I85PREP
⌘ K
Assam ASSEB Higher Secondary Finance study materials
Assam ASSEB Higher Secondary Finance study resources

Assam ASSEB Higher Secondary Finance practice questions

One question at a time. Build your Assam ASSEB Higher Secondary Finance understanding.

First 50 of 200 questions. Each one lists the choices, the correct answer, and an explanation. The checker at the top of this page saves progress in this browser when it is available.

Continue in the practice tool above to load more questions, 50 at a time.

Question 1Introduction to Finance and Financial System

Which financial institution in India is responsible for issuing currency notes (except one-rupee coins and notes) and conducting monetary policy?

  1. Securities and Exchange Board of India
  2. Life Insurance Corporation of India
  3. Reserve Bank of India Correct answer.
  4. State Bank of India

Explanation

The Reserve Bank of India is the central bank, so it manages note issuance, monetary policy, and banking regulation. SEBI regulates securities markets, SBI is a commercial bank, and LIC is an insurer.

Question 2Introduction to Finance and Financial System

A firm raises funds by selling new shares directly to investors for the first time. This transaction belongs to which market?

  1. Primary market Correct answer.
  2. Secondary market
  3. Money market
  4. Forex market

Explanation

The primary market is where new securities are issued and sold for the first time, so the issuer receives the proceeds. The secondary market only involves trading of already-issued securities among investors.

Question 3Introduction to Finance and Financial System

Which of the following is a characteristic of the money market?

  1. It deals in securities with original maturity of one year or less Correct answer.
  2. It provides long-term project finance to industry
  3. It handles only foreign currency transactions
  4. It deals exclusively in equity shares of listed companies

Explanation

The money market is the segment for short-term funds, typically instruments with maturity up to one year such as treasury bills and commercial paper. Long-term finance and equity trading belong to the capital market.

Question 4Introduction to Finance and Financial System

A saver deposits money in a bank and the bank lends most of it to borrowers. Which function of the financial system does this illustrate?

  1. Currency issuance
  2. Mobilisation of savings and allocation of credit Correct answer.
  3. Price discovery of securities
  4. Risk diversification

Explanation

Financial intermediaries collect small savings and channel them as loans to productive users, which is the savings mobilisation and credit allocation function. This pooling converts scattered household savings into usable investment funds.

Question 5Introduction to Finance and Financial System

Which regulator is primarily responsible for protecting investors and regulating the Indian securities market?

  1. Reserve Bank of India
  2. Securities and Exchange Board of India Correct answer.
  3. Insurance Regulatory and Development Authority of India
  4. Ministry of Corporate Affairs

Explanation

SEBI was set up as the statutory regulator of the securities market to protect investors and regulate intermediaries such as brokers and mutual funds. IRDAI regulates insurers and RBI regulates banks and monetary matters.

Question 6Introduction to Finance and Financial System

A treasury bill is best described as which type of instrument?

  1. A short-term discount instrument issued by the government Correct answer.
  2. A medium-term corporate bond
  3. A long-term equity instrument
  4. A foreign currency derivative

Explanation

Treasury bills are short-term government debt sold at a discount to face value and redeemed at par, so the investor earns the difference. They are money market instruments with maturities usually up to one year.

Question 7Introduction to Finance and Financial System

An investor buys shares of a company on a stock exchange from another investor. Which market is this and who receives the sale proceeds?

  1. Secondary market; the selling investor receives the proceeds Correct answer.
  2. Primary market; the issuing company receives the proceeds
  3. Money market; the bank receives the proceeds
  4. Primary market; the broker receives the proceeds

Explanation

Trading of already-issued shares between investors occurs in the secondary market, and the selling investor, not the company, receives the money. The company only raises funds when it issues new shares in the primary market.

Question 8Introduction to Finance and Financial System

Which of the following best explains why financial intermediaries reduce information costs for savers?

