Mock Test Questions:

1. X wants to make the right choices on making financial commitments to make the best
use of her income and savings. She (X) pays an EMI of Rs.23,000 on an outstanding
home loan of Rs.10 lakhs with 5 years to go. She has an offer to switch to a new
housing loan company that is offering a rate of 7.25%. X has a conveyance allowance
of Rs.7500 per month and she is looking to buy a vehicle that fits into that budget. She
has seen a vehicle that costs Rs.4 lakhs and found financing for 80% of the cost at an
interest rate of 12%.The term will be 5 years. One of the insurance policies held by X
is maturing and she has to decide between taking the sum assured of Rs.10 lakhs as
cash or a monthly payment of Rs.10,000 over 10 years. Take inflation at 6%.

i) Should X consider the home loan switch to the new provider?

a. No, since the new loan will mean higher interest payments in the initial years
b. Yes, since it reduces the outstanding loan amount quicker
c. Yes, since the interest rate on the new loan offer is lower
d. No, since the interest rate on the new loan is higher
[Hint: Use the Rate function to calculate the interest rate on the existing home loan. That works out
to 13%.]

ii) Can she afford the car she has evaluated?

a. Yes, she will be able to pay the EMI on the loan

b. No, the EMI will be higher than the conveyance allowance
c. She will be able to pay the EMI only if the term of the loan goes up.
d. She will be able to pay the EMI only in the first year. Subsequently, the EMI will be
higher than the allowance
[Hint: Use the PMT function to calculate EMI. EMI<7500, therefore she can afford it.]

iii) Should X take the Rs.10 lakhs as cash or opt for the periodic payment?

a. Take the cash down

b. Take the monthly payout
c. Both options have the same financial implications
d. The correct option will depend upon the investment return B will earn on the cash
down option
[Hint: Compare PV of cash down with PV of monthly payout. Rs.10,00,000 (PV of cashdown) is
higher than Rs. 9,00,734 (PV of monthly payout). The inflation rate of 6% is used to discount the
future cashflows to present value]

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 2. X is in his early 30's and considering a shift to self-employment. he is confident of
doing well but realizes there may be disruption to income in the initial stages. He
wants to evaluate his finances before he takes the call to branch out on his own. He
also wants to help his father create a corpus for managing their health needs. They
need a guaranteed payout of Rs.7500 each month to meet their expense on
medicines.
Monthly Income
Salary
1,40,000

Monthly Expenses

Loan repayment
65,000

Living expenses
50,000

1,15,000

Assets Liabilities
Cash in bank
1,20,000
fixed deposit maturing in 18 months
75,000
Open ended Equity mutual fund
2,00,000
self-occupied property and loan outstanding 5500000
75,00,000
PF Balance
8,00,000

86,95,000

i) X expects income to be uncertain. Are his finances in a position to support this?

a. No, since liquid assets to networth ratio is low at 1.69
b. No, since liquid assets to networth ratio is low at 1.04
c. No, since liquid assets to networth ratio is low at 3.43
d. Yes, since liquid assets to networth ratio is adequate at 6.08
[Hint: Liquid assets to monthly expenses indicate the ability to manage even if income is affected. 3-
6 months atleast should be available. In this case it is just enough to meet one month expense.]

ii) X is confident that he has done well with his finances. He has bought a house on
loan and has investments in mutual funds. What is the evaluation you would do
of his financial performance so far?

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 a. Savings to Income ratio at less than 1 is not good but can be attributed to the
home loan and its repayment. X has to ensure that the ratio improves consistently
over time.
b. Savings to Income ratio at 5.17 is good but can be improved over time by reducing
debt and investing more
c. Savings to Income ratio at 62.11 is very good particularly given his age. X has to
consistently save at this rate to secure his future
d. Savings to Income ratio at 2.82 is not good but can be improved over time by
reducing debt and investing more
[Hint: Savings to income ratio is calculated as total accumulated savings, excluding self -occupied
house/annual income.]

iii) What is the corpus that is required to generate the income of Rs.7500 per month
for his parents if the yield being offered is 6%?
a. Rs.500000
b. Rs.1000000
c. Rs.1500000
d. Cannot be estimated
[Hint: Annuity formula is income required/yield

Note: It is considered that the money required by the parents is for perpetuity.]

3. D is in her mid-40s and been managing her finances on her own. She has always
found it difficult to meet her goals even though she saves and invests. Her primary
investments are in equity mutual funds. She is now getting ready to fund her son's
college education in a year. This is a snapshot of her finances.

