Institute of Chartered Accountants of India

Certificate Course of Forex and Treasury

Management
Paper: 2
Answer all the questions

Each question carries one credit. Mark the correct answer from the
alternatives provided

1. Exporters who are permitted to retain a part of their export proceeds in a

Foreign currency account called Exchange earners foreign currency
account (EEFC), can maintain such accounts with Authorized dealers in:
a.
b.
c.
d.

Current account
Savings bank account
Term deposits
All of the above

2. Which of the following is/are true according to the International Fisher

effect?
a. Currencies with higher level of inflation, will have higher level of
interest rate
b. Real returns are equalized across countries through arbitrage
c. Until the expected real return in two countries are equalized the
process of arbitrage continues
d. Currencies with lower level of interest rate, will appreciate against
currencies with higher level of interest rate
3. In an option forward contract for an export transaction under direct quote,
when a currency is in forward premium bank will add:
1

a.
b.
c.
d.

Maximum premium to the bid rate

Minimum premium to the bid rate
It will ignore the premium
It will deduct the premium

4. There are various forms of purchasing power parity (PPP) theory. Which
form of PPP is also known as the law of one price?
a.
b.
c.
d.

Numerical form
Relative form
Accounting form
Absolute form

5. The method of estimating the value of various items on the basis of

expected development in the future period is known as:
a. Percent of sales method
b. Budgeted expense method.
c. Subjective method
d. Objective method
6. True commercial life refers to
a. Life period of an income generating asset
b. Expected number of years an income producing asset can generate cash
inflows
c. Difference between the time of purchase of an asset and the time of final
disposal of the asset
d. It is also known as physical life of the asset.
7. Which of the following statement/s is/are false regarding internal auditing?
a. Internal auditing of a company is done by an individual who is not an
employee or partner of the company.
b. The main objective of an internal audit is to ensure true and fair
presentation of accounts.
2

c. Internal audit is optional.

d. Both (a) and (b) above.
8. K Ltd., issues 15% debentures, the face value being Rs. 100. The net
amount realized per debentures is Rs. 97. Debentures are redeemable at par
after 10 years. The tax rate for the firm is 50%. What is the cost of these
debentures?
a.
b.
c.
d.

5.98%
7.92%
8.24%
15.5%

9. A cash budget is:

a.
b.
c.
d.

The amount of cash that can be utilized during a particular period

The cash that is budgeted for the purchase of fixed assets
An estimate of future cash flows
An estimate budget of inflows and outflows from the manufacturing
activities of the firm

10.The reorder point is given by ---- where

S is annual usage
L is lead time
F is stock-out acceptance factor
R is average quantity ordered
a.
b.
c.
d.

S x L x F (S x R x L)1/2
S + L + F (S x R x L)1/2
S + L x F (S x R x L)1/2
S x L + F (S x R x L)1/2

11.A current ratio less than one implies:

3

a.
b.
c.
d.

Negative net working capital

Financing of working capital using long-term sources
Adoption of a conservative working capital policy
A low debt service coverage ratio

12.The MM hypothesis of capital structure irrelevance is based on the

argument(s) of :
a.
b.
c.
d.

Existence of perfect capital markets

Equalization of market values of firms due to arbitrage
Absence of personal leverage
Both (a) and (b) above

13.The term capital structure refers to:

a.
b.
c.
d.

The manner in which a firm obtains its long-term sources of funding

The length of time needed to collect accounts receivable
Whether the firm can remain profitable in the long run
Which specific assets the firm should invest in

14. A gross profit margin ratio may not indicate:

a.
b.
c.
d.
15.

Earning power
The efficiency of production
The efficiency of pricing
The gap between net sales and cost of goods sold

Which of the following is/are features of equity capital?

a. The payment of dividend is compulsory, irrespective of the companys
financial performance.
b. The dividend, if not paid during a year becomes payable in the next year.
4

c. Dividend is payable only if the company makes a profit.

d. Dividend becomes payable only if recommended by the BoD and passed
by the company in the AGM
16.The rational expectations model of dividend policy says that:
a. Since the expectations of the investors are always rational, there
will be no effect of dividend policy on the valuation of the firm
b. If the investors have rational expectations, they will value a
dividend paying firm higher than a non-dividend paying firm
c. If the investors have rational expectations, they will value a nondividend paying firm higher than a dividend paying firm
d. If the declared dividend is in line with the expectations of the
investors, there will be no effect on the valuation of the firm.

17.Which of the following forms of purchasing power parity states that

changes in spot rates over a period of time reflect the changes in the price
levels over the same period in the currencies of the concerned economies?
a.
b.
c.
d.

Absolute form
Expectations form
Relative form
Both (a) and (b) above

18.Which of the following is not an assumption of Hecksher-Ohlin model?

a.
b.
c.
d.

There is no obstruction to trade

There are two factors of production
Both commodity and factor markets are perfectly competitive
There are increasing returns to scale.

19.An audit committee is a sub-committee of

a.
b.
c.
d.

