Nflat Book

Target
NCFEs
NFLAT
(NATIONAL FINANCIAL LITERACY
ASSESSMENT TEST)
for the students of Classes 8, 9 and 10
by
Manju Goel
his book provides :

T
Syllabus for the Test
General Instructions for the Test
Chapter-wise key notes
Chapter-wise Question Bank

with Answers and Explanations
GOYAL BROTHERS PRAKASHAN
GOYAL BROTHERS PRAKASHAN

E D U C A T I O N A L P U B L I S H E R S
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Reserved with Goyal Brothers Prakashan
First Edition : December, 2013
Published & Printed by

Roshan Lal Goyal for Goyal Brothers Prakashan, New Delhi
General Instructions About the Test

l Students
can register for the test through their schools only. No

direct registration available.
l The
l There
l Please
l Particulars to be noted : Please note carefully your Roll Number,
examination consists of 75 questions to be completed in

1 hour.
is no passing mark for this test and all students will receive
a certificate.
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.
Date of Exam., Time and Venue for the examination given in the
hall ticket/ admit card.
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in Attendance : You should be present at the

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Published by Goyal Brothers Prakashan

New Delhi, Ph. 0120-3830000
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work to be done on the sheet provided : You should

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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.

New Delhi, Ph. 0120-3830000
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

New Delhi, Ph. 0120-3830000
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

Understand nominal interest and effective interest rate

Understand the Rule of 72 and Rule of 144
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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
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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 dos and donts 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

What is Entry Load and Exit Load

New Delhi, Ph. 0120-3830000
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


New Delhi, Ph. 0120-3830000
CONTENTS
1. Money Matters :
Smart Goals and Financial Analysis ... ... 11 21
2. Budgeting : Balancing
the Means and the Ends ... ...
22 31
3. Understanding Insurance
and Risk Management ... ...
32 42
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

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1
MONEY MATTERS : SMART GOALS
AND FINANCIAL ANALYSIS
Key Points
l Meaning of money : Money is something which is freely
used and generally accepted as medium of exchange and as a

unit of account.
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.
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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

(d) Distribution of national income
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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 childs 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 firms 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 shareholders
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
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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 governments burden in protecting the
common person from the elements of market failure.
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(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
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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
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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. Mehtas total income and expenditure detail is given
below.
Months total income = `15000
Months 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
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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
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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
Car
50,000
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
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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
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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.
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2
BUDGETING : BALANCING
THE MEANS AND THE ENDS
Key Points
l Wants and needs : Needs are basic necessities one cannot
wish away, e.g., in summer fan becomes a need. Whereas wants
make our life comfortable, e.g., an Air Conditioner makes life
more comfortable in summer.
l Income : The amount of money or its equivalent received
during a period of time in exchange for services rendered,
from the sale of goods or property or as profit from financial
investments.
l Sources of income : Different sources of income are :
Income from salaries
Income from capital gains
Income from house property
Income from profits or gains of business
Income from other legal sources
l Business : Any economic activity carried on for earning
profits.
l Professional income : It is the earned income and is classified
as ordinary income for tax purposes.
l Investment income : The income one derives from capital
gains, dividends and other activities related to the purchase and
sale of securities.
l Capital gain : Profit from the sale of property or an investment.
l Active income : Income for which services have been
performed, e.g., wages, salaries, tips, commissions etc.
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New Delhi, Ph. 0120-3830000
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 someones 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
persons ability to modulate or control impulses.
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New Delhi, Ph. 0120-3830000

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
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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
Familys 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
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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 firms

(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

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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 Deepaks 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
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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
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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

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

38. Observe the picture given below. State what does it show?
(a) Deficit budget

(b) Surplus budget
(c) Balanced budget
(d) Government expenses
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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)
19. (a)
20. (b)
21. (d)
22. (b)
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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.
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3
UNDERSTANDING INSURANCE AND
RISK MANAGEMENT
Key Points
l Insurance : A mechanism wherein the insurer undertakes to
l
l
l
l
l
l
l
l
l
l
indemnify the insured in the event of loss.

Premium : The amount paid by the insured to the insurer for
covering the risk.
Insurance policy : The formal document or agreement in
writing, setting out the terms and conditions related to the
insurance.
Indemnity : Refers to compensating for loss or security for loss.
Pure risks : These are unpredictable risks, e.g., fire, theft,
strike etc.
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.
Risk : Risk is the possibility of suffering harm or loss due to
some unfavourable occurrence.
Investment risks : Probability or likelihood of occurrence
of losses relative to the expected return on any particular
investment.
Sum insured : It is the maximum amount that an insurance
company will pay to someone who makes a claim.
Risk management : Management of the pure risks to which a
company might be subject.
Deductions or deductible : Amount of loss that the insured
pays before the insurance kicks in or starts.
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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.
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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.

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

(a)

(b)

(c)

(d)
plan in the name of Anmol Jeevan is

Childrens plan
Basic life insurance plan
Pension plan
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

6.
Can insurance of the vehicle be transferred to the purchaser
of vehicle?

(a) Yes, by informing the insurance company
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(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
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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
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(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
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)
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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
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
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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
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
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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)
(c)

(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 holders car that does not involve a collision
with another car. It covers the risks like fire, theft, explosion,
earthquake, civil commotion etc.
6. (c)
7. (b)
8. (b)
9. (b) Explanation : No claim bonus is a benefit for those who
have not claimed insurance during the preceding year of
cover. It means the premium they would pay in the following
year would be lower.
10. (d)
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11. (c)
12. (d)
13. (a)
14. (b)
15. (a)
16. (d)
17. (c)
18. (d)
19. (d)
20. (d)
21. (a) Explanation : The principle of subrogation applies to all
insurance contracts which are contracts of indemnity.
22. (a) Explanation : The principle of indemnity is applicable in case
of fire.
23. (d) Explanation : Heterogeneity is opposite of homogeneity. It is
fundamental characteristic of services which results in variation
from one service to another or from one customer to another.
24. (c)
25. (c)
26. (c) Explanation : It is a contract whereby one party promises to
save the other from loss caused to him by the conduct of the
promisor himself or by the conduct of any other person.
27. (a) Explanation : Re-insurance refers to that insurance in which
an insurance company gets its risk insured from another
insurance company.
28. (a) Explanation : The term Assurance is used in life insurance
policy. It means that the policy holder is assured of receiving
money from insurance company whether alive or dead (to his
heirs.)
29. (c) Explanation : It refers that the insured can get only the
compensation against actual loss and he cannot make profit
out of insurance.
30. (b) Explanation : It refers that if the same subject matter, except
life, is insured by more than one insurer, the actual loss will
be shared among all insurers.
31. (d) Explanation : It includes insurance contracts other than life
insurance contracts like insurance for theft, fire, accident etc.
32. (d)
33. (c) Explanation : In this, the insurance company compensates
the loss suffered by the insured employer on account of the fraud,
dishonesty etc.
34. (d)
35. (b)
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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.
40. (d)
41. (a)
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4
UNDERSTANDING INVESTMENTS
Key Points
l Investment : In finance, an investment is a monetary asset
l
l
purchased with the idea that the asset will provide income in
future.
Liquidity : The degree to which an asset or security can be
bought or sold in the market without affecting the assets price.
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.
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
Inflation : The rate at which the general level of prices for
goods and services is rising and, consequently, the peoples
purchasing power is falling.
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.
Simple Interest : It is the interest calculated only on the
principal regardless of the interest earned so far. The formula
for simple interest is:
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prt
100
where, I is the simple interest

p is the principal

r is the rate of interest

t is the period of time

I=
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 :
r
A = P 1 +
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 + i n 1
where, i = the stated annual interest rate

n = the number of compounding periods in one year
l Consumer Price Index (CPI) : CPI measures changes in the
price level of a market basket of consumer goods and services
purchased by households. The annual percentage change in a
CPI is used as a measure of inflation.
Updated cost
CPI =
Base period cost
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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 investments 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.

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.
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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

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 ones 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?
(a)
`95.0 (b)
`95.1 (c)
`95.2 (d)
`95.3
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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 assets 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

(c) CPI
(d) WPI
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15. When prices rise very fast at double or triple digit rate it is
called

(a) Creeping inflation
(b) Walking inflation

(c) Hyper inflation
(d) Running inflation
16. The method of estimating an investments doubling time
(in finance) is known as

(a) Rule 50
(b) Rule 60

(c) Rule 72
(d) Rule 144
17. With the rising prices, profit expectations

(a) Increase
(b) Decrease

(c) Remain same
(d) Stop
18. The disadvantage of inflation includes

(a) Hoarding
(b) Fall in quality

(c) Reduction in saving (d) All of the above
19. On January 1, 2007, a short time investment was purchased
for `10,000. On December 31, 2007, the market value was
`12,000. On March 1, 2008, the security was sold for `3,000
loss. The amount reported on the 2008 cash flow statement
as a result of sale is
(a)
`8000 cash inflow
(b) `7000 cash inflow
(c)
`4000 cash inflow
(d) `3000 cash inflow
20. Income and expenditure accounts is a summary of all incomes
and expenses relating to the

(a) Previous accounting year

(b) Current accounting year

(c) Future accounting year

(d) Two year accounts
21. Mr. Kapoor : What is the matter? You look very much
disturbed. Is something bothering you?

