Multiple Choice Questions - AFM Complied by CA Nikhil Monga

mcq book compilation

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AFM (SFM) by CA Nikhil Monga

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Multiple Choice Questions – AFM Compiled by CA Nikhil Monga

--------------------------------index------------------------------
Independent MCQs
Chapter 1: Financial Policy and Corporate Strategy____________________ 04
Chapter 2: Risk Management_______________________________________ 04
Chapter 3: Advanced Capital Budgeting______________________________ 05
Chapter 4: Security Analysis________________________________________ 08
Chapter 5: Security Valuation_______________________________________ 09
Chapter 6: Portfolio Management____________________________________ 11
Chapter 7: Saucerization___________________________________________ 12
Chapter 8: Mutual Funds___________________________________________ 12
Chapter 9: Derivatives Analysis and Valuation_________________________ 13
Chapter 10: Foreign Exchange Exposure and Risk Management__________ 16
Chapter 11: International Financial Management_______________________ 19
Chapter 12: Interest Rate Risk Management___________________________ 20
Chapter 13: Business Valuation_____________________________________ 21
Chapter 14: Mergers, Acquisitions and Corporate Restructuring__________ 22
Chapter 15: Startup Finance________________________________________ 23
Case Scenarios
Case Scenario 1__________________________________________________ 25
Case Scenario 2__________________________________________________ 26
Case Scenario 3__________________________________________________ 27
Case Scenario 4__________________________________________________ 28
Case Scenario 5__________________________________________________ 29
Case Scenario 6__________________________________________________ 30
Case Scenario 7__________________________________________________ 32
Case Scenario 8__________________________________________________ 33
Case Scenario 9__________________________________________________ 34
Case Scenario 10_________________________________________________ 36
Case Scenario 11_________________________________________________ 37
Case Scenario 12_________________________________________________ 39

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Case Scenario 13 (RTP November 2024)______________________________ 41

Case Scenario 14 (RTP November 2024)______________________________ 42
Case Scenario 15 (MTP November 2024 – Series 1)_____________________ 43
Case Scenario 16 (MTP November 2024 – Series 1)_____________________ 45
Case Scenario 17 (MTP November 2024 – Series 1)_____________________ 46
Case Scenario 18 (MTP November 2024 – Series 2)_____________________ 48
Case Scenario 19 (MTP November 2024 – Series 2)_____________________ 49
Case Scenario 20 (MTP November 2024 – Series 2)_____________________ 51
Case Scenario 21 (MTP May 2024 – Series 1)__________________________ 53
Case Scenario 22 (MTP May 2024 – Series 1)__________________________ 54
Case Scenario 23 (MTP May 2024 – Series 1)__________________________ 55
Case Scenario 24 (MTP May 2024 – Series 1)__________________________ 55
Case Scenario 25 (RTP May 2024 – Series 2) __________________________ 55
Case Scenario 26 (RTP May 2024 – Series 2) __________________________ 55
Case Scenario 27 (MTP May 2024 – Series 2)__________________________ 56
Case Scenario 28 (RTP May 2024)____________________________________ 56
Case Scenario 29 (RTP May 2024)____________________________________ 57
Case Scenario 30 (Nov 2024 exam)___________________________________ 59
Case Scenario 31 (Nov 2024 exam)__________________________________ 60
Case Scenario 32 (Nov 2024 exam)___________________________________ 61
Case Scenario 33 (Nov 2024 exam)___________________________________ 63

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chapter wise mapping of case scenarios

Chapter Chapter Name Case scenario
no.
1 Financial Policy and Corporate Strategy -
2 Risk Management -
3 Advanced Capital Budgeting Decision 19
4 Security Analysis 29
5 Security Valuation 2, 6, 12, 15, 20, 22, 32, 33
6 Portfolio Management 7, 13, 23
7 Securitization 28
8 Mutual Funds 3, 5, 14, 16, 21
9 Derivatives Analysis and Valuation 1, 17, 18, 31
10 Foreign Exchange Exposure and Risk
10, 11, 26, 27
Management
11 International Financial Management -
12 Interest Rate Risk Management -
13 Business Valuation 9, 25
14 Mergers, Acquisition and Corporate
4, 8, 24, 30
Restructuring
15 Startup Finance -

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Chapter 1 – Financial policy and corporate strategy

1. The primary objective of investors in a world economy is to:
a. to select investment and financial opportunities that will give them maximum expected
returns at minimum risks
b. to select investment and financial opportunities that will give them maximum expected
returns at maximum risks
c. to select investment and financial opportunities that will give them minimum expected
returns at maximum risks
d. None of the above
Answer: a
2. The strategic financial management is:
a. Backward looking
b. Report – focused discipline
c. Forward-looking subject of financial management
d. All of the above
Answer: d
3. ______________ is the springboard for wealth creation
a. Investment in highly risky securities
b. Capital investment
c. Foreign Exchange Risk Management
d. None of the above
Answer: b
Chapter 2 – Risk Management
1. Which of the following techniques can be used to manage counter party risk?
a. Local sourcing of raw materials and labour.
b. Evaluating countries macro-economic conditions.
c. Rapid action in the event of any likelihood of defaults.
d. Entering into joint ventures.
Answer: c
2. Which type of risk is primarily faced by a company when it ventures into a new
industry or geographical area with completely different laws and regulations?
a. Operational Risk
b. Compliance Risk
c. Currency Risk
d. Financial Risk
Answer: b

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3. One year Var [Value at risk] of a portfolio is Rs.10 crores with a confidence level of
95%. This means__________
a. There is a 5% probability that the loss will be Rs. 10 crores at the end of the year
b. The loss will not exceed Rs. 9.5 crores during valuation anytime during the year
c. The worst expected portfolio loss over one year will not exceed Rs. 10 crores with 95%
confidence
d. The investor can presume that there is a 95% chance of loss over one trading year will
exceed Rs. 10 crores
Answer: c
4. _____________is associated with diffusion of economic crisis throughout a market,
asset class or geographic region
a. Systematic Risk
b. Unsystematic Risk
c. Contagion Risk
d. Credit Risk
Answer: c
5. Which type of risk occurs when a counter party fails to honour their obligations?
a. Interest Rate Risk
b. Currency Risk
c. Credit Risk
d. Political Risk
Answer: c
Chapter 3 – Advanced Capital Budgeting Decisions
1. Nominal cash flows are cash flows which__________ inflation
a. Includes
b. Excludes
c. are neutral of
d. completely ignores
Answer: a
2. Certainty Equivalent approach is:
a. Guaranteed return from an investment after adjusting for certainty equivalent coefficient\
b. Return that is expected over the lifetime of a project
c. Equivalent to Net present value
d. An important component in Decision Tree Analysis
Answer: a
(Consider pessimistic approach)

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3. Which of the following critical factor is generally overlooked by capital budgeting

decision makers.
a. Quantitative factors
b. Qualitative factors
c. Time factor
d. Discounting factor
Answer: b
4. When risk is high, the cash flow under certainty equivalent coefficient is:
a. Higher
b. Lower
c. No impact
d. None of the above
Answer: b
(There is inverse relationship)
5. The projects bearing higher risky cash flow should be evaluated with discount rate:
a. Lower than risk free rate
b. Equal to risk free rate
c. Higher than risk free rate
d. Equal to Treasury Bills rate
Answer: c
6. The firm expects an NPV of ₹ 10,000 if the economy is exceptionally strong (30%
probability), an NPV of ₹ 4,000 if the economy is normal (40% probability), and an NPV
of ₹ 2,000 if the economy is exceptionally weak (30% probability). Expected NPV is:
a. ₹ 5,200
b. ₹ 6,000
c. ₹ 5,000
d. ₹ 6,200
Answer: a
(10,000 x 0.30 + 40,000 x 0.40 + 2,000 x 0.30) = 5200
7. Variance measures:
a. How far each number in the set is from the mean
b. The mean of a given data set
c. Return on investment
d. Level of risk borne for every percent of expected return

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Answer: a
8. Sensitivity analysis is useful in decision making because:
a. It shows the probabilities associated with each outcome
b. It tells the user how much critical each input is for the Output value
c. It allows to calculate the probable results under different scenarios
d. The results of sensitivity analysis are reliable
Answer: b
9. Which of the following input specified by decision maker in simulation analysis is held
constant all over the simulation runs
a. Exogenous variables
b. Parameters
c. Random Number
d. Probability Distribution
Answer: b
10. Expected cash flows are calculated as:
a. Sum of likely cash flows of the project
b. Sum of likely cash flows of the project multiplied by probability of respective cash flows.
c. Sum of likely cash flow of project divided by probability of cash flow.
d. None of these
Answer: b
11. _________ involves infinite calculations to obtain the possible outcomes and
probabilities for any given observation.
a. Simulation analysis
b. Sensitivity analysis
c. Scenario analysis
d. Decision Tree approach
Answer: a
12. Scenario analysis is considered under scenarios such as:
a. Worst Case Scenario
b. Base Case Scenario
c. Best Case Scenario
d. All of the above
Answer: d
13. ___________ approach is used to compare the NPVs of multiple projects which have
different operating life.