Income

Salary
2,20,000
Expenses
loan repayment
90,000
essential living
65,000
Discretionary expenses
30,000

1,85,000
Travel expenses incurred every 2 years
2,00,000 8,333.33

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 Assets Liabilities

Cash in bank
80,000
Equity mutual funds
50,00,000 20,00,000

Bank fixed deposits maturing in 18 months

15,00,000 5,00,000
Liquid funds
3,00,000
Gold
10,00,000 4,00,000
Provident Fund
18,00,000
self-occupied property and loan outstanding
70,00,000 37,50,000
Car and loan outstanding
2,50,000 2,00,000
Personal loan
5,00,000

1,69,30,000 73,50,000

(i) D is considering taking loans where necessary, if her corpus falls short of the
goals that she has to meet in the next 5 years. What will be your advice to her?

a. She should avoid loans since her leverage ratio is high at 43%
b. She should consider loans to fund her goals since the debt to income ratio at 41%
is low
c. She should not consider loans since her debt to income ratio at 2 times is
excessive
d. She should consider loans to fund her goals since the leverage ratio is low at 4
times
[Hint: Leverage ratio is calculated as total liabilities/total assets. Higher the leverage the more risky
it is.]

(ii) D is not sure that her life goals like retirement will be met within her planned timeline. She
however believes that she is managing her income and expenses reasonably well. What is the advice
that you would give as her investment adviser?

a. Liquidity ratio, currently at 11%, can be increased to fund goals

b. Expense ratio, currently at 88%, should be reduced to save and invest more for
goals
c. Leverage ratio, currently at 43%, can be increased to fund goals
d. All of the above

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 iii) Which of the following factors may hinder D's ability to fund her child's education
goal in a year's time?
a. The liquid assets to Networth ratio is low at 3.9% and D may find it difficult to
realize the funds required given the short time available to pay for the goal.
b. Leverage ratio, currently at 43%, is high and this may prevent D from finding the
funds for the goal
c. The expense ratio at 88% is high and implies that D may not be in a position to meet
education expenses at this stage
d. The discretionary expenses to total expense ratio at 40% is high and this will affect
her ability to meet essential expenses
[Hint: Liquid assets here is cash and liquid funds-Rs.380000. Networth is (16930000-7350000). A low
ratio will indicate lower ability to find the funds required to meet the goal]

4. J is servicing a 15 year home loan for Rs.30,00,000 at a rate of 7.5% on which he pays
an EMI of Rs.27,810. He is planning taxes for the new year and he would like to have
an idea of the principal and interest component of the EMI. Calculate the same for
the 61st period.
a. The principal component in the EMI is Rs.13167.39 and interest component is
Rs.14642.98
b. The principal component in the EMI is Rs.9424.63 and interest component is
Rs.18385.75
c. The principal component in the EMI is Rs.13905.19 and interest component is
Rs.13905.19
d. The principal component in the EMI is Rs.15212.62 and interest component is
Rs.12597.75

5. L is doing an annual review of her equity portfolio and want to make some decisions
on stock holdings in it.

i. L has seen a run-up in prices in the stocks in his portfolio. He wants to add more
of stocks that have good growth prospects but wants to avoid over valued stocks.
Which of the following would best suit his preference?
a. Stocks where PE ratio is >1
b. Stocks whose PE ratio is > than PE ratio of market index
c. Stock whose PEG ratio less than 1
d. Stock whose PEG ratio greater than 1 and PE ratio is less than 1
[Hint: PEG ratio less than 1 implies market has not incorporated the growth prospects into the stock
price fully.]

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 ii. L wants to add dividends earned as a part of her retirement income portfolio. In
a situation of rising prices what is she likely to observe in this regard?

a. Dividend payout is likely to be higher

b. Dividend yield is likely to be lower
c. Dividend payout is likely to be lower
d. Dividend yield is likely to be higher

[Hint: Dividend yield is likely to be lower. The formula is Dividend per share/Market price per share.
Since the denominator goes up, the yield comes down.]

iii. Which of the following should L see as an indicator to consider buying the
shares she wants to accumulate?
a. Stock is trading just above 30 day moving average
b. Stock price is near the top of a rising trend
c. Stock trading well below 200 day moving average
d. Stock is trading at the start of a declining trend
[Hint: The other options are not indicators to buy.]

