IC28 Mock Test Sample 17
This chapter explains compound interest, discount rates, investment yields, and return measurement methods. It covers nominal and effective discount rates, their relationships with interest rates, and formulas for present and accumulated values. The chapter also discusses conversion between nominal and effective rates when interest or discount is compounded multiple times a year. Practical applications include banker's discount, valuation of bills, and calculation of present and future values. Investment yield measurement methods such as Money Weighted Rate of Return (MWRR), Time Weighted Rate of Return (TWRR), and Linked Internal Rate of Return (LIRR) are introduced for evaluating investment and fund manager performance.
1. In Example 4, accumulated value of Rs. 5000 at end of 5 years at nominal discount 9% convertible quarterly is approximately:
a. Rs. 6500
b. Rs. 7881.96
c. Rs. 8500
d. Rs. 9000
2. For computing average interest yield on life fund: A is fund at start, B is fund at end (after tax), I is interest earned. Per (5.7), the net interest yield i is:
a. 2I/(A+B−I)
b. I/A
c. I/B
d. I/(A+B)
3. Per formula (5.8), the gross rate of interest i' is:
a. 2T/(A+B−I)
b. 2I'/(A+B−I)
c. I'/(A+B)
d. I/(A+B−I')
4. In Example 5, with A=50,00,000, Premium income=5,00,000, Claims=2,50,000, Expenses=50,000, Gross interest=3,60,000, Tax=80,000, the net interest I is:
a. Rs. 2,80,000
b. Rs. 3,60,000
c. Rs. 80,000
d. Rs. 4,40,000
5. In Example 5, the fund at end of year B is:
a. Rs. 54,80,000
b. Rs. 50,00,000
c. Rs. 60,00,000
d. Rs. 55,00,000
6. In Example 5, the net rate of interest earned i is approximately:
a. 7.06%
b. 5.49%
c. 8.0%
d. 4.5%
7. In Example 5, the gross rate of interest i' is approximately:
a. 5.49%
b. 7.06%
c. 8.0%
d. 6.0%
8. What does MWRR stand for?
a. Most Weighted Risk Return
b. Money Weighted Rate of Return
c. Mean Weighted Real Return
d. Modified Weighted Risk-free Return
9. Per formula (5.9) for MWRR, the equation of value is:
a. AT = C0(1+i)^T + ∑Ct_k(1+i)^(T−t_k)
b. AT = C0 + ∑Ct_k
c. AT = C0 · T · i
d. AT = (1+i)^T
10. What is a key drawback of MWRR for evaluating fund manager performance?
a. It is too simple
b. It is sensitive to timing and size of cash flows beyond manager's control
c. It ignores compound interest
d. It is not standardized
11. What does TWRR stand for?
a. Time Weighted Real Return
b. Time Weighted Rate of Return
c. Total Weighted Risk Return
d. Total Weighted Rate of Return
12. Per formula (5.10), TWRR is defined by:
a. (1+i)^T = chain multiplication of portfolio growth factors
b. (1+i)^T = AT/C0
c. Sum of returns/T
d. Average of returns
13. MWRR and TWRR will be similar when:
a. Cashflows are large relative to fund
b. Cashflows are small relative to fund or return is stable
c. Fund is empty
d. Always identical
14. Per formula (5.11), the Linked Internal Rate of Return (LIRR) over intervals is:
a. (1+i)^T = product of interval returns
b. (1+i)^T = ∑ik
c. Product ik
d. Average return × T
15. In Example 6, Manager A's MWRR after returning Rs. 2 crore at 6 months is:
a. 33%
b. 50%
c. 61%
d. 100%
16. In Example 6, Manager B's MWRR after taking additional Rs. 2 crore at 6 months is:
a. 33%
b. 50%
c. 61%
d. 100%
17. In Example 7, the time-weighted rate of return for Manager A is:
a. 33%
b. 50%
c. 61%
d. 75%
18. In Example 7, the time-weighted rate of return for Manager B is:
a. 33%
b. 50%
c. 61%
d. 100%
19. From Example 6/7: which method is fairer for comparing manager performance?
a. MWRR
b. TWRR
c. Simple return
d. Average of MWRR and TWRR
20. Why might TWRR be impractical to compute?
a. Requires fund valuation at every cash flow date
b. Too many calculations
c. Insufficient data
d. Government regulation
