FE&IA Question Bank

FINANCIAL EDUCATION AND INVESTMENT AWARENESS

MODEL QUESTIONS & ANSWERS
Module 1: Foundations for Finance
SECTION-A (2 Marks)
1. What is Finance?
It is the study of money and investment which explain the fundamentals of investment, banking,
capital market etc.
2. What is money?
It is anything that serves as a medium of exchange which is widely accepted as a means of payment.
3. What do you mean by financial plan?
It refer to the evaluation of the current and future financial state of a person or entity which gives
picture to create strategies for achieving short and long term plans.
4. What is time value of money?
It is a fundamental financial concept which states that the value of money at present time is greater
than a reliable promise to receive the same amount of money at a future date.
5. Define Interest.
Interest is the charge on loan borrowed from financial institutions. It is expressed interms of
percentage per year.
6. What is simple interest?
It is the cost of borrowing money without accounting for the effects of compounding which means
that it is a tool that calculates the interest on loans or savings without compounding.
7. What is compound interest?
It is the addition of interest to the principal sum of a loan or deposit. This indicate the interest
calculated on the principal and interest accumulated over the previous.
8. What is discounting?
It is the act of estimating the present value of a payment that is to be received in the future which
takes into account the time value of money.
9. What is Annuity?
It is a fixed amount of money paid to someone every year until their death or insurance agreement
that provide the money that is paid.
10. What is perpetuity?
It is a stream of cash flows that never terminates. It is a security t pays for an infinite amount of
time.
PREETHIKARANI K, ASSISTANT PROFESSOR

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K.L.E’S S. NIJALINGAPPA COLLEGE
11. What is cash inflow?

It is the money going into the business which could be from sales, investments or financing.
12. What are securities?
These are financial instruments that hold some kind of monetary value. These can stocks or bonds
that can be bought, sold and traded.
13. Give the meaning of Fixed-income securities.
It is an investment that provides a return in the form of fixed periodic interest payments and
eventual return of principal at maturity.
14. What are debentures?
It is a debt instrument that may or may not be secured by any collateral which is issued by
govemment or Public company to finance. It is a long term capital investment projects.
15. What are preference shares?
These are also called as preferred stocks, which enable preference shareholders to receive dividends
before ordinary shareholders.
16. What are equity shares?
These are popular investment options among investors which represent a fractional ownership in a
company listed in the stock market.
17. What is dividend?
A dividend is a share of profit and retained earnings that a company pays out to its shareholders and
owners.
18. What is dividend capitalization?
These are dividends due on the preferred shares which are capitalized by adding them to the stated
price of the preferred shares.
19. What is capitalization of earnings?
It is the process of estimating the value of a company through its present earnings and cash flow
that help estimate the company's future earnings and profits.
20. Mention the types of money?
The types are
 Currency (bills and coins) issued by government.

 Fiat currency.
 Substitutes.

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21. What is earnings capitalization?

It is a method used to value a business by deriving the net present value of its projected future
earning based on current earnings and expected future performance.
22. Give the meaning of financial goals of an individual?
These are the targets set by an individual to achieve financial milestones or plans which they try to
achieve it within a time frame.
23. What is Discounting?
It is the current worth of cash which has to be received in future with one or more payment this has
been discounted at a market rate of interest.
24. What is compounding?
It is the process of determining the future value of present money. It involves investing money,
reinvesting the interest earned and finding value at the end of specified period.
25. What is the difference between ordinary annuity and annuity due?
Ordinary annuity: In this inflow or outflow of cash fall due for payment at the end of the each
period. Payment belongs to the period preceding its date. It is appropriate for payments
Ex: Issuer of coupon bonds usually pay interest at the end of every 6 months until the maturity date.
Annuity due: It is the series of cash flows occurring at the beginning of each period. Payment
belongs to the period following its date. It is appropriate for receipts
Ex: Payment of rent, lease etc.
26. What is fixed income security?
Its an investment that provides a return in the form of fixed periodic interest payments and eventual
return of principal at maturity.
Ex: Bonds, money market, preference shares.
27. Name the types of bank deposits.
They are Fixed deposit, recurring deposit, Current account and Saving deposit.
28. What is present value of single cash inflow?
It refers to how much a single cash flow in the future will be worth today and is calculated by
discounting the future cash flow for given time at a specified discount rate.
29. What is security valuation?
It is the process of determining current worth of an asset or company in which regulators evaluate
the safety and risk associated with securities.

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SECTION-B (6 Marks)
1. Name the properties of money.
Ans. The properties of money are:
 It is the medium of exchange of which allow the people to satisfy their needs.
 It is portable and dividable so that a worthwhile quantity can be carried on one's person.
 It is a unit of account-a socially accepted standard unit with which things are priced.
 It is durable to retain its usefulness for many future exchange.
 It is recognizable.
2. Explain the different types of money.

Ans: Following are types of money.
i) Fiat money: The form of money issued by a government and is not guaranteed by a tangible
goods like gold and silver.
Ex: INR. pounds etc
ii) Crypto currencies: These are an electronic medium of exchange that exists virtually and has
opportunities for international exchanges.
iii) Fiduciary money: It will be used as a means of trade determines its value.
iv) Commodity money: It is the oldest kind whose value is described by the actual value of the
commodity itself.
v) Paper money: It refer to the bank notes and government notes which are used as money.
3. Explain the need for money.

Ans: The money is required for the following purpose.
 It serves as a medium of exchange: It is acts as intermediary between the buyer and seller to
facilitate transactions. Regardless of whether they desire each others goods and services.
 It serve as store of value: It is an easily transported store of value that is available in a number of
convenient denominations. To be a medium of exchange it must hold its value over time.
 It serves as unit of account: Money can be measured based on goods and services it can buy
which means that it can be used to set price for goods that people want to consume.
 It serves as a standard of deferred payment: It is usable today to make purchase amd that will be
paid in the future.

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4. Name the types of financial goals of an individual.

Ans. There are 3 types. Namely
i. Short term goals: These are the goals that an individual wants to achieve in less than 3 years
which are required for immediate expenses. Ex: Student tution fee or buying a car.
ii. Medium term goals: These are the goals with an achievement target of 3-10 years which are
critical for evaluating your progress against long term goals. Ex: Buying a house or investing in
stocks.
iii. Long term financial goals: These goals require more deliberation, diligent planning,
execution and patience. They require more than 10 years to accomplish. Ex: Retirement or funding
higher education.
5. What are the characteristics of sound financial plan?

Ans: Sound financial plan should be
 Simplicity: It should be simple and easy to understand and manage which should consider
technological changes, resources and other factors.
 Flexibility: It should be flexible to adapt changes with a minimum of delay to meet changing
condition in the future.
 Uniformity: It should be prepared by considering organization structure.
 Economy: It should reduce the expenses involved in underwriting commission, discount,
brokerage etc. It should also ensure average cost of capital should be minimum.
 Liquidity: It should be maintain necessary liquidity. This shows the capacity of the business to pay
its operating expenses and short term debts in time.
 Use of resources: It should be prepared to make best use of resources which is possible when
capital requirement are estimated correctly.
6. Name the factors influencing financial planning.

Ans. The factors are
 Objectives: The objectives of financial planning whether consistent with the objectives of
organization or not affect the business. If it is consistent it helps in raising funds at reasonable cost.
 Inflation rate: Financial planning will be at risk and cause loss in the situation like increase in
interest rate, decrease in share price, less interest on saving account etc.
 Requirement of business: Financial requirement of the business for the present and future days
affect financial planning.
 Risk profile: The ability of a person or business in taking risk will influence developing financial
plan. Even risk investments are usually taken by youth which represent age factor.
 Economic growth: The financial plans are depend on economic growth of a country.The stock
prices will be high, moderate interest rate during economic progress and vice versa.
 Global issues: Rise in price of oil may cause inflation which cause ups and down in our stock
market and impact financial planning.
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7. Explain the importance of Time value of money.

Ans. Its importance are
 It is possible to take better financial decisions in uncertainty situation using time value of money.
 It helps individual in choosing the best investment proposal .It helps to decide to accept or reject the
proposal for investment.
 Having money right now is more valuable than getting the same amount in future. In business t
money can be used for expansion which can generate more money.
 To find feasible time period to get back the original investment or to earn expected rate of return.
 It helps in determining wage and price fixation.
 It helps in comparing projects which are similar in nature.
 It is possible to assess the debt position of a business.
8. A sum of Rs 10000 is borrowed by Anil for 2 years at an interest of 10% compounded

annually. Find the compound interest and amount he has to pay at the end of 2 years.
Ans: Given: Principal =10000, rate = 10%, Time = 2years
Amount (A2) = P (1+R/100)2
= 10000 (1+10/100)2
=10000(11/10)(11/10)
= Rs. 1
Compound Interest (for 2 year) = A2 – P
= 12100 – 10000
= Rs. 2100
9. Write a note on Annuity.
Ans: An annuity is a series of even cash flows. A series of payments or receipts of equal amounts is
known as annuity. That means it is a stream of cash flows (inflow or outflow) over a specified
period of time which exist from the beginning of a year.
Ex: Recurring deposit account, loan repayment in fixed EMIS.
Future value of annuity: It is the sum of future value of Re.I for the given period of time duration
at the given rate of interest.
Formula: Here.
FVra = Future value of a Regular Annuity
FVad = Future value of Annuity Due
A = Amount of periodic payments or receipts

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r = Interest rate or profit rate

n = Number of payments or receipts
Present value of an annuity: It is the sum of present value of Re. 1 for the given period of time
duration at the given rate of interest.
10. What are the types of annuity?

Ans: They are
 Immediate annuities: These are the payments or receipts which are made at the end of each period.
Here the premium is paid in a lump sum and not multiple number.
 Deferred annuity: These are the payments or receipts which starts after a certain number of years.
This happens when a person retire. In mean time investment grows on a tax deferred basis.
 Fixed annuity: This type of annuity spreads out payments over a fixed period. With this annuity
the age, health of annuity holder do not affect the amount of the payments.
 Variable annuity: It provides based on performance of sub accounts that fund the annuities
growth. Sub accounts work in a similar way to mutual funds .
 Immediate annuity: These are the receipts or payments which are made at the end of the each
period. re premium os paid in a lump sum and not multiple number of times.
11. Write a note on present value of single cash flow.

Ans: It is also called as annuity which represent a series of equal cash flows that occur at regular
intervals for a finite period of time. These are essentially a series of constant cash flows that are
received at a specified frequency over a fixed time period. The common payment frequencies are
yearly, semiannually, quarterly and monthly. There are 2 types of annuities. (Ref question no 25,
sec A)
The formula for calculating present value of single cash flow is,
PV=FV/(1+r)n
Where (1+r) n is present value interest factor which is known as discounting factor.
12. Write a note on present value of series of cash flow.

It is used to obtain the initial/current worth of a series of cash flow to be invested for some years at
a prevalent rate of interest.
Ex: Money to be invested today to meet rent payment liabilities for next 5 years.
Formula: PV = A[[1- (1+r) - N] / r)
Where A is the amount paid per year for a period of N years.
It consists of Uniform and non-uniform series.

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Annuity is divided into 3 types:

 Ordinary annuity
 Annuity due
 Perpetuity
Ex: Dividend paid by a company on its share for a lifetime
The formula for calculating present value of a single future cash flow maybe extended to compute
present value of series of equal cash flow as given below
Po = De / Ke
Po = Current price of shares.
De = Expected annual cash flow.
Ke=Capitalisation rate.
Present value of a series of unequal cash flows:
Cash flow are unequal because profit of a firm for instance which culminate into cash flows are not
constant year after year.
Po = D n / (Ke-g)
Where, Po = Current price of shares.
Dn = Dividend for N number of years
Ke = Capitalisation rate
G = Growth rate
13. Find out the present value of Rs 3,000 received after 10 years if discount rate is 10%,r =
10%.
Solution: r =10%, n-10 years
PV = FV/(1+r)n
PV = 3000(1+10)10
PV = 3000(.386) = Rs 1,158
14. Find out the present value of a 5years annuity of Rs 50,000 discounted at 8%.
Solution: r=8%, n=5years, PV=50,000
PV = A[(1+r)n-1/r(1+r)n]
= 50,000(1.08)5-1 / 0.8(1.08)5

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= 50,000(3.993)
= Rs. 1,99,650
15. Why do we need to calculate valuation of securities?