Friend : Yes, actually I am worried about my wife. She is
sick and medical care is very expensive. Now, I am also
retired and my pension cannot make up for all the expenses
that I have to incur. I do not know how to manage?

Mr. Kapoor : True my friend. One needs to make enough
provisions for some regular income in ones old age.
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New Delhi, Ph. 0120-3830000

Can you tell the suitable plan for old age financial security?
(a)
Investment in property to earn rental income
(b)
Purchasing tax free bonds
(c)
Depositing money in Public Provident Fund for
15 years.
(d)
All of the above
22. Rajul has got his first pay today. He is thrilled and has
already made plans to spend his hard earned income. But
he is wondering where should he keep his money safely. On
the other hand Bhavesh, a friend of Rajul, wants to start his
own business for which he needs funds. He is wondering
from whom he can borrow money.

What is that one place where both of these people can find
a solution to their problem?
(a)
Parents (b)
Friends
(c)
Banks (d)
Market
23. Which is not an important aspect of investment?
(a)
Safety (b)
Liquidity
(c)
Business (d)
Growth
24. Kritika :

l Starts investing `1000 per year from the age of 15.
l At the age of 30 she stops investing
l She does not withdraw a single penny from this money.

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Kanika :

l Starts investing `5000 per year from the time she is
30 years old.

l She continues to invest the same amount till the age of 60.

l She does not withdraw a single penny from this money.
Both earn 15% return on their investment. What does this
show?

(a) Time value of money

(b) Friends co-operation

(c) Consumption value of money

(d) Expenditure value of money
25. A single investment of `100 for one year at 15% of interest
rate will become
(a)
`105 (b)
`110
(c)
`115 (d)
`120
26. Sonu has `1000 to invest for 3 years at the rate of 5%
compound interest. After 3 years, his money will be worth
(a)
`1057.50 (b)
`1123.12
(c)
`1089.29 (d)
`1157.62
27. A sum of money at simple interest amounts to `815 in
3 years and to `854 in 4 years. The sum is
(a)
`640 (b)
`680
(c)
`698 (d)
`720
28. How much time will it take for an amount of `450 to yield
`81? The simple rate of interest is 4.5% per annum.

(a) 1 year
(b) 2 years

(c) 3 years
(d) 4 years
29. Meena took a loan of `1200 with simple interest for as many
years as the rate of interest. At the end of the loan period
she paid `432 as interest. What was the rate of interest?

(a) 5% per annum
(b) 6% per annum

(c) 7% per annum
(d) 8% per annum
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30. If interest rate rises, the present value of any future earnings
is bound to

(a) Fall
(b) Rise

(c) Suffer from inflation (d) Increase in risk
31. By opportunity cost we mean the cost

(a) Which is incurred in the past before we make a decision
about what to do in the future

(b) That cannot be avoided, regardless of what is done in the
future

(c) That we forgo or give up, when we make a choice or a
decision

(d) None of these
32. Which of the following classes of risk cannot generally be
avoided or mitigated?

(a) Currency risk
(b) Business risk

(c) Financial risk
(d) Interest rate risk
33. Which of he following is not an economic motive for holding
money in the liquid form?

(a) Transaction motive
(b) Speculative motive

(c) Saving motive
(d) Precautionary motive
34. Interest paid or earned on both the original principal amount
borrowed/lent and previous interest earned is often referred
to as

(a) Simple interest
(b) Compound interest

(c) Present value
(d) Future value
35. A Rule of 72 says

(a) Poor countries double their standard of living every
72 years

(b) Modern countries double their standard of living every
72 year

(c) A 7.2% annual growth rate doubles the standard of
living in 10 years.

(d) A 7.2% annual growth rate increases the standard of
living by 100% in 72 years.
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Answers
1. (c)
2. (d)
3. (d)
4. (b)
5. (b) Explanation : Because he will have to pay 33.33% tax on
the return which is compulsory.
6. (a)
7. (c) Explanation : Interest rate of 5% on 95.2 will be `4.76
(Thus 95.2 + 4.76 = 99.96)
prt
8. (b) Explanation : Simple Interest =
100
1500 6 2
100
= 180
9. (d) Explanation : Compound interest is, A =

P = 1500, r =
P 1 +
100n
nt
4.3
= 0.043, n = 4, t = 6.
100
0.043
Therefore, A = 1500 1 +
4( 6)

= 1938.84
So, the balance after 6 years is approximately `1938.8
10. (b) Explanation : Annualised interest is calculated as :
n
i
A
= 1 + 1
n
12
.12
= 1 +
12
= 12.683%
11. (a) Explanation : Nominal interest rate is the periodic interest
rate multiplied by the number of periods per year. e.g. a
nominal interest rate of 12% based on monthly compounding
means a 1% interest rate per month.
5
12. (b) Note : `1000
= `50
100
13. (b)
14. (a)
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15. (c) Explanation : In case of hyper inflation prices rise from

20 to 100 per cent per annum or more. It is also called
galloping inflation. It brings total collapse of the monetary
system because of the continuous fall in the purchasing
power of money.
16. (c)
17. (a)
18. (d) Explanation : Hoarding refers to the purchase of large

quantities of a commodity with the intent of pushing up
the price by creating shortage in the market.
19. (b) Note : Cash inflow = Purchase price Loss

= `10,000 `3000

= `7000
20. (b)
21. (d)
22. (c) Explanation : Bank is a financial institution whose primary

activity is to act as a payment agent for customers and to
lend and borrow.
23. (c) Explanation : Liquidity refers to the immediate ready
availability of money when a person wants to use it.
24. (a)
25. (c)
26. (d) Explanation : Formula for calculating final amount including

the principal is as follows:
M = P(1 + i)n
Here,
M = Final amount including the principal
P = Principal amount
i = the rate of interest per year
n = the number of years invested
Thus,
M = 1000(1 + 0.05)3 = `1157.62
27. (c) Explanation :

Simple interest for 1 year = `(854 815) = `39
Simple interest for 3 years = `(39 3) = `117
Principal = `(815 117) = `698

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100 81
28. (d) Explanation : Time =
years
450 4.5

= 4 years
29. (b) Explanation : Let rate = R% and Time = R years
1200 R R
Therefore,
= 432
100

12 R2 = 432

R2 = 36

R=6
30. (a)
31. (c)
32. (b)
33. (c)
35. (c)
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34. (b)
5
BASICS OF BANKING
Key Points
l Meaning of Bank : A bank is a company which collects
money from the public in the form of deposits and lends the
same to borrowers. It provides facilities for safekeeping.
l Central Bank : Central Bank serves as a leader of the banking
system and the money market. It exercises supervision and
control over all other banks in the country. In India, Reserve
Bank of India is the Central Bank.
l Commercial Banks : These are joint stock banks which
receive deposits from the public and business firms. They also
provide short-term and medium term loans to the customers.
l Savings Account : Savings account is meant for the general
public to encourage thrift. It fosters the habit of savings. A
reasonable rate of interest is allowed on the credit balance in the
savings account. No overdraft facility is available.
l Current Account : It is generally opened by businessmen. A
person or a firm can open this account with a bank by depositing
a certain amount, usually `5000. There is no restriction on the
numbers of withdrawals. No interest is paid on current account.
l Recurring Deposit Account : In this type of account, a
customer is allowed to deposit a certain amount of money every
month for a specified period of time. At the end of the period,
he is given the total deposit amount alongwith interest at the
prescribed rate.
l Fixed Deposit Account : Under this account, a person makes
a deposit of money in one lump sum for a specified period of
time, say one year, three years, five years or more. Passbook
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or cheque book facility is not required. The customer is not

allowed to withdraw from the account before the expiry of
the specified period, but he can borrow against the security of
deposit. Depositor is given a higher rate of interest.
Demand Drafts : Bank drafts are known as demand drafts, as
they are always payable on demand without any days of grace.
These are always payable to a certain payee named in the draft
or to his order. Banks charge a nominal commission for this
service.
Bankers Cheque or Pay Order : Cheque is drawn by
one person upon another. It can be drawn payable or bearer.
A cheque is an unconditional order in writing drawn upon a
specified banker, directing the bank to pay a certain sum of
money to the order of a person or to the bearer of the instrument.
Automated Teller Machines (ATM) : Banks provide ATM
card to the current account holder or savings account holder
who is an individual or proprietor. It offers transaction related
interactive customer exchange facility to customers.
Tele-banking : Under this facility, a customer can get
information about the balance in his/her account or information
about the latest transactions on the telephone. This facility is
available round the clock.
Electronic Funds Transfer System (EFTs) : EFT system
enables employers to transfer salaries or wages directly from
the companys bank account to the employees bank accounts.
Internet banking : This gives to the customers anytime
access to their banks. They can check their account details, get
their bank statements, perform transactions, and pay their bills
sitting in their homes and offices.
Electronic mail (e-mail) : It is a system of electronic
correspondence used to send and receive messages through
a network of computer and telecommunication links. It is a
subscription service in certain cases.
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l Permanent Account Number (PAN) : Permanent

Account Number is issued by Income Tax Department under
the supervision of the Central Board of Direct Taxes. It also
serves as an important ID proof. This number is mandatory
or compulsory for financial transactions like opening a bank
account, receiving taxable salary, sale and purchase of assets
above specified limits etc.
l Personal Identification Number (PIN) : PIN is a secret
numeric code shared between a user and a system that is used to
authenticate the user of the system. PINs are used for ATMs and
debit cards and credit cards at the point of sale.