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a. Simulation analysis
b. Coefficient of variation
c. Equivalent annual cost
d. Sensitivity analysis
Answer: c
Chapter 4 – Security Analysis
1. Which of the following affects industry analysis?
a. Product lifecycle
b. Government Attitude
c. State of Competition in the industry
d. All of these
Answer: d
2. An efficient capital market is one which_________
a. Taxes are irrelevant
b. Security prices reflect available information
c. Securities always offer a positive rate of return to investors.
d. Security prices are guaranteed (by the SEBI) to be fair.
Answer: b
3. As per the Dow Jones Theory the Secondary movement of stock prices last from______
a. One year to three years
b. Three weeks to three months
c. Day to day
d. None of these
Answer: b
4. Which factor significantly influences the demand in consumer products industries
a. Interest rate
b. Discount rate
c. Inflation rate
d. None of the above
Answer: c
(Other factor mainly impact investment decisions)

5. Which of the following technique is not used for economic analysis?

a. Barometer/Indicator Approach

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b. Economic Model Building Approach

c. Mixed Forecasting
d. Economic Model Building Approach
Answer: c
6. Which of the following is a drawback of the Anticipatory Surveys technique used in
economic analysis?
a. Survey results guarantee that intentions surveyed would materialize
b. They are regarded as forecasts per se, as there can be a consensus approach by the
investor for exercising his opinion.
c. Both of (a) and (b)
d. None of the above
Answer: d
(As opposite of first two options are drawbacks of Anticipatory Survey)
Chapter 5 – Security Valuation
1. Which of the following is not a money market instrument?
a. Commercial paper
b. Participatory certificates
c. Warrant
d. Treasury Bills
Answer: c
2. A debenture of ₹ 10,000 carrying 15% coupon rate is quoted in the market at ₹ 13,500.
The current yield on this debenture will be:
a. 13.50%
b. 15.00%
c. 11.11%
d. 10.00%
Answer: c
(Interest = ₹ 1,500 Yield = ₹ 1500/13500 = 11.11%)
3. The annual interest of a bond divided by its face value is called the bond’s____________
a. Coupon Rate
b. Face value
c. Maturity
d. Yield to Maturity
Answer: a

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4. The value a zero coupon with a maturity of three years and a maturity value of Rs. 1,000
discounted at 7% is
a. Rs. 816.30
b. Rs. 901.94
c. Rs. 966.18
d. Rs. 1000
Answer: a
(Rs. 1000/(1.07)3 = Rs. 816.30)
5. A Ltd. issued commercial paper worth ₹ 10 crores as per the following details:
Date of issue: 15th June, 2022
Maturity period: 73 days
No. of days in a year: 365 days
Interest rate: 15% p.a.
Intermediary charges: 0.1% of Net Receipts
The net amount received by the company on such issue of CP shall be
approximately_____
a. ₹ 9,69,90,291
b. ₹ 9,70,87,379
c. ₹ 9,69,77,379
d. ₹ 9,69,00,000
Answer: a
6. The following information is related to two bonds same in other respects:
Price of Bond A = ₹ 101
Price of Bond B = ₹ 120
Coupon Rate of Bond A = 14%
Coupon Rate of Bond B = 15%
If both the bonds are redeemable at a premium of 10% after 2 years and the required
yield on this category of Bonds is 16% then best avenue for investment shall be____
a. Bond A
b. Bond B
c. Any of the two Bonds
d. Neither of the two Bonds
Answer: a

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Chapter 6 – Portfolio Management

1. Arbitrage Pricing Theory was developed by_______
a. William Sharpe
b. Harry Markowitz
c. Stephan Ross
d. Black Scholes
Answer: c
2. What is the common hypothesis for Traditional and Modern Theories of Portfolio
Management.
a. Both approaches use statistical methods
b. Both approaches are based on judgement
c. Both approaches are based on hypothesis that a portfolio reduces risk by diversification
d. None of these
Answer: c
3. Risk Premium is:
a. Extra rate of return expected by the investors as a reward for bearing extra risk.
b. Equivalent to the rate of Government Securities
c. Return provided to equity shareholders
d. Risk free rate of return
Answer: a
4. According to the CAPM, the intercept of Security Market Line (SML) should be equal
to______
a. Zero
b. The expected risk premium on the market portfolio
c. The risk-free rate
d. The expected return on the market portfolio
Answer: c
5. Calculation of Coefficient of Variance depends on:
a. Standard deviation
b. Expected Return
c. Expected cash flow
d. All of the above
Answer: d
(CV = SD/Expected Return)

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Chapter 7 – Securitization
1. ___________ is the process of repackaging or rebundling of illiquid assets into
marketable securities.
a. Diversification
b. Securitization
c. Structured finance
d. Tokenization
Answer: b
(The term diversification is used in context of Portfolio Management. Securitization is one of
the form of Structured Finance. Tokenization can be one form of issuing units after
Securitization.)
2. The main objective of creating a Special Purpose Vehicle (SPV) in the securitization
process is______________
a. To acquire legal and beneficial interest in the assets.
b. To issue securities to the investors.
c. To remove the asset from the balance sheet of the originator.
d. To write off the asset as bad debt from the balance sheet of the originator.
Answer: c
(While the first two options follow the third option, the fourth option is wrong option.)
Chapter 8 – Mutual Funds
1. The major difference between open ended and close ended mutual fund schemes is
that_________
a. In Open Ended Schemes, investors can only make entry and exit during pre-specified
intervals
b. Close-ended schemes allow investors to redeem their investment at any time
c. Open-ended schemes have a limited life, while close-ended schemes have an indefinite
redemption period.
d. Open-ended schemes have an indefinite redemption period, while close-ended schemes
have a limited life.
Answer: d
(Close ended schemes are for short duration and open ended schemes are meant for
indefinite period)
2. Which of the following Business Parks has launched India’s first Real Estate
Investment Trust (ReIT)?
a. Galaxy Business Parks
b. DLF Cyber City
c. Patni Knowledge Parks.

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d. Embassy Office Parks

Answer: d
3. The lower the______ of the index Fund, higher the accuracy the more predictable return
is.
a. Alpha
b. Beta
c. Tracking Error
d. Exit Load
Answer: c
Chapter 9 – Derivatives Analysis and Valuation
1. When an investor buys back the same amount of futures contracts that he sold earlier
is called__________
a. Closing out the position
b. Going long of the futures.
c. Opening a new position
d. None of these
Answer: a
2. In a future contract, the term Basis is________
a. The difference between the prevailing spot price and the futures price.
b. The difference between the current market price and the strike price.
c. The difference between the long position and the short position.
d. The difference between the initial margin and the maintenance margin.
Answer: a
(As such no particular terms are used for remaining options)
3. Which of the following position provides protection from a decrease in prices of a
share?
a. Buying of Future Contracts in the share.
b. Buying Call option in the share
c. Selling of Future Contracts in the share
d. Selling Put Option in the share
Answer: c
4. Which of the following is a traditional method for an Indian farmer to sell wheat?
a. Forward Contract
b. Future Contract
c. Spot Market

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d. Capital Market
Answer: c
(In Indian context, first two options are modern method and last option is more related to
financial instruments.)
5. What is the purpose of trading in futures?
a. Only for speculation
b. Only for hedging
c. Both for speculation and hedging
d. Only for arbitraging
Answer: c
(Depends on the purpose of the person taking position in Future Market. Moreover, there are
low possibilities of arbitrage opportunities in the Future Market)
6. Which of the following is true regarding a forward contract?
a. It is standardized
b. The contracting parties negotiate only on the price.
c. The contracting parties negotiate only on quantity and quantity.
d. Both parties negotiate on quality, quantity, place, and price.
Answer: d
7. Which among the following derivative product is not traded in an exchange at all?
a. Futures
b. Options
c. Forwards
d. None of these
Answer: c
8. As per Real Option in Capital Budgeting any commitment to disinvest upon the action
of another party is called__________
a. Long Call
b. Long Put
c. Short Call
d. Short Put
Answer: c
9. The maximum possible loss for a covered call writer is_____
a. Option premium
b. Current price of the underlying asset.
c. Strike Price

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d. Initial investment (net of premium)

Answer: d
10. Which amongst the following is not a Greek for Options Pricing
a. Delta
b. Gamma
c. Theta
d. Rho
Answer: d
11. A short forward contract on share of A Ltd. that was negotiated some time ago will
expire in 3 months and has a delivery price of ₹ 4,000. The current forward price for
three-month forward contract is ₹ 4,200 and the 3-month risk-free interest rate (with
monthly compounding) is 6%. The value of the same short forward contract will
be_______
a. ₹ 200.00
b. ₹ 270.00
c. ₹ 189.00
d. ₹ 197.03
Answer: d
12. The spot price of an investment is ₹ 3,000 and the risk-free rate for all maturities (with
continuous compounding) is 10% p.a. Suppose the asset provides an income of ₹ 200
at the end of the first year and at the end of the second year, then three-year forward
price shall be_______
(e0.10 = 1.1052, e0.20 = 1.2214 and e0.30 = 1.3499)
a. ₹ 1,967
b. ₹ 3,584
c. ₹ 4,515
d. ₹ 4,050
Answer: b
13. Mr. A, a speculator shorts 1000 shares of X Ltd. when the share price was ₹ 50 and
closed out the position after 3 months when the share price was ₹ 43. The company
pays a dividend of ₹ 3 per share during the 3 months. The gain of Mr. A will be_____
a. ₹ 1,000
b. ₹ 4,000
c. ₹ 7,000
d. ₹ 3,000
Answer: b