External auditors
Internal auditors
Board of directors
WCM Committee

20.The EOQ model of inventory management tries to

a.
b.
c.
d.

Minimize the cost of ordering and carrying inventory

Minimize the financing cost of inventory carried
Minimize time
Minimize inventory

21.Primary purpose of establishing Internal Control in an organization is to

a.
b.
c.
d.

Prevent misappropriations and frauds

Ensure that risk taking is made difficult
Bring out the flaws in the working of various functions
All of the above.

22.Which of the following liabilities are classified under Time liabilities for
the computation of NDTL?
a. Unclaimed deposits
b. Credit balances in the cash credit accounts
c. Outstanding TTs (Telegraphic Transfers), MTs (Mail Transfer)
d. Staff security deposits.
23.Risks such as civil riots, natural calamities are covered under
a.
b.
c.
d.

Insurance against non-performance

Insurance against business risks
Umbrella policies
Excess liability coverage

24.Primary market is where securities are issued by:

a.
b.
c.
d.

Stock Exchange
FII
Brokers
Companies to the subscribers directly

25.Petty cash reserves are maintained at low level

i. To prevent unnecessary expenditure
ii. To minimize risk of loss
iii. To minimize work to maintain these reserves
a. (i) only
b. (ii) and (iii) only
c. (ii) only
d. (iii) only
26.The basis of estimation for receipts of interest and dividend in the cash
budget is usually by the:
a.
b.
c.
d.

Receipts pattern of the past

Financial forecast
Companys investment portfolio
Past proportion of interest and dividend to total sales.

27.The term SLR in treasury of a bank refers to

a.
b.
c.
d.

A ratio of assets and liabilities

A ratio to be adhered to by bank treasury
A measure of liquidity
Indicator of the extent of investments by bank

28.Which of the following indicates the Debt Service Coverage Ratio (DSCR)
of 1.5 of a firm?
a. The total obligations (i.e., interest plus repayment on the long-term
loan) of the firm are 1.5 times its PBDIT
b. The total obligations are 1.5 times its PAT
c. The post-tax cash earnings are 1.5 times its total obligations
7

d. The post-tax earnings plus depreciation and other non-cash expenses

plus interest on term loan is 1.5 times the interest on term loan and
the amount of loan repayment
29.A company can hold foreign currency balance in India in the form of
a. RFC [D] account
b. FCNR Account
c. Foreign Currency account
d. EEFC account

30.Repo
a. Is an agreement to sell the securities by the seller to the buyer after a
specific period of time and amount
b. Is an agreement to repurchase the securities by the seller from the
buyer after a specific period of time and amount
c. Is a redeemable agreement by a company in respect of its preference
shares
d. Is an agreement to redeem its equity shares by a company on a
specific date and amount

31.Utilization of various provisions in such a way that the tax liability is

reduced but it results in the violation of the spirit of guidelines though the
laws are complied with is known as:
a.
b.
c.
d.

Tax evasion
Tax avoidance
Tax planning
Tax reduction

32.An Italian company has to pay Japanese Yen for an import transaction in a
few days from now. To hedge this, the company will
a.
b.
c.
d.

Sell Japanese yen forward

Buy Japanese Yen forward
Buy USD forward
Sell Japanese Yen spot

33.Given total debt-equity ratio = 5:4; total assets = Rs.4,500; short-term debt
= Rs.600 and total debt consists only of long-term debt and short-term
debt, the long-term debt is equal to
a.
b.
c.
d.

Rs.1,567
Rs.1,900
Rs.2,167
Rs.2,500

34.Mr. Naresh deposited Rs.2,000 at the beginning of every month in a bank

for five years, if the interest rate is 12% p.a. compounded monthly, then
the accumulated amount he will get after 5 years is
a.
b.
c.
d.

Rs. 89,910
Rs.1,34,400
Rs.1,63,340
Rs.1,64,973

35.Which of the following is not a prediction of bankruptcy model?

a.
b.
c.
d.

Altmans Z score model

Beaver Model
Wilcox Model
CAPM

36.Mutual benefit funds are also known as

a.
b.
c.
d.

Multanis
Nidhis
Muddatis
Hundis

37.Which of the following are subsystems of the inventory management

system?
a. EOQ subsystem.
b. Stock-level subsystem
c. Reorder-point subsystem.
d. All of the above.
38.According to the Monetary Approach of exchange rate forecasting,
inflation is the outcome of
a.
b.
c.
d.

Increase in wages in the economy

Increase in real output growth
Increase in government spending
Increase in money supply in excess of real output growth.

39.Which of the following serves as evidence that the goods have actually
been imported into India for the remittance sent in foreign currency by an
Authorized Dealer?
a.
b.
c.
d.

Bill of Lading
Bill of Entry
Air Way Bill
Combined Transport bill of lading

40.Which of the following is not a function of World Trade Organization?

a. To limit harmful trade practices
b. Cooperating with other international institutes involved in global
policy-making
c. Acting as a forum for multilateral trade negotiations
10

d. Short-term financing for development of trade among member

countries.
41.Which of the following is an internal hedging technique?
a.
b.
c.
d.