  1. They guarantee every loan will be repaid in full
  2. They specialise in screening borrowers and monitoring loans on behalf of depositors Correct answer.
  3. They eliminate all risk from the financial system
  4. They fix interest rates by government order

Explanation

Intermediaries develop expertise in assessing creditworthiness and monitoring borrowers, so individual savers need not do this themselves. This screening and monitoring lowers information costs and supports lending.

Question 9Introduction to Finance and Financial System

A government security with a maturity of 10 years would be classified as belonging to which market?

  1. Forex market
  2. Commodity market
  3. Money market
  4. Capital market Correct answer.

Explanation

Instruments with original maturity above one year are capital market instruments, so a 10-year government security belongs to the capital market. The money market covers maturities of one year or less.

Question 10Introduction to Finance and Financial System

Which of the following is the primary role of a stock exchange?

  1. To provide a regulated platform for buying and selling listed securities Correct answer.
  2. To issue currency on behalf of the government
  3. To insure investors against losses
  4. To lend working capital to companies

Explanation

A stock exchange provides an organised, regulated marketplace where listed securities can be traded, giving investors liquidity and price transparency. It does not lend funds, issue currency, or insure investors.

Question 11Introduction to Finance and Financial System

A company wants short-term funds for 90 days to manage working capital. Which instrument would be most appropriate?

  1. Preference shares
  2. Debentures with 10-year maturity
  3. Commercial paper Correct answer.
  4. Equity shares

Explanation

Commercial paper is an unsecured short-term promissory note used by firms to raise funds for a few months, so it suits a 90-day need. Equity and long-term debentures are capital market instruments and are unsuitable for short-term liquidity.

Question 12Introduction to Finance and Financial System

Which of the following correctly pairs a financial instrument with its issuer?

  1. Equity share - Reserve Bank of India
  2. Certificate of deposit - commercial bank Correct answer.
  3. Treasury bill - commercial bank
  4. Commercial paper - Government of India

Explanation

A certificate of deposit is issued by commercial banks and financial institutions to raise short-term funds. Treasury bills are issued by the government, commercial paper by companies, and equity shares by companies.

Question 13Introduction to Finance and Financial System

Which function of money allows prices of different goods to be compared using a common unit?

  1. Unit of account Correct answer.
  2. Medium of exchange
  3. Standard of deferred payment
  4. Store of value

Explanation

As a unit of account, money provides a common measure in which prices and values are expressed, which makes comparison possible. The medium of exchange function concerns settling transactions.

Question 14Introduction to Finance and Financial System

An investor holds a diversified portfolio of shares and bonds to reduce exposure to any single asset. Which function of the financial system is being used?

  1. Information provision
  2. Risk sharing and diversification Correct answer.
  3. Pooling of funds
  4. Payment and settlement

Explanation

By spreading investments across many assets, the investor uses the financial system's risk-sharing and diversification function. Losses in one asset are offset by gains or stability in others.

Question 15Introduction to Finance and Financial System

Which of the following statements about the relationship between savings and investment in an economy is most accurate?

  1. Savings and investment are unrelated because firms fund investment only from profits
  2. Financial markets channel household savings into investment by firms, supporting capital formation Correct answer.
  3. Investment always equals savings in every individual household
  4. Financial markets reduce the total savings available to firms

Explanation

Households save, and financial markets and intermediaries transfer these savings to firms that need funds for investment, which supports capital formation. This flow is central to economic growth.

Question 16Introduction to Finance and Financial System

A firm issues bonds whose proceeds are used to build a new factory. Which two functions of the financial system are most directly involved?

  1. Currency issuance and price control
  2. Payment settlement and insurance underwriting
  3. Mobilisation of funds and allocation to productive investment Correct answer.
  4. Tax collection and budget allocation

Explanation

Bond issuance pools funds from many investors and allocates them to a productive project, so mobilisation and allocation are the functions involved. Currency issuance, tax collection, and underwriting are unrelated to this transaction.