1.
The apex bank which supervises and controls the entire
banking system of our country is

(a) Reserve Bank of India

(b) Commercial Bank

(c) Exchange Bank

(d) Industrial Bank
2.
Exchange banks are a type of commercial banks. Their main
function is

(a) Financing foreign trade

(b) Buying and selling of gold and silver

(c) Facilitating foreign remittances

(d) All of these
3.
Which is not the function of commercial banks?

(a) Accepting deposits

(b) Lending money

(c) Discounting of bills

(d) Issue of currency notes
4.
In which type of bank account, the account holder is required
to deposit a specific amount every month?

(a) Savings deposit account

(b) Recurring deposit account
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(c) Current account

(d) Fixed deposit account
5.
Which is not the advantage of payment by cheques?

(a) Safety
(b) Convenience

(c) Easy transfer
(d) Risk of loss
6.
Which is not considered essential while investing money?

(a) Safety
(b) Return

(c) Liquidity
(d) Acceptability
7.
The cheque book contains printed blank forms of cheques
which the customer can fill in and sign whenever he wants
to pay money to somebody or for himself/herself. Out of
the following statements, which is not an essential feature
of cheques?
(a)
It is payable to self or any other person

(b) It is drawn on a specified bank

(c) It is signed by the drawer

(d) It is a conditional order to pay
8. Observe the pictures carefully and tell the correct answer.

(a) Automated Teller Machine and Debit Card

(b) Automated wending Machine and Credit Card

(c) Automatic Telephone Machine and PAN Card

(d) Automatic Calling Machine and PAN Card
9.
Two parallel transverse lines across the face of a cheque is
called

(a) Cancelling
(b) Crossing

(c) Endorsing
(d) Withdrawing money
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10. Looking at the sample form of Savings Bank Account, state

the requirements for opening a savings bank account.

(a) Address proof
(b) Passport size photo

(c) PAN card/number
11. The banks have a system of clearing. What is required for
the clearing process?

(a) All banks meet at one place
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(b) Exchange the cheques received by them from their

respective customers
(c) Settle the accounts among themselves
(d) All of these
12. Looking at the picture of Demand Draft Requisition Form

and the Demand Draft, can you tell what is a demand draft?
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(a)
(b)
(c)
(d)
Bill drawn on demand

Bill drawn on supply
Bill drawn on by government
None of these
13. Name the account in which a person makes a deposit of

money in one lump sum for a specified period of time.

(a) Savings account

(b) Current account

(c) Fixed deposit account

(d) Recurring deposit account
14. Which is not the function of commercial banks as an agent?

(a) Sale and purchase of securities on behalf of customers

(b) Collecting various receipts like dividends, interest etc. on
behalf of customers

(c) Collecting and paying cheques, bills of exchange on
behalf of customers

(d) Issuing of currency notes
15. When a bank gives permission to a client to withdraw more
money than his actual deposit in his account, then the excess
withdrawal is called

(a) Bank draft
(b) Discounting
(c) Overdraft
(d) Remittances
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16. Real Time Gross Settlement System (RTGS) is managed by

(a) State Bank of India
(b) Reserve Bank of India

(c) Government of India (d) Foreign Bank
17. What enables the card holders to have overdraft facility of
an amount depending upon the creditworthiness of the party?

(a) Debit Cards
(b) ATM

(c) Credit Cards
(d) Cheques
18. Following picture gives the specimen of a cheque. Looking
at the picture can you tell the parties of the cheque?
(a) Drawer
(c) Payee
(b) Drawee
(d) All the above
19. Which one is not the commercial bank of India?

(a) Punjab National Bank

(b) State Bank of India

(c) Reserve Bank of India

(d) Syndicate Bank of India
20. Which is not the function of Central Bank?

(a) Monopoly of note issue

(b) Governments bank

(c) Controller of credit

(d) Accepting public deposits
21. Punjab Bank Ltd. comes under which category of banks?

(a) Private Sector Banks (b) Public Sector Banks

(c) Co-operative Banks (d) Foreign Banks
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22. Which bank is known as the Apex Bank of India?

(b) State Bank of India
(c) Central Bank
(d) Bank of India
23. Accepting deposit is which type of function of banks?
(a) Primary function
(b) Secondary function
(c) Social function
(d) Agency function
24. Which of the following does not come under e-banking?
(a) Automated Teller Machine
(b) Electronic Fund Transfer
(c) Depositing cash in account
(d) Debit card
25. A central bank which sets the short term rate of interest
must
(a) Sell government bonds
(b) Change the reserve ratios
(c) Meet the resulting demand for reserves
(d) Seek government approval
26. Government securities with terms of more than one year are
called
(a) Capital bills
(b) Treasury bills
(c) Bills of exchange
(d) Government bonds
27. By the term money we mean
(a) the same as income
(b) the values of all coins and currency in circulation at
anytime
(c) anything that is generally accepted as a medium of
exchange
(d) the fixed assets of a person or individual
28. The difference between a banks actual reserves and its
required reserves is its
(a) Profit margin
(b) Required reserve ratio
(c) Net worth
(d) Excess reserves
29. Which of the following is not the function of Central Bank?
(a) Lending to the government
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(b) Conduct of monetary policy

(c) Issue of currency notes and coins

(d) Supervising the stock market
30. Indian commercial banks are categorized into

(a) Private sector banks (b) Public sector banks

(c) Foreign banks
31. An increase in Cash Reserve Ratio by Reserve Bank of
India leads to

(a) Increase in deposit

(b) Decrease in deposit

(c) Increase in lendable resources

(d) Decrease in lendable resources
32. The affairs of Reserve Bank of India are conducted by

(a) Regional Board
(b) Local Board

(c) Central Board
33. Who intervenes in the markets to maintain the external value
of Indian rupee?


(b) Exporters

(c) International Monetary Fund

(d) Importers
34. Currency notes of which of the following denominations are
not printed in India?
(a)
`10 (b)
`50
(c)
`1000 (d)
`2500
35. When banks accept a fixed sum of money from an individual
for a definite period and pay with interest on maturity, the
deposit is known as

(a) Term deposit
(b) Demand deposit

(c) Bond
(d) Security
1. (a)
Answers
2. (d)
3. (d)
4. (b)
6. (d)
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5. (d)
7. (d) Explanation: The essential features of cheque are as follows:

l A cheque is a written document
l It is an unconditional order to pay
l It is drawn on a specified bank
l It contains the sum payable
l The amount is payable on demand
l It is signed by the drawer
l It is payable to self (drawer) or to any other person
There are three parties to a cheque :
l Drawer, who writes the cheque
l Drawee, the bank on which the cheque is drawn
l Payee, the person to whom the money is payable. Drawer
and Payee are the same person in case of a cheque for
self.
8. (a)
9. (b)
10. (d)
11. (d)
12. (a) Explanation : Bank draft is a bill drawn either on demand

or o therwise by one banker on another in favour of a

third party or by one branch of a bank on another branch of
the same bank or by the head office on a branch or vice versa
for a sum of money payable on demand or order. These are
also known as Demand Drafts.
13. (c)
14. (d)
15. (c)
16. (b) Explanation : RTGS is a gross settlement system in which

17. (c)
b oth processing and final settlement of funds transfer

instructions can take place continuously i.e., in real time.
Transfers are settled individually, without vetting debits
against credits.
18. (d)
19. (c)
20. (d)
21. (a) Explanation : Private sector banks are owned by a private

individual. Majority of stake is held by private individuals
and not by government.
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22. (a) Explanation : Central Bank is the supreme monetary institution

at the apex of the monetary and banking structure of a country.
23. (a)
24. (c)
25. (c)
26. (d) Explanation : Government bond is a debt security issued

by a government to support government spending. It is most
often issued in the countrys domestic currency.
27. (c)
28. (d)
29. (d)
30. (d)
31. (d) Explanation : CRR is the specified minimum fraction of the

total deposits of customers which commercial banks hold as
cash.
32. (c)
33. (a)
34. (d)
35. (a) Explanation : It is a money deposit in the banks that cannot

be withdrawn for a certain term or period of time. The longer
the term, the better the yield on the money deposited.
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6
INTRODUCTION TO
STOCKS AND BONDS
Key Points
l Stocks : It is a type of security that signifies ownership in a
corporation and represents a claim on part of the corporations
assets and earnings.
l Equity : It is the residual claimant or interest of the most junior
class of investors in assets, after all liabilities are paid.
l Equity shares : Shares that carry no preferential or special
rights in respect of annual dividends and in the repayment of
capital at the time of liquidation of the company are called
equity shares.
l Share premium : It is the amount that is over and above par
value on the amount that has been subscribed to for a new issue
of corporate capital. It can only be used for certain specific
purposes that are laid out in the corporations by-laws.
l Bonds : It is a debt instrument issued for a period of more
than one year with the purpose of raising capital by borrowing.
Generally, a bond is a promise to repay the principal alongwith
interest on a specified date.
l Debentures : It is a type of debt instrument that is not secured
by physical assets or collateral. Debentures are backed only by
the general creditworthiness and reputation of the issuer.
l Dividend : A sum of money paid regularly (typically annually)
by a company to its shareholders out of its profits or reserves.
l Earning Per Share (EPS) : It is the portion of the companys
profits allocated to each outstanding share of common stock.
The essential equation for EPS is:
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EPS =
Net Income
Total Number of Capital Stock Shares
l Price-Earnings Ratio (P/E Ratio) : It is the valuation ratio