Forwards
Futures
Options
Sourcing

42.The quote is said to be an European quote where the exchange is

expressed
a. In terms of US dollars per unit of any other currency
b. In terms of number of units of foreign currency per unit of domestic
currency
c. In terms of British pound per US dollar
d. In terms of euro per unit of any other currency
43.Factor income represents income received by investors on foreign
investments in financial assets (securities). This transaction is recorded
under
a.
b.
c.
d.

Capital account.
Current account
Trade account
Invisibles account

44. Between two currencies with different rates of interest,

a.
b.
c.
d.

There will always be a parity in exchange rates

The currency with higher interest rate will be at a premium
The currency with lower interest rate will be at a premium
There will be a steady flow of investments

11

45.In a swap-out deal, the foreign currency is

a.
b.
c.
d.

Bought both spot and forward

Sold both spot and forward
Sold spot and bought forward
Sold forward with different maturities

46.Current account deficit occur(s) when

a.
b.
c.
d.

Imports exceeds exports

Exports exceeds Imports
National expenditure exceeds national income
Both (a) and (c) above.

47.In Indias Balance of payments account, exports are valued at

a.
b.
c.
d.

Exworks
FOB value
C&F value
CIF value

48.Bank of the Middle East, Dubai is maintaining an account with SBI

Mumbai. SBI Mumbai calls this account as
a.
b.
c.
d.

Nostro account
Vostro account
Loro account
Mirror account

49.According to Altmans Z Score model

i. If a Z score 1.81, the firm is healthy
ii. If Z score 2.99, the firm is healthy
iii. If Z score 1.81, the firm is likely to be bankrupt.
iv. If Z score 2.99, the firm is likely to be bankrupt.
a. (i) and (ii)
b. (i) and (iii)
12

c. (i) and (iv)

d. (ii) and (iii)
50.Foreign exchange risk is defined as:
a. Variance in the value of assets, liabilities and operating income due
to unanticipated changes in exchange rates
b. Variance in operating income due to expected changes in exchange
rates
c. Variance in operating income, value of assets and liabilities due to
unfavourable movement of exchange rates
d. Possibility of loss a firm may sustain due to changes in the exchange
rates
51.Which of the following statements is false?
a. Authorized dealers are market makers in the foreign exchange market
b. Foreign currency broker act as a middleman between two market
makers
c. The counterparty in the foreign exchange market is another bank
d. Foreign exchange brokers buy or sell foreign currencies for their
customers.
52.On Tuesday 24-1-2013 a bank in India contacts a bank in London and buy
dollar spot against rupee. Funds are payable in New York and 26-1-2013 is
a holiday in India but not in New York. The value date is
a.
b.
c.
d.

24-1-2013
25-1-2013
26-1-2013
27-1-2013

53.The phenomenon of exchange rates changing more than the required for a
given change in an economic variable and later coming back to the new
equilibrium is explained by
a. Efficient Market Hypothesis
b. Dornbusch Sticky-Price Theory
13

c. Demand-Supply Approach
d. Imitation-Gap Theory
54.Suppose the Mexican Peso depreciates by 75% against the US dollar, what
is the percentage appreciation of the US dollar against the Peso?
a.
b.
c.
d.

15%
25%
75%
300%

55.A countrys capital account balance is expected to

a. Decrease if its home currency is expected to weaken, other things
being equal.
b. Increase if its home currency is expected to weaken, other things
being equal.
c. Increase if interest rates decrease in that country and increase in other
countries.
d. Both (a) and (c) above
56.In the case of forward cover, the cost of hedging is
a. The annualized forward premium
b. The difference between the forward rate and expected spot rate for
the maturity date
c. The difference between the forward rate and current spot rate
d. The difference between the forward rate and actual spot rate
prevailing on the date of maturity
57. If Indian rupee appreciates against USD, it means
a. Rupee is costlier in USD terms
b. Rupee is cheaper in USD terms
c. Rupee is volatile
d. There is stability in the market
58.If the ratio of quick assets to projected cash operating expenditure is 0.25
and the quick assets are Rs. 90,000, the defensive interval ratio is
14

a.
b.
c.
d.

30 days
60 days
90 days
120 days

59.A Certificate of Deposit is available for secondary market transactions

after ------- days from the date of issuance.
a.
b.
c.
d.

0 (No restriction)
7
15
30

60.Which of the following statements is false?

a.
b.
c.
d.

Size of forward contract depends on the term of the contract

Fluctuations in short-term interest rate affect the futures price
In forward contract direct costs are low but indirect costs are high
Forward market is well regulated.

61.Commercial banks are permitted to offer the following to the corporate

i. Export financing
ii. Term financing
iii. Foreign currency loans
a.
b.
c.
d.

(i) only
(i) and (ii) only
(i) and (iii) only
(i) (ii) and (iii) only

62.Which of the following statements is/are false?

a. Minimum value of an American call option is either zero or, S0 X
b. Maximum value of an American call option can be the value of
underlying asset (S0)
c. If two American call options have same exercise price, the option
with longer maturity date will be worth less than the other option
15

d. An American call option can never be worth less than a European

call option
63.Which of the following institutions has international monetary cooperation
as its primary concern?
a.
b.
c.
d.