Ans: Valuation of securities is needed for the following reasons .
 To ensure that we are paying a fair price for the investment.

 To determine the rate of return that we need to receive to break even on our investment.
 To determine intrinsic value and to make investment decision.
 To value the fair market value of a financial instrument at a particular time.
 To determine profitability of the business and its future market value.
16. Apple stock on 28/03/2019, was trading $188.72 per share. The company's stock buyback
program has lowered the share outstanding from over 6 billion to 4715,280,000. Calculate
market equity of capitalization.
Market value of equity = Stock price * share outstanding
= 188.72 * 4,715,280,000
= $889,867,641,600
17. Write a note on valuation of preference shares.

Ans. Preference shares pay a constant dividend which is the percentage of the face value of the
shares. Dividend on preference shares is assumed to be perpetual payments. To value a perpetuity,
take the annual return and divide it by an appropriate discount rate. If preferred stocks have fixed
dividend, then the value can be calculated by discounting each of these payments to the present day
It is calculated using the formula.
Value (Preference Share) = D/r
Where D is annual dividend
r = investors required rate of return.
Factors to be considered in valuation of preference shares
 Ability of the company in paying the liquidation preference upon exit to the preferred share holders.
 Existence of voting rights for the preference shares and control of the company over it.
 If preferred shares have any redemption rights.
 Dividend rate and liquidation preferences.

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18. ABC Ltd has issued Rs 100 preference share on without it pays a dividend of Rs 9. Assume
this share yielding dividend of 11%. What is the value of preference share.
Ans: The preference dividend of Rs 9 is perpetuity
P = D/r
= 9/0.11
P = Rs 81.82
19. If current price of a preference share of a company is Rs 60 and annual dividend is Rs 4.

What is the yield on preference share?
Ans: r =D / p
= 4 / 60
r = 6.67%
20. The dividends of a company are Rs 50, Rs 75, Rs 100 in the first 3 years and required rate
of return is & % per annum. What is the share value?
Ans: P = D/(1+r)1 +D/(1+r)² +D/(1+r)3
= 50/(1+0.07)1+75/(1+0.07)2+ 100/(1+0.07)3
= 50/1.07 +75/1.1449 + 100/1.225043
= 46.7289 +65.5079 +81.6297
= 194
21. Write a note on valuation of equity shares.

Valuation of equity shares can be made on the basis of the assets of the company, It is known as
asset-backing method. The shares are valued on the basis of real internal value of the assets of the
company. After reduction of preference share capital value from net worth of the company we get
value of company to the equity share holders This method may be made either on a going concern
basis or on. Break-up value basis.
22. Amon 2 companies find which one has got high equity value
Particulars Company A Company B
Total shares outstanding 1000000 100000
Share price 50 5000
PREETHIKARANI K, ASSISTANT PROFESSOR 1

K.L.E’S S. NIJALINGAPPA COLLEGE 0
Solution: Equity value = Total shares outstanding*current share price

Company A
Equity value = 10,00,000 X 50
= 5,00,00,000
Company B
Equity value = 100,000 X 5000
= 50,00,00,000
Equity value for company B is higher than company A.
23. How is the value of a debenture calculated?

The value of debenture is computed using simple formula which is the sum of present value of all
the coupons Payments and the final redemption amount, discounted at the required rate of return
Important concepts: Loan amount The "Principal", "face amount” or “year value" represent the
amount that the debenture issuer Agrees to pay at the of the debenture. It represent original cost of
the stock, which helps in determining stock valuation at maturity Coupon/interest rate: This amount
of interest can be computed by multiplying the interest rate with the loan amount Interest schedule.
The frequency of interest payments is usually in interval of 6 months Yield-to-maturity is computed
to determine performance of different securities and to make comparison of one against other to
make qualitative decision.
YTM = Face value/current value-1
Price of debentures coupon 1/(1+YTM)1 + Coupon 2/(1+YTM)2+...+Face value/ (1+YTM)1
24. XYZ Ltd issued $240000 debentures at 5% coupon rate. Determine the interest paid.
Solution: Interest expense = Interest rate /100 X Debt amount
= 5/100 X 24000
= $12000
25. Write a note on dividend capitalization.
Ans: The approach approximates a future dividend stream based on firms dividend history and an
assumed growth rate and computes market capitalization rate that equates it with the current market
price. This approach applies to companies that pay dividend and it assumes that the dividend will
grow at a constant rate
Re = (D1 / p0) +g
Where, Re = Cost of equity

D1 = dividends next year

P0 = current share price
G = dividend growth rate
Current share price: It is found by searching company name on the exchange that the stock being
traded on Dividend growth rate: It is obtained by calculating the growth of the company's past
dividends and taking average of the values.
The growth rate for each year can be found by using the formula
Dividend growth=(Dt/Dt-1)-1
Where,
Dt = dividend payment of year t
Dt-1-Dividend payment of year t-1 (one year before year t)
26. Company A trade on p&s 500 at a 10% rate of return. It has beta of 1.1, expressing
marginally more volatility than the market. Presently the T-bill (risk free rate) is 1%. Using
Capital Asset Pricing Model determine cost of equity
Solution:
Cost of equity = Risk free rate of return + Beta X (market rate of return-risk free rate of
return)
= 1+1.1 X (10-1)
= 10.9%
27. ABC Co. is currently being traded at $5 per share and just announced a dividend of $0.50
per share which will be paid out next year. An analyst estimated the dividend growth rate of
this company to be 2%. What is the cost of equity?
Solution:
D1 = $0.50 , P0 = 5, g =2%
Re = (DI/Po)+g = (0.50/5)+2 = 12%
28.Explain earning capitalization approach.
This method helps investors to understand and estimate future profit of a company to plan their
investment. This approach consider current earnings of the business, its cash and annual rate of
return for investors to determine future profit of the business. The method assist in determining
business valuation for investors and other stakeholders. Hence it estimate gross income generated
over a period that also applies to subsidiary holings of a business, its product line etc. It is important

for an investor to know business profile and its operations. Investors may determine business value
through its current earnings and anticipate future profits.
Earning capitalization = Net present value/capitalization rate
For larger enterprise, the weighted average of earnings over time divided by capitalization rate.
29.Consider a future cash flow of Rs 100, which is set to be received in 4 years. The discount
rate is given at 15%. What is the present value?
Solution: PV = FV/(1+r)n
PV = 100/(1+0.15)4
= Rs 57.18
30. What are the types of discount rates?

Ans: They are
 Weighted average cost of capital: It calculates NPV of a business
 Cost of equity: It is the rate of return a business provide to its investors to determine company's
equity value.
 Debt cost: It is the interest rate on its debt given by business which is utilized in the appraisal of
fixed income assets.
 Hurdle rate: It is the lowest allowable rate of return for a project investment.
 Risk free rate: The rate of return provided by an investment with no risk is known as risk free rate.
31. A person X makes an initial investment of $3000. The future cash flow for 4 years is given
below
Particulars Value
Discount rate 10%
Initial investment $3000
Year 1 $500
Year 2 $1000
Year 3 $1500
Year 4 $2000
Calculate the net present value
Solution: NPV = F/[1+r)n - Initial Investment

F = Projected cash flow of the year

R = Discount rate
N = no. of years of cash flow in future
=F/(1+r)n
= 500/[1+10]1 = 454.5455
=1000/(1+10)2 = 826.4463
= 1500/(1+10)3=1126.972
= 2000/[1+10]4 = 1366.027
NPV = (454.5455+826.4463+1126.972+1366.027) - 3000
= $773.9908
32. Rajini borrowed Rs 50,000 for 3 years at arate of 3.5% per annum. Find the Simple
Interest
Solution: P = 50,000
R = 3.5%
T=3
SI = (pXRXT)/100
= (50,000X3.5X3)/100
= Rs 5250
33. The count of a population of men was found to increase at the rate of 2% per hour. Find
the count at the end of 2 hours if the initial count was 600000.
Solution: A=P(1+R/100)n
Population = 600000(1+2/100)²
= 624240
34. Calculate the present value of a payment of $500 to be received after 3 years assuming a
discount rate of 6% compounded semi annually.
Solution: PV=FV/(1+r/m)nx
= 500/(1+6/2)2*3
= $418.74
SECTION – C (10 Marks)

1. Explain the reasons why you need a financial plan.
Ans: Financial plans are needed for the following reasons
 Right asset location: It is wise to invest in more than one type of instrument to achieve long term
goals. Financial plans helps in protecting wealth during uncertain economic condition.
 To reduce debt: Cost of debt can harm long term financial interest. If a person invest according to
financial plan it helps in making debt free.
 Risk diversification: Financial plan protect one's financial goals from the vagaries of capital
market. Otherwise one may invest in assets that give higher returns in bull market which increase
risk in portfolio.
 Managing cash flows: Maintaining budget is essential in tracking long term financial goals which
helps in realizing spending of income.
 Save taxes: It is required to save taxes and also invest inmost tax efficient investment options
according to our financial goals.
 Disciplined investing: A person will be more likely to be disciplined if he follow financial plan. To
be discipline he must adhere to asset allocation and re balancing etc.
 Reduce debt: It helps to reduce burden of debt which affect savings of people and on long term
financial interest. Hence investing according to financial plan is essential.
 Future plans: It is possible to gain visibility into our finances in the future. It is possible to plan
how much money one can have in future and will be aware of returns on investment
 Retirement: With the financial plan we can plan our finances such that our lifestyle is taken care
of. One can meet and taken care of medical expenses and emergencies during their retirement.
 Savings: By recording income and expenses one can make savings. It gives idea about money
required to achieve objectives.
2. What are the objectives of financial planning?
Ans. The objectives are
 Estimating time and source of fund:

The main objective of financial planning is to estimate the availability and supply of fund at the
right time. This will enable for the smooth running of business.
 Determine total capital required:

Depending on requirement of current and fixed assets and expenses, business will determine total
capital required with the help of financial planning.
 Avoid unnecessary excess fund:

Financial plan will prevent business from raising unnecessary funds which are ideal asset of the
business.
 Generating capital structure:

Capital structure of the company is considered based on financial planning which include planning
of debt equity ratio.
 Avoiding risk:
Financial planning identifies issues in business plan, prepare solution to eliminate those risk or
issues and thus saves lot of money.
It's objective is to raise the chance of success by making the business to pro against shortcomings
and risk
 Financial policies:
It helps in preparing financial policies with regard to lending, borrowings, cash control etc
 Optimum use:
It helps in maximum utilization of scarce financial resource in the best possible manner to get
maximum return on investment
 Balance:
Its objective is to ensure reasonable balance between outflow and inflow of cash to maintain
stability of the business.
 Survival
It is prepared with the intention of making growth and expansion program which helps in long run
survival of the company.
3. Explain the steps involved in financial planning.

Ans: Following are the steps in financial planning
Step 1: Defining financial objectives and goals:
Defining ones goals which should be clear, quantifiable and achievable is the first step in planning.
These goals may be short, medium or long term goals.
Step 2: Gathering information:
Information of income, expenditure, asset and liabilities etc should be gathered in relation to
finance.
Step 3: Analysing information:
Identify challenges and opportunities as it pertains to cash flows and debts, retirement and risk
management. The following ratios can be used to understand financial circumstances. Solvency
ratio, saving ratio, liquidity ratio and debt service ratio.
Step 4: Developing financial plan:

Once if it Is felt good to proceed by considering above steps develop and present plan which
include a balance sheet, tax calculation and annual cash flow report.
Step 5: Implementation:
It is considered as an action plan where there will be way to achieve short, medium and long term
goals. Following through with this plan is where many people tend to fail. So one should be diligent
and disciplined with the money.
Step 6: As it is a dynamic process, one need to assess financial decisions periodically. This may
include income and expenditure adjustments, new investment strategy etc
4. Write a format of a sample financial plan for a young adult.