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14. The spot price of an investment asset that provides no income is ₹ 3000 and the risk-
free rate for all maturities (with yearly compounding) is 10%. The three-year forward
price of same investment shall be_________
a. ₹ 3,993
b. ₹ 4,050
c. ₹ 4,020
d. ₹ 4,043
Answer: a
15. ABC Masala Co. purchase jeera to make its products. The company is concerned that
prices may rise prior to building inventory for festivals sales. Analysts project that price
per quintal could vary from ₹ 52,000 to ₹ 70,000. A September futures contract can be
obtained with a ₹ 65,000 purchase prices. What is ABC’s risk in this situation?
a. Coca prices will rise above ₹ 65,000 and Tingley will purchase its coca at a price of ₹ 65,000
b. Coca prices will decline below ₹ 65,000 and Tingley will have to purchase coca at ₹ 65,000.
c. Coca prices will hit ₹ 65,000 and the contract was a waste of time
d. ABC Co. has no risk in this situation
Answer: b
(Contrary to Option, in Forward and Future, a commitment is involved.)
16. A put option on a company’s stock has an exercise price of ₹ 200. On the delivery date,
the stock is trading at ₹ 240 per share. What should the investor who has paid ₹ 20 for
the option do?
a. Not exercise the option and lose ₹ 20.
b. Not exercise the option and lose ₹ 60.

c. Exercise the option and gain ₹ 20.

d. Exercise the option and gain ₹ 40.

Answer: a
(₹ 20 is sunk cost. By exercising option ₹ 40 be more lost).
Chapter 10 – Foreign Exchange Exposure and Risk Management
1. US dollar is quoted today as: spot $1 = INR 80 and six months forward $1 = INR 83
a. This means $ is at discount

b. This means future of rupee is uncertain

c. This means future of rupee is unclear

d. This mean $ is at premium

Answer: d

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(As more INR need to be surrendered to acquire same amount of US$.)

2. Suppose Hari approaches a forex dealer who loads INR 1.00 margin on the interbank
rate for travel related remittances. If in the interbank market the USD is quoted at INR
85.46 – 85.50 then Mr. Hari
a. Can buy travel card at INR 84.46.

b. Can buy travel card at INR 84.50.

c. Can buy travel card at INR 86.46.

d. Can buy travel card at INR 86.50.

Answer: d
(Margin is added in selling rate by bank.)
3. On October 10,2022, the Spot exchange rate is INR/USD = INR 66.2525 – INR 67.5945
and the two months swap points are 125 and 195. What would be the foreign exchange
rate after 2 months?
a. INR/USD = INR 66.2620 – INR 67.6070

b. INR/USD = INR 66.2400 – INR 67.5750

c. INR/USD = INR 66.2330 – INR 67.5820

d. INR/USD = INR 66.2650 – INR 67.6140

Answer: d
(Swaps points shall be added to the respective rates.)
4. US dollar is quoted today as: spot $1 = ₹ 80 and six months forward $1 = ₹ 84. The
annualized forward margin is _____________
a. 10%

b. 5%

c. 3%

d. 6%

Answer: a
[(84-80)/80 x 12/6 x 100 = 10%]
5. ____________ theory substantiates that the expected disparity between the exchange
rate of two currencies is approximately equal to the difference between their countries’
nominal interest rates.
a. Interest rate parity

b. Purchasing power parity

c. International Fisger Effect (IFE)

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d. None of these

Answer: c
6. How does a deficit in current account affect the exchange rate of a country?
a. Appreciation of home currency

b. Depreciation of home currency

c. No impact on the exchange rate

d. It depends on the size of the deficit

Answer: b
(More foreign exchange is required to settle trade bills.)
7. If USD/INR spot is trading at 83.2000 and one year Swap annualized premium is trading
at 6.8% then what would be the net outright rate
a. 77.4500

b. 77.5524

c. 88.4500

d. 88.8576

Answer: d
[ ₹83.2000 x (1.068) = ₹ 88.8576]
8. Combination of two fixed floating currency swaps to fixed currency swap is called?
a. Vanilla Swap

b. Circus Swap

c. Extendible Swap

d. Roller-Coaster Swaps

Answer: b
(Acronym stands for Combined Interest Rate and Currency Swap.)
9. How can expectations affect the exchange rate of a currency?
a. Speculators can have a substantial impact on exchange rate through speculations

b. The current spot/forward rates are often used to develop forecasts.

c. A combination of forecasting techniques is used to develop forecasts

d. Historical data is used to predict future values

Answer: a

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(A lot of speculation activities results in unanticipated demand and supply of foreign

currencies)
10. T & L Ltd has submitted its bid along with bid bond guarantee of its bank for Green-
house gas construction project in Australia with expected cash flows spread over next
3 years. Though its pricing is very competitive, it is not sure of securing it due to other
factors. But if secured, it has huge exchange risk in the invoicing currency viz.: AUD. It
can opt for the following derivative product to protect itself.
a. Forward contract

b. Futures contract

c. Option contract

d. Swaps

Answer: c
(In case if contract is not secured even then will not be bound by the contract in AUD)
11. A trader sold 20 lots of USD/INR in an exchange (1 lot = $ 1000) via currency futures.
He dealt at a future price of INR 78/$ for 3 months. Currently future price is trading at
INR 82/$. The M2M (Mark to Market) of trader in the exchange shall be__________
a. INR 4,000

b. INR 8,000

c. INR 80,000

d. INR 40,000

Answer: c
[(INR 82 – INR 78) x $ 1,000 x 20 = INR 8,000]
12. An Indian exporter expecting a remittance of USD 5 Million, planning to hedge his
position by option contracts should__________
a. Buy call option in USD.

b. Buy Put option in USD.

c. Buy call option in INR.

d. Buy put option in INR.

Answer: b
Chapter 11 – International Financial Management
1. Which of the following factors are crucial in multinational capital budgeting?
a. Cash flows from domestic projects

b. Profits remitted to the host country

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c. Effect of foreign exchange risk on the parent firm’s cash flow

d. Changes in rates of inflation in the parent country

Answer: c

(More or less first two options are based on third option. Changes in rates in inflation in parent
country indirectly impacts the capital budgeting decision.)

2. What is the difference between evaluating a project-based cash flows and parent firms
cash flows?
a. Evaluation based on parent firms cash flows requires competition with existing local firms

b. Evaluation based on parent firms cash flows involves financial cash flows only

c. Evaluation based on parent firms cash flows eliminates problems associated with
fluctuating exchange rates.

d. Evaluation based on parent firms cash flows involves operating and financial cash flows.

Answer: d

(In case of evaluation of foreign projects the actual cash remitted plays a big role)
Chapter 12 – Interest Rate Risk Management (IRRM)
1. The primary difference between an interest rate swap contract and forward contract can
be on account of______________
a. Underlying

b. Time of payment

c. Daily marking of the market

d. Number of exchanges

Answer: d

2. Suppose A Ltd. is entering into an interest rate swap with a notional principal of Rs.
10,00,00,000. At the beginning of the swap, the initial amount of money the
counterparties must exchange_________
a. Rs. 0

b. Rs. 50,00,000

c. The future value of Rs. 10,00,00,000

d. Rs. 10,00,00,000 discounted

Answer: a

(Settlement shall be made as per prevailing interest rates on forthcoming reset dates)

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3. Which of the following contract involves the notional principal for the purpose of
exchange of liabilities.
a. Currency Swap

b. Plain Vanilla Swap

c. Forward Contract

d. None of these

Answer: b

Chapter 13 – Business Valuation

1. ____________ approach attempts to identify multi-industry companies that are
undervalued and would have more values if separated from each other
a. Economic Value-Added Method

b. Market Value Added Method

c. Chop-Shop Method

d. None of the above

Answer: c

(Other two methods are mainly concerned with Cost of Capital)

2. ____________ method involves valuation as per determination of the cost of group

assets and liabilities of equivalent company in the open market.
a. Net Asset Value

b. Net Realizable Value

c. Replaceable Value

d. None of the above

Answer: c

(Net asset value method is based on Balance Sheet. Net realizable value can be defined as
realizable value of all assets after deduction of liquidation expenses and paying off liabilities.)

3. X Ltd. made a net profit of Rs. 50,00,000 and incurred expenses of Rs. 15,00,000. The
number of issued equity shares is 10,00,000. The company has a debt of Rs. 5,00,000.
The market related details are as follows:
Rf = 10%; Market Rate of Return = 15%; β = 1.2
The per share earning value of the company shall be __________
a. Rs. 31.25

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b. Rs. 21.88

c. Rs. 218.75

d. Rs. 312.50

Answer: a

[(50,00,000/0.16)/10,00,000]

Chapter 14 – Mergers, Acquisitions and Corporate Restructuring

1. Which type of merger happens when two companies that have buyer-seller relationship
(or potential buyer-seller relationship) come together?
a. Horizontal Merger

b. Vertical Merger

c. Conglomerate Merger

d. Congeneric Merger

Answer: b

(In horizontal merger, two companies merged are in the same industry. Conglomerate mergers
involve firms engaged in unrelated type of business operations. In congeneric mergers, the
acquired and the target companies are related through basic technologies, production
processes or markets.)

