b) `1838.84
(c) `1754.30 (d) `1938.84
10. Vivek buys a certificate of deposit with a 12% stated annual
interest rate. If the bank compounds the interest every month (i.e., 12 times in a year), then the effective annual interest rate would be
(a) 12.483% (b) 12.683% (c) 12.583% (d) 12.783%
11. A nominal interest rate of 12% based on monthly compounding means
(a) 1% interest rate per month (b) 1.25% interest rate per month
(c) 1.15% interest rate per month (d) 2.0% interest rate per month
12. Shyam purchases a bond of `1000. The bond that promises to pay 5% interest is said to have a stated contractual, face or nominal interest rate of 5%. How much the corporation will pay each year?
(a) `40 (b) `50 (c) `55 (d) `60 13. The degree to which an asset or security can be bought
or sold in the market without affecting the asset’s price is known as
(a) Safety (b) Liquidity (c) Return (d) Comparability
14. Periodic interest rate multiplied by the number of periods per year is
(a) Nominal interest rate (b) Effective interest rate
