Finance & Bank

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Which of the following type of compounding will be most beneficial from a lender's
1
perspective, for a given interest rate?
Option 1 Compounded daily
Option 2 Compounded semi-annually
Option 3 Compounded quarterly
Option 4 Compounded annually

Greater the frequency of compounding, greater the effective return or yield. Therefore,
Solution
daily compounding will yield highest interest to Bank.

Sharma traders wants to borrow Rs. 10 lakhs for 3 years, for his business requirements.
He approached 3 banks who quoted him 3 different rates, with different compounding.

Find out which one would be the best choice for Sharma traders.

Option 1 SYM Bank

Option 2 AVG Bank
Option 3 IDNC Bank
Option 4 IDNC and AVG Both will cost same

Bank
IDNC Bank
Solution AVG Bank
SYM Bank
Out of the three options, least interest is paid in case of SYM bank.

An investment in land requires an initial outlay of INR 2 million. It promises to pay INR
3 2.18 million in one year. What is the net present value (NPV) of the investment. Assume
a market interest rate of 10%.
Option 1 INR (18,181.82)
Option 2 INR 18,181.82
Option 3 INR 361,818.18
Option 4 INR (361,818.18)

Initial outlay
After 1 year
Solution Interest Rate
Present Value (2180000/((1+0.1)^1))
NPV (Present Value - Initial Outlay)
 Saurabh has bought a life insurance endowment policy for 15 years. He has to pay an
annual premium of INR 60,000 for 15 years. He will receive INR 15 lakhs on maturity
(i.e. one year after all premiums are made). He will also receive INR 20,000 on every
4 4th year, as 'cash back' bonus. What returns will he get on this policy? If he is getting
an interest of 9% on other investment avenues, will it be advisable for him to go for this
insurance policy? Note: Saurabh wants to use insurance as a pure investment product.

Option 1 No, as he will get a return of 6.94% on insurance policy

Option 2 No, as he will get a return of 7.92% on his insurance policy
Option 3 Yes, as the return he will get, is 9.8%
Option 4 Yes, as the return he will get, is 8%

Year
0
1
2
3
4
5
6
7
8
9
Solution 10
11
12
13
14
15
IRR

Since IRR is less than 9%, NPV for this investment at a discount rate of 9% (the alternative investment) would
negative and Saurabh should not invest in insurance policy.

You have bought shares of Infosys at a price of Rs. 1200. You are exposed to market
5
risk. Now, what can you infer from this?
Option 1 You may incur losses due to change in share price.
Option 2 You may incur losses due to change in market interest rates.
Option 3 You may incur losses due to change in exchange rates.
Option 4 You may incur losses due to change in brokerage rates charged by brokers.

If prices fall below the purchased price, you will incur loss. This is known as equity
Solution
risk/market risk.
 Following are the returns of 4 stocks, for the past five years. Manoj, an investor, wants
to invest in a stock which will give him good returns with minimum risk. Can you
suggest in which of the following stocks, should Manoj invest?

Option 1 Stock A
Option 2 Stock B
Option 3 Stock C
Option 4 Stock D

Solution
Year 1
Year 2
Year 3
Year 4
Year 5
Average
Standard Deviation
Return/ Unit of risk

Ronak is a wholesaler who stocks goods in his godown. He wants to protect himself
from the risk of loss, due to fire or any natural calamity. So he decided to purchase
insurance. What should be the maximum amount he should be willing to pay as annual
7
premium?
It is observed that on an average, he suffer such loss once in 4 years and the average
loss amount is INR 1 lakh.
Option 1 INR 25,000
Option 2 INR 1 lakh
Option 3 INR 10,000
Option 4 INR 4 lakhs

The probability of loss is once in 4 years i.e. 0.25.

The quantum of loss = INR 1 lakh.
Solution
Hence, maximum amount of premium he would be willing to pay = INR 1 lakh * 0.25
= INR 25,000.

Megha has taken an education loan, for which all repayments including interest, will
start after 2 years. The Bank has to show the interest earned yearly in its books. So,
8 which of the following is/are true?