2. The general reason for a divestiture, such as sell-off or spin-off may be________
a. Synergy

b. Economies of scale

c. Reverse synergy

d. None of these

Answer: c

3. A merger that combines companies deal with the same product but in separate markets
is called a __________
a. Market extension merger

b. Pure conglomerate merger

c. Vertical merger

d. Reverse merger

Answer: a

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Chapter 15 – Startup Finance

1. In corporate restructuring when a company sells shares of the new company in market
by making a public offer is called___________
a. Sell off

b. Spin off

c. Split off

d. Equity Carve Outs

Answer: d

2. Which of the following can not be considered as a potential source of startup

financing?
a. Bank loans

b. Personal financing

c. Crowdfunding

d. Government grants

Answer: d

(Government grants are generally provided for some specific purposes.)

3. Which among the following is not a method to approach a pitch presentation?

a. Introduction of a team

b. The market size of the product

c. Explaining the approach to be followed to solve a problem

d. Method to be followed by the firm to bootstrap

Answer: d

4. The vendor financing in startup involves

a. Borrowing funds from customer to lend funds to the company

b. Borrowing funds from customer to purchase products from the company

c. Lending funds to customer so that he can purchase products from different vendor

d. Lending funds to customer so that he can purchase products from the company itself.

Answer: d

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Case Scenario 1 (Derivatives)

X and Y are two friends. Since Y has earned a lot of profit from trading in financial derivative
market, X is also considering speculating on Gamma Corporation’s share, which is currently
trading at ₹ 700 per share, through taking positions in options in stocks of same company.
Accordingly, X took following contract positions in the options on Gamma Corporation’s stock:

i) Purchasing one contract of 2-month call option with a premium of ₹ 35 and an

exercise price ₹ 750
ii) Purchasing one contract of 2-month put option with a premium of ₹ 25 and an
exercise price ₹ 600

After some time, trading in option market and understanding the nitty-gritties of same, X
being CEO in an organization advised his team to implement the concept of Financial
Options in the Capital Budgeting decisions called ‘Real Option’

Based on the above information, answer the following questions:

1. Assuming the contract size of each option contract is 100 and the price of Gamma
Corporation’s share after two months falls to ₹ 550, the net pay-off of will be__________
a. ₹ 1000 loss

b. ₹ 1000 profit

c. ₹ 3000 profit

d. ₹ 3000 loss

Answer: a

2. The per share price of Gamma Corporation’s stock after 2 months at which X shall be
at Break Even is_________
a. ₹ 540

b. ₹ 600

c. ₹ 625

d. ₹ 785

Answer: a

3. Which of the following statement is false regarding Real Options?

a. Real Options methodology is an approach to capital budgeting that relies on option pricing
theory to evaluate projects

b. Real options approach is intended to supplement, and not replace, capital budgeting
analyses based on standard Discounted Cash Flow (DCF) methodologies

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c. Real options are different from financial options as their periods start from the end of 1 st
Year and are higher than financial options

d. Real options are normally traded in the market and are priced

Answer: d

Case Scenario 2 (Security Valuation)

The data given below relates to a convertible bond of X Ltd:

Face Value ₹ 450

Coupon rate 15%

No. of shares per bond 25

Market price of share ₹ 20

Straight value of bond ₹ 400

Market price of convertible bond ₹ 550

Based on the above information, answer the following questions:

1. The stock value of bond would be_______

a. ₹ 500

b. ₹ 400

c. ₹ 550

d. ₹ 450

Answer: a

2. The percentage of downside risk based on market price of convertible bond is______
a. 10%

b. 27.27%

c. 18.18%

d. 11.11%

Answer: b

3. The conversion premium is _______

a. 10 %

b. 27.27 %

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c. 18.18 %

d. 11.11 %

Answer: a

4. The conversion parity price of the stock is ________

a. ₹ 25

b. ₹ 20

c. ₹ 22

d. ₹ 24

Answer: c

Case Scenario 3 (Mutual Funds)

Mr. A is interested in investing ₹ 1,00,000 for which he is considering following three
alternatives:

(i) Invest ₹ 1,00,000 in Mutual Fund X (MF X)

(ii) Invest ₹ 1,00,000 in Mutual Fund Y (MF Y)
(iii) Portfolio – invest ₹ 60,000 in MF X and ₹ 40,000 in MF Y

Average annual return earned by MF X and MF Y is 12% and 11% respectively. Risk free rate
of return is 8% and market rate of return is 10%

Covariance of returns of MF X, MF Y and market portfolio mix are as follow:

MF X MF Y Portfolio

MF X 4.400 4.300 3.370

MF Y 4.300 4.200 2.800

Portfolio 3.370 2.800 4.200

Based on the above information, answer the following questions:

1. Standard Deviation of MF X is __________

a. 2.0736

b. 2.0976

c. 1.8358

d. 2.0494

Answer: b

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2. Portfolio return would be _________

a. 11.00%

b. 12.00%

c. 11.50%

d. 11.60%

Answer: d

3. Based on Standard Deviation, the optimum investment of Mr. A would be ________

a. Portfolio

b. All investment in MF X

c. All investment in MF Y

d. Both MF Y and mix are indifferent

Answer: b

Case Scenario 4 (Mergers and Acquisition)

P Ltd. is studying the possible acquisition of Q Ltd. by way of merger. The following data are
available:

After Tax No. of equity Market price Book value per

Firm
earnings shares per share share

P Ltd ₹ 10,00,000 2,00,000 ₹ 75 ₹ 210

Q Ltd ₹ 3,00,000 50,000 ₹ 60 ₹ 105

The merger shall be gone through by exchange of equity shares and the exchange ratio is set
according to different weights assigned to different basis as mentioned below:

EPS 50%

Market Price 25%

Book Value 25%

Based on the above information, answer the following questions:

1. The swap ratio based on assigned weights shall be _______
a. 0.825

b. 0.925

c. 0.952

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d. 0.752

Answer: b

2. Based on swap ratio as per assigned weights the total number of shares issued by P
Ltd to Q Ltd shall be ______
a. 46,250

b. 41,250

c. 47,600

d. 37,600

Answer: a

3. Post merger, the EPS of the P Ltd shall be ______

a. 5.39

b. 5.25

c. 5.28

d. 5.47

Answer: c

4. In case Q Ltd. wants to be sure that its EPS is not diminished by the merger, the relevant
exchange ratio to achieve the same objective should be ______
a. 0.83

b. 1.20

c. 1.30

d. 1.10

Answer: b

Case Scenario 5 (Mutual Funds)

Mr. Y has invested in three mutual funds (MF) as per the following details:

Particulars MF X MF Y MF Z

Amount of investment (₹) 4,00,000 8,00,000 4,00,000

Net Assets Value (NAV) at the time of purchase (₹) 10.30 10.10 10

Dividend Received up to 31.03.2023 (₹) 9,000 0 6,000

NAV as on 31.03.2023 (₹) 10.35 10 10.30

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Effective Yield per annum as on 31.03.2024 (percent) 9.66 -11.66 24.15

Assume 1 year = 365 days

On the basis of above information, choose the most appropriate answer to the following
questions:

1. Total NAV of MF Y as on 31.03.2023 would be approximately _________

a. ₹ 4,01,941.73

b. ₹ 4,12,000.00

c. ₹ 7,92,079.20

d. ₹ 82,500.00

Answer: c

2. Total Yield of MF X in terms of ₹ would be approximately _________

a. ₹ 10,941.73

b. ₹ 7,920.80

c. ₹ 18,000.00

d. 12,450.45

Answer: a

3. Number of days for which MF X is held would be approximately ________

a. 31 days

b. 68 days

c. 103 days

d. 85 days

Answer: c

Case Scenario 6 (Security Valuation)

ABC Ltd. is planning to expand its business and therefore raising fund by issuing a convertible
bond of ₹ 10 crore. An investor “Mr. X” is interested to invest in the bond of ABC Ltd.

Mr X has following data related to the convertible bond:

The data given below relates to a convertible bond

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Face Value ₹ 250

Coupon rate 12%

No. of shares per bond 20

Market Price of share ₹ 12

Straight value of bond ₹ 235

Market price of convertible bond ₹ 265

Maturity 5 years

You, being an expert of the matter, are required to answer his questions. Select the most
appropriate alternative:

1. The percentage of downside risk of the bond is approximately ________

a. 10.42%

b. 6.38%

c. 2.13%

d. 12.77%

Answer: d

2. The conversion premium in percentage term of the bond is _____

a. 12.77%

b. 10.42%

c. 2.18%

d. 13.45%

Answer: b

3. The conversion parity price of the stock is _______

a. ₹ 11.75

b. ₹ 12.00

c. ₹ 13.25

d. ₹ 12.50

Answer: c

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4. If he wants a yield of 15%, the maximum price he should be ready to pay for is _____
a. 217.41

b. 224.81

c. 240.00

d. 232.32

Answer: b

Case Scenario 7 (Portfolio Management)

Suppose you are a financial consultant and following 3 clients have approached to you seeking
advice on the investment to be made in securities. All these clients have different background
and risk appetite as well as perception to the market.