World Bank
Bank for International Settlements
International Monetary Fund
International Development Association

64.Which of the following is not an assumption of the Theory of Comparative

Advantage?
a.
b.
c.
d.

In both the markets perfect competition exists

Technical innovation is a continuous process in both the markets
The marginal product of labor is constant
Labor is perfectly mobile within the country

65.Which of the following is not an assumption of binomial option pricing

model?
a. The underlying stock does not pay any dividends over the life of the
option contract
b. There are no transaction costs and no taxes
c. Market participants entail no counterparty risk
d. Market prices are such that there are arbitrage opportunities
66.Which of the following is true about merchant quote?
a. It is a quote given by an authorized dealer to RBI
b. It is a quote given by the authorized dealer to the scheduled
cooperative banks
c. It is a quote given by an authorized dealer to another authorized
dealer
d. It is a quote given by the bank to its retail customers

16

67.Which of the following is true under a currency board system?

a. The interest rates are automatically set by the market mechanism
b. When there is a higher demand for the anchor currency, the reserves
with the currency board gets enhanced
c. Lending to either the government or the domestic banks by the
currency board is allowed
d. The board can act as the lender of the last resort
68.The discount rate used in the APV method to calculate the benefit due to
increased borrowing capacity if the probability of positive cash flows is
low, is
a.
b.
c.
d.

The cost of capital for the parent company

Risk free rate of interest in home country
Risk free rate of interest in host country
Market rate of interest in home country

69.Which of the following is the reason for the J-Curve effect? The reason for
this is
a. The inelastic nature of short-run foreign demand for exported goods
allows export businesses to achieve a temporary unfair advantage.
b. The elastic nature of short-run foreign demand for exported goods
allows export businesses to achieve a temporary unfair advantage.
c. The elastic nature of short-run foreign demand for exported goods
delays the benefits that export businesses should realize.
d. The inelastic nature of short-run foreign demand for exported goods
delays the benefits that export businesses should realize.
70.If interest rate parity holds and the transaction costs are zero, covered
foreign financing will result in an effective borrowing rate that is
a.
b.
c.
d.

Less than domestic interest rate

Greater than domestic interest rate
Equal to domestic interest rate
Less than domestic interest rate if forward rate is in discount
17

71.An inter-bank swap deal in the foreign exchange market is

a. A pair of deals involving a purchase and sale of different foreign
currency amounts on a particular day
b. A buy/sell deal for different foreign currency amounts, at the same
rate
c. A pair of deals for different foreign currency amounts, different rates
d. A pair of deals involving a purchase and sale for different delivery
dates for the same amount of foreign currency.
72.An international cartel can maintain a high monopoly price if
a. The elasticity of demand for rest of the world is low
b. The elasticity of demand for rest of the world is high
c. The cartel controls a small share of the world market for the
cartelized commodity
d. The elasticity of supply of the cartelized commodity by the rest of the
world is high
73.Bought-out-Deal (BoD) comes into picture when
a. Companies do not wish to disclose information by way of public
issue
b. Promoters do not want to dilute their stake by going public.
c. Small projects require funds but costs of public issue are substantially
high
d. Board for Industrial and Financial Reconstruction (BIFR) offers a
sick unit to existing blue chips in that industry.
74.The current Interest rates are as under
Year
Interest Rate

1
10%

2
11%

18

3
12%

The expected 1 year rate after 2 years is r12 and expected 2 years rate after 1
year is r21 then which of the following is true?
a.
b.
c.
d.

r12 = 10.5%r21 = 11.5%

r12 = 11%
r21 = 11%
r12 = 12%
r21 = 11%
r12 = 14%
r21 = 13%

75.The system under which the exchange rates are determined by the demand
and supply position for the currencies in the foreign exchange market is
known as
a.
b.
c.
d.

Target zone arrangement system

Crawling peg system
Fixed exchange rate system
Floating exchange rate system

76.An Indian exporter exporting to U. K. is benefited most

a. By realizing the export proceeds immediately if pound is at a discount
b. By delaying the realization of export proceeds if pound is at a
discount
c. By delaying the realization of export proceeds if pound is at a
premium
d. Both (a) and (c) of the above.
77.A Bull-dog bond is
a. Issued in U. K. market by U. K. borrower
b. Issued in U. K. market in sterling by a non U. K. borrower under
private placement & unlisted
c. Issued in U. K. in sterling by a non U. K. borrower and listed
19

d. Issued outside U. K. by a U. K. borrower and listed

78.The Euro dollar interest rates in London are as under
1 month : 3.25 p.a.
2 month : 3.50 p.a.
3 month : 3.75 p.a.
The one month interest rate after 2 months is expected to be
a.
b.
c.
d.

4.12% p.a.
4.18% p.a.
4.23% p.a.
4.28% p.a.