Bank will credit its 'interest income' account and a corresponding debit entry will be
Option 1
made, in the 'interest receivable' account.
Option 2 The bank will not make any accounting entry until Megha actually starts repaying.
 When Megha pays, the bank will credit 'interest receivables' account and debit cash
Option 3
account.
The bank will credit its 'interest income' account yearly, and a corresponding debit entry
Option 4
will be made in Megha's loan account.

Bank will create a suspense account for interest receivables till the time Megha starts
repaying.
So, in order to show the interest income annually, Bank will credit the interest income
Solution
account and debit the interest receivables account.
After Megha starts repaying, Bank will make the nullifying credit entry in interest
receivable account and debit the cash account.

AXM Ltd., a software company, has bought computers worth Rs. 20 Lakhs. The payment
9
was made through a cheque. What will be the effect in the books of AXM Ltd.?
Bank account- Credited,
Option 1
Fixed Assets - Debited
Bank account- Debited,
Option 2
Fixed Assets - Credited
Bank account- Debited,
Option 3
Fixed Assets - Debited
Bank account- Credited,
Option 4
Fixed Assets - Credited

If there is an increase in assets, it is debited, and when there is a decrease asset

account is credited.
Solution Here, Bank balance is an asset, so bank account will be credited as the balance is
reduced.
Fixed asset account will be debited as assets have increased.

Use the data below to answer the following question:

10

How much is the PAT?

Option 1 INR 122.00 million
Option 2 INR 122.85 million
Option 3 INR 120.98 million
Option 4 INR 120.13 million

Solution Total Revenue

Less Direct cost
Less Selling, General & administrative expense
 Less Depreciation
Add Other income
Earnings before interest & tax
Less Interest Expenses
Earning after tax
Less Tax (25% of 167.2)
PAT

RM jewelers sold jewelry worth INR 40 lakhs, out of which 50% was sold on credit, in
the last quarter. It has reported depreciation of INR 2 lakhs for this quarter. PAT for this
11
period was 5 lakhs. Calculate the cash balance of RM jewelers, assuming no other
transactions and zero opening balance.
Option 1 (- INR 13 lakhs)
Option 2 (-INR 23 lakhs)
Option 3 INR 27 lakhs
Option 4 INR 23 lakhs

Cash balance= PAT + Noncash expenses - Non cash income.

Solution = (5 + 2 - (50%*40)) lakhs
= (-13 lakhs)

PNG Bank has total assets of INR 20,000 crore reported in the last fiscal year. This year,
PNG bank earned a net profit of 1000 crores, while their interest expense was 2000
12
crores. What would be the total assets for this fiscal year for PNG Bank, assuming no
other additions/reductions?
Option 1 INR 21,000 cr
Option 2 INR 18,000 cr
Option 3 INR 20,000 cr
Option 4 INR 23,000 cr

Profit of INR 1000 cr will be added in owner's equity, therefore, total liabilities will
increase by 1000 cr, on the asset side, this will reflect either in the cash account or the
receivables account. So, total assets will also increase by the same amount.
Solution
Interest expense is a part of Income statement and will be considered while calculating
the Net profit, so it will not be seperately included in the Balance sheet.
Finance & Banking Fundementals India

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CI= [P*(1+r/m)^mt] - P
380746.017339273
378842.80676189
378749.897

-2000000
2180000
10%
1981818.18
-18181.82
 Cash Flows
-60000
-60000
-60000
-40000
-60000
-60000
-60000
-40000
-60000
-60000
-60000
-40000
-60000
-60000
-60000
1500000
6.94%

the alternative investment) would be

Stock A Stock B Stock C Stock D
18% 14% 17% 9%
15% 11% 22% 10%
16% -5% -9% 8%
11% 9% 23% 10%
5% 20% 13% 7%
13% 10% 13% 9%
5% 9% 13% 1%
2.53 1.06 1.01 7.22
 440
200.5
67.3
 7.5
2.5
167.2
3.4
163.8
41.8
122.00