• Client A wants to invest in Fixed income avenues and therefore he is looking at the
credit rating of the securities as well as financial ratios such as interest coverage,
earning power etc and the general prospect of the industry.
• Client B wants to earn a fixed income over a period of time by holding the security till
its maturity
• Client C wants to earn more by taking more risk. Therefore, he is more interested to
invest in stocks. He believes that price reflects all information found in the record of
past prices and volumes.

On the basis of above information, choose the most appropriate answer to the MCQs:

1. The main factor to be considered in selecting fixed income avenue for client A shall be
____________
a. Yield to maturity

b. Risk of Default

c. Tax Shield

d. Liquidity

Answer: b

2. The main factor that have to be evaluated in the selection of Bond for client B shall
be____________
a. Yield to maturity

b. Risk of Default

c. Tax Shield

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d. Liquidity

Answer: a

3. If weak form efficiency is prevailing in the market then which approach is best for
selection of Equity Shares?
a. Technical Analysis

b. Fundamental Analysis

c. Random selection Analysis

d. None of these

Answer: b

Case Scenario 8 (Mergers and Acquisitions)

AES Ltd. wants to acquire DNF Ltd and has offered a swap ratio of 1:2 (0.5 shares for every
one share of DNF Ltd). Following information is provided:

AES Ltd DNF Ltd

Profit after tax ₹ 36,00,000 ₹ 7,20,000

Equity shares outstanding (Nos.) 12,00,000 3,60,000

PE ratio 10 times 7 times

Market price per share ₹ 30 ₹ 14

On the basis of above information, choose the most appropriate answer to the following
questions:

1. The number of equity shares to be issued by AES Ltd. for acquisition of DNF Ltd. would
be________
a. 1,68,000

b. 1,80,000

c. 2,40,000

d. 3,00,000

Answer: b

2. The EPS of AES Ltd. after the acquisition would be ______

a. ₹ 2.00

b. ₹ 3.00

c. ₹ 3.13

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d. ₹ 4.00

Answer: c

3. The equivalent earnings per share of DNF Ltd. would be_____

a. 1.00

b. 1.50

c. 1.57

d. 2.00

Answer: c

4. If AES Ltd. PE multiple remains unchanged, then its expected market price per share
after the acquisition would be________
a. 14.00

b. 30.00

c. 31.30

d. 40.00

Answer: c

Case Scenario 9 (Business Valuation)

During one business meeting at XYZ Ltd., one of the member pointed out that while evaluating
the performance of any company, one should not only see its operating income but should
also analyse its capital structure as well. Weighted Average Cost of Capital changes on the
basis of capital structure keeping all other factors unchanged.

He presented data relating to 3 companies Alpha Ltd., Beta Ltd. and Gama Ltd. whose
operating income are equal, but their capital structure is different.

The following information relating to these 3 companies is as follows:

(₹ in ‘000)

Alpha Ltd. Beta Ltd. Gama Ltd.

Total invested capital 20,00,000 20,00,000 20,00,000

Debt / Assets ratio 0.8 0.5 0.2

Shares outstanding 61,000 83,000 1,00,000

Pre-tax cost of debt 16% 13% 15%

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Alpha Ltd. Beta Ltd. Gama Ltd.

Cost of equity 26% 22% 20%

Operating Income (EBIT) 5,00,000 5,00,000 5,00,000

The Tax rate is uniform 35% in all cases. The industry PE ratio is 11X.

Based on above case scenario, choose the most appropriate answer of the following:

1. The weighted average cost of capital of Alpha Ltd. shall approximately be_______
a. 13.520%

b. 15.225%

c. 17.950%

d. 18.000%

Answer: a

2. The EVA for Beta Ltd. is ______

a. ₹ 54,600 thousand

b. ₹ 20,500 thousand

c. (-) ₹ 34,000 thousand

d. ₹ 21,500 thousand

Answer: b

3. The Price per share of Gama Ltd. shall be ________

a. ₹ 28.60

b. ₹ 31.90

c. ₹ 31.46

d. ₹ 29.45

Answer: c

4. The estimated market capitalisation for Alpha Ltd. is _______

a. ₹ 26,47,700 thousand

b. ₹ 31,46,000 thousand

c. ₹ 17,44,600 thousand

d. ₹ 23,73,800 thousand

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Answer: c

5. Earning per share of Beta Ltd is ________

a. ₹ 2.60

b. ₹ 2.90

c. ₹ 2.86

d. ₹ 2.15

Answer: b

Case Scenario 10 (Forex)

2023, Mr X, an exporter enters into a forward contract with a BNP Bank to sell US$ 1,00,000
on 31 December 2023 at ₹ 85.40/$. However, due to the request of the importer, Mr. X
received the amount on 28 November 2023. Mr. X requested the bank to take delivery of
remittance on 30 November 2023 i.e., before due date. The inter banking rates on 28
November 2023 was as follows:

Spot ₹ 85.22/85.27

One Month Premium 10/15

Note: (1) Consider 365 days in a year

(2) Prevailing Prime Lending Rate is 12%

Based on above case scenario, choose the most appropriate answer of the following:

1. The bank may accept the request of customer of delivery before due date of forward
contract provided the customer is ready to bear the loss if any consisting of _____
a. Swap Difference

b. Interest on Outlay of Fund

c. Swap Difference Plus Interest on Outlay of Fund

d. Fixed Charges Plus Swap Difference and Interest on Outlay of Fund

Answer: d

2. In case of early delivery bank shall charge interest on outlay of fund at a rate not less
than _______
a. 8%

b. 10%

c. 12%

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d. 18%

Answer: c

3. Swap difference for US$ 1,00,000 is ______

a. ₹ 5,000

b. ₹ 20,000

c. ₹ 18,000

d. ₹ 8,000

Answer: b

4. Interest on outlay of funds shall be approximately _______

a. ₹ 92 payable by X

b. ₹ 183 payable by X

c. ₹ 183 payable by Bank

d. ₹ 122 payable by Bank

Answer: b

5. Net inflow to Mr. X is approximately _______

a. 85,42,183

b. 85,20,000

c. 85,19,817

d. 85,40,000

Answer: c

Case Scenario 11 (Forex)

A US parent company has subsidiaries in France, Germany, UK and Italy. The amount due to
and from the affiliates is converted into a common currency viz. US dollar and entered in the
following matrix.

Inter Subsidiary Payments Matrix (US$ Thousands)

Payment affiliate

France Germany UK Italy Total

France --- 80 120 200 400

Receiving
affiliate Germany 120 --- 80 160 360

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Payment affiliate

France Germany UK Italy Total

UK 160 120 --- 140 420

Italy 200 60 120 --- 380

Total 480 260 320 500 1560

The treasurer of US Parent company is suggesting that by applying Multilateral Netting system
the company can save a lot of transfer/ exchange costs. The company’s Board agreed with
Treasurer’s proposal.

From the above case scenario, choose the most appropriate answer of following MCQs

1. Before applying Multilateral Netting, it is necessary to apply _______

a. Unilateral Netting

b. Bilateral Netting

c. Multilateral Netting

d. Interest Rate Swapping

Answer: b

2. Through Multilateral Netting these transfers will be reduced to _______

a. $ 50,000

b. $ 100,000

c. $ 150,000

d. $ 200,000

Answer: d

3. The Net payment/ Net Receipts for France after netting shall be ________
a. Net Receipt $ 40,000

b. Net Payment $ 80,000

c. Net Payment $ 40,000

d. Net Receipt $ 80,000

Answer: b

4. The Net payment/ Net Receipts for Italy after netting off shall be ________
a. Net Receipt $ 60,000

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b. Net Payment $ 120,000

c. Net Payment $ 60,000

d. Net Receipt $ 120,000

Answer: b

5. Suppose if the transfer charges are 0.01% of the amount transferred then by applying
multilateral netting techniques there will be reduction in overall cost of transfer by ____
a. US $ 136

b. US $ 156

c. US $ 1,360

d. US $ 1,560

Answer: a

Case Scenario 12 (Security Valuation)

XYZ Ltd. needs funds for a short tenure. Some functional level manager suggested about the
bank credit/ overdraft option. On conforming from Finance Department, it was found that
company exhausted its credit limits due to meeting recent contingency fund requirements.
Then CA Nikhil, CFO suggested the idea of floating commercial papers by XYZ Ltd.

Accordingly, XYZ Ltd. is planning to issue commercial papers (CP), the details of which is
given below:

Issue Price of CP ₹ 97,550

Face Value ₹ 1,00,000

Maturity Period 3 Months

Issue Expense

Brokerage 0.15% for 3 months

Rating charges 0.50% p.a.

