MODULE-1

FOUNDATION FOR FINANCE

SECTION-A

1. What is the meaning of money, and why is it needed?

Answer:
Money is a medium of exchange that facilitates transactions by eliminating the inefficiencies of a
barter system. It is needed to provide a standardised value for goods and services, store value over
time, and act as a unit of account to measure and compare the value of different items.

2. What is financial planning, and why is it important?

Answer:
Financial planning is setting financial goals, developing a plan to achieve them, and monitoring
progress over time. It is important because it helps individuals manage their finances effectively,
prepare for future needs, and ensure financial stability.

3.Define financial goals.

Answer:
Financial goals are specific, measurable objectives that an individual wants to achieve with their
money within a certain time frame. These goals guide financial planning and decision-making to
ensure that resources are allocated effectively.

4.What is the meaning of the time value of money?

The time value of money (TVM) is the concept that money available today is worth more than the same
amount in the future due to its earning potential. This principle acknowledges that money can earn
interest or be invested to generate returns over time.

5.Define simple interest.

Simple interest is the interest calculated on the principal amount of a loan or investment, without
considering any interest previously earned. The formula for simple interest is:

Simple Interest=𝑃×𝑟×𝑡

𝑃-principal amount

r- is the annual interest rate, and

t - time in years.

6.What is discounting?

Discounting is determining the present value of a future amount of money. It involves applying a
discount rate to a future cash flow to determine how much it is worth today.
7.What is the present value of cash inflow?

The present value of a cash inflow is the current worth of a future sum of money, discounted at a
specific rate. It represents the amount that would need to be invested today to yield the future cash
inflow at a given rate of return.

8.What is Annuity?

An annuity is a financial product that provides a series of regular payments over a specified period.
These payments can be made monthly, quarterly, or annually.

Example: If you invest in an annuity that pays you Rs. 10,000 every year for 20 years, this is an
example of an annuity. The payments will continue for the set period of 20 years, after which they will
stop.

9.What is perpetuity? Give an example

A perpetuity is a type of financial payment that continues indefinitely, with no end date. It involves
receiving a fixed amount of money at regular intervals (such as annually) forever.

Example: If you invest in a financial product that pays you Rs. 1,000 every year forever, that
investment is considered a perpetuity.

10.What is meant by a Bank?

A bank is a financial institution that accepts deposits from the public and provides loans and other
financial services, such as checking and savings accounts, credit cards, mortgages, and investments.

11.What is meant by securities?

Securities are financial instruments that represent ownership or debt obligations. They are bought and
sold in financial markets and can include stocks, bonds etc.

12.What is meant by financial instrument?

A financial instrument is a tradable asset or contract that has monetary value.

13.What is meant by a share?

A share represents ownership in a company. When you buy shares of a company's stock, you become a
part-owner of that company. Shareholders typically have voting rights and may receive dividends,
which are a portion of the company's profits distributed to shareholders.

14.What is meant by debentures?

Debentures are debt instruments issued by corporations or governments to raise capital. When you
buy a debenture, you're essentially lending money to the issuer. In return, the issuer promises to repay
the principal amount at maturity and may also pay periodic interest payments.

15.What is meant by dividend?

A dividend is a payment made by a corporation to its shareholders as a distribution of profits. It is

typically paid out of the company's earnings
16.What are the two types of shares?

Preference Shares: Preference shares are a type of share that typically guarantees its holder a fixed
dividend payment before any dividends are distributed to holders of common shares. They often do not
carry voting rights.

Equity Shares: Equity shares, also known as common shares, represent ownership in a company. They
provide holders with voting rights and a stake in the company's profits, but dividends are not
guaranteed and can vary depending on the company's performance.

17.What are fixed income securities

Fixed income securities are investment instruments that provide investors with a fixed or predictable
stream of income over time. These securities typically pay a fixed rate of interest or dividend at regular
intervals, such as semi-annually or annually.
Ex: Government bonds.

SECTION-B & C

1. Explain the significance of money in an economy.

Money plays a crucial role in an economy as it facilitates the exchange of goods and services, supports
economic growth, and helps maintain stability. Here are the key significances of money in an economy:

1. Medium of Exchange:

Money eliminates the inefficiencies of the barter system by providing a common medium of exchange.
It allows people to buy and sell goods and services easily without needing a direct exchange, making
transactions smoother and more efficient.

2. Unit of Account:

Money provides a standard measure of value, which helps in pricing goods and services uniformly.
This makes it easier to compare the value of different products, aiding consumers and businesses in
making informed economic decisions.