(Preparing a financial plan involves certain steps as mentioned in Question No.7) Here is the format
of financial planning with short term and long term goals.
Short Term Goals (Less Than One Year)
Priority Goal Total cost Duration Monthly Target
Cost Date
Buying 200000/- 5 months 20000/- 30 Jan

vehicle 2022
Pay off credit XXX XXX XXX XXX

bills
Marriage XXX XXX XXX XXX
Intermediate goals(1-10 years)

Cost Date
Education 500000/- 4 years 250000/- XXX
Insurance XXX XXX XXX XXX

Home XXX XXX XXX XXX
rennovation
Long term goals (10 years)

Cost Date

Retirement XXX XXX XXX XXX

Plan
Higher XXX XXX XXX XXX
Education
5. What are the financial goals of an individual?
 Retirement plan:
It is a long term investment to accumulate wealth throughout ones career which provide substantial
savings to fund our lifestyle.
• Pay off debt:
It is possible to lead comfortable life if we make every month payment and to stop borrowing which
may increase burden of an individual.
 Homeownership:
It is a long term goal which necessitate creating budget that account for expenses. may involve
saving up a sizeable down payment is the best way to get a reasonable home loan.
 Settling credit card debt:

Settling credit card debt can make one free to concentrate on other expenses and also establish a
schedule for using the card in the future.
 Launching the business:
Many people at some point in their career plan to build and maintain business operations which can
be a expensive process.
 Reserving money for emergencies:
This involves saving money for unforeseen circumstances which can avoid accumulating
more debt.
 Financial freedom:
It is the use of financial resources without concerns about overspending.
 Plan for fun:

If one can plan for saving with financial plan, they can reward oneself with fun saving goals like
vacation, entertainment, purchasing etc
 Create a multiple income stream:

Creating part time cash flow which enable early retirement, Starting own business are possible if
one follow financial plan. It helps to have many source of income.
 Financial freedom:

It is the ability to use your financial resource without concerns about overspending.
6. Case Analysis: Financial planning for a single women

The case analysis related to a client Ms. ABC, 32 years, who was divorced.She is working as a
principal with post-tax salary of 30,000 p.m.She had taken a car loan for 5 years @12%, EMI
for this is Rs 8500 and a joint home loan with her Ex-husband for 20 years and EMI for this is
25,000.Her total monthly expenses is Rs 24,500 p.m
Help her to prepare and follow a financial plan to meet her short and long term goals by
analyzing her goals.
Facts of the case: Given data
Profile:
Instruments Corpus(Rs)
PPF 50000
FD 120,000
Cash 100000
Jewellary 10000
Total Asset 370,000
Short term and long term goals of Ms ABC

Financial goals Time horizon Future Cost
Purchase of house 5 675000
Daughters education 12 3000000
Retirement 28 11200000
Analysis:
 She is not having knowledge of making investment decision in different avenues.

 It is difficult for her to maintain same life style after divorce.
 Her loans are taking more than 50% of her salary.
 Return of 7% pa on FD can be considered as small potion of her monthly income.
Solution:

 Analyzing this case shows that her monthly income is more than 90% of her salary which need to
be cut down by reducing movie, shopping etc which can increased debt.
 Her profile was missing insurance and hence it is better to opt for term insurance policy for cover of
Rs 50 lakhs for 20 years and premium for this is 14,000.
 It is better for her to be in a rented house of 8.000 p.m for few years and avail home loan for 85% of
the cost. Make a plan to accumulate corpus of Rs 675.000.The stamp duty and registration charges
of Rs. 150,000 can be made by FD which will mature after 5 years.
 For her daughter's education it is advised to take education loan for 80% of estimated cost.For the
remaining amount it is advised to invest Rs 2,700 p.m.
 She can start her retirement planning at the age of 43
Summary of financial plan
Goals Horizon Future Start Horizon Required (%)
Cost investment per month
at the age
of
House 5 675,000 32 5 7,300 7%
purchasing
Education 12 32 12 2,700 7%
Retirement 28 1,12,00,000 43 13 44,200 7%

Module 2:
Investment Avenues
SECTION-A (2 Marks)
1. What do you mean by investment?
It is a financial asset that will provide with higher returns in the future and help to grow people's
money. It is obtained with the intention of allowing it to appreciate in value over time.
2. Mention few types of investment.
They are
 Stocks
 Bonds
 Mutual funds
 Public provident fund
3. What is speculation?
It is the act of conducting a financial transaction that has substantial risk of losing value and also
holds expectation of a significant gain.It involves buying of an asset or financial instrument with the
hope that price of asset will increase in future.
4. What is diversification?
It is a risk management strategy that spreads one's wealth across a variety os assets and assets type
in order to reduce the risk of financial loss in one particular asset Diversification mixes a wide
variety of investments within a portfolio.
5. What are bank deposits?
It is a placing of money into banking institution for safekeeping for some time, in return for which
the bank pays the depositor interest payments. It includes fixed deposits, current deposits, saving
deposit and recurring deposit.
6. What are corporate securities?
These are negotiable financial instrument which holds monetary value conferring the right to
receive property not currently in possession of holder.
7. What are equity shares?

It is also known as stock, which is a small portion of the company that an investor buys in
anticipation of future profits. It is issued to the public which forms main source of long term
financing.
8. What are preference shares?
These are also known as preferred stocks, which are owned by the people right to receive part of the
company's profit before the holders of ordinary shares are who have the paid.
9. What is debenture?
It is a kind of bond or other debt instrument that is unsecured by collateral. It is a long term debt
instrument used by large companies to borrow money
10. What is bond?
It is a fixed income instrument that represent a loan from n investor to a borrower. It is a contract
between these two where borrower uses the money to fund its operation and investor receives
interest on investment.
11. What is a company deposit?
The deposit placed by investors with companies for a fixed term carrying a prescribed rate of
interest is called company deposit. These are governed by Companies Act.
12. Name few post office saving schemes.
They are post office savings account, National saving recurring deposit account, Senior citizen
saving schemes account, Public provident fund account, National saving certificates etc
13. What is a government security?
It is a tradable instrument issued by the central or state government Which has range of investment
products with a promise of the full repayment of invested principal at maturity of the security.
Ex: Treasury bills. Treasury notes, Treasury bonds,Savings bonds etc
14. What is real estate?
It refer to physical property which include land building or improvements attached land, whether
natural or manmade. This include activity of buying and selling of land and building.
15. What is chit fund company?
It is a type of saving schemes in India which is a part of the unorganized money market industry
like friends, relatives etc and may be organized by financial institution. It is a type of rotating
savings and credit association system.
16. What is a Nidhi company?
It is a type of Non- Banking financial Company formed to encouraging savings and receiving
deposits and lend money to its members for their mutual benefits.
17. What is life insurance?

It is a contract between insurance policy holder and insurance company, where the company
guarantees the insurer pay a sum of money to named beneficiaries upon the death of an insured
person.
18. What is NPS?
National Pension System is a voluntary defined contribution pension system and a long term
investment plan to facilitate a regular income post retirement to all the subscribers.
19. What is Atal Pension Yojana?
It is formerly known as Swavalamban yojana is a government scheme aimed towards unorganized
sector to create a universal social security system for all Indians. It is based On NPS providing a
stream of income after the age of 60 to all citizens of India.
20. What is PMVVY?
It is pension scheme for senior citizens which provide social security and financial independence to
the people post retirement by offers from returns on investment.
21. What is VPBY?
It is government pension scheme for senior citizens that provide annuity to old aged in the form of
an immediate annuity plan. It is implemented through LIC, and individuals must pay premium at
the beginning of the policy.
22. What is IGNOAPS?
It is a pension scheme for senior citizens to provide social protection by offering pension to its
beneficiary which includes seniors, widows and disabled.
23. Expand NPS and APY.
NPS = National Pension System
APY=Atal Pension Yojana
24. Expand PMVVY, VPBY and IGNOAPS.
PMVVY = Pradhan Mantri Vaya Vandana Yojana
VPBY = Varishtha Pension Bima Yojana
IGNOAPS = Indira Gandhi National Old Age Pension Scheme
25. What is risk?
It is the probability that actual results will differ from expected results. It measures the uncertainty
that investor take to receive gain from an investment .
26. What is return?
It is the gain or loss of an investment over a certain period of time. It includes a change in value of
the investment and cash flows which the investor receives from that investment.

27. What is Nominal return?

It is the net profit or loss of an investment expressed in the amount of currency before any
adjustments for taxes, fees, dividends etc
28. What do you mean by Real return?
It is adjusted for changes in prices due to inflation or other external factors. These lower than
nominal returns which do not subtract taxes and inflation.
29. What is stock market?

It is a place in which shares of a publicly held companies are brought and sold. It is asset of
exchanges where companies issues shares and other securities for trading.
30. Give the meaning of primary market?
It is the part of the capital market where securities are created for the first time for the investors to
purchase. As securities are sold for the first time here, these are also called as New Issue market.
31. What is secondary market?
It is a place wher in shares of companies are traded among investors. Investors purchase securities
or assets from other investors rather than from issuing companies themselves.
32. What is a stock exchange?
It is a market where financial instruments like stocks, bonds and commodities are traded.
It allow companies to raise money and investors to make decision using real time price information.
33 What is trading and settlement?
In securities industry, the trading and settlement refers to the time between the trade date that an
order is executed in the market and the settlement date when a trade is considered final.
34. What is DEMAT account?
It is a necessary account to hold financial securities in a digital form and to trade shares in share
market. It enable electronic transaction of securities to be bought and sold through process of
dematerialization.
35. What do you mean by depository in security industry?
It is an institution which holds the securities of an investor through the depository participant and
provide services in relation to these securities.
36. Who is a depository participant?
He is the agent or registered stock brokers of a depository who act as mediator between traders and
investors who can help in managing assets efficiently.
37. Give the meaning of investor protection.

The investor protection Act was established to prevent some of the problems that caused the
financial crisis and to protect investors 's interest and to promote confidence in market's integrity.
38. What is maturity date?
It is the final date for the payment of any financial product when the principal along with the
interest needs to be paid to the investor by the issuer.
SECTION-B
(6 Marks)
1. What are the objectives of investment?
Its objectives are
 To keep money safe: keeping money safe and secure is the main objective of investment for
people. So one can make investment that come with low or reduced risk and returns will be low in
such investments. Ex: investment in government bonds
 To help money grow: People want to secure money for future. It is long term goal where they want
money to grow into wealth. So one has to consider investment objectives that can offer significant
return.
 Income: Investing in fixed deposits and stocks of companies pay regular income They come with
high level of risk and low stability. Conservative investors tend to include income objectives in their
portfolios due to their attractive returns
 Tax saving: Tax saving is a common investment objective among many people. NPS is an example
of investment objective that promote tax saving, Actual return on investment are the returns after
taxes. Hence consider tax exemptions available before choosing an investment.
 Liquidity: It is the ability to trade or convert assets into cash with minimal risk of loss. Investors
has to choose investing in securities that are easy to liquidate.
 To save for retirement
2. What are the essentials of investment?
These are the essentials of investment
 Investment objective: Individuals may be having short term or long term goals. Based on goal
setting one can decide on the type of asset suitable.
 Returns: It is related to the risks and prospects of the investment. (Ref Sec A qn no 26).
 Lock-in period: It is the period for which investments cannot be soid or redeemed. Investment is
locked for a fixed period during which one cannot access money.
 Net asset value: It is the value of fund's asset minus the value of its liabilities.It is used to
determine value of assets held. It is typically represented on a per-share basis.
 Risk: It is the ability of an individual to withstand market fluctuations Ref Sec A qn no 25.
3. Name the types of risk faced by investors.