Stamp Duty 0.175% for 3 months

Based on above case scenario, answer the following questions:

1. The bond equivalent yield of the same commercial paper shall be approximately
_______
a. 2.51%

b. 10.05%

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c. 7.53%

d. 11.05%

Answer: b

2. The effective interest rate per annum of same CP shall approximate be____
a. 10.44%

b. 10.05%

c. 2.51%

d. 11.05%

Answer: a

3. Based on effective interest rate, the total annual cost of funds to the company shall
approximately be _______
a. 11.27%

b. 11.85%

c. 12.24%

d. 10.08%

Answer: c

4. Which of the following instruments cannot be used by a bank to meet its short-term
funding requirements?
a. Call/ Notice money

b. Commercial Paper

c. Certificate of Deposit

d. Repurchase Agreement (Repo)

Answer: b

5. The period of commercial paper ranges from______

a. 14 days to 364 days

b. 3 months to 6 months

c. 7 days to 1 year

d. 1 year to 3 years

Answer: c

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Case Scenario 13 (RTP November 2024) (Portfolio Management)

Two friend Mr. A and Mr. N were discussing about the risks of market. While Mr. A is sort of
risk averse, Mr. N is an aggressive investor and believes in taking risk. Mr. N said we cannot
diversify the market risk at all, and he quoted the Modern Portfolio Approach. Both friends
analyze the market data for the few months and came out with expected returns on two stocks
for a particular market.

Market Return Aggressive Defensive

7% 4% 9%

25% 40% 18%

Based on above scenario, answer the following questions:

1. The Beta of Defensive stock is_________

(a) 2

(b) 0.5

(c). 4

(d). 1

Answer: b

2. If the market return is equally likely to be 7% or 25% then expected return of Aggressive
stock shall be________
(a) 18%

(b) 13.50%

(c) 22%

(d) 11%

Answer: c

3. The Alpha of the Defensive stocks is__________

(a) -10%

(b) 22%

(c) 5.50%

(d) 12%

Answer: c

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4. The Modern Portfolio Theory was propounded by ___________

(a) William Sharpe

(b) Black Scholes

(c) Stephen Ross

(d) Harry Markowitz

Answer: d
5. As per Capital Market Line (CML) Theory the Portfolios lying on the CML over the market
portfolio are called ____________
(a) Lending Portfolios

(b) Borrowing Portfolios

(c) Diversified Portfolios

(d) Risk- Free Portfolios

Answer: c
Case Scenario 14 (RTP November 2024) (Mutual Funds)
Mr. X on 1.7.2021, during the initial offer of some Mutual Fund invested in 10,000 units having
face value of ₹ 10 for each unit. On 31.3.2022, the dividend paid by the M.F. was 10% and
Mr. X found that his annualized yield was 153.33%. On 31.12.2023, 20% dividend was given.
On 31.3.2024, Mr. X redeemed all his balance of 11,296.11 units when his annualized yield
was 73.52%.

Based on the above information answer the following questions:

1. NAV per unit of the Fund as on 31.03.2022 shall be approximately………………

(a) ₹ 19.50

(b) ₹ 20.50

(c) ₹ 21.50

(d) ₹ 22.50

Answer: b
2. Total number of units as on 31.03.2022 shall be approximately………….
(a) 10487.80 units

(b) 12585.65 units

(c) 9465.35 units

(d) 11575.40 units

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Answer: a
3. Total Dividend received by Mr. X as on 31.03.2023 shall be ……………

(a) ₹ 20,625.50

(b) ₹ 20,870.45

(c) ₹ 20,975.60

(d) ₹ 21,565.75

Answer: c
4. NAV per unit as on 31.03.2023 shall be approximately………………
(a) ₹ 24.65

(b) ₹ 24.85

(c) ₹ 25.95

(d) ₹ 26.45

Answer: c
5. NAV as on 31.03.2024 shall be approximately………………
(a) ₹ 20.50
(b) ₹ 25.95
(c) ₹ 26.75
(d) ₹ 27.20
Answer: c
Case Scenario 15 (MTP November 2024 – Series 1) (Security Valuation)
Bank A is in need of fund for a period of 14 days. To meet this financial need on 20th
September 2023 Bank A enters into an agreement with Bank B under which it will sell 10%
Government of India Bonds issued on 1st January 2023 @ 5.65% for ₹ 8 crore (Face value is
₹ 10,000 per Bond). The clean price of same Bond is ₹ 9,942 and the Initial Margin be 2% and
the maturity date of Bond is 31st December 2028. Consider 360 days in a year and interest is
payable annually.

Based on above Case Scenario, answer the following questions:

1. The arrangement entered between Bank A and Bank B will be called ……….

(a) Call Money Arrangement

(b) Commercial Bill Arrangement

(c) Commercial Paper

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(d) Repurchase Option

Answer: d

2. Dirty Price of the Bond will approximately be……………………….

(a) ₹ 10,353

(b) ₹ 10,670

(c) ₹ 10,499

(d) ₹ 10,816

Answer: b

3. The start proceeds of the transaction shall be approximately ……………….

(a) ₹ 8,38,36,804

(b) ₹ 8,36,53,000

(c) ₹ 8,58,36,804

(d) ₹ 8,48,52,585

Answer: b

4. The second leg of the transaction shall be approximately.……………….

(a) ₹ 8,38,36,804

(b) ₹ 8,36,53,000

(c) ₹ 8,58,36,804

(d) ₹ 8,48,52,585

Answer: a

5. The amount of Accrued Interest per Bond shall be approximately ……………

(a) ₹ 728

(b) ₹ 720

(c) ₹ 734

(d) ₹ 714

Answer: a

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Case Scenario 16 (MTP November 2024 – Series 1) (Mutual Funds)

The Asset Management Company of the mutual fund (MF) has declared a dividend of 9.98%
on the units under the dividend reinvestment plan for the year ended 31st March 2021. The
investors are issued additional units for the dividend at the rate of closing Net Asset Value
(NAV) for the year as per the conditions of the scheme.

The closing NAV was ₹ 24.95 as on 31st March 2021. An investor Mr. X who is having 20,800
units at the year-end has made an investment in the units before the declaration of the dividend
at the rate of opening NAV plus an entry load of ₹ 0.04. The NAV has appreciated by 25%
during the year. Assume the face value of the unit as ₹ 10.00.

Based on above Case Scenario, answer the following questions:

1. The Opening NAV of the Asset Management Company shall be …………

(a) ₹ 20.24

(b) ₹ 19.96

(c) ₹ 18.75

(d) ₹ 17.65

Answer: b

2. The Number of the units purchased shall be ………………….

(a) 18750

(b) 17500

(c) 20450

(d) 20000

Answer: d

3. Original amount of the investment shall be ………………

(a) ₹ 4,00,000

(b) ₹ 6,50,000

(c) ₹ 3,55,000

(d) ₹ 5,65,000

Answer: a

4. Which of the following statement about Expense ratio is/ are incorrect:

(i) It is the percentage of income that were spent to run a mutual fund.

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(ii) It includes advisory fees, travel costs, registrar fees , custodian fees, etc.

(iii) It includes Brokerage costs for trading of Portfolio.

(iv) High Expense Ratio can seriously undermine the performance of a mutual fund scheme.

(a) (i), (ii), (iii)

(b) (i), (iii)

(c) only (iii)

(d) only (i)

Answer: c

5. …………………considers and uses downside deviation instead of total standard

deviation in denominator.

(a) Expense Ratio

(b) Sharpe Ratio

(c) Treynor Ratio

(d) Sortino Ratio

Answer: d

Case Scenario 17 (MTP November 2024 – Series 1) (Derivatives analysis and

valuation)
You as an investor had purchased a 4-month European Call Option on the equity shares of X
Ltd. for ₹ 10, of which the current market price is ₹ 132 per share and the exercise price ₹
150. You expect the price to range between ₹ 120 to ₹ 190. The expected share price of X
Ltd. and related probability is given below:

Expected Price (₹) 120 140 160 180 190

Probability 0.05 0.20 0.50 0.10 0.15

Based on above case scenario answer the following questions:

1. Expected price of share of X Ltd. at the end of 4 months shall be…….

(a) ₹ 160.00

(b) ₹ 160.50

(c) ₹ 158.00

(d) ₹ 140.00

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Answer: b

2. Suppose if the exercise price prevails at the end of 4 months the Value of Call Option
shall be…………

(a) ₹ 0

(b) ₹ 18

(c) ₹ 10

(d) ₹ 14

Answer: a

13. In case the option is held to its maturity, the expected value of the call option shall
be……………

(a) ₹ 0

(b) ₹ 18

(c) ₹ 10

(d) ₹ 14

Answer: d

4. In the given different scenarios of expected prices of share of X Ltd. at the time of
maturity the option shall be in-the-money in …………… scenarios.

(a) two

(b) three

(c) five

(d) In none of the scenario

Answer: b

5. In the given different scenarios of expected prices of share of X Ltd. at the time of
maturity the option shall be at-the-money in …………… scenarios.

(a) two

(b) three

(c) five

(d) In none of the scenario

Answer: d

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Case Scenario 18 (MTP November 2024 – Series 2) (Derivatives)

Suppose you are a risk manager at a financial institution, and your company has loaned a
significant amount of ₹ 500 crore to a company X Ltd. for a period of 3 years at 6-month at
MCLR plus 200 bps. You are concerned about X Ltd.'s ability to repay the debt due to recent
market volatility. To protect your institution from potential default, you decide to purchase a
Credit Default Swap (CDS) from ABC Bank Ltd. for same notional amount at a premium
quoted at 1% per year through cash settlement.