79.If the Euro is quoted $ 0.90 today and the inflation-rates are 4% in Eurozone and 3% in U.S.A. What should be the $/Euro quote after 3 months?
a.
b.
c.
d.

$ 0.9022/Euro
$ 0.8978/Euro
$ 0.8966/Euro
$ 0.8855/Euro

80.The discount rate used in the APV method to calculate the benefit due to
increased borrowing capacity if the probability of positive cash flows is
low, is
a.
b.
c.
d.

The cost of capital for the parent company

Risk free rate of interest in home country
Market rate of interest in home country
Market rate of interest in host country.

81.A speculator buys Euro at Rs.88.44 and expects to make a profit by

keeping an open position for 1 month. He expects that
a. The spot ask rate after 1 month will be less than the current spot bid
rate
b. The spot ask rate after 1 month will be more than the current spot ask
rate
20

c. The spot bid rate after 1 month will be less than the current spot ask
rate
d. The spot bid rate after 1 month will be more than the current spot ask
rate.
82.Exchange rates changing more than that required by a change in an
economic variable and later coming back to the new equilibrium is
explained by
a.
b.
c.
d.

Marshall-Lerner condition
International Fisher effect
Quantity theory of money
Dornbusch sticky price theory

83.Which of the following is not a suitable strategy to hedge economic

exposure?
a.
b.
c.
d.

Product mix
Plant location
Market selection
Currency swap.

84.Which of the following theories of exchange rate assumes that the

purchasing power parity holds good?
a.
b.
c.
d.

Monetary approach
Portfolio balance approach
Asset approach
Demand-supply approach

85.Which of the following are translated at current rate under the temporal
method?
a.
b.
c.
d.

Cash
Receivables
Inventory
All of (a), (b) and (c) above.
21

86.Indian Rupee is
a. Fully convertible on current account
b. Partly convertible on current account
c. Fully convertible on capital account
d. Not at all convertible
87.Which of the following is/are an example(s) of a Euro-yen deposit?
a.
b.
c.
d.

A yen deposit held by a Japanese resident in a US bank

A yen deposit held by any one in a London bank
A yen deposit held by non-resident Japanese in a bank in Japan
Both (a) and (b) above.

88.Which of the following letters of credit (L/C) permit an exporter to draw

advance even before the shipment of goods?
a.
b.
c.
d.

Revocable credit
Revolving credit
Confirmed credit
Anticipatory credit.

89.Which of the following advances is not a post-shipment credit?

a.
b.
c.
d.

Advances against receivables from the Government of India

Advances against retention money relating to exports
Advances against approved deemed exports
Packing credit

90.The main risk faced by a treasurer is

a.
b.
c.
d.

Market risk
Credit risk
Operational risk
Sovereign risk

91.A US based MNC borrowed 5,00,000 at 3.5% for 6 months and invested
the amount in India at 8% for 6 months. If the current spot rate is Rs.71 per
22

pound what should be the 6 month Rs./ forward rate, in order to get a
positive spread?
a.
b.
c.
d.

> 72.57
< 72.57
> 72.75
< 72.75 but >72.57

92.Which of the following forms of arbitrage takes advantage of discrepancies

in the cross currency rates?
a.
b.
c.
d.

Interest rate arbitrage

Covered interest arbitrage
Triangular arbitrage
Two-way arbitrage

93.If 3 month Eurodollar interest rate is 3.75% p.a. and 3 month Euroyen
interest rate is 2% p.a., the dollar will trade at an annualized
a.
b.
c.
d.

Forward discount of 2.74%

Forward premium of 2.74%
Forward discount of 1.74%
Forward premium of 1.74%

94.To ensure that there is no three point arbitrage, the relationship among the
rates of three currencies should conform to

a. {1/S(A/B)ask } X S(C/B)bid x S(A/C)ask 1

b. S(A/B)ask / S(C/B)ask S(A/C)bid
c. S(A/B)bid X {1 / S(C/B)ask } X {1 / S(A/C)ask } 1
d. Both (a) and (b) above
95.Which of the following statements is false?
a. SDR transactions involve no exchange of currencies but only book
entries
23

b. SDR is defined in terms of certain gold equivalent

c. Issue of SDRs to a member country is in proportion to its quota in
IMF
d. SDR is a composite currency unit
96.Which of the following is false with respect to credit rating?
a. A credit rating reflects borrowers accountability
b. A credit rating reflects the borrowers expected capability and interest
to pay the interest and principal amount on time
c. A credit rating is a general purpose evaluation of the issuer
d. A credit rating is not an extensive audit of the issuing company
97.The face value of a 364-day T-Bill is Rs.100 and its purchase price is
Rs.92.25. The yield from such a TBill is _____ %.
a.
b.
c.
d.

7.75
7.77
8.00
8.42.

98.Debt instruments with warrants allowing the investor to subscribe to the

equity of another company at certain price is known as
a.
b.
c.
d.

Secured Premium Notes

LYONS
Third Party Convertible Debentures
Cumulative Convertible Preference Shares

99.Which of the following allows simultaneous purchasing and selling of

different securities by a person so that the composition of the portfolio can
be changed without significant costs?
a.
b.
c.
d.