of companys current share price compared to its per share
earnings. It is calculated as:
Market Value Per Share
P/E Ratio =
Earnings Per Share (EPS)
l Stock exchange : It is the organized and regulated financial
market where securities are bought and sold at prices governed
by the forces of demand and supply.
l Face value of stocks or bonds : The face value of bonds
represents the principal or redemption value. Interest payments
are expressed as a percentage of face value.
l Market value of stock : The current quoted price at which
investors buy or sell a share of common stock or a bond at a
given time.
l Primary market : It is the part of the capital market that deals

with issuing of new securities. It is the market in which buyers
and sellers negotiate and transact business directly without any
intermediary such as resellers.
l Secondary market : It is also called after-market. It is

the financial market in which previously issued financial
instruments such as stocks, bonds, options etc., are bought and
sold.
l Dematerialization : It refers to the absolute and relative
reduction in the quality of materials required to serve economic
functions in society. In finance, it refers to the substitution of
paper form securities by book-entry securities.
l Demat account : In India, shares and securities are held
electronically in a Dematerialized Account (Demat Account),
instead of the investor taking physical possession of certificates.
The account is opened by the investor while registering with the
investment broker.
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l Nifty : Nifty stands for National Stock Exchanges Fifty. It

is an index computed from performance of top stocks from
different sectors listed on National Stock Exchange (NSE).
l BSE SENSEX : The BSE SENSEX also called the BSE 30
or simply the SENSEX is a free float market index of 30 well
established and financially sound companies. (It stands for
Bombay Stock Exchange Sensitive Index.)
l National Stock Exchange of India (NSEI) : The NSEI
was set up by All India Financial Institutions and Commercial
Banks in November 1992. In this, the system of transaction of
securities is very efficient and transparent. It is also called a
Model Exchange.
l Bear : A bear is a pessimistic speculator in the stock market
who always sells securities in anticipation of falling prices.
l Bull : A bull is an optimistic speculator who always buys
securities in anticipation of selling them at higher prices and
thereby makes a profit.
l Initial Public Offer (IPO) : An Initial Public Offering (IPO)
is a type of public offering where shares of stock in a company
are sold to the general public, on a securities exchange, for the
first time.

1. A place where stocks and shares and other long term

commitments or investments are bought and sold is called

(a) Commodity market (b) Stock market

(c) Business market
(d) Peoples market
2.
An optimistic speculator who buys securities in anticipation
of selling them at higher prices is called

(a) Bull
(b) Bear

(c) Trader
(d) Speculator
3.
Suppose Companies A and B both earn `1000, but Company
A has 10 shares outstanding, while Company B has 50 shares
outstanding. Which companys stock would you like to own?
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(a) Stock of company A

(b) Stock of both A and B

(c) Stock of company B

(d) None of these
4.
What is the market value of a `10,000 face value bond with
a 10 percent coupon rate when the markets rate of return
is 9%?

(a) More than its face value

(b) Less than its face value

(c) Same as its face value

(d) Decreasing face value
5.
What is the yield on a share of preferred stock, which has
a `100 par value and is currently selling for `160 in the
market place? The shares of preferred stock pays a 16%
annual dividend.

(a) 10%
(b) 14%

(c) 16%
(d) 19%
6.
If the intrinsic value of a share of common stock is less
than its market value, which of the following is the most
reasonable conclusion?

(a) The market is undervaluing the stock

(b) The market is overvaluing the stock

(c) The stock has a low level of risk

(d) The stock offers a high dividend payout ratio
7.
In case the markets required rate of return for a particular
bond is less than its coupon rate, the bond is called

(a) Discount bond
(b) Premium bond

(c) Face bond
(d) Par bond
8.
The record of a countrys transactions in goods and services
and assets with the rest of the world is called .

(a) Current account
(b) Capital account

(c) Balance of Payments (d) Balance of trade
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9.
Look at the picture and identify the building

(a) Stock Exchange
(b) Reserve Bank of India

(c) Parliament House
(d) None of these
10. If the market value of a share is lower than the face value,
then the shares are said to be at a

(a) Discount
(b) Dividend

(c) Premium
(d) Equality
11. Mr. Chopra wants to start a company, ABC Limited with 8
friends. Mr Chopra invests `500 and invites the friends to
invest `200 each, to which all the friends agree. In this case,
the total capital of the company would be
(a)
`2000 (b)
`2200
(c)
`2100 (d)
`2300
12. A trading account of a company reveals the

(a) Financial position of an organisation

(b) Assets of the company

(c) Liabilities of the company

(d) Gross profit during the year
13. The regulatory power of SEBI includes

(a) Protecting the interests of investors in securities

(b) Promoting the development of the securities market

(c) Regulating the securities market

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14. Shares and debentures of a company or corporate body or

government are the

(a) Economic instruments

(b) Financial instruments

(c) Credit instruments

15. If a company is currently trading at `43 a share and earnings
over the last 12 months were `1.95 per share, then P/E Ratio
for the stock would be

(a) 21.05
(b) 22.05

(c) 23.05
(d) 24.05
16. Business in stock exchanges and any other securities market
is regulated by

(a) Stock Exchange Market

(b) Government Authorities

(c) SEBI

(d) Nifty
17. Bonds issued by companies with a low credit rating and
high growth potential are called

(a) Convertible bonds
(b) Non-convertible bonds

(c) Secured bonds
(d) Floating bonds
18. The part of the capital market that deals with issuing of new
securities is known as

(a) Primary market
(b) Secondary market

(c) Capital market
(d) Trading market
19. A sum of money paid regularly by a company to its
shareholders is called

(a) Profit
(b) Dividend

(c) Share
(d) Equity
20. An optimistic speculator in the stock market is called

(a) Bear
(b) Bull

(c) Jobber
(d) Broker
21. Interest on government securities on fixed basis is known
as

(a) Bank Rate
(b) Prime Lending Rate

(c) Coupon
(d) None of these
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22. A market for existing securities rather than new issues is

known as the

(a) Secondary market
(b) Prime market

(c) Tertiary market
(d) Capital market
23. A market where new securities are bought and sold for the
first time is known as

(a) Primary market

(c) Tertiary market
(d) Current market
24. A market for relatively long term financial instruments is
called

(a) Tertiary market

(c) Primary market
(d) Capital market
25. Which of the following is not a characteristic of stock
exchange?

(a) It allows securities to be listed on more than one exchange

(b) It requires one to be a member in order to be allowed to
trade

(c) It allows exchange listed issues to trade off the exchange
floor with the aid of brokers

(d) Stocks traded on exchange must meet minimum listing
requirements
26. What is the most appropriate goal of a firm?

(a) Profit maximisation

(b) Stakeholder maximisation

(c) EPS maximisation

(d) Shareholder wealth maximisation
27. Securities and Exchange Board of India (SEBI) was
established in 1988 and was given statutory status through
an Act in

(a) 1988
(b) 1989

(c) 1990
(d) 1992
28. Which is not the function of stock exchange?

(a) Pricing of securities

(b) Safety of transaction

(c) Providing scope for speculation

(d) Purchase of property
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29. Important money market instruments are?

(a) Treasury Bills
(b) Commercial Bills

(c) Call money
30. Equity shareholders are called

(a) Partners of the company

(b) Owners of the company

(c) Guardian of the company

(d) Executives of the company
31. Public deposits are the deposits that are raised directly from

(a) The Directors
(b) The Auditors

(c) The Public
(d) The owners
32. Those shares which do not carry any preferential rights in
the payment of annual dividend and repayment of capital
in the event of liquidation are called

(a) Equity Shares

(b) Preferential Shares

(c) Debentures

33. Which is not the advantage of public deposit?

(a) Easy method

(b) Fair weather friend

(c) No need of mortgage

(d) Benefit of trading on Equity
34. Trade credit is an example of

(a) Short term finance

(b) Long term finance

(c) Medium term finance

35. Functions of financial markets include

(a) Facilitating price discovery

(b) Providing liquidity to financial assets

(c) Reducing the cost of transactions

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Answers
1. (b)
2. (a)
3. (a) E xplanation: EPS of Company A
Net Earnings
1000
=
=
= 100
Outstanding Shares
10
Net Earnings
1000
= 20
=
Outstanding Shares
50
You would like to own the stock of company A with an EPS of
100, whereas company B has EPS of 20
4. (a) Explanation : When the required rate of return is less
than the coupon rate, the bond sells at a premium i.e., greater
than the face value.
5. (a) Explanation : The dividend on the share of preferred stock
is `16 (16% 100). The yield is :
16
Dividend
Yield =
= 10%
=
Market Price 160
EPS of Company B =
6. (b) 7.
(b)
8. (c)
9. (a)
10. (a)
11. (c)
12. (d)
13.
(c) Explanation : Securities and Exchange Board of India (SEBI)
is authorised to regulate all merchant banks on issue activity,
lay guidelines and supervise and regulate the working of mutual
funds and oversee the working of stock exchanges in India.
14.
(b) Explanation : All securities are financial instruments.
15. (b) Note : P/E Ratio =
Market Value Per Share