On the respective reset dates for the same period actual MCLR interest rate comes out as
follows:

Reset MCLR
1 9.75%
2 10.00%
3 10.25%
4 10.35%
5 10.50%
6 10.60%

Based on above case scenario answer the following questions:

1. The primary purpose of a Credit Default Swap (CDS) is...................

(a) to increase the value of bonds.

(b) to protect against default risk of a debt obligation.

(c) to provide guaranteed profit to the buyer.

(d) to create a new form of loan.

Answer: b

2. Which of the following statements is true about CDS contracts?

(a) CDS contracts cannot be used for speculation.

(b) CDS contracts are governed by government regulations.

(c) CDS contracts are private agreements between two parties.

(d) CDS contracts eliminate all risks for the buyer.

Answer: c

3. Which organization publishes the guidelines and rules for conducting Credit Default
Swap transactions?

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(a) Federal Reserve

(b) International Swap and Derivative Association (ISDA)

(c) Securities and Exchange Commission (SEC)

(d) World Trade Organization (WTO)

Answer: b

4. Assuming no default occurs the total premium your company will pay during the
designated loan period shall be........

(a) ₹ 5 crore

(b) ₹ 10 crore

(c) ₹ 15 crore

(d) ₹ 30 crore

Answer: c

5. Suppose if the lender defaults somewhere in the beginning of third year of loan (after
payment of interest upto 2 years) and the market value of a reference loans falls to 75%
of its par value, then ABC Bank will pay your company ...........in a cash settlement.

(a) ₹ 15 crore

(b) ₹ 30 crore

(c) ₹ 125 crore

(d) ₹ 500 crore

Answer: c

Case Scenario 19 (MTP November 2024 – Series 2) (Advanced Capital

Budgeting Decisions)
XYZ Ltd. is a mid-sized manufacturing company that produces industrial equipment. The
company is considering a new investment project—a state-of-the-art automated production
line, which is expected to improve production efficiency. The details of the same project are
as follows:

Initial Cost of the project 10,00,000

Sales price/unit 60

Cost/unit 40

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Sales volumes

Year 1 20000 units

Year 2 30000 units

Year 3 30000 units

The applicable discount rate is 10% p.a.

Based on above case scenario answer the following questions:

1. Sensitivity analysis helps to identify…………………..

(a) the exact profitability of the project

(c) the break-even point.

(c) the degree to which a change in each variable affects the NPV.

(d) the amount of investment required

Answer: c

2. The sale price per unit so that the project would break even with zero NPV shall be
approximately…………..

(a) ₹ 40.00

(b) ₹ 55.28

(c) ₹ 60.00.

(d) ₹ 44.74

Answer: b

3. The cost per unit so that the project would break even with zero NPV shall be
approximately…………..

(a) ₹ 40.00

(b) ₹ 55.28

(c) ₹ 60.00.

(d) ₹ 44.74

Answer: d

4. Overall …………in the sale volume will lead to the project to break even with zero
NPV.

(a) increase of 23.68%

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(b) fall of 23.68%

(c) Increase of 31.03%

(d) fall of 31.03%

Answer: b

5. A/an …………in the initial outlay will lead to the project to break even with zero NPV.

(a) increase of 23.68%

(b) fall of 23.68%

(c) Increase of 31.03%

(d) fall of 31.03%

Answer: c

Case Scenario 20 (MTP November 2024 – Series 2) (Security Valuation)

You are an investment analyst working for a financial advisory firm. You have been asked to
analyze the bond market's yield curve to assist your clients in making investment decisions.
The yield curve represents the relationship between the interest rates (yield) and the time to
maturity for debt securities, usually government bonds.

For simplicity, assume the following yield data for government bonds over various maturities
(measured in years):

Yield Curve Table

Maturity (Years) Yield (%)

1 Year 3.00%

2 Years 4.00%

3 Years 5.00%

5 Years 6.00%

7 Years 6.40%

10 Years 7.00%

15 Years 7.40%

30 Years 7.60%

Based on above case scenario answer the following questions:

1. The main characteristic of a normal yield curve is……………….

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(a) Short-term yields are higher than long-term yields.

(b) Short-term yields are lower than long-term yields.

(c) Yields remain the same across all maturities.

(d) Yields fluctuate randomly over different maturities.

Answer: b

2. Based on the revised yield data, what is the yield spread between the 10-year bond
and the 1-year bond?

(a) 2.0%

(b) 3.5%

(c) 4.0%

(d) 5.0%

Answer: c

3. An inverted yield curve typically indicates………………

(a) Economic growth

(b) Economic uncertainty

(c) An upcoming recession

(d) Inflationary pressure

Answer: c

4. If an investor is looking to invest for 2 years starting 3 years from now, the forward
rate he would expect shall be………

(a) 7.41%

(b) 7.52%

(c) 7.76%

(d) 7.93%

Answer: b

15. If an investor is looking to invest for 2 years starting 5 years from now, the forward
rate he would expect shall be………

(a) 7.41%

(b) 7.52%

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(c) 7.76%

(d) 7.93%

Answer: a

Case Scenario 21 (MTP May 2024 – Series 1) (Mutual Funds)

Mr. Y has invested in the three mutual funds (MF) as per the following details:

Particulars MF ‘X’ MF ‘Y’ MF ‘Z’

Amount of Investment (₹) 4,00,000 8,00,000 4,00,000

Net Assets Value (NAV) at the time of purchase (₹) 10.30 10.10 10

Dividend Received up to 31.03.2023 (₹) 9,000 0 6,000

NAV as on 31.03.2023 (₹) 10.35 10 10.30

Effective Yield per annum as on 31.03.2023 9.66 -11.66 24.15

(percent)

Assume 1 Year = 365 days

On the basis of above information, choose the most appropriate answer to the following
questions:

1. Total NAV of MF ‘Y’ as on 31.03.2023 would be approximately ……………

(a) ₹ 401941.73

(b) ₹ 412000.00

(c) ₹ 792079.20

(d) ₹ 82500.00

Answer: c

2. Total Yield of MF ‘X’ in terms of ₹ would be approximately ……………..

(a) ₹ 10941.73

(b) ₹ 7,920.80

(c) ₹ 18,000.00

(d) ₹ 12450.45

Answer: a

3. Number of days for which MF ‘X’ is held would be approximately………….

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(a) 31 Days

(b) 68 Days

(c) 103 Days

(d) 85 Days

Answer: c

4. Number of days for which MF ‘Y’ is held would be………….

(a) 31 Days

(b) 68 Days

(c) 103 Days

(d) 85 Days

Answer: a

Case Scenario 22 (MTP May 2024 – Series 1) (Security Valuation)

ABC Ltd. is planning to expand its business and therefore raising fund by issuing a convertible
bond of ₹ 10 crore. An investor “Mr. X” is interested to invest in the bond of ABC Ltd. Mr. X
has following data related to the convertible bond.

The data given below relates to a convertible bond:

Face value ₹ 250

Coupon rate 12%

No. of shares per bond 20

Market price of share ₹ 12

Straight value of bond ₹ 235

Market price of convertible bond ₹ 265

Maturity 5 Years

You, being an expert of the matter, are required to answer his questions. Select the most
appropriate alternative:

1. The percentage of downside risk of the bond is approximately……………..

(a) 10.42%

(b) 6.38%

(c) 2.13%

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(d) 12.77%

Answer: d

2. The conversion premium in percentage term of the bond is……………..

(a) 12.77%

(b) 10.42%

(c) 2.18%

(d) 13.45%

Answer: b

3. The conversion parity price of the stock is…………….

(a) ₹ 11.75

(b) ₹ 12.00

(c) ₹ 13.25

(d) ₹ 12.50

Answer: c

4. If he wants a yield of 15% the maximum price he should be ready to pay for
is…………….

(a) 217.41

(b) 224.81

(c) 240.00

(d) 232.32

Answer: b

Case Scenario 23 (MTP May 2024 – Series 1)

Same as case scenario 7 covered in this book

Case Scenario 24 (MTP May 2024 – Series 1)

Same as case scenario 8 covered in this book

Case Scenario 25 (MTP May 2024 – Series 2)

Same as case scenario 9 covered in this book

Case Scenario 26 (MTP May 2024 – Series 2)

Same as case scenario 10 covered in this book

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Case Scenario 27 (MTP May 2024 – Series 2)

Same as case scenario 11 covered in this book

Case Scenario 28 (RTP May 2024) (Securitization)

Grow More Ltd. an NBFC is in the need of funds and hence it sold its receivables to MAC
Financial Corporation (MFC) for ₹ 100 million. MFC created a trust for this purpose called
General Investment Trust (GIT) through which it issued securities carrying a different level of
risk and return to the investors. Further, this structure also permits the GIT to reinvest surplus
funds for short term as per their requirement. MFC also appointed a third party, Safeguard
Pvt. Ltd. (SPL) to collect the payment due from obligor(s) and passes it to GIT. It will also
follow up with defaulting obligor and if required initiate appropriate legal action against them.