Switch deals
Repo deals
Reverse repo deals
Open market operations

24

100.

LYONS are
a.
b.
c.
d.

101.

The regulatory body for the securities market in USA is

a.
b.
c.
d.

102.

a.
b.
c.
d.
103.

Securities and Exchange Board

Securities Exchange Commission
Securities Investment Board
Securities Regulatory Board
Which of the following is not an issuers consideration while
choosing a financial instrument?
Cash Flow
Taxation
Liquidity
Leverage
Euro Commercial Papers are instruments issued at

a.
b.
c.
d.
104.

London
Any European trade center
USA
Both USA and Europe
Trading in derivative instruments, can be used to

a.
b.
c.
d.
105.

Optionally convertible debentures

Third party convertible debentures
Zero coupon convertible notes
Tax saving bonds

Increase risk exposure

Decrease risk exposure
Alter risk exposure
All of the above.
Secured Premium Notes are

a. Issued at face value and do not carry interest and are redeemed by
repayment in a series of installments at a premium over the face value
25

b. Issued at a discount to their face value and are redeemed at par on

expiry of their tenure
c. Sold at a large discount on their face value and mature at par value
d. Also called LYONS
106.
Simultaneous purchasing and selling of different securities by a
person so that the composition of the portfolio can be changed without
significant costs is referred to as
a.
b.
c.
d.

Open market operations

Switch deals
Repos
Reverse repos

107.
Bonds that are floated by the foreign countries and are denominated in
the currency of the country where they are floated are referred to as
a.
b.
c.
d.

Eurobonds
Foreign Currency Convertible Bonds
Foreign bonds
Straight bonds

108.
Which of the following is not true about cumulative convertible
preference shares (CCPS)?
a. CCPS pays fixed dividend
b. CCPS can be considered as a part of the networth of the company
even before its conversion
c. CCPS helps companies to maintain EPS and increase the leveraging
capacity of the company
d. CCPS cannot be issued with warrants
109.
Export Credit and Guarantee Corporation, ECGC, which provides
export credit insurance support to Indian exporters does not cover which of
the following risks?
a.
b.
c.
d.

Cancellation of valid import license

Insolvency of the buyer
Commercial disputes including quality disputes
War, civil war or civil disturbances in buyers country
26

110.
Which of the following institutions do not have the permission to
operate as a Primary Dealer?
a.
b.
c.
d.

SBI Gilts Limited

ICICI Securities & Finance Co. Ltd.
PNB Gilts Limited
None of the above.

111.
Which of the following intermediaries is/are not registered with
SEBI?
a.
b.
c.
d.

Portfolio Managers
Brokers
Foreign Institutional Investors
All of the above intermediaries are required to be registered with
SEBI.

112.
If the shares reserved to mutual funds on firm basis in a public issue
has not been fully subscribed, the unsubscribed portion
a.
b.
c.
d.

Can be added to other reserved categories

Should be added to the net public offer
Should be subscribed by the promoters
Can be subscribed by the underwriters

113.
XYZ Ltd. was granted a certificate by SEBI to act as a merchant
Banker. In which of the following capacities can XYZ Ltd. not be
associated with a public issue without obtaining any separate certificate of
registration to act so?
a.
b.
c.
d.

Lead Manager
Co-Manager
Advisor
Underwriter

114.
Which of the following statements is/are true with respect to Repo
Deals?
i. They help to even out interest rates in the call money market
27

ii. They involve sale of a security with an undertaking to buy the

same security at a predetermined selling price on a
predetermined future date
iii. They are medium/long term deals
a.
b.
c.
d.
115.

Only (I) above

Both (I) and (II) above
Both (I) and (III) above
Both (II) and (III) above.
Which of the following statements is true?

a. Clean bills should possess the documents of title to goods

b. In post-shipment finance the banker runs the risk of dealing only with
the documents and not in goods
c. Banks can rediscount the bills arising out of share transactions
d. Banks cannot rediscount the bills, which were originally discounted
with them by their corporate clients.
116.
An instrument was assigned a rating of MA from ICRA. The
instrument rated is a/an
a.
b.
c.
d.
117.

Bond
Commercial paper
Fixed deposit
Preference share
Which of the following is/are true regarding government securities?
i. Foreign institutional investors are not allowed to invest in
government securities
ii. The coupon on these securities is always pre-determined by the
Central Bank
iii. They are also issued in the form of zero coupon securities.

a.
b.
c.
d.

Only (I) above

Only (III) above
Both (I) and (III) above
Both (II) and (III) above

28

118.

Which of the following statements is true?

a. Clean bills should possess the documents of title to goods
b. Banks cannot rediscount bills, which were originally discounted with
them by their corporate clients
c. Banks can rediscount the bills arising out of share transactions
d. In post-shipment finance the banker runs the risk of dealing only
with the documents and not in goods.

