«O» ECON F212 FUNDAMENTALS OF FINANCE & ACCOUNTING

END-SEM EXAMINATION (CLOSED BOOK) – SECOND SEMESTER 2022-23

Duration = 120 Minutes Total Points = 105 == 35% of the course weight
Note1: Question I and II answers should be written in the below box only.
Answering against the question will not be considered for evaluation.
Overwritten / smudged / multiple times written answers will not be considered for evaluation.
Note-2: There is no negative marks for wrong answers.

I. Answer the following fill in the blank questions. Each correct answer carries 2 points.

1. If the current real interest rate is -2% p.a. (i.e. minus two percent per annum) and the expected inflation
rate 6% p.a, then ………………will be the nominal interest rate.

2. If the simple interest rate is 20 percent and if it is compounded semi-annually then

…………will be the effective annual return.

3. Today, Mr. FOFA sold a bond at ₹925 which he bought at ₹890 two years back. He also received two
annual coupon payments each one ₹100. Using this information find out Mr. FOFA’s realised rate of
return.

4. A four-year bond with a 10 percent coupon rate and 8 percent required rate of return has a duration of
3.42 years. Coupons are paid semi-annually. If the required rate increases by 10 basis points (i.e. from
8 to 8.10 percent) then ……………will be the percentage change in the bond price.

5. Suppose a bank enters a reverse repurchase agreement in which it agrees to buy fed funds from one of
its correspondent banks at a price of ₹5,000,000, with the promise to sell these funds back at a price of
₹5,000,147.55 (₹5,000,000 plus interest of ₹147.55) after five days. The yield on this repo to the bank
is calculated as ……………….

6. Suppose you can invest in taxable corporate bonds that are paying a 10 percent annual interest rate or
municipal bonds. If your marginal tax rate is 35 percent, the after-tax or equivalent tax-exempt rate of
return on the taxable bond will be ……………….

7. Consider an investor who, on January 1, 2022, purchases a TIPS bond with an original principal of
100, a 4 percent annual (or 2 percent semi-annual) coupon rate, and 10 years to maturity.
……………………….. will be the first coupon amount if the semi-annual inflation turns out be 0.5
percent on June 30, 2022.

8. Mr. FOFA evaluating a stock and it paid a dividend at the end of last year of 3.50. Dividends have
grown at a constant rate of 2 percent per year over the last 10 years, and this constant growth rate is
expected to continue into the future. If the required rate of return on the stock is 10 percent then
…………...will be the present value of the stock.

9. In order to buy a two-wheeler, Mr. FOFA is planning to invest ₹10,000 on the last day of every year
for the next six year. If the interest rate on the investment is 8 percent, the future value of Mr. FOFA’s
investment in six years will be (round it nearest two decimals) …………………

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 10. Mr. FOFA owns a preferred stock that promises him to pay an annual dividend of 5 percent of the par
(face) value of the stock (received in quarterly instalments). If the par value of the stock is ₹100, then
how much Mr. FOFA receives ……………. rupees every quarter.

II. Answer the following accounting fill in the blank questions. Each correct answer carries 1 point.

1. .............................A feature of the corporate form of organization whereby corporate creditors (such as
banks or suppliers) ordinarily have claims against the corporate assets only, not against the personal
assets of the owners.

2. The accounting principles that conform to the tendency of accountants to resolve uncertainty and doubt
in favour of understating assets and revenues and overstating liabilities and expenses, is known as
................

3. According to ...................... principle, the accounting data should be definite, verifiable and free from
personal bias of the accountant. This principle requires that each recorded transaction/event in the books
of accounts should have adequate evidence to support it.

4. The preparers of financial statements have to contend with uncertainties that inevitably surround
many events and circumstances. Such uncertainties are recognized by the disclosure of their nature
and extent and by exercise of ___________ in the financial statements.

5. Apart from legal requirements, good accounting practise also demands that all significant information
should be disclosed. For example, mode of valuation of assets, various types of revenues and expenses
properly grouped etc. Which accounting convention is does this refer to …………………….

6. The accounting equation is ------------------=---------------------------+----------------------------------.

7. The difference between assets and liabilities is ………………….

8. Income increases net assets and also ……………………….

9. A withdrawal of cash reduces cash and ………………………….

10. Increase in all asset accounts are ………………………

11. Answer the following short answer questions. Total 20 points.

1. List the any six money market instruments (6 points)
2. List the characteristics of common stock which differentiates it from other financial securities. (4 points)
3. List the six items that are part of shareholder's equity (6 points)
4. Explain the conservatism concept (4 points)

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 III. Answer the following long answer questions.
1A. Suppose that the current one-year rate (one-year spot rate) and expected one-year T-bond rates over
the following three years (i.e., years 2, 3, and 4, respectively) are as follows: (7 points)
Using the unbiased expectation theory, calculate current rates for two, three and four -year maturities.
Using the liquidity premium theory, theory, calculate current rates for two, three and four -year
maturities.

1B. Let’s assume that today's current (spot) one-year, two-year, three-year, and four-year zero-coupon
Treasury security rates were as follows: (3 points)
2A. Calculate the duration of a bond using the following information. Face value of bond is 1000;
coupon rate is 10 percent and coupons are paid semi-annually; the required rate of return is 8 percent
per annum; and the maturity period is 5 years. (7 points)

2B. List the duration features (3 Points)

3. Prepare the T-accounts using the following information (10 Points)

April 1 2023 FOFA invested 5000 in the Pet food business as owner

Cash Pain id Capital

April 1 2023 Pet food firm paid the rent 750 for the April

Cash Prepaid Expenses

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 April 1 2023 Pet food borrowed 4000 from bank on a 9 percent note payable

Cash Notes Payable

April 5 2023 Equipment bought for 7200 for cash

Cash Equipment

April 9 2023 An initial inventory purchased on credit for 800

Inventory Accounts Payable

April 12 2023 Pet food made a sale of 12000 in cash only

Cash Sales Revenue

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April 15 2023 Pet food paid the wages to it employees 3000 (wages are paid for every 15 days)

Cash Wage expenses

April 30 2023 Electricity bill received 450 (not paid yet)

Accounts Payable Electricity Expense

4. Prepare the trial balance using the following information (10 Points)

Account Amount
Cash ₹450
Accounts Receivable ₹1200
Inventory ₹850
Prepaid Advertising ₹150
Accounts Payable ₹2000
Unearned revenues ₹0
Common Stock ₹300
Dividends ₹50
Sales revenue ₹1600
Cost of goods sold ₹1150
Advertising expenses ₹50

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 5. Using the following information calculate the following ratios and also provide a one-line
interpretation (quick, receivable turnover, debt to equity, gross profit margin and interest
coverage) (15 points)

Particulars Amount
Cash and Cash Equivalents 1000
Accounts Receivables 500
Current Debt 250
Long Term Debt 1200
Cost of Goods Sold 600
Inventory 300
Sales revenue 1200
Depreciation and Amortization 150
Interest Expense 75
Shareholder’s Equity 900
Net profit 200
Total Assets 2500

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