Question 17Introduction to Finance and Financial System

Which of the following best distinguishes a financial market from a financial intermediary?

  1. Markets deal only in short-term funds, while intermediaries deal only in long-term funds
  2. Markets are regulated, while intermediaries are never regulated
  3. Markets bring savers and borrowers together directly, while intermediaries stand between them and create their own claims Correct answer.
  4. Intermediaries issue securities, while markets never facilitate trading

Explanation

In a financial market, surplus and deficit units transact directly, whereas an intermediary such as a bank accepts deposits and issues its own loans, creating separate claims. Both markets and intermediaries can be regulated and can deal in short- and long-term funds.

Question 18Introduction to Finance and Financial System

If the central bank raises the repo rate, which immediate effect is most likely in the financial system?

  1. Stock exchanges suspend all trading
  2. Borrowing costs for banks rise and credit may become costlier for firms Correct answer.
  3. Commercial banks stop accepting deposits
  4. The government stops issuing treasury bills

Explanation

The repo rate is the rate at which banks borrow short-term funds from the central bank, so an increase raises banks' funding costs and tends to make credit costlier. Deposits, treasury bill issuance, and trading continue.

Question 19Introduction to Finance and Financial System

Which of the following is an example of a financial asset?

  1. Raw material inventory in a warehouse
  2. A delivery truck used for logistics
  3. A factory building owned by a company
  4. A fixed deposit receipt held by a saver Correct answer.

Explanation

A financial asset represents a claim on another party, such as a deposit claim on a bank. Physical assets like buildings, trucks, and inventory are real assets used in production.

Question 20Introduction to Finance and Financial System

Which statement best describes the role of a depository such as NSDL or CDSL in the Indian financial system?

  1. It insures bank deposits up to a fixed limit
  2. It lends money to investors for buying shares
  3. It sets the interest rate on bank deposits
  4. It holds securities in electronic form and facilitates transfer of ownership Correct answer.

Explanation

Depositories hold securities in dematerialised electronic form and enable transfers through accounts maintained by depository participants. Lending, rate setting, and deposit insurance are performed by other institutions.

Question 21Financial Institutions and Markets

Under the Reserve Bank of India Act, 1934, which body is responsible for fixing the policy repo rate and the monetary policy stance?

  1. The Monetary Policy Committee Correct answer.
  2. The Securities and Exchange Board of India
  3. The Board for Financial Supervision
  4. The Central Board of Direct Taxes

Explanation

The RBI Act was amended in 2016 to create a six-member Monetary Policy Committee, which meets at least four times a year and is mandated to keep consumer price inflation near the 4 per cent target. The Governor holds a casting vote if the committee is evenly split. The other bodies listed have no role in setting the policy repo rate.

Question 22Financial Institutions and Markets

A customer deposits a cheque drawn on another bank into her savings account. Which institution acts as the clearing house that settles the interbank funds movement?

  1. The National Stock Exchange
  2. The State Bank of India branch
  3. The clearing house of the Reserve Bank of India Correct answer.
  4. The National Payments Corporation of India

Explanation

Cheque clearing in India is operated through the RBI's clearing houses, which net the obligations of member banks and settle the residual balances in their current accounts with the RBI. The RBI thus provides the settlement finality that makes interbank payment safe. NPCI operates retail payment systems but not cheque clearing houses.

Question 23Financial Institutions and Markets

In the primary market, a company sells new shares directly to investors. Which of the following best describes the primary market's economic function?

  1. It guarantees investors a fixed rate of return
  2. It channels fresh savings into issuers who need capital Correct answer.
  3. It provides liquidity to holders after listing
  4. It transfers existing securities between investors

Explanation

The primary market is where securities are issued for the first time, so the proceeds go to the issuer and finance real investment. Secondary market trading, by contrast, merely changes ownership of already-issued securities. Liquidity and price discovery are functions of the secondary market.

Question 24Financial Institutions and Markets

Which of the following is a negotiable instrument that a bank issues on itself and that functions as a secure substitute for carrying cash?