119.
Consider the following data:
Value of the asset leased =
Rs.40 lakhs
Lease rentals
=
Rs.32 ptpm
Lease period
=
4 years
Payment pattern
=
Payable quarterly in advance.
The add-on yield in the above lease transaction is
a. 13.4%
b. 21.4%
c. 25.2%
d. 28.6%

120.
Sri Finance offers a hire purchase plan for its corporate borrowers on
the following terms :
Flat rate of interest
12%
Repayment period
3 years
Frequency
Monthly in advance
Deposit at the inception of hire agreement 20% of the cost of the asset.
The annual percentage rate using the approximation formula is
a.
b.
c.
d.
121.

18.0%
19.8%
23.4%
24.7%
Gap loan, a form of real estate loan is a

a. Loan extended during the gap the borrower is able to find out a
suitable lender
29

b. Loan extended to the developer to cover the difference between the

bank construction loan and the total cost of the project.
c. Loan extended on which additional payment is required to be made to
cover the gap between market interest rate and the ceiling rate agreed
upon.
d. Loan on which the interest charged is generally lower than the prime
lending rate.
122.
i.

ii.

iii.

a.
b.
c.
d.

Which of the following is true regarding factoring and forfeiting?

Factoring can be structured either as recourse or non-recourse
arrangement but forfeiting can be structured only as non-recourse
arrangement.
Factoring can be structured so that service elements are not carried by
the factor whereas under forfeiting the forfeiter has to take the
responsibilities of receivables accounting.
In factoring the factor need not participate in the credit granting
process but the forfeiter under forfeiting has to participate.
Only (I) above
Both (I) and (III) above
Both (I) and (II) above
Both (II) and (III) above

123.
Which of the following is/are true regarding Collateralized Mortgage
Obligations?
a. They are preferred to pass through securities by issuers as funds can
be raised more cheaply.
b. They are not preferred by investors because of low level of credit
quality.
c. Investors who want to avoid call risk prefer short tranche CMOs.
d. Investors who prefer to have low interest rate risk avoids shorter
tranche CMOs.
124.
Which of the following is/are true regarding the accounting treatment
of a hire purchase transaction?
i. Capital content of outstanding hire purchase installments is shown as
liability in the books of hirer
ii. Present value of hire purchase installments or cash price of the asset,
whichever is minimum, is capitalized in the books of hirer
30

iii. Finance income component of hire purchase installments is recorded

as current liability in the books of the finance company
a.
b.
c.
d.

Only (I) above

Only (II) above
Both (I) and (II) above
Both (I) and (III) above.

125.
Which of the following can be termed as a cross-border lease
transactions?
i. The lessor and lessee are located in India and the supplier is located in
England
ii. The lessor and supplier are located in India and the lessee is located in
England.
iii. The lessee is located in India, lessor is located in England and the
supplier is located in USA.
a.
b.
c.
d.

Only (I) above

Only (II) above
Both (I) and (II) above
Both (II) and (III) above

126.
Assets worth Rs.20,000 of Classic Finance Limited remained doubtful
for 2 years. If 50% of the assets are secured, the provision to be made
against these doubtful assets is
a.
b.
c.
d.

Rs. 6,000
Rs.13,000
Rs.16,000
Rs.26,000

127.
Venture capital provided for a major expansion of a company when its
sales volume is increasing and it is breaking even or becoming profitable is
referred to as
a.
b.
c.
d.

First stage financing

Second stage financing
Third stage financing
Bridge financing
31

128.
A short term loan extended at the time of completion of the project to
provide bridge finance until the developer can obtain financing of a more
permanent nature is referred to as
a.
b.
c.
d.

Bow ties
Mini perms
Gap loans
Buy down loans

129.
Which of the following is\are true regarding pledged account
mortgages?
i. They resemble traditional mortgages from the lenders point of view.
ii. The pledged account under this type of mortgage is created by the
seller out of his profits.
iii. This type of mortgages are preferred by borrowers who have
sufficient cash on hand, but face cash flow shortage for the first few
years.
a.
b.
c.
d.

Only (I) above

Only (II) above
Both (I) and (III) above
Both (II) and (III) above

130.
Which of the following measures is not a preventive anti-takeover
measure?
a.
b.
c.
d.

Golden parachute
Poison pill
Standstill agreement
Dual Capitalization

131.
The proposal which provides one or more of securities, the right or the
option to exchange part or whole of their holdings for a different class of
securities of the firm is called:
a. Share repurchase
b. Tender offer
c. Proxy contest
32

d. Exchange offer
132.

Which of the following is/are false?

i. The quasi rent is the return necessary to maintain an assets current
service flow.
ii. The quasi rent represents a recovery of sunk costs when profits are
included in its measurements.
iii. The quasi rent value is the present value of a stream of cash flows
a.
b.
c.
d.

Only (I) above

Only (II) above
Only (III) above
Both (I) and (II) above

133.
Which of the following characteristics is/are necessary for a business
to make a good leveraged buyout candidate?
i. Strong and secure cash flows.
ii. Greater equity cushion.
iii. High debt on the capital structure.
a.
b.
c.
d.
134.

