AS 05 (iv) - Finance and Investment Mock Test 03
This section explains important concepts related to bonds, futures, options, investment returns, auditing, and postal savings schemes. It covers current yield limitations, futures contract size, reasons investors expect compensation, the historical tulip speculation, bond coupon calculations, expected return estimation, the role of company auditors, option square-off and exercise procedures in India, Post Office Recurring Deposit (RD) default rules, and the concept of option delta. These topics help investors understand fixed-income securities, derivatives, corporate governance, financial risk, investment valuation, and savings products, enabling them to make informed financial decisions while effectively managing risk and return
1. What is the main limitation of the 'Current Yield' measure for bond investors?
A. It is difficult to calculate
B. It excludes the capital gain or loss component, making it unsuitable for investors interested in total return
C. It overestimates the true yield of the bond
D. It is only applicable to government bonds
E. It cannot be calculated for floating rate bonds
2. What is the 'Contract size' in futures?
A. The number of futures contracts that can be bought with the initial margin
B. The notional value of the contract worked out as Futures Price multiplied by the volume of units
C. The minimum number of futures contracts that can be traded in a single transaction
D. The amount of physical commodity underlying each futures contract
E. The total open interest in a futures contract
3. To part with money, investors require compensation for:
A. Tax benefits, expected rate of price-rise, and government bonds
B. Time period, expected rate of price-rise, and uncertainty of payments in future
C. Time period, guaranteed returns, and no risk
D. Expected rate, political stability, and exchange rates
E. Inflation rate, liquidity, and credit ratings
4. Speculative use of options at the Amsterdam Trade Centre based on tulips resulted in:
A. The growth of the Dutch economy
B. The establishment of the Royal Exchange in Britain
C. The collapse of the Dutch economy
D. The founding of the Chicago Board of Trade
E. The introduction of standardized futures contracts
5. How is the annual Coupon amount of a bond calculated?
A. Coupon = Yield to Maturity × Market Price
B. Coupon = Coupon Rate / Par Value
C. Coupon = Coupon Rate × Par Value
D. Coupon = Market Price / Par Value
E. Coupon = Face Value / Years to Maturity
6. The expected return on Security 1 in the chapter example with 5 states of nature is:
A. 0.14
B. 0.16
C. 0.18
D. 0.20
E. 0.12
7. What is the duty of a company Auditor?
A. To manage the day-to-day operations of the company
B. To report to the shareholders whether or not the books of the company have been properly kept and that the balance sheet and profit and loss account present (or do not present) a true and fair view of the company's affairs
C. To file the Memorandum of Association with the Registrar
D. To maintain the register of members and share ledger
E. To determine the objects clause of the company
8. What is the 'square off and exercise' procedure in Indian options? When would you exercise?
A. Always exercise in-the-money options at any time during the contract period
B. Only exercise when the option is at-the-money at expiry
C. You square off (close position) if you want to take the opposite position; you exercise your option when you want to take delivery of the underlying stock or index; as options are cash settled in India, on exercise you get the intrinsic value
D. In India, options are never exercised; they are always squared off
E. You exercise by notifying the exchange 30 days before expiry
9. When a Post Office RD account has more than 4 defaults, what happens?
A. The account automatically closes
B. The account earns no interest but remains open
C. The account shall be treated as discontinued, and revival is permitted only within 2 months of the 5th default payment date
D. The account continues with a penalty fee
E. All deposited amounts are immediately refunded
10. Which of the following is the DELTA of an option?
A. The change in option price due to the passage of time
B. The rate of change of delta with respect to changes in the stock price
C. The amount an option price is expected to move based on a ₹1 change in the underlying stock; calls have positive delta (0 to 1) and puts have negative delta (0 to -1)
D. The change in option price due to one percentage-point change in interest rates
E. The change in option price due to one point change in implied volatility