  1. A commercial paper
  2. A certificate of deposit
  3. A bank draft Correct answer.
  4. A debenture

Explanation

A bank draft is drawn by a bank on another branch or on itself and is payable to a named payee, so it is a safe, negotiable means of remitting funds. It is not a money market instrument and does not carry interest. It is therefore a cash-substitute payment instrument rather than a borrowing or investment product.

Question 25Financial Institutions and Markets

A scheduled commercial bank in India is one that fulfils the conditions of the RBI Act, including a minimum paid-up capital and reserves. Which additional requirement makes a bank 'scheduled'?

  1. Obtaining a licence from SEBI
  2. Listing its shares on a recognised stock exchange
  3. Being included in the Second Schedule of the RBI Act Correct answer.
  4. Joining a self-regulatory organisation for banks

Explanation

Section 42 of the RBI Act requires banks to satisfy capital and business conditions and to be included in the Second Schedule to the Act to become scheduled banks. Scheduled status brings access to RBI refinance and clearing membership. Stock exchange listing and SEBI licensing are unrelated to this status.

Question 26Financial Institutions and Markets

Which regulator is primarily responsible for protecting investors in the Indian securities market and for registering stock brokers and mutual funds?

  1. The Pension Fund Regulatory and Development Authority
  2. The Insurance Regulatory and Development Authority of India
  3. The Securities and Exchange Board of India Correct answer.
  4. The Reserve Bank of India

Explanation

SEBI was given statutory powers by the SEBI Act, 1992, and its mandate covers investor protection, market development and regulation of intermediaries such as brokers, merchant bankers and mutual funds. The RBI regulates banks and monetary policy, while IRDAI and PFRDA regulate insurance and pensions respectively.

Question 27Financial Institutions and Markets

The RBI raises the cash reserve ratio, requiring banks to hold a larger share of net demand and time liabilities as cash with the RBI. What is the most direct effect on bank credit creation?

  1. Banks can lend more because their deposits rise
  2. Bank reserves are converted into government securities
  3. The cost of borrowing for banks falls sharply
  4. The money multiplier falls, so credit creation contracts Correct answer.

Explanation

The cash reserve ratio locks up a portion of bank deposits as idle cash with the RBI, reducing the lendable base and lowering the credit multiplier. A higher ratio therefore contracts credit creation and is a contractionary monetary tool. It does not lower banks' borrowing costs or convert reserves into securities.

Question 28Financial Institutions and Markets

An investor buys a 91-day Treasury bill at a discount and holds it to maturity. Which statement about the return is correct?

  1. The return comes from the difference between the discounted purchase price and the face value Correct answer.
  2. The return is a fixed coupon paid every quarter
  3. The return is a dividend declared by the government
  4. The return depends on the equity market index

Explanation

Treasury bills are zero-coupon instruments issued at a discount to face value, so the investor's gain is the difference between the issue price and the redemption value. They carry no periodic coupon and are backed by the sovereign. This makes them the benchmark for short-term risk-free return.

Question 29Financial Institutions and Markets

A company wants short-term funds and issues commercial paper. Which condition must it satisfy under Indian money market norms?

  1. It must be listed on a stock exchange for at least ten years
  2. It must be a scheduled commercial bank
  3. It must have a specified minimum credit rating from a recognised agency Correct answer.
  4. It must pledge government securities as collateral

Explanation

Commercial paper is an unsecured promissory note, so investors rely on the issuer's creditworthiness; RBI guidelines therefore require a minimum credit rating from a recognised rating agency and a minimum net worth. Banks cannot issue CP, and CP is unsecured, so no collateral is pledged. Listing history is irrelevant to eligibility.

Question 30Financial Institutions and Markets

A mutual fund scheme states that it will invest at least 65 per cent of its assets in equity shares. Which SEBI category does this describe?