Only (I) above

Both (I) and (II) above
Both (I) and (III) above
Both (II) and (III) above

Mezzanine financing
i. Has primary claim on the assets of the target.
ii. Has both equity and debt characteristics.
iii. Is subordinated debt issued in connection with LBO.
a.
b.
c.
d.

Only (I) above

Both (I) and (II) above
Both (II) and (III) above
Both (I) and (III) above

135.
Which of the following is false with respect to asset-backed
securitization?
a. It is generally backed by easily traceable movable property like real
estate
33

b. Asset need not exist at the time of securitization such as future cash
flows can also be securitized
c. Process takes into consideration depreciation in the value of the assets
d. Legal hassles are relatively less as compared to mortgage backed
securities.
136.
Which of the following is true with respect to mortgaged backed
bonds?
i. Use of collateral is more efficient than in case of mortgage pass
throughs
ii. Certainty of cash flow is more predictable than in case of collateral
mortgage backed bonds
iii. Liquidity is more excellent than treasury bills.
a.
b.
c.
d.

Only (I) above

Only (II) above
Both (I) and (II) and( III) above
None of the above.

137.
Which of the following model does not assume that lease is a
substitute of debt?
a.
b.
c.
d.
138.

Weingartners Model
Equivalent Loan Model
Bower-Herringer-Williamson Model
Bower Model
Which of the following is false with respect to credit rating?

a. A credit rating reflects borrowers accountability

b. A credit rating reflects the borrowers expected capability and interest
to pay the interest and principal amount on time
c. A credit rating is a general purpose evaluation of the issuer
d. A credit rating is not an extensive audit of the issuing company
139.
In which of the following types of factoring the factor provides an
advance generally varying between 75-85 % of the value of the receivables
34

factored and the balance is paid upon collection or on the guaranteed

payment date?
a.
b.
c.
d.
140.

Recourse factoring
Maturity factoring
Advance factoring
Supplier guarantee factoring
Reintermediation means

a. Increase in deposits experienced by banks due to merchant banking

activities
b. Increase in deposits experienced by banks due to increased network of
branches
c. Loss of deposits by financial intermediaries because alternative types
of indirect lending becomes more attractive
d. Loss of deposits by financial intermediaries because of direct lending
141.
Exaggeration of the loss for the claim from an Insurance Company is
called
a.
b.
c.
d.
142.

Morale Hazard
Inflated loss
False claim
Moral Hazard
Which of the following is true?

a. When duration gap is positive,

market value of equity
b. When duration gap is negative,
market value of equity
c. When duration gap is positive,
market value of equity
d. When duration gap is negative,
market value of equity

increase in interest rate increases

decrease in interest rate decreases
decrease in interest rate decreases
increase in interest rate decreases

143.
Loss due to Jettison Peril which is covered in marine insurance
arises, when
35

a.
b.
c.
d.

144.
a.
b.
c.
d.

145.

The goods are lost in fire

The goods are stolen
The goods are fraudulently disposed or sold by master of the ship
The goods are thrown off the ship, so as to make the ship lighter, in
order to save the vessel and the crew
Which of the following statements is false?
Monetary expansion lowers the equilibrium interest rate
Monetary expansion increases the interest rate in the long-run
Monetary expansion in excess of real output growth pushes the
inflation upwards
Monetary expansion has a direct effect on interest rates and an
indirect effect on exchange rates.

Which of the following deposits is an example of transaction account?

a.
b.
c.
d.

Fixed deposits
Savings bank deposits
Cumulative / Recurring Deposits
Term Deposits which have become due for payment, but not paid yet.

146.
If a bank is lowering its credit deposit ratio, by investing these
deposits in low risk financial assets such as Government securities, high
grade privately issued debt such as commercial paper, then it is called
a.
b.
c.
d.
147.

Securitization
Universal banking
Narrow banking
Relationship banking.
Which of the following statements is false with respect to SLR?

a. SLR investments act as a first line of defence to maintain proper

liquidity of the bank
b. SLR results in restriction of the expansion of bank credit
c. SLR leads to augmenting the investment of banks in Government
securities
d. SLR ensures solvency of the banks
36

148.
Which of the following statements is false regarding liquidity risk
management?
a. Fundamental approach aims to eliminate liquidity risk in the long run
b. Technical approach aims to eliminate liquidity risk in the short run
c. In liability management, a proposal for loan is approved when there is
surplus funds
d. Asset management aims to eliminate liquidity risk by holding near
cash assets
149.
All deposits based on their maturity fall under which of the following
categories?
a.
b.
c.
d.

Volatile funds, working funds, float funds

Stable funds, vulnerable funds, volatile funds
Owned funds, stable funds, float funds
Volatile funds, working funds, stable funds

150.
Which of the following statements is false regarding liquidity risk
management?
a. Fundamental approach aims to eliminate liquidity risk in the long run
b. Technical approach aims to eliminate liquidity risk in the short run
c. In liability management, a proposal for loan is approved when there is
surplus funds
d. Asset management aims to eliminate liquidity risk by holding near
cash assets

37