Investors mainly face 2 types of risk. They are

Un diversifiable risk: It is also known as market risk which are linked to every company These
risk arises due to exchange rate, inflation rate, interest rate, war etc. This kind of risk cannot be
eliminated through diversification. Hence it has to be accepted by investors. This kind of risk is not
specific to a particular company.
Diversifiable risk: It is also called as unsystematic risk and is specific to a company. This can be
eliminated through diversification. Business risk and financial risk are common unsystematic risk.
4. What are the disadvantages of diversification?

They are
 Different rules for different assets: Without understanding different structure and working of
different assets can lead to risk and lead to wrongful investments
 Tax implications: Different assets are taxed differently, without proper planning of this, one may
be in risk of additional tax compliance or higher consulting cost .
 Cost of investment: Diversifying portfolio require consideration of assets having different fees and
charges. If not it may dilute the value of your investment.
 It does not eliminate all types of risk within a portfolio.
 It may cause investing to feel burdensome requiring more management.
5. How to make diversification in investment successful?

Following points are to be considered for successful diversification
 Monitor portfolio regularly: Investor has to make sure that their investment is align with their
financial goals. If not some adjustments must be made at the right time. This ensure that the chosen
investment bring good return.
 Considering fees: Investor has to be careful while online stock broker on the charges they make
even though they provide fee-free trading services. Paying high fee can be more than return on
investment.
 Asset allocation: Investor must maintain balance between investments in stocks and bonds. Stocks
are having high risk with high returns and bonds are more stable with lower returns.
 Factors that impact financial market: Investors has to understand stock exchange, bond markets,
foreign exchange, interbank markets of the financial market. Also external factors like interest rate
and inflation influence its dynamics.
 Invest in money market securities: Investing in money market securities like T- bills. Culs lead to
ease in liquidation and also have lower risk. It ensure safety of investor's money for the short term.
 Assess qualitative risk: It is essential to evaluate the stocks through specific parameters that
indicate its stability to do well. The parameters used are brand value. compliance with regulation,
competitive advantage etc
6. Give the meaning of current account deposit and explain its features.

It is also called as demand deposit account, which is meant for individulas who require a higher
number of transactions daily. It allows customers to deposit and with amount at any time without
giving any notice.
Features:
 It is continuous in nature as there is no fixed period to hold a current account.
 As long as account holder has fonds in his account, there is no restriction on the number and
amount of withdrawl made.
 These accounts allow account holder to withdraw money using bank cards, chek over the counter
withdrawal slips.
 It is non interest bearing bank account.
 Account holder has to maintain higher minimum balance as compared to saving account.
 Penalty will be charged if the account holder do not maintain minimum balance.
 It do not promote saving habits among account holders.
7. What are the advantage of current account deposit?

They are
 There is no restriction on the number and amount of withdrawal made.

 It allows handling of large volumes of receipts and/or payments systematically.
 Helps businessmen to make a direct payment to their creditors by issuing cheks, Dd or pay orders.
 The creditors of account holder can get credit worthiness information of the account holder through
inter-bank connection.
 Over draft facilities are available to the account holder
 There are no restrictions applied on the deposits made into this account opened at the bank's home
branch.
8. What are the disadvantages of current account deposits?
They are
 Account holder do not earn any interest on money deposited in this account.
 There is an operational burden with this deposit since most package accounts offer services at
additional cost.
 There is limit to issuance of free chequebooks or DD .Ex 25 numbers per month. More than this
account holder has to pay extra money.
 Higher fees due to corporate business transactions.
 Higher minimum balance has to be maintained, otherwise one has to pay penalty.
 Some banks charge transaction fees on current account transaction which may involve online fund
transfer, withdrawing money from other bank's ATM
9. What is Fixed deposit. Name few characteristics.

These deposits are offered by bank or NBFCs where a person can deposit lump sum of money to get
higher rate of interest and in which money will be locked for a fixed period of time.
Features:
 It provide higher rate of interest than savings account .
 The amount can be deposited once. If additional amount has to be deposited, then it should be made
in separate accounts.
 It assures the return that would be accrued to them at the end of each period.
 It can be renewed without any hassle.
 One cannot withdraw before the maturity period. In emergency it can be withdrawn by paying
penalty.
 This type of account meets the future cash flows of the individual
10. What are the advantages of fixed deposits?

They are
 The person requiring loan can also give fixed deposit account as security to the bank.
 It assures guaranteed returns which has zero risk compared to other forms of investments.
 Compared to other forms of term deposit, it pays more interest to account holders.
 It is easy to open this kind of deposit and even online can be used.
 One can hold more than one Fd account when making a additional investment
11. What are the disadvantages of Fixed deposits?

They are
 Amount will be locked for a fixed duration and converting into cash is not easy. But Premature
withdraw of the fund can be made by paying penalty.
 Interest earned in this is added to the taxable income of the deposit holder unlike in saving account.
 The returns received from FD account are very low compared to inflation rate of the country.
 The rate of interest remains the same for the entire duration of the fixed deposit, even there is
change in rates.
 The benefit of diversification not available as they have invest all money in one account only
12. What is saving account. Name few characteristics.

It is a deposit account held with a bank to manage savings, expenses and investments of people
Features:
 Bank offers payment facilities such as billpay with this account which enable account holders to
pay water bill, electricity bills and others directly from their account.

 Bank offers interest to depositors whose rate is determined by amount deposited and policies of
RBI.
 There is necessary to maintain minimum balance in some cases and in other cases like zero balance
account can be maintained.
 Provide easy withdrawal of money through ATM and some bank charge small fee for this.
 Pass book and cheque books are provided for financial transactions.
 There is no age restriction for this kind of account.
13. What are the advantages of saving accounts deposits?

They are
 Account holder can get benefit of interest every quarter which helps to earn from idle money in the
account.
 It is easy to open this account and withdraw and deposit money anytime and allow quickly transfer
of money from one account to another.
 As it deals in cash account holder need not to worry about selling investment or making other
complicated moves to access money
 It is highly liquid as it allow to access and use money as per the wishes and there is no lock-in
period.
 Many financial institution allow bills to be paid automatically out of this account without subjecting
to withdrawal and transfer laws. Hence it avoid late-fees or missed payments
14. What are the disadvantages of saving accounts deposits?

They are
 The interest rate of bank fluctuate with time and hence value of return from this is not fixed.
 Interest rate is low compared to other forms of account or investment.
 Most of these accounts have minimum balance requirements or monthly maintenance fees.
 Most credit unions compound your saving account interest monthly or even annually. Hence full
potential of money will not be realized.
 These accounts have federal limits when withdrawing funds which is 6 times per month. The bank
will charge fee if limit is exceeded.
15. What is Recurring deposit. Name few characteristics.
It is a type of term deposit where a person need not to deposit a lump sum money saving rather than
he has to deposit a fixed sum of money every month.
Features:
 The minimum investment amount varies from one bank to another.
 It guarantees return on maturity and interest rate donot change during the deposit period.
 The interest rate is higher than saving account and is similar to FD interest rate.

 A person can open this for a minimum of 6 months and can go upto 10 years. It gives flexibility to
choose the time period.
 These are a type of fixed income investment and interest rate is known before investing the money
16. What are the advantages of recurring deposits?

They are
 Investor will deposit a fixed sum of money every month which will build up a saving discipline.
 Eligibility criteria for investing in this is easy.
 Many banks provide loan against the RD account which is 80% of the balance in account.
 It allow for low minimum investment amount which may be as low as Rs. 100.
 There is no limit on number of Rd accounts one can hold.
17. What are the disadvantages of Recurring deposits?

They are
 Changes cannot be made in investment amount once the Rd account is opened.

 Interest rate is low compared to other investment options.
 After depositing the money one cannot withdraw any part of the money until the term of the deposit
is over.
 If amount is withdrawn before maturity, penalty has to be paid
18. What are the features of equity shares?

They are
 These shares remain with the company and is given back when company is closed.
 Most of equity shares provide voting rights to investors to choose efficient managers.
 Equity shares already issued can be traded in secondary capital market
 The dividend rate depend on obtainability of the surfeit capital.
 These shareholders are eligible to gain additional profits generated by a company.
19. Name few types of equity shares.
They are
i. Bonus share: these are issued from earnings of business, where profit is distributed in the form of
additional stake in a company. It do not increase total market capitalization value of a company.
ii. Right share: It is issued to existing stockholders to preserve property rights of old investors.
iii. Paid-up capital: It forms part of subscribed capital which the company invest in their business.
iv. Ordinary shares: these are issued to avail fund to meet long term expenses of business and
ownership benefits is provided to business.

v. Sweat equity shares: As an appreciation for great job company reward employees with shares.
vi. Preference equity shares: It is issued to an investor as guarantee of the payment of cumulative
dividend before returns are distributed among ordinary shareholders.
20. What are the features of preference shares?

They are
 These can be easily converted into common stock if shareholder wants to change its
holding position.
 These shareholders have the major advantage of receiving dividends first compared to other
shareholders
 These shareholders are having voting rights in case of extraordinary events.
 Dividends are paid to shareholders on specific dates
 It allow shareholders to receive dividend payouts when other stockholders may receive dividend
slater.
21. Differentiate equity shares and preference shares.
Basis Equity shares Preference share

Defintion It represent extent of It come with preferential
ownership in a company rights when it comes to
receiving dividend.
Dividend rate Fluctuate as per earnings Fixed
Voting rights Shareholders have voting No voting rights
rights to choose managers
Claim to assets Shareholders do not have Shareholders have right to
right to claim their assets claim
when decide to wind up
Capital repayment It is repaid at the end Repaid before equity shares
Redemption Cannot be redeemed Can be redeemed
Convertibility Shares cannot be converted Can be converted
into equity share.
22. What are the features of debentures?

They are

 Interest rate: Debenture owners will receive coupon rate as the interest which is fixed or it can
change over time.
 Credit rating: This will have impact on interest rate that the investor receive. Credit rating firms
determine the safety of purchasing corporate and government bonds.
 Maturity date: It is important for non-convertible debentures as it helps company to dictate when it
must pay back the debentures holders.
 Voting rights: Debenture holders do not have voting rights as they are not instruments of equity.
 The interest payable to these holders is a charge against profit of the company hence should be
made even in case of loss.
23. What are the features of bond?

They are
 Bonds prices correlated with interest rate. If interest rate goes up, bond prices decreases and vice
versa.
 These have maturity dates at which point the principal amount must be paid back in full or risk
default.
 It is a form of debt which the investor pay to the issuer for a defined time frame.
 These are tradable in the secondary market and hence ownership shift among various investors.
 Credit rating agencies classify bonds on the risk of a company defaulting on deb payment .This
determine the degree of confidence that investors have in an organisation's bond
24. Explain the different types of bonds.

They are
 Floating interest bonds: The bonds whose coupon rate are subject to market fluctuation are called
floating bonds. The return on investment depend on inflation, condition of the economy etc.
 Fixed rate bonds: In this bond, the interest remain fixed throughout their tenure which help
investors to have predictable returns on investment irrespective of market condition.
 Inflation linked bonds: These are linked to inflation whose interest rate is lower than fixed rate
bonds. These are designed to curb the impact of economic inflation on the face value and interest
return.
 Perpetual bond: The bonds which do not have maturity period and these are fixed security
investments wher issuer do not have to return the principal amount to the purchaser.
 Bearer bond: They do not carry the name of the bond holder and anyone having bond certificate
can claim the amount
25. Differentiate bond and debentures.
Parameters Debentures bonds

Collateral These are secured or unsecured Secured by some kind of

collateral
Tenure The tenure is short term or long It is a long term
term based on fund requirement. investment and tenure is
generally long.
Issued by Issued by private companies Issued by financial

institutions, government
agencies, large
corporations.
Risk level Have high risk as they are not These are safe as they are
backed by collateral backed by some form of
collateral.
Rate of interest They offer high rate of interest as Offer low rate of interest
they are unsecured as the stability of
repayment in future is
high.
Payment Payment is periodical as per the It is on accrual basis

prospectus. which is monthly, half
yearly or annually.
Convertibility It allow for converting debentures It cannot be converted
into shares if they believe that the into equity share.
company's stock will rise in future
26. What are the feature of company deposit?