Earnings Per Share (EPS)
16. (c)
17. (a) Note : Bond holders can convert these into a specified number
of shares of common stock in the issuing company or cash
of equal value.
18. (a) 19.
(b)
20. (b)
21. (c) Explanation : A coupon payment on a bond is a periodic
interest payment that the bondholder receives during the
time between when the bond is issued and when it matures.
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22. (a)
23. (a)
24. (d) Explanation : Capital market is a part of a financial system

concerned with raising capital by dealing in shares, bonds
and other long-term investments.
25. (c)
26. (d)
27. (d)
28. (d)
29. (d)
30. (b)
Explanation : The entity owner of shares or stock, are more
commonly known as shareholder or stockholder.
31. (c)
32. (a)
33. (b)
34. (a) Explanation : Trade credit refers to that credit facility which
is extended by one businessman to another for purchase of
goods and services.
35. (d)
Explanation : Financial market is a market for the creation
and exchange of financial assets.
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7
INVESTMENTS : THE WIDER
SPECTRUM
Key Points
l Asset class : It is a group of securities that exhibit similar
l
l
l
l
l
characteristics and behave similarly in the market place. They

are subject to the same laws and regulations. The three main
classes are Equities (stocks), fixed income (bonds) and cash
equivalents (money market instruments).
Mutual funds : It is a type of professionally managed
collective investment scheme that pools money from many
investors to purchase securities. Most mutual funds are open
ended i.e., the investors can buy or sell shares of the fund
anytime.
Equity fund : A mutual fund that invests principally in stocks
is called Equity fund or Stock fund. It can be managed
actively or passively.
Debt funds : These are the funds that invest predominantly
in fixed income bearing instruments like corporate debentures,
treasury bills, commercial papers etc.
Balanced funds : It is a mutual fund that buys a combination
of common stock, preferred stock, bonds, etc. to provide both
income and capital appreciation while avoiding excessive risk.
Tax saving funds : These cater to the investors need of
minimising tax burden on the returns from investments.
Closed end funds : It has fixed number of shares which are
publicly traded. The price of closed end share fluctuates based
on investor supply and demand .
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l Growth plans : It is mutual fund whose primary investment

l
l
l
l
l
l
l
l
objective is long-term growth of capital.

Dividend plans : In this the fund pays dividend from time to
time as and when the dividend is declared.
Net Asset Value (NAV) : It is the value of an entitys assets
less the value of its liabilities. This may also be the same as the
book value or the equity value of the business.
Entry load : This is the amount which the Mutual Fund
companies collect from investors when they join or leave the
scheme. The fee charged is generally referred to as load.
Exit load : This fee is charged when investors leave the scheme.
Public Provident Fund (PPF) : PPF is a privately held
international financial group. It operates in the area of consumer
financing, retail banking and insurance. Individuals who are
residents of India are eligible to open their account in the PPF
scheme. Interest earned is fully exempt from tax without limit.
National Savings Certificate (NSC) : It is a saving bond.
NSCs can be purchased from a Post Office by an adult in his
own name or in the name of the minor, a trust or two adults
jointly. These are issued for six year maturity and can be
pledged to banks for taking loans.
Post Office Monthly Income Scheme (POMIS) : It is a
guaranteed return investment available at the Post Office. It
gives an assured monthly income which is paid every month.
Real estate : Real estate refers to the land, buildings and
things permanently attached to land and buildings. It is also
called realty and real property.
Ponzi schemes : It is an investment operation that pays
returns to its investors from existing capital or new capital paid
by investors, rather than from profit earned by the individual or
organization operating it.
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1.
Can you guess?

l This is a six year deposit scheme earning interest at 8%
per annum.

l The amount invested is also eligible for deduction from
taxable income within limits.

l Available in post offices or through agents.

(a) PPF
(b) NSC

(c) POMIS
(d) NAV
2.
Read the following points carefully:

l A lump sum investment is made in the post office for 6
years at a monthly interest of 8%.

l The interest earned on the amount is paid as monthly
income to the investor.

Tick the right choice :

(a) NSC
(b) NAV

(c) PONIS
(d) POVAS
3.
What is the advantage of investing in real estate?

(a) One can save on rental expenditure by owning a house

(b) Capital appreciation takes place

(c) Provides cushion against inflation

4.
Observe the picture given below and tell what does NAV
stand for?
(a) Normal Asset Value

(c) Not Actual Value
(b) Net Asset Value

(d) Normal Actual Value
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5.
The total market value of the shares in which the mutual
fund has invested its money is known as

(a) NAV
(b) NSC

(c) MIS
(d) VAT
6.
Mutual funds have advantages compared to direct investing
in individual securities. Which one is not the advantage of
mutual fund?

(a) Increased diversification

(b) Daily liquidity

(c) No opportunity to customize

(d) Ease of comparison
7.
The main investing objective of a debt fund will usually be

(a) Preservation of capital (b) Expenditure of money

(c) Capital depletion
(d) Asset appreciation
8.
Tax planning funds cater to the investors need of

(a) Minimizing tax
(b) Maximising tax

(c) Increasing revenue
(d) Increasing income
9.
Who is eligible to open an account in PPF?

(a) Minor child

(b) Individuals (Resident of India)

(c) Individuals (NRI)

(d) Person already having one account
10. The minimum deposit limit in PPF account is
(a)
`100 (b)
`500
(c)
`1000 (d)
`2000
11. The maximum deposit limit in PPF account is
(a)
`50,000 (b)
`60,000
(c)
`80,000 (d)
`100,000
12. What is the minimum tenure period of PPF account?

(a) 5 years
(b) 10 years

(c) 12 years
(d) 15 years
13. Under dividend plan the fund pays dividend as and when it
is declared

(a) Every year
(b) After 4 months

(c) After 6 months
(d) From time to time
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14. The use of money in the hope of making more money is

known as

(a) Deposit
(b) Investment

(c) Money making
(d) Financing
15. Which of the following observations concerning financial
assets is true?

(a) They are claims to the income generated by real assets

(b) They generate net income to the economy

(c) They contribute directly to the productive capacity of the
economy

(d) They increase knowledge that can be used to produce
goods and services
16. The key to any good investment strategy is to

(a) Balance the risks and returns

(b) Maximize the risks

(c) Minimize the returns

(d) Less investment
17. Adjustable rate of interest that can vary through the term of
debt, loan or bond depending upon the market conditions is

(a) Fixed rate of interest

(b) Floating rate of interest

(c) Equal rate of interest

(d) Decreasing rate of interest
18. Spreading investments across asset classes to minimize risks
and maximise returns is called

(a) Centralisation
(b) Deductions

(c) Diversification
(d) Borrowing
19. A professionally managed investment scheme that pools
money from many investors is

(a) NIS
(b) NSC

(c) Mutual fund
(d) Rescue fund
20. Price paid for borrowing money or that received for lending
money is called

(a) Investment
(b) Borrowing

(c) Interest
(d) Money rate
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21. A long-term safe investment and tax saving option issued

by Government of Indias Department of Post is

(a) NSC
(b) NAV

(c) MIS
(d) VAT
22. An arrangement with the lending agency to borrow money
on certain repayment terms is called

(a) Insurance
(b) Loan

(c) Interest
(d) Installment
23. Which type of fund invests in debt securities with very short
maturities?

(a) Growth fund

(b) Money market mutual fund

(c) Bond fund

(d) Certified fund
24. Shares of close end funds often sell

(a) At the net asset value, plus a load fee

(b) At a premium to the net asset value

(c) Exactly at the net asset value

(d) At a discount to the net asset value
25. Shares of a closed end fund are trading at a 4% premium
over NAV. If NAV is `10 per share, what is the current
market price of the funds share.
(a)
`9.60 (b)
`9.80
(c)
`10.40 (d)
`12.05
26. The process of investment involves
(a)
Understanding your investment needs

(b) Understanding risks and returns

(c) Creating a balanced portfolio

27. Life cycle needs pose a risk to your household expenses.
These if not planned for would often take a toll on your
finances. Can you tell which is not a risk management
approach?

(a) Avoiding the risk
(b) Transferring the risk

(c) Reducing the risk
(d) Facing the risk
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28. Every Mutual Fund is allowed to charge for operating

expenses, which are basically the cost of doing business.
The costs are deducted from the income earned by the fund
and are called expense ratios which include :

(a) Marketing and selling expenses

(b) Legal and audit fees

(c) Investment management and advisory fees

29. Load are the most talked about fees that mutual funds charge.
These are one time charges for purchasing or redeeming
shares of a mutual fund. These include

(a) Front end load
(b) Back end load

(a) Both (a) and (b)
(b) None of these
30. The entity who borrows money by issuing the bond and is
due to pay interest and repay capital in due course is the

(a) Investor
(b) Issuer

(c) Principal
(d) Government
31. Can you tell which is not a type of ownership investment?