Based on above scenario, answer the following questions:

1. The securitized instrument issued for ₹ 100 million by the GIT falls under category
of ____

(a) Pass Through certificate (PTCs)

(b) Pay Through Security (PTS)

(c) Stripped Security

(d) Debt Fund.

Answer: b

2. In the above scenario, the Originator is………………….

(a) Grow More Ltd.

(b) MAC Financial Corporation (MFC)

(c) General Investment Trust (GIT)

(d) Safeguard Pvt. Ltd.

Answer: b

3. In the above scenario, the General Investment Trust (GIT) is a/an………………….

(a) Obligor

(b) Originator

(c) Special Purpose Vehicle (SPV)

(d) Receiving and Paying Agent (RPA)

Answer: c

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4. In the above scenario, the Safeguard Pvt. Ltd. (SPL) is a/an………………

(a) Obligor

(b) Originator

(c) Special Purpose Vehicle (SPV)

(d) Receiving and Paying Agent (RPA)

Answer: d

5. Which of the following statement holds true?

(a) When Yield to Maturity in market rises, prices of Principle

Only (PO) Securities tend to rise.

(b) When Yield to Maturity in market rises, prices of Principle

Only (PO) Securities tend to fall.

(c) When Yield to Maturity in market falls, prices of Principle

Only (PO) Securities tend to fall.

(d) When Yield to Maturity in market falls, prices of Principle

Only (PO) Securities remain the same.

Answer: b

Case Scenario 29 (RTP May 2024) (Security Analysis)

You are a financial analyst at a prominent investment firm and have been tasked with
empirically verifying the weak form of Efficient Market Hypothesis (EMH) Theory for the XYZ
Stock Index, a collection of diverse stocks. You decided to conduct three different tests to
assess whether the stock market follows the principles of the weak form of EMH.

Test 1

For the past five years, you collected daily price changes of the stocks in the XYZ Stock Index.
You calculated correlation coefficients for different lag periods and analyzed whether past
price changes exhibit any significant correlation with future price changes. You considered
price changes to be serially independent. The results indicated that most auto correlation

coefficients are close to zero and statistically insignificant, suggesting those past price
changes do not predict future price changes.

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Test 2

You further investigated the randomness of price changes in the XYZ Stock Index. Analyzing
the sequence of daily price changes, you count the number of runs where price changes are
consistently positive or negative. Upon comparing the observed number of runs with the

expected number based on randomness, you find that they align closely, supporting the idea
that price changes follow a random pattern.

Test 3

To examine the efficacy of trading strategies based on historical price trends, you implemented
a simple trading rule for the XYZ Stock Index. The rule involves buying when the price crosses
a moving average of 5% threshold and selling when it crosses another 7% threshold. Over a

period of testing, you computed the returns generated by the trading strategy. The results
revealed that the returns are not consistently better than random chance, implying that past
price trends do not reliably predict future price movements.

Conclusion:

After conducting the three tests the evidence supports the weak form of Efficient Market
Theory for the XYZ Stock Index you concluded that past price trends do not reliably predict
future price movements.

Based on the above information answer the following questions:

1. Test 1 is …………………

(a) Serial Correlation test

(b) Filter Rules test

(c) Run test

(d) Variance Ratio test

Answer: a

2. Test 2 is ………………….

(a) Serial Correlation test

(b) Filter Rules test

(c) Run test

(d) Variance Ratio test

Answer: c

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3. Test 3 is ………………

(a) Serial Correlation test

(b) Filter Rules test

(c) Run test

(d) Variance Ratio test.

Answer: b

4. The Filter Rule Test should not be applied for buy and hold strategy if…………….

(a) the behavior of stock price changes is predictable.

(b) the behavior of stock price changes is dependent on past trends.

(c) the behavior of stock price changes is correlated.

(d) the behavior of stock price changes is random.

Answer: d

5. Results of your studies support the……………

(a) Semi-strong EMH Theory

(b) Strong EMH Theory

(c) Random Walk Theory

(d) Markowitz Theory

Answer: c

Case Scenario 30 (Nov 2024 exam) (Merger and Acquisition)

The Company X Ltd. proposes to take over Y Ltd. The chief executive of a company thinks
that shareholders always look for the earnings per share. Therefore, he considers
maximization of the earnings per share as his company’s objective. The following information
is available in respect of X Ltd and Y Ltd

X Ltd. Y Ltd

Net Profit 80 Lakh 15.75 Lakh

P/E Ratio 10.50 10

Current Market price per share ₹ 42 ₹ 85

From the information given above, choose the correct answer to the Question no. 1 to 3:

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1. If the company borrows funds @ 15% rate of interest and buys out Target Company
by paying cash, how much should he offer to maintain his EPS assuming tax rate @
30%

(a) 210 Lakhs

(b) 315 Lakhs

(c) 150 Lakhs

(d) 0 Lakhs

Answer: c

2. Maximum exchange ratio which the company should offer so that the company could
keep EPS at current level is.

(a) 1 : 0.952

(b) 1 : 2.125

(c) 1 : 2.023

(d) 1 : 0.196

Answer: b

3. No. of shares to be issued by X Ltd

(a) 3.9375 Lakhs

(b) 1.7639 Lakhs

(c) 3.7485 Lakhs

(d) 0.3631 Lakhs

Answer: a

Case Scenario 31 (Nov 2024 exam) (Derivatives analysis and valuation)

Based on the following information, choose the correct answer from the following questions:

Situation Action Exercise Price Premium Spot Price

I Exercised 140 20 160

II Exercised 200 15 175

III Lapsed 300 25 400

From the information given above, choose the correct answer to the Question no. 1 to 3

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1. In situation III, the investor’s position and the amount of profit / loss is:

(a) Put option, ₹ (25)

(b) Call option, ₹ 75

(c) Short position, ₹ 100

(d) Long position, ₹ (100)

Answer: a

2. In situation I, the investor’s position and amount of profit or loss is:

(a) Put option and ₹ 20

(b) Call option and ₹ 0

(c) Put option and ₹ 0

(d) Call option and ₹ 20

Answer: b

3. In situation II, the investor’s position and the amount of profit/ loss is

(a) Put option and ₹ 10

(b) Call option and ₹ 10

(c) Put option and ₹ 25

(d) Call option and ₹ 25

Answer: a

Case Scenario 32 (Nov 2024 exam) (Security Valuation)

The following information is available in respect of Bond 1 and Bond 2

Bond 1 Bond 2

Face value, redeemable value at par ₹ 1000 ₹ 1000

Coupon rate, payable annually (%) 6% 10%

Time to maturity (years) 5 3

An investor has the portfolio consisting of 75% of Bond 1 and 25% of Bond 2. The current
YTMs prevailing in the market is 10%

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Year (n) 1 2 3 4 5

PVIF (10%, n) 0.9091 0.8264 0.7513 0.6830 0.6209

From the information given above, choose the correct answer to the Question no. 1 to 4:

1. New price of the portfolio if YTM changes from 10% to 10.5% based on the duration
is:

(a) ₹ 870.12

(b) ₹ 902.36

(c) ₹ 1832.23

(d) ₹ 1864.45

Answer: a

2. What should be the price and duration of Bond – 2?

(a) ₹ 826.43 and 2.49

(b) ₹ 1000 and 2.74

(c) ₹ 924.85 and 2.74

(d) ₹ 1000 and 2.49

Answer: b

3. What should be the price and duration of Bond – 1?

(a) ₹ 848.34 and 4.43

(b) ₹ 811.09 and 4.38

(c) ₹ 1227.44 and 4.43

(d) ₹ 658.15 and 3.90

Answer: a

4. What will be the price sensitivity of the portfolio?

(a) – 4.027

(b) – 2.491

(c) – 3.643

(d) – 3.981

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Answer: c

Case Scenario 33 (Nov 2024 exam) (Security Valuation)

Z Ltd. paid a dividend of ₹ 5 for the current year. The dividend is expected to grow at 25% for
the next 6 years and at 10% per annum thereafter. The return of government bond is 13% per
annum and market return is expected to be around 20%. The correlation between market
return and Z Ltd share return is 0.3773. The standard deviation of market return and Z Ltd
share is 12% and 18% respectively.

Round off to two decimal places.

From the information given above, choose the correct answer to the Question no. 1 to 5:

1. What is the intrinsic value of Z Ltd. shares?

(a) ₹ 156.69

(b) ₹ 303.14

(c) ₹ 349.62

(d) ₹ 341.30

Answer: a

2. What is the present value at the end of 4th year?

(a) ₹ 23.71

(b) ₹ 12.56

(c) ₹ 6.53

(d) ₹ 6.99

Answer: c

3. What is the expected return of Z Ltd shares?

(a) 15%

(b) 23.92%

(c) 16.92%

(d) 16.5%

Answer: c

4. What is value in perpetuity at the start of the 6th Year?

(a) ₹ 156.69

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(b) ₹ 303.14

(c) ₹ 349.62

(d) ₹ 341.30

Answer: b

5. If current market price of the shares is ₹ 315 than stock is

(a) Over valued

(b) Under valued

(c) Fairley Valued

(d) Cannot be determined

Answer: a

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