They are
 The capital in a company fixed deposit is not protected if the company is unable to meet its
financial obligation.
 Deposit earns no real returns when inflation is above the guaranteed interest rate offered by deposit.
 The main objective of investing in this is to earn higher rate of interest compared to hank deposit.
 It is suitable for conservative investors seeking assured returns from a lump sum investment for
goals upto 5 years.
 Interest depend on tenure of the deposit and the issuer.
27. What are the features of real estate?

They are
 One kind of real estate in not same as the other.
 Improvements made on land can increase its value which can generate more income.
 Once infrastructure are developed.it is difficult to replace or relocate.
 Real estate cannot be moved from one place to other.

 Supply and demand of this is affected by preference of users.

 Land is permanent and forever.
28. Name the kinds of real estate.

They are
 Residential: It is a property used for residential purpose and common type of estate It consist of
housing for individuals, families or group of people, Ex Family homes and town hoses.
 Land: It is an undeveloped property and vacant land which is purchased for future development,
investing in this is a long term strategy as tax and maintenance cost is minimum. Ex: farms and
ranches.
 Commercial: It is a kind of real estate that are used by businesses for their operation. Ex: hotels
and hospitals
 Industrial real estate: These land and buildings are used for industry purpose for manufacturing,
distribution or storage etc.
29. Write a note on investment in gold.

The opportunities available to invest in gold are investing in bullion, mutual funds and futures. With
few exceptions direct investment in gold are provided and other derive part of their value from other
sources.
Gold bullion: It is a form of direct gold ownership which is a form of pure or nearly pure, gold that
has been certifies for its weight and purity. This consists of coins, bars and other forms of gold. It is
necessary to stay updated on price and its is better to use a reputable dealer.
Gold coins: These are commonly bought by investors from private dealers ata premium of about
1% to 5% above gold value and now it is jumped to 10%.
Advantages:
 Their prices are mentioned in global financial publications.
 These are minted in small size than the large bars to make investment convenient.
 Many reputed dealers are available in many areas.
The problem lies in the change in dollar change its value and insurance cost is high
 Gold mutual funds: Direct purchase of gold can be made by investing in gold- based exchange-
traded fund. These funds are purchased or sold like stocks. It offers more liquidity than physical
gold and more diversification than individual gold stocks.
 The value of gold mutual funds and ETFs may not match with market price of gold, and these
investments may not perform same as physical gold.
30. What are the features of Nidhi company?

They are
 A Nidhi company can be registered as a public company and for this license is not required from
RBI.
 The liability of shareholders are extend only to their share capital.
 The ownership of the company is held in the form of shares. Ownership is not people
dependent and can be transferred easily.
 Members follow a limited liability policy where their goal is to foster the practice of saving. Hence
raising fund is easy.
 On incorporation Nidhi shall not issue preference shares, if it is issued already such shares be
redeemed as per the terms
31. What are the features of chit fund company?

They are
 It is a rotating saving scheme that facilitate borrowings and savings.

 Number of individuals make contributions towards the chit value at regular intervals.
 It work as micro finance institutions.
 It serves as a means of financial assistance for lower income house holds.
 They come with a predefined value
32. Differentiate Nidhi company or chit fund company.

Chit fund Nidhi company
It is a committee where some people contributeIt is an NBFC where members can deposit some
fixed money for a decided period of time. amount of money or recurring deposit.
It is mandated to legalize under Registrar of Firms,
These are liable to follow Nidhi rules and
societies and chits. public limited company Act 2013.
These are administered by an outsider who is It is operated by its members only
appointed by mutual agreement.
Members can withdraw money through auctionShareholders
or lend money to members in the form
lucky draw. of loan.
Chit fund is kept for a certain duration. Saving deposit or loans have a fixed duration, not
the company.
33. What are the features of stock exchange?

They are
 Securities market: It is the capital market that deal with sale and purchase of securities of
companies, government organizations.
 Regulatory body: The exchange of securities are done through brokers on behalf of companies.
 Registerds securities: Only listed securities are traded on stock exchange.

 Mode of operation: The members or brokers are to be authorized to carry out trading activities.
 Measuring device: The trading activities directly impact the growth thr organization or business.
 Obligatory: The functions of all stock exchange is regulated by SEBI.
34. What are the functions of primary market?

They are
 Underwriting services: Underwrintg is difficult for a company launching new issue offer.
Underwriter must purchase all unsold shares if the company cannot sell them to the public.
 New issue offer: It organizes new issue offer which had not been traded on any other exchange
earkier which involve detail assessment of project viability.
 Distribution: A new issue is also distributed in this market which is initiated with a new prospectus
issue.
 Global investment: This helps in improving domestic and foreign companies and enable risk
diversifting.
35. What are the functions of secondary market?

They are
 It provide a platform for trading of financial instruments like bonds, shares and debentures.
 This market allow investors to easily sell their holdings and convert into cash when they need and
hence provide liquidity.
 It is an indication of nation's economy and act as link between saving and investment he flow of
investment capital reduces economic uncertainty.
 This market trade only authorized securities and also there is is strict oversight by regulatory bodies
 Valuation data of this market provide information to investors to know how much investments has
to be made. Also it helps in tax calculation and other financial task. Goverment also get benefit
from tax accordingly Creditors can also assess valuation to determine credit worthiness of a
borrower and avoid risk.
36. What are the advantages of demat account?

They are
 Security: Eliminate risk of paper based share certificates It is safe to hold securities in electronic
form than holding it physically which can get lost, damage or stolen.

 Convenient storage: It allow to store any number of shares and can monitor details of all shares
holded in this account.
 Reduce time: Unlike in physical securities, it allow the transfer of shares quickly and securely
which reduces processing time.
 Reduce in cost: Physical shares require paperwork and stamp duty which increase stock. But this
account can be get at no time.
 Stores other investments: Apart from shares, this account can hold multiple assets like mutual
fund, government securities etc.
37. What are the features of Demat account?

They are
 Easy share transfer: Transfer of securities from one demat account to another is done through
delivery instruction slip or receipt instruction slip which allow smooth transaction.
 Faster dematerialisation: If investor having certificates in physical form, they have to provide
detailed instructions to Depository Partcipant to convert them into electronic form.If an investor is
holding its certificates in electronic form, it can be easily converted into physical form by
requesting it.
 Freezing: Account holder can freeze their account for a certain period if they want to prevent
unexpected debit or credit into one's demat account.
 Multiple accessing option: These are operated electronically using multiple modes like
smartphone, computer or other device.
 Availing loan: Many lenders provide loans against securities in this account which can be used as
collateral.
38. Name the types of depository participants in India.

There are 2 types
National Securities Depository Limited: It is promoted by National Stock Exchange,UTI,and
IDBI. The activities are carried out through service provider such as DP, share transfer agents and
clearing corporation of stock exchange.Dp's to provide services to investors, has to register with
NSDL and it will consider them as partners in NSDL. The investors need to open depository
account with the DP to avail depository services like account maintenance, dematerialisation etc.
These act as middlemen between investor and the depository. For providing services they levy Dp
charge to get services
Central Depository Services Limited: It is promoted by Bombay Stock Exchange, Bank of India
and SBI. The registered DP under CSDL provide services to investors who act as link between
investors and CSDL.DP's will provide investors their statement of account at regular interval. This
give investor details of their transaction and securities held by them.

39. Name the grievances of investor against brokers.

They are
 Delay in payment of securities sold: A broker fail to make payment to client who has sold securities
within 48 hours of pay out of funds by clearing house of stock exchange.
 Delay in delivery of purchased security to the client: Broker will fail to deliver yje purchased
security to his clients within 48 hours of payout of securities.
 Charging high brokerage from clients.
 Non-passing of corporate benefits: Broker play tricks in passing corporate benefits like bonus share,
right share etc to the clients.
 To earn secret profit they do not issue contract note to the clients.
40. What are the method of redressal of grievance against companies in Investor Service Cell?
It is as follows
 The cell receive the complaint from investor and forwarded to company to solve this within 15
days.
 If company fails to do and number of pending complaints against company exceeds 25, the cell
issue show cause notice of 7 days to the company.
 If the company again fais to resolve the complaint within 7 days of issue of show ause notice, the
scrip of the company is suspended from the trading.
 IY can also transfer scripts of defaulting company to Z category for non redressing investor
complaints.
 Companies having non resolved complaints more are instructed to employ special personnel to clear
pending complaints on a priority basis.
41. What are the measures taken by SEBI for investor protection?
 SEBI has Office of Investor Assistance and Education to receive complaints of investors with
respective stock exchange and depository for redressal.
 Grievances related to other intermediaries are also taken and are continuously monitored.
 It has established Web based redressal system "SCORES" where complaints can be lodged online
any time.
 The Ombudsman will be appointed who has power to receive complaints from investor and
facilitate resolution through mutual agreement or mediation.
 SEBI has also provided guidelines SEBI (Disclosure and investor protection) Guidelines.2000 and
SEBI(Investor Protection and Education) Regulation 2009 to investor protection.

SECTION-C (10 Marks)
1. Differentiate investment and speculation.
Basis Investment Speculation

Meaning Purchase an asset/security to get Conducting a risky
stable returns financial transaction with
hope of getting substantial
profit
Time horizon Long term Short term
Risk levels Moderate high
Intent to profit Changes in value stable Changes in price uncertain
income
Return Modest but continuous high
Fund Investor's own fund Borrowed fund
Decision making Depends on financial Technical charts, market
performance of the company psychology and individual
opinion
Investor attitude Cautious and conservative Aggressive and
carelessness
Similitude Purpose is to get benefit later To acquire high benefits
2. Explain the factors influencing investment decision.

They are
 Objectives: It involves decision making where investment depend on objectives of the individual. It
may be short term or long term fund allocation.
 Returns: An investors always try to invest in that asset which yield him good return and involving
less risk. They prioritize positive returns and employ limited funds in a profitable asset.
 Risk involved: Many risk factors are involved which influence investment decisions.

They are
- Interest risk: The price of the bond is influenced by interest rate. If interest rate rises, it rises
price of the bond also and vice versa
-Inflation risk: Rise in inflation can reduce purchasing power of investors. For instance if rate of
return is 5% and inflation rate is 3%, investors will receive a return of 2% only.
-Currency risk: If exchange rate reduces, investment returns will be lowered
- Volatility risk: It involves micro economic factors like SEBI rules, RBI policies etc have impact
on how well a business perform and this in turn influence value of funds
 Tax benefits: Tax associated with assets or security is also one of the factor to be considered by an
investor. Investors who want to take less risk, they choose investment opportunities that are taxed
less.
 Safety: Investor consider their investment is safe if the company maintains transparency in
financial disclosure and adhere to regulatory framework.
 Liquidity: Sometimes investors need emergency funds and to withdraw money before maturity.
Hence they opt those security which has high degree of liquidity.
 Tenure: The investment decision also depènd son maturity period and payback period as many
funds are blocked for a certain period.
3. Explain the need for diversification?

Diversification is needed for the following reasons
 Protect against loss: It helps investors to preserve their wealth towards the end of their
professional career and protect against loss. It helps them to consider risk over return.
 Risk adjusted return: It helps in increasing the risk adjusted returns of a portfolio. Investors can
make more money through riskier investment and it is a measurement of efficiency to know how
well an investors capital is being deployed.
 Align with financial goals: Diversifying portfolios helps to invest in different investment
instruments for different time.Investment allocation is based on when one need to redeem
investment for a goal to come fruition.
 Growth opportunity: To have growth opportunity in different sectors investing in different asset
class is essential.One can benefit from growth opportunities in stocks that fall into various
categories based on market capitalisation.
 Risk management: Investing in different asset classes,can mitigate the risk of a person.
Diversifying portfolio helps in optimizing returns and protects one's downside in case markets are
volatile.
 Advantage of different investment instruments: It helps in balancing risk and returns in different
funds and helps to enjoy benefits in different instruments Ex: investing in fixed deposit, helps to
take advantage of returns and low risk.
 Compounding interest: Investing in mutual fund helps to gain compound interest which implies
that each investment generate interest on both principal amount and cu mulative interest over the
previous invested year.
 Safety: Different types of investment is nothing but safety of capital. However some of them are
high risk and some are low risk investment.