(a) Stocks
(b) Business

(c) Real Estate
(d) Profit
32. A Ponzi scheme generates returns for old investors by
(a)
Acquiring old investors
(b)
Acquiring new investors

(c) Contacting earlier investors
(d)
Removing earlier investors
33. No matter how large the number of stocks in the portfolio
is, the risk that cannot be diversified away is the

(a) Unique risk
(b) Systematic risk

(c) Company specific risk (d) Business risk
34. Foreign investments in and by a country are referred to as

(a) Capital flows
(b) Capital account

(c) Current account
(d) Government transactions
35. The activity concerned with the planning, raising controlling
and administering of the funds used in business is called

(a) Business finance
(b) Business transactions

(c) Business dealings
(d) Business profit
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36. The financial position of the organisation on a specified date

is shown by

(a) Income transactions

(b) Profit of the company

(c) Balance sheet

(d) Liabilities of the company
37. Read the following feature and mention the name of the
fund

l The scheme is for 15 years

l A person can invest maximum `1,00,000 per year

l The interest is tax free

l Loan facility is available

l Partial withdrawal facility is available

(a) Mutual Fund
(b) Public Provident Fund

(c) Debt Fund
(d) Standard Fund
38. Mr. Varma is a professional and works for a private company.
The company will not offer him a pension after he retires.
He wants the investment to be secure and offer him a lump
sum amount after his retirement along with tax benefits. Can
you suggest an appropriate investment plan?

(a) NSC

(b) Fixed deposit

(c) Public Provident Fund

(d) Savings deposit
39. Mohit saves a small amount every month and deposits the
money in his savings bank account. The bank offers him an
interest of 3.5%. But he wants his money to grow faster. His
college classes keep him fairly busy. He does not have the
time or the expertise to invest in share market. He wants
a solution within the bank. Can you suggest him the best
solution?

(a) Fixed deposit account

(b) Current deposit account

(c) Recurring deposit account

(d) None of these
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40. Ruchika earned a considerable amount throughout the year.

She invested a lot of money in shares, fixed deposits,
Systematic Investment Plan and Growth Mutual Funds.
However, at the end of the year she had to pay huge amount
of income tax. Can you suggest her the way to reduce her
tax liability?

(a) Investing in NSC

(b) Avoiding investment

(c) Opening recurring deposit

(d) Purchasing shares
1. (b)
Answers
2. (c)
3. (d)
4. (b) Explanation : NAV stands for the Net Asset Value
(b) Upward trends show increase in the value
Downward trends show decrease in the value
NAV
5. (a) Note : NAV per unit =
No. of units outstanding
6. (c)
7. (a)
8. (a) 9.
(b)
10. (b)
11. (d)
12. (d)
13. (d) 14.
(b)
15. (a)
16. (a)
17. (b)
18. (c) 19.
(c)
20. (c)
21. (a)
22. (b)
23. (b) 24.
(d)
25. (c)
26. (d)
27. (d)
28. (d)
29. (c) 30.
(b)
31. (d)
32. (b)
33. (b)
34. (a) 35.
(a)
36. (c)
37. (b)
38. (c)
39. (c) 40.
(a)
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8
BEYOND SAVINGS : BORROWING
Key Points
l Meaning of borrowing : Borrowing means receiving
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something of value in exchange for an obligation to pay back

something of usually greater value at a particular time in the
future.
Loan : Loan is an arrangement in which a lender gives money
or property to a borrower, and the borrower agrees to return it,
usually alongwith interest at some future point of time.
Interest rate : It is the rate at which interest is paid by
borrower for the use of money that they borrow from a lender.
Equated Monthly Instalment (EMI) : EMI is the fixed
payment amount made by a borrower to a lender at a specified
date in each calendar month. These are used to pay off both
interest and principal each month, so that over a specified
number of years, the loan is paid off in full.
Amortization : It is the reduction of the value of an asset by
prorating its cost over a period of years. The term means the
same as depreciation.
Credit card : Credit card is a small plastic card issued by a
bank, society etc. It gives the holder an option to borrow funds,
usually at point of sale.
Home loan : It is a loan given by a bank, mortgaged company
or other financial institution to purchase a home.
Personal Loan : A personal loan is made for any purpose
not specifically defined. It does not have to be secured by any
assets. The recipients use the money for general purposes.
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l
l
These are of two main types, i.e., secured personal loan and
unsecured personal loan.
Secured personal loan : It is backed by collateral or security
in the form of home, car or any other financial asset. Lack
of payment will result in repossession of the property by the
creditor.
Unsecured personal loan : It is not secured by anything
other than the signature of the recipient. It is usually based on
general creditworthiness of the person who borrows it.
Education loan : It is a term loan granted to Indian Nationals
for persuing higher education in India or abroad where
admission has been secured.
Consumer loan : It is an amount of money lent to an
individual, usually on a non-secured basis for personal, family
or household purposes. These are monitored by government
regulatory agencies for their compliance with consumer
protection regulations.
Vehicle loan : Loans given for buying a vehicle listed under
assets of an individual or an organization.
Fixed rate loans : These loans maintain the same interest rate
for the duration of the loan. Normally higher rates are charged
by lenders because they may lose money if market interest rates
increase.
Floating interest rate : It is the rate of interest that is allowed
to move up and down with the rest of the market or alongwith
an index. It is also called the variable interest rate because it can
vary over the duration of the debt obligation.
Processing charges : Loan process fee is a charge that
passes on costs to the borrowers for obtaining documentation
appraisals, employment and credit history or any other
information necessary for the lenders underwriting department.
Termination fee : An early termination fee is a charge levied
when a party wants to break the term of an agreement or long
term contract.
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l Prepayment of loan : The satisfaction of a debt or instalment

payment before its official due date e.g., payment of rent and
early loan payments.
l Good loans : It is the loan which helps you build or buy the
most precious asset of lifetime e.g., house, land, education loan
etc.
l Bad loans : This loan is usually taken to satisfy immediate
personal requirements or expenses like, buying consumer
durables or going on vacation etc.
l Credit score : It is numerical expression based on a level
analysis of a persons credit files, to represent the creditworthiness of that person.
l CIBIL : Credit Information Bureau (India) Limited is Indias
first Credit Information Company founded in August 2000.
It collects and maintains records of an individuals payments
pertaining to loans and credit cards.

1.
The act of giving money to another party in exchange for
future repayment of the principal amount along with interest
is called

(a) Borrowing
(b) Paying

(c) Loan
(d) Rate of Interest
2.
A home loan taken to purchase a house or property for
investment purpose is a

(a) Good loan
(b) Bad loan

(c) Not so good loan
(d) Not so bad loan
3.
Vineet has taken a personal loan of 5 lakh rupees for an
yearly interest rate of 13% and a tenure of 5 years, then the
EMI of the loan is
(a)
`10350 (b)
`11475
(c)
`11377 (d)
`11503
4.
The payment of loan including part of principal and some
interest repaid at regular intervals are called

(a) Secured loans
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(b) Unsecured loans

(c) Simple payment loans

(d) Instalment loans
5.
Which of the following statements is true?

(a) The providers of loan capital are paid a dividend

(b) Loan capital is money borrowed from outsiders

(c) Loan capital is not normally repaid to the lender

(d) Loan capital is money subscribed by shareholders of a
company
6.
EMI stands for

(a) Easy Monthly Instalment

(b) Equated Monthly Instalment

(c) Equated Mortgage Instalment

(d) Easy Mortgage Investment
7.
To increase the given present value, the discount rate should
be adjusted

(a) Downward
(b) Upward

(c) Parallel
(d) Same
8.
About an year ago, Vipin took a loan of `10,000 to buy
a new mobile phone costing `11500. Today he finds that
the price of that phone has come down to `7000. Now he
is wondering why he took the loan. As per your opinion,
which of the following is correct?

(a) Vipin should have saved money to buy a phone later

(b) Vipin should not have saved money to buy a phone later

(c) Yes, Vipin did the right thing by taking loan

(d) None of these
9.
Puneet was looking for 2BHK (Two bed room apartment)
two years back. Later, he dropped the idea as he was not
having money to buy the property. He was not prepared to
take loan though he was eligible for it. Now the price of
the same property has gone up. It was logical to take loan
two years back for buying property because

(a) Puneet would have saved the rent

(b) Puneet would have got tax benefits
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(c) Puneet would have got the property at less price

10. Public deposits represent loans from the public including

employees and shareholders of the company. Which is not
an advantage of public deposit?

(a) No charge on assets (b) Flexibility

(c) Risk to investors
(d) No interference
11. Trade credit is the credit extended by one business firm to
another as incidental to sale or purchase of goods and services.
It has the advantage of

(a) Simple and convenient method

(b) No formalities are involved

(c) No interest is payable

12. Instalment credit refers to the facility of buying machinery,
equipment and other durable goods on credit. Which is not
the feature of instalment credit?

(a) The buyer has to pay a part of the price of the asset at
the time of delivery

(b) The balance is payable in a number of instalments

(c) It is more economical than bank loans

(d) The supplier charges interest on the balance due
13. Which is not an advantage of bank credit?

(a) Flexible and can be repaid whenever desired

(b) Loans are available for a short period

(c) Loans can be repaid in easy instalments

(d) Banks do not interfere in the management of clients
business
14. The borrower is required to pay the interest on the whole
amount from the date of sanction in case of

(a) Taking loan
(b) Buying goods

(c) Doing expenditure (d) Transaction
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15. Loans granted for some immediate need are known as

(a) Transaction loans
(b) Unsecured loans

(c) Secured loans
(d) Vehicle loans
16. Long term loans are raised by the companies from financial
institutions. Which is not the limitation of it?