  1. An equity scheme Correct answer.
  2. A gilt scheme
  3. A liquid scheme
  4. A gold exchange traded fund

Explanation

SEBI's mutual fund categorisation requires an equity scheme to hold a minimum of 65 per cent of assets in equity and equity-related instruments, which also determines its tax treatment. Liquid schemes hold short-term debt, gilt schemes hold government securities, and gold ETFs hold gold. The stated 65 per cent equity floor therefore identifies an equity scheme.

Question 31Financial Institutions and Markets

A bank's liabilities include a large block of savings deposits repayable on demand. Which liquidity risk does this structure create for the bank?

  1. Withdrawal risk because deposits can be encashed at short notice Correct answer.
  2. Refinancing risk from callable long-term bonds
  3. Interest rate risk arising from fixed long-term coupons
  4. Currency risk from foreign borrowings

Explanation

Demand and savings deposits can be withdrawn at short notice, so a bank that funds long-term loans with them faces the risk of sudden outflows. This is the classic asset-liability maturity mismatch that prudential liquidity requirements address. Coupon and currency risks are separate exposures not created by the deposit's short maturity.

Question 32Financial Institutions and Markets

The RBI reduces the policy repo rate. Which transmission effect is most consistent with the liquidity adjustment framework?

  1. The SLR requirement is automatically abolished
  2. Deposit insurance cover is increased
  3. Short-term money market rates tend to fall, lowering banks' marginal funding cost Correct answer.
  4. Government bond yields rise immediately because demand falls

Explanation

A repo cut lowers the cost at which banks borrow short-term funds from the RBI against government securities, which usually pulls call money and certificate of deposit rates down. This is the first link in monetary transmission to lending rates. SLR and deposit insurance are statutory parameters that are not changed by a repo decision.

Question 33Financial Institutions and Markets

A firm issues bonds with a face value of Rs 1,000 and an 8 per cent annual coupon, but the market yield on comparable bonds rises to 10 per cent. What happens to the bond's price?

  1. It becomes equal to the coupon rate
  2. It falls below Rs 1,000 Correct answer.
  3. It stays exactly at Rs 1,000
  4. It rises above Rs 1,000

Explanation

Bond prices move inversely with market yields: when the required yield exceeds the coupon rate, the fixed coupon stream is worth less than face value, so the bond trades at a discount. The price must fall until the yield to maturity matches the market's 10 per cent. A price at or above par would leave the yield below the market rate.

Question 34Financial Institutions and Markets

A bank holds government securities to satisfy the statutory liquidity ratio. Why are these securities preferred for this purpose?

  1. They carry the highest coupon among all securities
  2. They are exempt from interest rate risk
  3. They are guaranteed by the issuer's shareholders
  4. They are liquid and eligible for repo with the RBI Correct answer.

Explanation

Government securities held for the SLR must be readily realisable, and their eligibility as collateral in RBI repo operations makes them a reliable source of liquidity. They are also treated as low-risk assets for capital purposes. High coupons and exemption from interest rate risk are not characteristics of these securities.

Question 35Financial Institutions and Markets

An investor purchases a share in the secondary market through a stock exchange. Which statement correctly distinguishes this transaction from a primary market purchase?

  1. The share is newly created for the investor
  2. The transaction requires the company's board approval
  3. The seller, not the company, receives the proceeds Correct answer.
  4. The company receives the proceeds of the sale

Explanation

In a secondary market trade, ownership of an already-issued share passes from one investor to another, so the consideration goes to the selling investor while the company receives nothing. Only primary issues bring fresh capital to the issuer. No new shares are created and board approval is not needed for each trade.

Question 36Financial Institutions and Markets

A small business needs to raise equity capital without a full public issue. It approaches a SEBI-registered platform that lists the securities on a dedicated exchange segment for small and medium enterprises. Which route is this?

  1. The initial public offering main board
  2. A rights issue to existing shareholders
  3. A preferential allotment to a single investor
  4. The SME platform of a recognised stock exchange Correct answer.