 Shuffle among investment: Diversification is practical approach to shuffle and take advantage of
the market movement.
4. Explain in detail various types of bank deposits.

(Ref Sec B Qn no 6,9,12,15)
Call Deposit Account: It is called as interest-bearing checking accounts, checking plus or
advantage accounts. It combine the features of checking and saving accounts, allowing consumers
to easily access their money and also to earn interest on their deposits.
5. Explain different types of preference shares.

They are
i. Cumulative preference shares: It allow shareholders the right to enjoy cumulative dividend
payout by the company even it is not earning profit.
ii. Non-cumulative preference share: In this dividend payout takes place from the profit made by
the company and they do not collect dividends in the form of arrears.
iii. Redeemable preference share: These shares can be repurchased or redeemed by the issuing
company at a fixed rate and date
iv. Irredeemable Preference shares: These shares cannot be repurchased or re deemed by the
issuing company at a fixed rate and date. These help companies by acting as lifesaver during
inflation.
v. Convertible preference shares: These are converted into common equity shares at a specific
price and time depending on terms of issue.
vi. Non-Convertible preference shares: These cannot be converted into common equity shares at
a specific price and time but retain preferential rights towards payment of capital over common
shareholders in case of winding up.
vii.Paritcipating preference share: These shareholders have chance of earning more than stated
rate of fixed dividends. They earn fixed dividend and opportunity to share in company's extra
carning.
viii.Non-Participating preference share: These shareholders are entitled to pre-fixed dividends.
They cannot participate in surplus profit of the company.
6. Mention the different types of debentures.

They are

 Secured debentures: These are also called as mortgage debentures in which debentures are secured
against assets of the concerned company. A charge is created on such asset in case of default in
repayment of such debentures.
 Unsecured debentures: The debentures which are created out of the credibility and do not carry
securities against any assets of the company are called unsecured debentures.
 Redeemable debentures: The debentures which are payable at the expiry of their term either in
lump sum or in installment over a time period are called redeemable debentures.
 Irredeemable debentures: They don't acrry along a redemption date with it. They are redeemable
when company goes into liquidation or redeemable after an unspecified long time interval.
 Convertible debentures: These can be converted into equity shares after a specific period at the
option of debenture holder on the terms and condition of the contract.
 Non-convertible debentures: These are traditional debentures which cannot be converted into
equity of the issuing company. Hence investors are paid with higher interest
 Registered debentures: These debt tools are registered where holders details are legally enrolled
with the issuing authority.
 Bearer debentures: These debentures are not registered with the issuer. The holder is entitled to
interest simply by holding the bond
7. Explain various types of corporate securities.

They are
 Debt securities:It is any debt that can be bought and sold between the parties prior to maturity in
the market. These are negotiable instrument where ownership is readily transferable from owner to
another. Ex:Bonds and certificate of deposit.
 Equity securities: It represent ownership claims on a company's net asset. The different types of
equity securities have different ownership claims on a company's net assets, which affect their risk
and return characteristics in different ways.
 Derivative securities: It is a kind of financial contract whose value is dependent on an underlying

asset, or benchmark or group of asset. The m main purpose is to minimize risk. There are 4 types.
a. Futures: It is an agreement between two parties for the purchase and delivery of an asset at an
agreed upon price at a future date. The parties involved are obligated to fulfill a commitment to buy
or sell the asset..
b. Forwards: These are not standardized- the terms of each contract are negotiated and determined
by the parties involved. These are similar to futures but do not trade on an exchange, only retailing.
c. Options: These contracts grant their owners the right to sell or purchase a specific, security for a
specific price on or before a specific expiration date.

d. Swaps: It is an agreement between two counterparties to exchange financial instruments,

cashflows or payments for a certain time.
 Hybrid securities: It is a single financial product that combines different financial securities or has
features of multiple kinds of securities Ex: convertible bonds
8. Explain different saving schemes under post office investments.

a) Post office saving account:
 One account can be opened with one post office and can be transferred from one post office to
other.
 It can be opened in the name of minor.
 Minimum balance required to be maintained is Rs 50.
 Interest rate of 4% p.a. is applicable on the deposits
b) Post office recurring deposit account:

 The tenure of this is fixed for 5 years.
 It allow small investors to invest even Rs 100 per month and no limit on upper limit.
 It can be transferred from one post office to other.
 It allow flexibility by allowing a partial withdrawal upto 50% of balance after a year.
c) Post office monthly income scheme:

 It offers guaranteed fixed monthly income on investment.
 Accounts are transferrable from one post office to other.
 Investors can hold multiple accounts with maximum investment of Rs. 4.5 lakh by combining all
account.
 Account cannot be closed before completing one year.
d) Senior citizen saving schemes:

 The minimum age of entry is 60 years to open this account.
 It is government backed retirement scheme which allow to make lump sum deposit.
 It can be opened individually or jointly.
 It offers interest arte of 7.4% p.a.
 It qualifies for deduction under section 80c of Income Tax Act.
9. What are the different types of Government securities?

They are

a) Traesury bills: These are short term securities with a maturity period of less than one year
issued by central government of India. These are also called as zero coupon securities as they do not
pay interest. It can be purchased for a reduced rate once T- bills mature, government pays the entire
amount of bill.
These are issued in 3 different tenors-
 91 days
 182 days
 364 days
b) Cash management bill: These are also short term securities and it will be issued at variety of
terms. These term only last a few days. Thus making this security an ultra short investment option.
It is used by the government to fulfill the temporary cash flow requirements
c) Treasury notes: These can be purchased in terms of 2,3,5,7 or 10 years. Interest will be paid
every 6 months until they each maturity date Once it reach maturity, individuals can redeem the
entire face value.
d) Floating rate notes: These are the debt instrument with an interest rate that change based on
external benchmark which is equal to money market reference rate.It can be a good investment for
risk averse investors who want to protect their portfolio from rising interest rates.
e) Treasury inflation protected securities: These are available based on 5,10 or 30 years term
period which pay interest to all users every 6 months. If inflation increases, there will be an increase
in security value. The users enjoy interest payment every 6 months through these securities.
f) State development loans: These are dated government securities issued by state government to
meet their budget requirements. It features variety of investment tenures. It holds slightly higher
rate.
g) Dated government securities: These are issued by state government which have either fixed or
floating rate of interest, also known as a coupon rate. These are long term instruments as they
deliver broad range of tenure starting from 5 years to 40 years.
10. Explain different types of life insurance plans in India?

I. Term insurance: It is a insurance that provide death benefit to beneficiary only if the insured
dies during the specified period. The premium paid provide tax exemption and it provides 100%
risk cover.
II. Whole life policy: It is a insurance policy which covers a policy holder against death throughout
his life and individual enjoy the life cover. The policyholder has to pay regular premium until his
death upon this corpus is paid to the family. Premium paid is tax exempt and these are combined
with other insurance products to address various needs.
III. Endowment policy: It is payable to insured if insured party is still living on the policy's
maturity date or to beneficiary. If the insured survives the policy tenure he gets back the premium
paid with other investment returns and benefits like bonus

IV. Money back policy: It is a policy that gives a percentage of the sum assured regular intervals
during the policy term. In case of unfortunate event before the full term of policy, beneficiaries can
receive entire sum assured regardless of installmen paid. It offers new ULIP versions of money-
back policies.
V. Unit linked Insurance plans: It is one policy that provides dual advantage of protection and
flexibility in investment. Part of amount invested provides life cover and remaining is invested in
the equity and debt instrument for maximizing returns.
VI. Child insurance plans: It is an important financial planning tools for parents which helps to
build a significant sum for child's education and marriage expenses. It provides maturity benefits
either in the form of annual installments or one time payout after child turns 18.
VII. Retirement insurance plans: It helps to develop financial independence in non- working
years. It allow to save and invest for the long term which ensure financial security and to
accumulate significant amount.
VIII. Group insurance plan: It is a policy that covers group of people under a single insurance
policy which cover minimum 10 members. Employers, banks, corporates and other homogeneous
group of persons can buy this policy.
IX. Saving and investment plan: It channel regular saving into long term investment goals but
helps in protecting one's financial goals with a premium protection option which allow planned
investment to continue even after demise.
11. What are the features/benefits of National Pension System?

They are
 Returns: it offers returns higher than other traditional tax saving investments.
 Subscribers can also switch their investment option and change their fund manager.
 Risk assessment: There is a cap in the range of 75% to 50% on equity exposure for the NPS. There
is different range for different categories which stabilize risk- return in the interest of investors,
which means the corpus is safe from the equity market volatility.
 Tax efficiency: It provide tax deduction up to Rs1.5 lakh to be claimed for NPS for one's
contribution as well as from employer. It allow a tax deduction of up to 2 lakh in total.
 Withdrawal rules: It is required to keep aside at least 40% of the corpus to receive regular pension
from a PFRDA-registered insurance firm. Remaining 60% is tax free.
 It provide flexibility in investment through auto choice and active choice.
 Auto choice is available as default option and fund investment is managed automatically.
 Under active choice individuals are free to decide available asset classes in which to invest their
fund.
 Subscribers can also switch their investment option and change their fund manager It allow
subscriber to withdraw their contributions partially.
 It allow to withdraw up to 25% for children's wedding, studies, building houses etc. and allow to
meet financial needs before retirement during emergencies
 It allow individual to make investment through

 Tier-1 account: It function as pension account and subject to specific restrictions.

 Tier-2 account: These are voluntary account providing liquidity of funds via investment and
withdrawal
 Acess and portability: It is ensured through online acess of the pension account to the NPS
subscriber through web portal and mobile app, across all geographical location and portability of
employments.
12. What are the features/ benefits of Atal Pension Yojana?

They are
 Withdrawal policies: The contributions cannot be withdrawn before the scheme is over, But in
exceptional case such as illness, contribution and interest earned will be allowed to withdraw.
 Age restrictions: Individuals above 18 years and below 40 years can invest as Contribution to this
shall be made for at least 20 years.
 Guaranteed pension: There are 5 options, Rs 1,000 to Rs 5000 and contribution increases as
monthly pension amount increases.
 Automatic debit: The bank account of beneficiary is linked with his pension account and monthly
contributions are directly debited
 Facility to increase contribution: The government provide an opportunity to increase or decrease
one's contribution once a year to change the corpus amount. There are different contributions which
tantamount to different pension amount
 Penalty: If beneficiary delays in the payment of contribution penalty will be charged If default
continues for 12 consecutive months,account shall be deactivated and amount thus accumulated
along with interest would be returned to respective individual .
 Guaranteed benefits: Benefits will be available to spouse/nominee/next of kin as per the rules in
case of demise of the subscriber.
 Flexible: It is flexible as pension amount can be upgraded or downgraded based on choice of
subscriber.
 Tax benefits: Contributions to this scheme qualify for tax benefits under section 80 CCD of the
Income Tax Act, 1961.
 Low risk: It is one of the low risk retirement option as benefits guaranteed by the government of
India.
 This subscription is open to both organized and unorganized sector workers.
13. Write a note on risk-return relationship.