(a) Risk of financial insolvency

(b) Interference with the management

(c) Long processing time

(d) Low cost of term loan
17. Functions of financial markets include

(a) Facilitate price discovery

(b) Provide liquidity to financial assets

(c) Mobilise savings

18. In comparison to credit cards, the interest rate charged on
bank loan is

(a) Higher
(b) Lower

(c) Same
(d) No connection
19. In case of failure to repay the loan, bank can affect your
credit

(a) Positively
(b) Negatively

(c) Optimistically
(d) Basically
20. The opportunity cost of holding money is determined by

(a) the discount rate
(b) the inflation rate

(c) the interest rate
(d) the level of aggregate output
21. In terms of demand for money, the interest rate represents

(a) the rate at which current consumptions can be
exchanged for future consumption

(b) the price of borrowing money

(c) the return on money that is saved for the future

(d) the opportunity cost of holding money
22. Reduction of the value of an asset by prorating its cost over
a period of years is called

(a) Amortization
(b) Interest rate

(c) Termination fee
(d) Processing charges
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23. Anita earns `25,000 per month. She is the only earning
number in the family of four. Her entire income goes towards
meeting the household expenses. She wants a bank loan
i.e., Personal loan to meet the expenses of her daughters
marriage. Will she be able to get it from the bank?

(a) Yes, after giving or depositing collateral

(b) Yes, without any collateral

(c) No, because the loan is required for personal use

(d) No, because she is a woman
24. Kamal was a call centre employee and had taken a car loan
three years back. He left the job a year back after the illness.
After that, he could not pay the monthly instalment of the
car loan. Now, he needs a loan for starting a company of
his own. Will Kamal get the loan?

(a) Yes, as he is not sick now

(b) Yes, because he wants to open a company

(c) No, because his creditworthiness is not good

(d) No, because he wants to open a company
25. Vijay wants to buy an apartment of `50 lakhs in Delhi.
If he takes a housing loan from a bank, then the original
documents of the house will

(a) Be with him
(b) Be with the broker

(c) Be with the bank
(d) Be with the government
26. Sonu is crazy about bikes and wants to buy it which is
priced around `1,00,000. He plans to take a loan from the
bank for the entire amount. If the bank agrees to give him
the loan, will the bank deposit the loan amount in his bank
account or will they give him in cash?

(a) Give him cash

(b) Give him bike

(c) Deposit loan amount in his account

(d) None of these
27. What are the parameters for taking bank loan and calculating
EMI?

(a) Amount of loan
(b) Loan period

(c) Rate of interest
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28. Meena wants to take loan for meeting her household

expenditure because her income is less than the expenditure.
How much should she borrow following the 70-20-10 rule?

(a) Borrow less
(b) Borrow more

(c) Should not borrow
(d) None of these
29. An option given to the holder to borrow funds usually at
point of sale, is

(a) Credit Card
(b) Debit Card

(c) ID Card
(d) PAN Card
30. Loan given by a bank, mortgage company or other financial
institution to purchase a property is called

(a) Secured loan
(b) Unsecured loan

(c) Personal loan
(d) Home loan
31. Loans monitored by government regulatory agencies for
their compliance with consumer protection regulations are
known as

(a) Personal loan
(b) Secured loan

(c) Consumer loan
(d) Vehicle loan
32. Rate of interest that is allowed to move up and down with
an index is

(a) Fixed rate of interest (b) Floating rate of interest

(c) Zero rate of interest (d) High rate of interest
33. The loan secured only by the signature of the recipient is
called

(a) Secured loan
(b) Unsecured loan

(c) Education loan
(d) Personal loan
34. Loan backed by collateral is called

(a) Unsecured loan
(b) Secured loan

(c) Home loan
(d) Vehicle loan
35. Loan that helps in building the most precious asset of lifetime
is known as

(a) Good loan
(b) Bad loan

(c) Personal loan
(d) Consumer loan
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36. Loan taken usually to satisfy immediate personal requirements

is considered

(a) Good loan
(b) Bad loan

(c) Secured loan
37. CIBIL stands for

(a) Credit Information Bureau India Ltd.

(b) Credit Information Business India Ltd.

(c) Credit India Business of Information Ltd.

(d) Credit Information Broadcasting India Ltd.
38. The creditworthiness of a person is represented by

(a) Bank score
(b) Interest score

(c) Credit score
(d) Debit score
39. Borrowing should be individuals

(a) Need based
(b) Comfort based

(c) Luxury based
40. Cost attached to the borrowings is called

(a) Rate of interest
(b) Multiple cost

(c) Basic cost
(d) Fixed cost
1. (c)
2. (a)
3. (c) Note : EMI = P
Answers
r (1 + r )
(1 + r )

where, P = Principal loan amount

r = Annual interest rate/12

n = Number of monthly instalments
4. (d)
5. (b)
6. (b)
7. (a)
8.
(a) Explanation : He should have saved money to buy the
mobile phone, instead of taking loan. In this way, he
would have got the call phone at a lower price. Besides
this he would have saved the money that he had to pay
towards interest on the loan. Another advantage is that
he would have earned some interest on the saved money
by keeping it in bank account.
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9.
14.
19.
24.
26.
(d)
10. (c)
11. (d)
12. (c)
13. (b)
(a)
15. (a)
16. (d)
17. (d)
18. (b)
(b)
20. (c)
21. (d)
22. (a)
23. (a)
(c)
25. (c)
(c) Note : The sanctioned amount of loan is credited in the
debtors account. Bank charges interest on the whole
amount from the day it was sanctioned. Loan is never
given to the borrower in the form of cash.
27. (d)
28.
(a) Explanation : She should allocate her monthly income
properly and borrow less.

The 70-20-10 rate states that :

l 70%
is allocated for living expenses (rent, food,

clothing etc)
l 20%
is allocated for saving (retirement, investment,

emergency fund etc).

l 10% is allocated for debt repayment or fun money.
29. (a)
30. (d)
31. (c)
32. (b)
33. (b)
34. (b)
35. (a)
36. (b)
37. (a)
38. (c)
39. (a)
40. (a)
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9
RETIREMENT AS A FINANCIAL GOAL
Key Points
l Retirement : It is a stage in the life cycle of an individual
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when one stops being an active part of the productive and

working population due to the advanced age.
Retirement planning : In a financial context it refers to the
allocation of finances for retirement. It is the planning for the
purpose of achieving financial independence after retirement.
Pension : Pension is a regular payment made by the State to
people above the official retirement age and to some widows
and disabled people. It is the regular income to the individual
after retirement.
Defined benefit pension plan : It is a pension plan in
which a specified monthly benefit or payment is available on
retirement. It is predetermined on the basis of the employees
earnings history, tenure of service and age.
Defined contribution : In this type of pension plan the
pension amount is dependent upon the aggregated retirement
corpus, determined by the amount of individual contribution.
Accumulation phase : In this phase a person invests
money in an annuity for the purpose of providing income for
retirement. The more invested during the accumulation phase,
the more will be received during the annuitization phase.
Defined benefit plan : It is a retirement account for which
your employer does all the work, including ponying up the
money and deciding where to invest it.
Defined contribution plan : In this type of plan, you decide
how much you want to contribute, and your employer puts the
money into your individual account on your behalf.
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l Employees Provident Fund (EPF) : This scheme is an
individual account defined contribution scheme wherein both

the employee and the employer contribute to the fund at the rate
of 12% of the employees pay which can be withdrawn at the
time of retirement.
Employees Pension Scheme (EPS) : It is a defined
benefit scheme, based on a contribution rate of 8.33% from
the employee to which government makes an additional
contribution of 1.16%. EPS was introduced in 1995.
National Pension System (NPS) : It is an Indian
Government defined contribution based pension system
which was launched in 2004. Apart from offering wide
choice of investment options to employees, this scheme also
helps Government of India to reduce its pension liabilities.
It is a move from a defined benefit pension to a defined
contribution based pension system.
PFRDA : Pension Fund Regulatory and Development
Authority (PFRDA) was established by Government of India
on 23rd August 2003. The mandate of PFRDA is development
and regulation of pension sector in India.
NPS Swavalamban model : It is designed to ensure ultralow administrative and transactional cost, so as to make small
investments viable. It works on a group model. Distinguishing
features are such as, voluntary, focussed, simple, economical,
portable etc.
Inflation : Inflation is a persistent increase in the general price
level of goods and services in an economy over a period of
time. It reflects the reduction in the purchasing power per unit
of money.
Pension plan : It is a type of retirement plan usually enjoying
tax exemption. In this, the employer makes contributions
toward a pool of funds set aside for an employees future
benefit.
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1.
The act of ending working or professional career is called

(a) Rest
(b) Retirement

(c) Escaping
(d) Tiredness
2.
Retirement planning requires to

(a) Determine how much annual income will be needed in
each year after retirement

(b) Determine how much must be contributed to retirement
savings in each working year

(c) Determine how much corpus must be accumulated in
retirement savings

3.
Which of the the following is not included in retirement
planning?

(a) Identifying sources of income

(b) Estimating expenses

(c) Managing assets

(d) Outflow of money
4.
Which of following is not considered as pension?