3. Store of Value:

Money allows individuals and businesses to store wealth in a form that can be easily used in the future.
Unlike perishable goods, money retains its value over time, enabling people to save for future needs
and investments.

4. Standard of Deferred Payment:

Money enables transactions that involve credit or deferred payments. It allows for borrowing and
lending, making it possible to buy now and pay later. This is essential for economic growth, as it
facilitates investment in businesses and infrastructure.

5. Facilitation of Trade and Specialization:

By simplifying transactions, money encourages trade and allows for greater specialization in the
economy. Individuals and businesses can focus on producing what they are best at, knowing they can
exchange their output for other goods and services using money.
6. Economic Stability and Policy:

Money is a tool for implementing monetary policy. Central banks use it to control inflation, manage
employment levels, and stabilise the economy by adjusting the money supply and influencing interest
rates.

In summary, money is fundamental to the functioning of any economy as it makes trade more efficient,
provides a means to store and measure value, and supports economic growth and stability.

2. State the meaning of the financial goal. What are the types of financial goals?

A financial goal is a specific target or objective that an individual or organization aims to achieve with
their financial resources. These goals are designed to provide direction and purpose for managing
money, investing, saving, and spending. Financial goals can be short-term, medium-term, or long-term,
and they help in planning and making informed financial decisions.

Types of Financial Goals

1.​ Short-Term Financial Goals:

○​ Definition: Goals that can be achieved within a year or less.
○​ Examples:
■​ Building an emergency fund of Rs. 50,000.
■​ Saving for a vacation or a small purchase.
■​ Paying off a small credit card balance.
2.​ Medium-Term Financial Goals:
○​ Definition: Goals that are typically planned for a period of 1 to 5 years.
○​ Examples:
■​ Saving for a down payment on a house.
■​ Paying off student loans.
■​ Funding a child’s education in the near future.
3.​ Long-Term Financial Goals:
○​ Definition: Goals that are planned for a period of more than 5 years.
○​ Examples:
■​ Retirement planning to ensure financial security in later years.
■​ Saving for a child’s college education.
■​ Accumulating wealth for a significant investment or purchase.

Categories of Financial Goals

1.​ Savings Goals:

○​ Objective: To build and maintain savings for future needs.
○​ Examples: Emergency fund, vacation fund, or a large purchase.
2.​ Investment Goals:
○​ Objective: To grow wealth over time through investments.
○​ Examples: Retirement savings, stock market investments, or real estate investments.
3.​ Debt Reduction Goals:
○​ Objective: To reduce or eliminate existing debt.
○​ Examples: Paying off credit card debt, student loans, or a mortgage.
4.​ Income Goals:
○​ Objective: To increase or enhance sources of income.
○​ Examples: Achieving a higher salary, starting a side business, or investing in
income-generating assets.
5.​ Protection Goals:
○​ Objective: To ensure financial security through risk management.
 ○​ Examples: Purchasing insurance, creating a will, or setting up an emergency fund.
6.​ Lifestyle Goals:
○​ Objective: To enhance quality of life and personal satisfaction.
○​ Examples: Buying a new car, renovating a home, or pursuing hobbies.

In summary, financial goals are essential for guiding financial decisions and actions. They can be
categorized by the time frame for achievement and the specific purpose they serve, such as saving,
investing, reducing debt, increasing income, protecting assets, or enhancing lifestyle. Setting clear and
achievable financial goals helps individuals and organizations manage their finances effectively and
work towards their desired outcomes.

3.What do you understand by a financial plan? What are the features of a financial plan? Explain the
essentials of a financial plan. Explain the importance of a financial plan.

A financial plan is a comprehensive strategy designed to help individuals or businesses achieve their
financial goals. It involves assessing current financial situations, setting short-term and long-term
objectives, and creating a roadmap to manage income, expenses, investments, savings, and risk
management. The goal of a financial plan is to ensure financial stability and growth over time.

Features of a Financial Plan:

1.​ Goal-Oriented: It focuses on specific financial goals, such as retirement planning, purchasing a
home, education funding, or business expansion.
2.​ Comprehensive: A financial plan covers all aspects of finances, including income, expenses,
savings, investments, insurance, and taxes.
3.​ Customized: It is tailored to an individual's or business's unique financial situation, needs, and
objectives.
4.​ Flexible: A financial plan is adaptable and can be adjusted as circumstances change, such as
changes in income, expenses, or financial goals.
5.​ Time-Bound: It includes timelines for achieving financial goals, helping individuals and
businesses track their progress.
6.​ Risk Management: It incorporates strategies to manage financial risks, such as insurance
coverage and emergency funds.