Generally higher investment return can be ensured by taking higher investment risk. But by
diversifying portfolio of investment asset, good return can be generated with less risk. Different
investments like money,market securities, bonds, private equity, real estate etc have varying risk -
return profiles.
i.Risk-free bonds
ii.Investment-grade bonds
iii.High-yield bonds
iv.Equities
v.private assets
In the above risk-free bonds, which are issued by government and consider as risk free and have
lowest investment return. Moving up each asset class get riskier. However investment return with
each asset class also increase. Private Asset is private equity involves investments in private
companies that are not publicly traded on an exchange. These investments include additional risks
like liquidity risk, but offers highest potential investment returns.
Risk tolerance:
While constructing a portfolio of assets, an investor needs to understand his individual risk
tolerance. It varies among investors. Factors that impact risk tolerance are
 Size of the portfolio
 Future earning potential
 Presence of other types of assets
 Amount of time remaining until retirement
 Ability to replace lost funds
14. Explain the different types of risk?

a) Based on occurrence:
 Pure risk: It is beyond the control of human and can result in a loss if it occurs. Ex: fire, flood etc.
 Speculative risk: These are controllable risk and is risk taken on voluntarily and can result in either
profit or loss. EX: betting on sports
b) Based on flexibility:
 Static risk: These are pure risk which are predictable and are present in an economy that is not
changing Ex: theft and bad weather.
 Dynamic risk: It is brought by changes in economy. Changes in price level, income etc can cause
financial loss Ex: technological change.
c) Based on measurement:
 Subjective risk: It is the psychological doubt of investor about uncertainty.
 Objective risk: It is a precise variation of the risk concerning investment.
d) Based on coverage:
 Real risk: It affects a larger population or all market sector.
 Particular risk: This will affect only particular firm or industry.

 Diversifiable risk: Also called as unsystematic risk are the risk of price change because of unique
features of particular security.
 Non-diversifiable risk: It is applicable to entire class of assets where value of investment declines
over the period due to any change that affect market.
15. Differentiate primary and secondary market.

Basis Primary market Secondary market
Meaning It is a market in which securities A market in which sale and
are sold for the first time purchase of newly issued
securities are made.
Issued by Companies Securities are transferred
between investors
Capital It directly contribute to capital of Indirectly contribute to
formation the company as there is transfer capital as those is exchange
of fund from surplus to deficit of funds between surplus
units. only.
Price The price of the securities are Price is fixed by demand and
fixed by management of the supply stock exchange
company market
Entry Companies enter into this to raise Listed companies only can
capital for their activities enter
Types of Sale of new securities take place Existing or second hand
securities securities are sold
Organised These are not organized It has organized setup

Geographical There is no fixed place Every It has fixed location and
location bank, institution etc contribute to working hours
this market
Products IPO and FPO Shares and debentures,
warrants etc.
Purchasing Direct Indirect
Parties Trading takes place between It take place
company and investors between investors
16. What are the functions of stock exchange?

They are

Economic growth: It is a platform for trading of securities which lead to reinvestment and
disinvestment process. This lead to capital formation and growth of economy
Pricing of securities: Based on demand and supply, it helps to value securities which is useful for
investors, government and creditors.
Transaction safety: Company names are listed only after verifying the soundness of the company.
These has to be operated in the prescribed rules. Hence securities traded in stock exchange are safe.
Facilitate liquidity: This gives assurance to investors that their investment can be converted into
cash whenever they wishlt offers liquidity in terms of investment
Better allocation of capital: Profit making companies can quote their shares for higher price and
traded in stock exchange to raise their capital.This facilitate allocation of investor's fund to
profitable channels
Promote saving and investment: It offers attractive opportunities of investment in various
securities which encourage people to save and invest in securities of companies
Economic barometer: It helps in measuring economic condition of a country. The economy of
each country is reflected in the price of shares which indicate boom or recession cycle of the
economy
Spreading equity cult: By ensuring better trading practices,educating public about investment and
regulating new issues, ie encourage people to invest in ownership securities
Speculation: It permits healthy speculation of securities to ensure liquidity and to reap rich profits
from fluctuations in security prices
Mobility of fund: It enable investors and companies to sell or buy securities and enable availability
of funds. The banks also provide funds for dealing in stock exchange
17. Explain the trading and settlement procedure of stock exchange operation.
Procedure:
I. Selecting a broker: As trading of securities in stock exchange cannot be done by themselves, a
broker has tpo be selected based on their requirement. This broker may be an individual or
partnership or a financial institution which must be registered under SEBI.
II.Opening a demat account: All securities are traded electronically and hence investor must open
dematerialised account to hold and trade in electronic securities. There are 2 depository participant
CDSL and NDSL.
III. Placing order: The investor then place the order to buy or sell share with his broker. The
broker will act according place order for share at the price mentioned. He will provide order
confirmation slip to investor.
IV. Execution of the order: When broker receives the order from investor, he executes it. Within
24 hour, he must issue a contract note which contain all information about transaction. This contract
note is an important evidence in case of any legal dispute.
V. Settlement: It is an actual transfer of securities from buyer to seller aling with the fund. There
are 2 types of settlement.
i. On spot settlement: Funds will be exchanges immediately and settlement follows the T+2
pattern. That is transaction occurring on Tuesday will be settled on Thursday
ii. Forward settlement: It happens when both the parties decided to settle on some future date. It
can be T+% or T+9.
18. Write a note on opening a demat account.
Step 1: Choosing depository participant: By considering the reputation of DP and required
services he can provide, select a DP with whom you can open demat account
Step 2: Provide basic detail: On DP's website, fill the online account opening form by providing
basic details like name, phone number etc and PAN card details
Step 3: Add bank details: Adding bank detais is necessary as it is used for crediting any amount
(dividend, interest) payable to you by the issuer company
Step 4: Uploading document Upload document related to address proof, proof of identity
Step 5: In-person verification: To comfirm the identity one can do verification by themselves and
no need to wait for an agent from DP as it is digitized
Step 6: E-sign Using Aadhar linked mobile number,DP will provide the option to sign application
digitally
Step 7: Form submission After all this process formm has to be submitted and account will be
created shortly. You will receive details of account like account number, login credentials to
access account.
19. What are the functions of a Depository Participant?

They are
 They help investors to open account which is necessary prerequisite to trade on stock exchange.
 They help in remat process which is temporarily transferring of shares from seller's account t to
broker's account when investor places a sell order. The broker then delivers the shares to buyer.
 They help in dematerialisation also which involves when buyer pays for shares, they are transferred
back to the seller's account. Also when investor place a buy order. the shares are temporarily
transferred from broker's account to seller's account
 A DP act as intermediary to avail loans for a shareholder and ensure borrower's shares are
transferred to the lender in case of default.
 Changing the beneficial ownership of securities is done through DP
 They also involve in corporate action benefits like transferring securities to the demat and bank
account of customers.
 The setting of transactions using stock exchange is done in connection with depositories.

 They offer corporate action benefits to their customers, like transferring securities into demat
account or bank account of customers which eliminate need to deposit the securities in physical
form with the company.
 They also facilitate other functions like recertification, de-stamping, transfer of shares to an heir
when shareholder dies etc
20. Write a note on grievances of investor against companies and method of redressal
The common grievances are
 Delay in dematerialisation of securities
 Non-receipt of dividend
 Delay in transfer of securities
 Non-receipt t of bonus share certificates
 Delay in registering transfer of securities
 Non-receipt of right issue offer: Eligible shareholders must receive letter of offer of rights shares by
registered post and it should be advertised in all India newspaper. Shareholder are not informed of
right issue
 Non-receipt of duplicate share certificate: A company has to issue duplicate share certificate if
shares are lost or misplaced after receiving a request.
 Transmission of shares: The company is bound to transfer the ownership of the shareholder to his
legal heirs on the death of shareholder.
 Non-receipt of notice of meeting: Every shareholder who are registered have right to receive notice
of meeting 21 day in advance.
21. What are the method of redressal of grievance against broker in Investor Service Cell?
It is as follows
a. When complaint is made with stock exchange authorities, it will be forwarded to investor cell
which will be forwarded to broker which ask him to resolve and reply within 7 days.
b. If there is no reply or if it is not satisfactory, it will be placed before Investor Grievance
Redressal Committee
c. On hearing from birth the side and effort made by broker to solve the matter failing which, it is
referred for arbitration which is a quasi judicial process
d. A sole arbitrator is in charge of this if the sum is less than 25 lakhs and for above 25 lakhs, a
penal of 3 arbitrators is appointed.
e. Appeal against arbitrator can be made in Appropriate court

Redressal of investors grievance against Companies:

a. The complaints from investors will be forwarded to the concerned company which has to settle
within 15 days
b. If company fails to resolve the complaint and pending cases against company causes to 25, the
cell issue show cause notice of 7 days to the company.
c. If company fails further to resolve within 7 days, the scrip of the company is suspended
from trading
d. Investor cell can also transfer scrips of this company to Z.category.
e. The company instructed to employ special personnel to clear pending complaints on a priority
basis
22. Explain the agencies available to seek redressal of Investor’s grievances (Or)
What are the steps taken to provide protection to investors?
An investor has protection against any grievances can seek redressal from the following agencies
 Grievance cell in stock exchange:
 SEBI
 Company Law Board
 Courts
 Press
 Grievance cell: ( Ref Sec C)
 SEBI: ( Ref Sec B)
 Redressal by company law board:

a. Every bench of company law board is consider to be a civil court and every proceedings as
judicial proceedings
b. It has the power to inspect records and documents and enforce attendance of witnesses
c. An investor can complain
d.To investigate the activities of the company
e. For relief in case of mismanagement
f. About non-payment or delay of fixed deposit and interest

 Redressal of investors grievances through courts:

a. This is the option for investors when he tried in all the above mentioned redessal methods
b. Complaint against companies can be filed with high court which has special designated benches
about company affairs
c. The time taken for processing in this much longer and costly and hence beyond the reach
of small investors
Module 3:
Mutual Fund
SECTION-A (2 Marks)
1. What are Mutual Funds?
It is pool of money collected from a number of investors who share a common investment objective
and invest in equities, bonds, or other securities. It is managed by professional Fund Manager.
2. What is open ended mutual funds?
The funds in which units are open for purchase or redemption through the year and allow investor
to keep invest as long as they want are called open ended mutual funds
3. What is close ended mutual funds?
If investors can purchase units only during initial offer period and units can be redeemed after the
completion of the specified maturity period are called close ended mutual fund
4. What are interval fund?
These are opened for repurchase of shares at different intervals during the fund tenure and thus fill
the gap between open and close ended funds.
5. What are Equity funds?
These are high risk funds that invest in equity stocks/shares of companies But they pro vide high
returns.
6. What are growth fund?
These are risky fund under which money is invested primarily in equity stocks with the purpose of
providing capital appreciation.
7. Give the meaning of fund of fund?
These are multi manager and safe fund that invest in other mutual fund and returns de pend on
performance of the target fund
8. Expand SIP, STP and SWP.

SIP Systematic Investment Plan

STP Systematic Transfer Plan
SWP-Systematic Withdrawal Plan
9. What is SIP?
It is a plan of Mutual fund where a person instead of making lump-sum investment, can invest in a
fixed amount in this scheme at regular intervals.
10. What is STP?
It is a mutual fund investment strategy in which a predetermined amount can be trans ferred from
one scheme of mutual fund to another scheme at predetermined intervals
11. What is SWP?
It is a opposite of SIP which allow to create a series of receivables from the mutual fund investment
regularly on a pre-decided date. This allow investors to customise withdrawal from the corpus in a
phased way
12. What is Net Asset Value?
NAV of an investment company is the value of fund assets minus the value of its liabilities which
represent market value per share for a particular mutual fund.
SECTION-B (6 Marks)
1. What are the features of Mutual fund?

Its features are
Low cost: These are available at low price compared to independent investments and they charge a
small amount as expense ratio from investors. It is charged to cover only administration,
management and other expenses.
Professional management: Professional managers manage mutual fund who do complete research
and analysis and monitor portfolio and its performances.
Diversification: there is opportunity for diversified portfolio containing different types of equities
and other options.
Properly regulated: This market is regulated by SEBI to ensure transparency and protection of
investor's health.
Easy purchasing: There is options of offline and onlinr purchasing of funds where the entire
process is easy and in online its convenient and fast.