(a) Sum of money paid regularly to a widow

(b) Person who is working in a company and earning
`10,000 per month

(c) Person who is getting `500 per month after leaving the
job

(d) A soldier who has been seriously injured in a war
getting regular income
5.
A period of time when an annuity investor is in the stages
of building up the cash value of the annuity is known as

(a) Distribution phase
(b) Accumulation phase

(c) Observation phase
(d) Working phase
6.
The first and the most important step in managing retirement
portfolio is

(a) Setting financial goals (b) Setting family goals

(c) Setting priorities
(d) Setting management goals
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7.
In which type of pension plan you decide how much you
want to contribute out of your salary?

(a) Defined benefit plan

(b) Defined contribution plan

(c) Accumulation plan

(d) Distribution plan
8.
In the EPF, both the employee and the employer contribute
to the fund out of the employees pay at the rate of

(a) 8%
(b) 10%

(c) 12%
(d) 14%
9.
In the EPS, the employee makes the contribution at the rate
of

(a) 5.35%
(b) 7.15%

(c) 8.20
(d) 8.33%
10. In the Employees Pension Scheme the government makes
an additional contribution of

(a) 0.50%
(b) 1.00%

(c) 1.16%
(d) 1.82%
11. In India, the Employees Pension Scheme was introduced in
the year

(a) 1992
(b) 1993

(c) 1994
(d) 1995
12. Employees Pension Scheme (EPS) is a

(a) Defined benefit scheme

(b) Defined contribution scheme

(c) Defined money scheme

(d) Defined collection scheme
13. An example of defined contribution scheme introduced for
employees is

(a) EPF
(b) EPS

(c) PPF
(d) NSC
14. Pension Fund Regulatory and Development Authority was
established by Government of India on

(a) 23rd July 2003
(b) 23rd August 2003

(c) 23rd July 2004
(d) 23rd August 2004
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15. The PFRDA performs promotional, developmental and

regulatory functions relating to the pension funds, through
regulations or guidelines. Proposed functions include

(a) Establishing mechanism for grievance redressal of the
subscribers

(b) Regulating the NPS

(c) Educating the subscribers and general public on issues
related to pension

16. Which of the following is not a main feature of NPS?

(a) The account shall be portable in case of change of
employment

(b) Every subscriber will have an individual pension account

(c) The subscriber may not chose the allocation of his funds
across various pension schemes

(d) On attaining the maturity, a minimum amount has to be
invested as annuity
17. The distinguishing features of NPS Swavalamban include

(a) Voluntary

(b) Economical

(c) Portable

18. Negative effects of inflation does not include

(a) An increase in the opportunity cost of holding money

(b) Uncertainty over future inflation which may discourage
savings

(c) Encouraging investments

(d) Shortage of goods due to hoarding
19. Inflation or increase in general price level results in

(a) Decrease in purchasing power
(b)
Increase in purchasing power

(c) Same purchasing power

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20. Retirement is the point where a person leaves job and cease
to work

(a) Completely
(b) Partially

(c) For long period
(d) For some time
21. Any plan, fund or scheme which provides retirement income
is called

(a) Retirement fund
(b) Pension fund

(c) Plan fund
(d) Benefit fund
22. Monthly sum that will be received by the subscriber at the
time of retirement is known as

(a) Annuity
(b) Subscription

(c) Benefit
(d) Deposit
23. The amount invested to receive annuity i.e., monthly pension
by the subscriber at the time of retirement is called

(a) Privatisation
(b) Standardisation

(c) Annuitisation
(d) Investment
24. CRA (Central Recordkeeping Agency) is the core
infrastructure for the NPS and is critical for its successful
operation. The main functions and responsibilities include

(a) Recordkeeping, administration and customer service/
functions

(b) Issuing of unique Permanent Retirement Account
Number (PRAN) to each subscriber

(c) Acting as an operational interface between PFRDA and
other NPS intermediaries

25. A single payment for the total amount due is called

(a) Total amount
(b) Lump sum

(c) Single amount
(d) Instalment
26. BPL stands for

(a) Below Poverty Line

(b) Bumper Population Level

(c) Below Poor Level

(d) Below Poverty Level
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27. Establishing a retirement goal allows to proactively manage

individuals.

(a) Financial life
(b) Medical life

(c) Health structure
(d) Economic structure
28. A traditional defined benefit scheme which runs on the basis
of pay-as-you-go system is

(a) Employees Provident Fund (EPF)

(b) Employees Pension Scheme (EPS)

(c) Civil Servants Pension (CSP)

(d) Public Provident Fund (PPF)
29. Indira Gandhi National Old Age Pension Scheme (IGNOAPS)
provides old age pension to BPL population

(a) Above 40 years of age

(b) Above 45 years of age

(c) Above 50 years of age

(d) Above 60 years of age
30. Indira Gandhi National Disability Pension Scheme (IGNDPS)
provide pensions to BPL (Below Poverty Line) persons with
severe or multiple disability in the age group of

(a) 5-10 years
(b) 10-15 years

(c) 18-59 years
(d) 30-59 years
31. In the IGNDPS, the Central Government Assistance for
pension is
(a)
`200 per month per beneficiary
(b)
(c)
(d)
32. Subscriber contributions accumulated and invested for
specified period is known as

(a) Lump sum
(b) Corpus

(c) Aggregate
(d) Annuity
33. Defined benefit plans are post retirement benefit plans where

(a) The risk and benefits will be less than expected falls
upon the employees

(b) The employer is legally not obliged to provide an agreed
level of post employment benefit
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(c) The employer is legally obliged to provide an agreed level

of post employment benefits

(d) The employer pays an agreed level of amount into the
pension fund each year
34. Which of the following items is always treated as a long
term employee benefit?

(a) A bonus payable within 12 months after the end of the
period of service

(b) A company car provided for an employees use

(c) A bonus payable more than 12 months after the end of
the period of service

(d) Employees wages and salaries
35. Short term employee benefits do not include

(a) Benefits in kind

(b) Employees social security contributions

(c) Bonuses payable more than 12 months after the end of
the period of service

(d) Short term sick pay
1.
6.
11.
16.
21.
26.
31.
(b)
(a)
(d)
(c)
(b)
(a)
(a)
2. (d)
7. (b)
12. (a)
17. (d)
22. (a)
27. (a)
32. (b)
Answers
3. (d) 4.
(b)
8. (c) 9.
(d)
13. (a) 14.
(b)
18. (c) 19.
(a)
23. (c) 24.
(d)
28. (c) 29.
(d)
33. (c) 34.
(c)
103
New Delhi, Ph. 0120-3830000
5. (b)
10. (c)
15. (d)
20. (a)
25. (b)
30. (c)
35. (c)

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GOYAL BROTHERS PRAKASHAN

GOYAL BROTHERS PRAKASHAN

D-231, Sector 63, Noida-201301 (U.P.)

: No. 51 (New) 87 (Old), East CIT Nagar,

Published & Printed by

Reserved with Goyal Brothers Prakashan

General Instructions About the Test

can register for the test through their schools only. No

l Particulars to be noted : Please note carefully your Roll Number,

examination consists of 75 questions to be completed in

in Attendance : You should be present at the

ticket /admit card to be surrendered: Bring this hall ticket/

Published by Goyal Brothers Prakashan

Reserved with Goyal Brothers Prakashan

pagers, cellphones, books, slide rules, foot rules, notebooks or

not leave your seat unless you are allowed.

l Travelling Allowance not admissible : No travelling allowance

of Stationery : You must bring a ball point pen with you.

work to be done on the sheet provided : You should

travelling, boarding & lodging expenses for attending the

decision in this regard shall be final and binding on all

Duration of Examination : 1 hour

Medium of Examination : English and Hindi

Combination of 1 mark, 2 marks and 3 marks

Negative marking of 25% for wrongly attempted

Published by Goyal Brothers Prakashan

Reserved with Goyal Brothers Prakashan

Detailed Test Syllabus

Published by Goyal Brothers Prakashan

Reserved with Goyal Brothers Prakashan

3. Understanding Insurance and Risk Management

Reserved with Goyal Brothers Prakashan

Reserved with Goyal Brothers Prakashan

is the market value of each share and how is it

Published by Goyal Brothers Prakashan

Reserved with Goyal Brothers Prakashan

P Know the difference between direct investing and investing

Published by Goyal Brothers Prakashan

Reserved with Goyal Brothers Prakashan

4. Understanding Investments ... ...

5. Basics of Banking ... ...

6. Introduction to Stocks and Bonds ... ...

7. Investments : The wider Spectrum ... ...

8. Beyond Savings : Borrowing ... ...

9. Retirement as a Financial Goal ... ... 96 103

Published by Goyal Brothers Prakashan

Reserved with Goyal Brothers Prakashan

used and generally accepted as medium of exchange and as a

Functions of money : Money performs four major functions:

l Wealth and money : Wealth is a measure of the value of all

Reserved with Goyal Brothers Prakashan

l SMART goals : SMART is an acronym for the 5 steps

l Financial planning : It is the process of meeting goals of life

Multiple Choice Questions

Reserved with Goyal Brothers Prakashan

Reserved with Goyal Brothers Prakashan

10. For the success of every business enterprise, it is essential

Reserved with Goyal Brothers Prakashan

(c) India has a formal nationwide structured financial

Reserved with Goyal Brothers Prakashan

19. For a thing to serve as money, it must possess the quality of