6. M is seeking some help on understanding her fixed income portfolio.

i. M wants to break a 5 year bank deposit on which she earns 7% interest and buy
a 8% corporate bond with a term to maturity of 5 years trading at a price of
Rs.107. Should she consider it? Take settlement date as 30th November 2022,
maturity date as 30th November 2027 and redemption price as Rs.100
a. Yes, since she will earn an yield of 8% on the bond as compared to 7% on the
fixed deposit
b. No, since the yield on the bond will be only 6.3% while the fixed deposit
gives her 7% interest
c. Yes, since the bond is available at Rs.107 which is at a premium to
redemption value of the bond at Rs.100
d. No, since corporate bonds can only be subscribed in the IPO and cannot be
bought in the secondary markets

ii. The yield applicable on the bond M goes up to 7.5%. What is the impact on the
price of the bond? The bond pays coupon annually.Take settlement date as 30th
November, 2022.

a. The price of the bond goes down to Rs.103

b. The price of the bond goes up to Rs.106
c. The price of the bond goes up to Rs.107
d. The price of the bond goes down to Rs.102

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 7. K is accumulating funds to meet the goal of putting down a downpayment for a
house in 2 years , childrens education in 7 years and retirement in 20 years. She
finds that she may fall short of the goal value for the house downpayment but does
not have extra savings to assign to the goal and she does not want to divert funds
from other goals to this goal.

i. Which of the following is the appropriate way for K to invest and manage the
goal to accumulate funds for the downpayment for the house?
a. K should invest in debt funds holding portfolios with low duration and postpone
the goal till the funds are accumulated
b. K should invest in high duration debt funds to earn better return and at the same
time have the low volatility of debt investments
c. K should invest in equity actively managed equity funds to earn better returns than
the index to get her to the goal value quickly
d. K should invest in index funds to combine the stability if index investing with the
higher returns from equity that will get to her goal value in the prescribed time
[Hint: The term to goal is too short for K to take risk for higher returns. Therefore, goal
postponement is an option to consider.]

ii. K wants to send her daughter to the US to pursue her education. Which of the
following is the most suitable investment choice for this goal?
a. Arbitrage fund
b. International fund
c. Target maturity funds
d. Any of these
[The other two funds are unsuitable since they are typically lower return debt funds.]

iii. Which of the following is the most suitable for the retirement goal?
a. Capital Protection Fund
b. Arbitrage fund
c. Flexicap fund
d. Short-duration fund
[The debt funds are not suitable for a long-term goal in the accumulation phase]

8. T is creating a corpus for her child's education and wants to make an annual
investment for the goal when she gets her bonus. The goal value is Rs.7,50,000 and
she needs it 5 years hence. She had made an investment of Rs.1,00,000 five years
back in an equity fund for this goal and it is now worth Rs.1,80,000. She wants to
make additional annual investment in the same scheme and expects the returns to
be what she earned so far in the fund. What is the annual contribution that T will
have to make to get to her goal given the current level? Select the closest option.

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 a. Rs.50183
b. Rs.66427
c. Rs.74386
d. Rs.81719
[Hint: Rs.1 lakh invested for 5 years is now worth Rs.180000. Use Rate function to calculate rate of
return. Use PMT function. Rate as calculated above. The current value of investments, Rs.180000,
will be taken as the PV]

9. C has a monthly debt repayment obligation of Rs.30,000 on Rs.25 lakhs of loans

taken with outstanding loans of Rs.18,00,000. C is seeking help to manage his debt
which has started affecting his ability to save for his goals. His monthly income is
Rs.75,000.

i. He has to decide on closing out a credit card debt on which there is an interest
cost of 2.5% per month. What is the annual cost of debt?
a. 34 percent
b. 30 percent
c. 2.5 percent
d. 18 percent
[Hint: ((1+monthlyrate)^12)-1]

ii. What is the debt servicing ratio given C's financial situation?
a. 14.4 percent
b. 20 percent
c. 4 percent
d. 40 percent
[Hint: Monthly debt servicing obligation/Monthly income]

10. F has a steady income and manages his expenses well to save for his goals. He has
a moderate risk appetite and wants to identify the most suitable mutual fund
products to meet his different needs and goals.

i. F wants to create an emergency fund that will take care of 3 months of expenses.
Which of the following funds is MOST suitable for this?

a. Ultra-short duration fund, since it has low volatility

b. Short-duration fund, since it will give better returns with safety of debt
c. Target maturity funds, since they have no interest rate risk
d. Long-term gilt funds , since they give good returns with no credit risk

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[Hint: Best suited for emergency fund]

ii. Given F's risk profile, which of the following fund categories is best suited for
saving for retirement goal 20 years away?
a. Sector funds
b. Arbitrage funds
c. Multi-cap fund
d. Mid-cap funds

[Hint: Best suited for risk profile.]

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