Explanation

SEBI permits small and medium enterprises to list on dedicated SME platforms with relaxed eligibility norms such as lower post-issue paid-up capital and a shorter track record. This broadens access to equity finance for smaller firms. Main board IPOs, rights issues and preferential allotments are distinct routes with different conditions.

Question 37Financial Institutions and Markets

A pension fund holds a 20-year government bond and expects interest rates to rise sharply over the next year. Which risk is most relevant to its bond portfolio?

  1. Operational risk from settlement failure
  2. Liquidity risk from an inactive market
  3. Default risk on the sovereign issuer
  4. Price risk from an increase in market yields Correct answer.

Explanation

When market yields rise, the present value of a bond's fixed cash flows falls, so long-duration bonds lose value; this is interest rate or price risk. Sovereign default risk is negligible for domestic government bonds, and active government securities markets generally provide reasonable liquidity. The dominant exposure in this scenario is therefore the yield-driven price change.

Question 38Financial Institutions and Markets

A bank's capital adequacy is computed under Basel norms. Which item qualifies as Tier-1 capital?

  1. Subordinated debt with a fixed maturity
  2. Paid-up equity capital and disclosed reserves Correct answer.
  3. A revaluation reserve on fixed assets
  4. A general provision on standard assets

Explanation

Tier-1 capital consists mainly of paid-up equity capital, disclosed reserves and retained earnings, which can absorb losses on a going-concern basis. Subordinated debt and most general provisions count as Tier-2 capital, and revaluation reserves are treated as upper Tier-2. The distinction matters because regulators require a minimum proportion of the total capital to be Tier-1.

Question 39Financial Institutions and Markets

The RBI conducts an open market operation by selling government securities. Which combination of effects is most consistent with the liquidity adjustment process?

  1. Bank reserves rise and short-term rates fall
  2. Bank reserves rise and the SLR is reduced
  3. Bank reserves are unchanged and rates are unchanged
  4. Bank reserves fall and short-term rates rise Correct answer.

Explanation

When the RBI sells securities, buyers pay from their bank balances, which drains reserves from the banking system and tightens liquidity, pushing short-term rates up. This is a contractionary open market operation. Purchases would have the opposite effect, and the SLR is a separate statutory ratio unaffected by open market sales.

Question 40Financial Institutions and Markets

A bank faces a sudden surge in demand for withdrawals and sells government securities to meet it. Which function of the secondary market does this illustrate?

  1. Regulation of market intermediaries
  2. Price discovery for new issues
  3. Underwriting of primary issues
  4. Liquidity provision to holders of securities Correct answer.

Explanation

An active secondary market lets holders convert securities into cash quickly at a fair price, which is the liquidity function. This is why banks keep SLR securities that can be sold or repoed during a deposit run. Price discovery, underwriting and regulation are separate functions performed by markets and regulators.

Question 41Time Value of Money and Financial Mathematics

An amount of ₹10,000 is invested at 10% per annum compound interest, compounded annually. What is the amount after 2 years?

  1. ₹12,000
  2. ₹12,100 Correct answer.
  3. ₹11,000
  4. ₹12,200

Explanation

Compound interest grows the principal by the interest rate each year, so the multiplier per year is 1.10. After two years the amount is 10,000 × (1.10)² = 10,000 × 1.21 = ₹12,100. Simple interest would give only ₹12,000, which ignores interest on the first year's interest.

Question 42Time Value of Money and Financial Mathematics

Which formula correctly gives the future value of a single sum under compound interest?

  1. FV = PV × r × n
  2. FV = PV × (1 + r × n)
  3. FV = PV ÷ (1 + r)ⁿ
  4. FV = PV × (1 + r)ⁿ Correct answer.

Explanation

Under compound interest the principal is multiplied by (1 + r) once for each compounding period, giving FV = PV × (1 + r)ⁿ. The term (1 + r)ⁿ is the compounding factor that captures interest on interest.