2. What are the benefits of investing in mutual fund?

They are
Liquidity: Mutual fund are having high liquidity which can be easily bought and sold in short term
except ELSS having specified lock-in period.
Less risk: The fund managers spreads investment across stock of companies and in different sectors
and manage mutual fund. This diversification can make risk less.
Expert management: Fund managers are appointed who manage this and identify best stock to
generate maximum profit. Hence investors need not to make research and asset allocation
Low cost: Buying multiple mutual funds at time, the processing and commission charges will be
paid less. Management fee charged is 1% -2.5% only
Tax benefits: One can invest in tax saving fund like ELSS which qualifies for tax deduction up to
Rs 1.5 lakhs
Safe and transparent: Its operations comes under SEBI and necessary disclosure has to be made
which makes trading safe and transparent
3. What are the drawbacks of mutual fund?

They are
 Penalty: In some mutual fund if investor want to exit before the stipulated time, they have to incur
exit charge.
 Cost: The salary of market analyst and fund manager comes from investor along with operational
cost which may increase overall cost although it has even cost advantage.
 Fluctuating returns: According to market conditions mutual fund returns keep fluctuating and
investor has to be aware of risk profile of fund before investing.
 Diversification: Even it can reduce loss, It can prevent from gaining significant profits.
 No intra-day trading: Unlike ETFS mutual funds are traded once per day which happens after the
market closes at 4 p.m.
4. Name and explain major mutual fund houses in India.

Mutual fund houses provide different schemes that investor can choose according to their goals
They are
I. SBI Mutual fund: It is one of the well recognised company founded in 1987, which offer various
scheme and it is second fund house after UTI, having 143 funds.

II. HDFC mutual fund: It rank 3" in the list, founded in 1999 and having 86 number of funds. It
has won trust of many investors and placed among top performer.
III. ICICI Prudential Mutual Fund: It was established in 1993 and one of the oldes and largest
AMCs in India. It offer solution for both corporate and retail investment by providing innovative
schemes. Number of funds is 142.
IV. Aditya Birla Sun Life Mutual Fund: It was set up in 1994, a joint venture be tween Aditya
Birla Capital Ltd and Sun Life AMC investments, Canada.It provide for tax saving, debt, hybrid,
liquid funds Etc.and number of funds is 121
V. Kotak Mahindra Mutual fund: Launched in 1998, which offer services like ELSS hybrid,
liquid equity etc .It was first AMC to offer a dedicated gilt fund for govern ment securities and
number of funds are 80.
5. Explain the benefits of Systematic Investment Plan.

They are
 It is best option for the people who do not have knowledge of finance and the way market moves.
 The fixed amount a person invest averages out the value of each unit and individual can buy more
units when the market is low and buy less when markets high.
 The small amount invested can grow daily upto a large corpus due as a sum of your contribution.
 One can start investing with an amount as low as Rs 100 per month
 Removes the need to time the market.
6. Explain the benefits of Systematic Transfer Plan.

They are
 High return: It benefit investor to earn higher returns by shifting to profitable venture when market
swings. It also assure better performance.
 Optimal balance: In allotting investments from debt to equity and vice versa, it helps to rebalance
the portfolio with a mixture of equity and debt instrument. This provide an optimal combination of
risk and return.
 Averaging of cost: It allow investors to lower their average cost incurred on invest ment. It
involves investing in fund when their 'average price is low and sell them when market value
increases
 Taxability: Each transfer under this is subjected to tax deduction provided capital gains are
incurred
 Stability: Investors can transfer their fund through this into safe investment schemes when there is
high degree of volatility in stock market which ensure safekeeping of investor's finance.
7. Differentiate SIP and STP of mutual fund.

Parameters SIP STP
Process A fixed sum of money invested Money gets transferred from debt
in this scheme deducted fom fund.
bank account.
Return Less as bank offer less interest Higher returns as debt generate
rate. decent returns around 10%
Time As these are open ended, no The amount and transfer period
defined time for investment are fixed.
Taxation Investor has to pay long term and Subject to short term capital
short term capital gains tax gains
depending on tenure of holding
funds
Advantage Compounding, disciplined Consistent return and rupee cost
investment approach averaging
8. What are the benefits of SWP?

 If SWP withdrawal rate is less than fund return, the investors can get capital appreciation in long
term.
 According to needs of investor, he can choose amount, date and frequency.
 It ensure regular income to investors for meeting regular expenses.
 There is no TDS on SWP amount for resident individual investors.
 Allow to customise the cash flow as per investor requirements.
9. What is the Net Value of Assets for mutual fund.

Mutual funds do not trade in real time. They are calculated based on trading method and depend on
various assets and liabilities.
Assets:
It consist of cash, cash equivalent, and other accrued income. Based on closing price of various
securities included in fund's portfolio, market value is calculated. These fund include a percentage
of capital in the form of liquid assets and cash. The sum of all these assets or their variants fall
under the category of assets
Liabilities:
It include outstanding payment, money owed to lenders, and other charges that are owed to
associated entities.. It may also include foreign liabilities,various accrued expenses, including
utilities, staff salaries,operating expenses etc. Hence for net asset value calculation the quantum of
above mentioned liabilities and assets as of the end of a particular day are taken into consideration
10. If the market value of the securities of a mutual fund scheme is Rs 500 lakh. The mutual
fund issues Rs 10 lakh units of Rs 10 each to its investors. Calculate Net asset value.
Solution: NAV = (Assets-debits)/no. of outstanding units

= 50
11. An investment company manages a mutual fund and like to calculate NAV for a single
share. The information provided is as follows
Value of securities=$75 million
Cash equivalents = $15 million
Income of the day =$24 million
Short term liabilities=41 million
Long term liabilities = $12million
Expenses of the day = $5000
Solution: NAV = (75,000,000+15,000,000+24,000,000-1,000,000-12,000,000-5,000,000) /

20,000,000
= $5.05
12. Raju invested in mutual fund with 30,000 units. Value of find asset is worth $20 million,
Short term and long term liabilities are $2 million and $1million along with other expenses of
$2 million. He wants to know NAV of mutual fund for 2000 shares after the tenure ends
NAV per share = (20,000,000-(2,000,000+1,000,000+2,000,000)1/30,000

= (20,000,000-5,000,000)/30,000
=15,000,000/30,000 = $500
The per unit price of the fund share is $500
NAV = 500 x 2000
= $1,000,000

SECTION – C
(10 marks)
1. Explain in detail History of mutual fund in India.

It is classified into
a. First phase (Phase of inception) 1964-1987:
 UTI was established in 1963 by the act of parliament, established by RBI.
 First scheme was Unit Scheme 1964.
 RBI de-linked UTI and IDBI look over the regulatory and administrative control in place of RBI
b. Second phase (Entry of public sector)1987-1993:
 Non-UTI mutual funds from public sector entered the market, It was established by Public sector
banks, LIC and GIC.
 SBI mutual fund was first non-uti followed by canbank mutual fund, Punjab national bank mutual
fund, Bank of India and bank of mutual fund.
 At the end mutual fund had asset of Rs 47,004 crores.
c. Third phase (Entry of private sector) 1993-2003:
 A new era started with entry of privare sector, giving investors wide choice of funds.
 All mutual funds were registered under SEBI to protect interest of investors.
 In 1996, regulations are replaced by new rules.
 Leads to merger and acquisition of many industries which lead to growth of mutual funds.
 At the end of 2003, there were 33 mutual funds with total asset of 1,21,805 crores fund.
d. Fourth phase (Phase of consolidation) 2003-2014:
 UTI was split into 2 separate entities, UTI Mutual Fund(under SEBI) and Specified Undertaking of
UTI(SUUTI) (under Indian government).
 The fund house mentioned above was sponsored by SBI.LIC.PNB and BOB
 With the bifurcation of UTI, setting up of UTI mutual fund and with mergers and acquisition, the
mutual industry has entered its current phase of consolidation and growth.

2. Explain the different mutual fund schemes in India.

A. Schemes based on maturity period:
i. Open ended scheme: Ref Sec A qn no 2. These schemes do not have fixed maturity period and
having high liquidity
ii. Close ended fund scheme: Ref Sec A qn no 3. It is having maturity period of 5-7 years. Some of
this fund provide an exit route to the investor by giving an option of selling back the units to mutual
fund at NAV related price.
iii. Interval fund: Ref Sec A qn no 4
B. Based on asset class:

i. Equity Fund: The objective of this is to provide capital appreciation over the medium to long
term which provide different option to investors like dividend option capital appreciation etc. It has
10 categories.
Large cap: Top 100 companies in terms of market capitalization
Mid cap: 101 st -250 th companies in term of market capitalization
Small cap: 251 st company onwards in terms of market capitalization
ii. Debt schemes: To provide regular and steady income to investors this scheme was started which
generally invest in fixed income securities like bonds, debentures
iii. Hybrid mutual fund: These fund invest their portfolio in a mix of different as classes like
equity, debt etc
C. Based on portfolio management:

i. Active funds: In this fund manager is active in deciding whether to buy, hold or sell the
securities.
ii. Passive fund: It hold a portfolio that replicate a stated index where fund manager having passive
role
D. Based on Investment objective:

i. Growth fund: Which invest in growth oriented assets and investment require dium to long term
investment horizon.
ii. Income funds: Objective is to provided regular and steady income to investors and these invest
in fixed income securities like corporate debentures, bond etc
iii. Money market fund: These are the options for investors seeking liquidity and protection and
commercial returns

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FINANCIAL EDUCATION AND INVESTMENT AWARENESS

FINANCIAL EDUCATION AND INVESTMENT AWARENESS

PREETHIKARANI K, ASSISTANT PROFESSOR

11. What is cash inflow?

 Currency (bills and coins) issued by government.

PREETHIKARANI K, ASSISTANT PROFESSOR

21. What is earnings capitalization?

PREETHIKARANI K, ASSISTANT PROFESSOR

2. Explain the different types of money.

3. Explain the need for money.

PREETHIKARANI K, ASSISTANT PROFESSOR

4. Name the types of financial goals of an individual.

5. What are the characteristics of sound financial plan?

6. Name the factors influencing financial planning.

7. Explain the importance of Time value of money.

8. A sum of Rs 10000 is borrowed by Anil for 2 years at an interest of 10% compounded

PREETHIKARANI K, ASSISTANT PROFESSOR

r = Interest rate or profit rate

10. What are the types of annuity?

11. Write a note on present value of single cash flow.

12. Write a note on present value of series of cash flow.

PREETHIKARANI K, ASSISTANT PROFESSOR

Annuity is divided into 3 types:

PREETHIKARANI K, ASSISTANT PROFESSOR

15. Why do we need to calculate valuation of securities?

 To ensure that we are paying a fair price for the investment.

17. Write a note on valuation of preference shares.

PREETHIKARANI K, ASSISTANT PROFESSOR

19. If current price of a preference share of a company is Rs 60 and annual dividend is Rs 4.

21. Write a note on valuation of equity shares.

Total shares outstanding 1000000 100000

Share price 50 5000

PREETHIKARANI K, ASSISTANT PROFESSOR 1

Solution: Equity value = Total shares outstanding*current share price

23. How is the value of a debenture calculated?

PREETHIKARANI K, ASSISTANT PROFESSOR 1

D1 = dividends next year

PREETHIKARANI K, ASSISTANT PROFESSOR 1

30. What are the types of discount rates?

PREETHIKARANI K, ASSISTANT PROFESSOR 1

F = Projected cash flow of the year

SECTION – C (10 Marks)

 Estimating time and source of fund:

 Determine total capital required:

 Avoid unnecessary excess fund:

 Generating capital structure:

PREETHIKARANI K, ASSISTANT PROFESSOR 1

3. Explain the steps involved in financial planning.

PREETHIKARANI K, ASSISTANT PROFESSOR 1

4. Write a format of a sample financial plan for a young adult.

Buying 200000/- 5 months 20000/- 30 Jan

Pay off credit XXX XXX XXX XXX

Intermediate goals(1-10 years)

Education 500000/- 4 years 250000/- XXX

Insurance XXX XXX XXX XXX

Long term goals (10 years)

PREETHIKARANI K, ASSISTANT PROFESSOR 1

Retirement XXX XXX XXX XXX

5. What are the financial goals of an individual?

 Settling credit card debt: