AS 05 (iv) - Finance and Investment Mock Test 07
This section explains key concepts in finance, investment, taxation, bond markets, derivatives, and financial markets. It covers credit risk, standard deviation as a measure of total risk, assumptions of the Capital Asset Pricing Model (CAPM), investment in gold, bond current yield, marketability of corporate bonds, marking-to-market in futures trading, financial market instruments, Vega in options pricing, and tax-exempt organizations. These topics help investors understand investment risk, portfolio management, bond valuation, derivative pricing, and market operations. Understanding these concepts enables better financial planning, informed investment decisions, effective risk management, and improved knowledge of capital market instruments.
1. Credit Risk is the risk that:
A. Interest rates will change
B. The issuer of a bond will run into financial difficulties and won't be able to pay interest or repay principal
C. The market will decline
D. Currency values will fluctuate
E. Liquidity will dry up
2. Standard Deviation (SD) measures:
A. Average return on investment
B. Total risk – the variability of returns of an asset as compared with its mean or expected value
C. Only systematic risk
D. Only unsystematic risk
E. The minimum return on investment
3. CAPM Assumption 7: There is a risk-free asset and no restriction on borrowing/lending at the risk-free rate means:
A. Risk-free assets do not exist
B. The risk-free asset is essential to simplify the complex pairwise covariance of Markowitz's theory, making the curved efficient frontier linear
C. Borrowing is always restricted
D. Investors cannot lend at the risk-free rate
E. The risk-free rate equals the market return
4. What is the ideal way to invest in GOLD according to the chapter?
A. Purchasing gold jewellery from a local jeweller
B. Buying physical gold bars and biscuits, or investing in dematerialized (Demat) form of gold through the commodity (bullion) market using NCDEX gold futures contracts
C. Only through Gold ETFs
D. Only through RBI Sovereign Gold Bonds
E. Only through physical gold coins
5. How is 'Current Yield' of a bond calculated?
A. Current Yield = Coupon Rate × Par Value
B. Current Yield = Annual Coupon / Market Price
C. Current Yield = (Annual Coupon + Capital Gain) / Market Price
D. Current Yield = Market Price / Annual Coupon
E. Current Yield = Yield to Maturity × Par Value
6. What is meant by 'Marketability' as a feature of corporate bonds?
A. Bonds can only be bought through primary markets
B. Bonds can be sold before maturity easily and quickly because of the size and liquidity of the bond market
C. Bonds can be converted into equity at any time
D. Bond prices are always stable
E. Bonds can be re-issued in the secondary market
7. What is 'Marking-to-Market' in futures trading?
A. The process of setting the initial futures price at the beginning of the contract
B. The process of revaluing each investor's positions, generally at the end of each trading day, and computing the profit or loss on the positions accordingly
C. The process of determining the final settlement price of a futures contract
D. The requirement to maintain a minimum account balance with the broker
E. The process of delivering physical assets at the expiration of a futures contract
8. Financial Markets trade in which of the following?
A. Only stocks and bonds
B. Commodities, Securities, Foreign Currencies, or Derivatives
C. Only government securities
D. Only agricultural commodities
E. Only currency and gold
9. In the Vega example from the chapter, which option (30-day vs. 356-day) has the higher Vega?
A. 30-day option (Vega = 0.03)
B. 356-day option (Vega = 0.20)
C. Both have equal Vega
D. The option closer to expiry always has higher Vega
E. Vega is not affected by time to expiry
10. How many items are listed as 'Exempt Organisations' in the chapter (income exempt from tax)?
A. 7 items
B. 14 items
C. 20 items
D. 34 items
E. 50 items