Question 43Time Value of Money and Financial Mathematics

The present value of ₹1,00,000 receivable 3 years from now, discounted at 10% per annum, is closest to:

  1. ₹1,33,100
  2. ₹70,000
  3. ₹76,923
  4. ₹75,131 Correct answer.

Explanation

Present value is found by discounting the future sum: PV = FV ÷ (1 + r)ⁿ. Here PV = 1,00,000 ÷ (1.10)³ = 1,00,000 ÷ 1.331 ≈ ₹75,131. Discounting reduces the value because money received later is worth less today.

Question 44Time Value of Money and Financial Mathematics

A series of equal cash flows paid at the end of each period for a fixed number of periods is best described as:

  1. an ordinary annuity Correct answer.
  2. an annuity due
  3. a lump sum
  4. a perpetuity

Explanation

An ordinary annuity (also called a regular annuity) consists of equal periodic payments made at the end of each period. The timing of payments at period-end is the defining feature that separates it from an annuity due.

Question 45Time Value of Money and Financial Mathematics

How does an annuity due differ from an ordinary annuity with the same payment, rate and number of periods?

  1. The annuity due has a larger future value because each payment earns one extra period of interest. Correct answer.
  2. The annuity due has no future value formula.
  3. The annuity due has a smaller present value because payments start earlier.
  4. Both have exactly the same value because the payments are equal.

Explanation

In an annuity due each payment occurs one period earlier, so every payment earns one additional period of interest. Multiplying an ordinary annuity value by (1 + r) shifts the timing and increases the future value.

Question 46Time Value of Money and Financial Mathematics

A sum of money doubles itself in 8 years under annual compound interest. Using the Rule of 72, the approximate annual rate is:

  1. 6%
  2. 9% Correct answer.
  3. 8%
  4. 12%

Explanation

The Rule of 72 estimates the doubling time as 72 divided by the annual percentage rate. Rearranging, rate ≈ 72 ÷ doubling time = 72 ÷ 8 = 9%.

Question 47Time Value of Money and Financial Mathematics

If the nominal annual rate is 12% compounded monthly, the periodic monthly rate used in time value calculations is:

  1. 12%
  2. 6%
  3. 1% Correct answer.
  4. 0.12%

Explanation

When compounding occurs more often than annually, the nominal rate is divided by the number of compounding periods per year. Here 12% ÷ 12 = 1% per month.

Question 48Time Value of Money and Financial Mathematics

The effective annual rate (EAR) for a nominal rate of 10% compounded semi-annually is closest to:

  1. 10.25% Correct answer.
  2. 10.00%
  3. 10.47%
  4. 20.00%

Explanation

EAR = (1 + r/m)^m − 1, where r is the nominal rate and m the number of compounding periods. For 10% compounded semi-annually, EAR = (1.05)² − 1 = 0.1025 = 10.25%.

Question 49Time Value of Money and Financial Mathematics

In time value of money, the discount rate is best interpreted as:

  1. the rate at which future cash flows are converted to present value, reflecting the opportunity cost of capital Correct answer.
  2. the rate at which a firm pays dividends
  3. the rate of interest paid on a savings account only
  4. the rate of inflation published by the government

Explanation

The discount rate reflects the required return or opportunity cost of capital used to bring future cash flows back to present value. A higher discount rate reduces the present value of distant cash flows.

Question 50Time Value of Money and Financial Mathematics

A project requires an initial outlay of ₹50,000 and returns ₹60,000 after one year. At a discount rate of 10%, the net present value (NPV) is closest to:

  1. ₹−4,545
  2. ₹5,000
  3. ₹4,545 Correct answer.
  4. ₹10,000

Explanation

NPV discounts the future cash flow to present value and subtracts the initial outlay. PV = 60,000 ÷ 1.10 = ₹54,545, so NPV = 54,545 − 50,000 = ₹4,545. A positive NPV means the project adds value at the given rate.