Essentials of a Financial Plan:

1.​ Assessment of Current Financial Situation:

○​ Evaluating current income, expenses, assets, liabilities, and net worth to understand the
starting point for the plan.
2.​ Setting Financial Goals:
○​ Defining clear, measurable, and realistic financial goals, such as buying a house, funding
education, or retirement planning.
3.​ Budgeting:
○​ Creating a budget to manage income and expenses effectively, ensuring that spending
aligns with financial goals.
4.​ Savings and Investment Strategy:
○​ Developing a plan for saving and investing to build wealth over time, considering risk
tolerance and time horizon.
5.​ Risk Management:
○​ Implementing measures to protect against financial risks, such as purchasing insurance
and establishing an emergency fund.
6.​ Tax Planning:
○​ Planning for tax efficiency by taking advantage of tax deductions, credits, and
 investment accounts that offer tax benefits.
7.​ Retirement Planning:
○​ Planning for long-term financial security by determining retirement needs and selecting
appropriate retirement savings vehicles.
8.​ Regular Review and Adjustments:
○​ Monitoring the financial plan regularly and making adjustments as needed to stay on
track with financial goals.

Importance of a Financial Plan:

1.​ Provides Direction and Clarity:

○​ A financial plan provides a clear path for managing finances, helping individuals and
businesses make informed financial decisions.
2.​ Helps Achieve Financial Goals:
○​ By setting specific objectives and outlining steps to achieve them, a financial plan
increases the likelihood of reaching financial goals.
3.​ Manages Income and Expenses:
○​ It ensures efficient management of income and expenses, preventing overspending and
promoting savings.
4.​ Reduces Financial Stress:
○​ Having a financial plan reduces uncertainty and anxiety about the future, providing
peace of mind by preparing for unexpected events.
5.​ Encourages Saving and Investment:
○​ A financial plan promotes disciplined saving and investing, helping build wealth and
financial security over time.
6.​ Risk Management:
○​ It helps identify potential financial risks and implements strategies to mitigate them,
such as purchasing insurance and creating an emergency fund.
7.​ Enhances Financial Decision-Making:
○​ With a financial plan in place, individuals and businesses can make better financial
decisions, considering their long-term impact on financial health.

In summary, a financial plan is an essential tool for achieving financial stability and success. It offers a
structured approach to managing finances, helping individuals and businesses navigate their financial
journey with confidence and clarity.

4.Describe the key components of a financial plan for a young adult.

1.​ A financial plan for a young adult typically includes:

●​ Personal Information: Basic details like name, age, employment status, income, and
dependents.
●​ Financial Goals: Short-term, medium-term, and long-term goals such as building an
emergency fund, saving for a down payment on a house, or retirement planning.
●​ Income and Expenses: Detailed list of monthly income and expenses to create a budget
and identify potential savings.
●​ Assets and Liabilities: Overview of current assets (savings, investments) and liabilities
(debts).
●​ Savings and Investment Plan: Strategies for saving money and investing in various
financial instruments to grow wealth.
●​ Insurance: Ensuring adequate coverage for health, life, and other necessary insurance.
●​ Debt Management: Plans to pay off high-interest debts and manage student loans or
other liabilities.
●​ Monitoring and Review: Regular review and adjustment of the financial plan to reflect
changes in financial situation or goals.
●​ Action Plan: Specific steps to achieve financial goals, including timelines and milestones.
​
5. Explain the need for financial planning

A financial plan is crucial for several reasons, addressing both immediate needs and long-term goals.
Here's why having a financial plan is necessary:

1. Provides Clarity and Direction:

●​ Goal Setting: A financial plan helps define specific financial goals, such as buying a home,
funding education, or saving for retirement. It provides a clear roadmap for achieving these
goals.
●​ Strategic Planning: It outlines the steps and strategies needed to reach financial objectives,
helping individuals and businesses stay focused and organized.

2. Enhances Financial Management:

●​ Budgeting: A financial plan includes budgeting to manage income and expenses effectively. It
helps track spending, identify areas for improvement, and ensure that resources are allocated
efficiently.
●​ Debt Management: It provides strategies for managing and reducing debt, improving financial
stability and reducing interest costs.

3. Promotes Saving and Investment:

●​ Savings Goals: A financial plan encourages disciplined saving by setting aside funds for future
needs and emergencies.
●​ Investment Strategy: It includes a strategy for investing, helping to grow wealth over time and
achieve long-term financial goals.

4. Risk Management and Protection:

●​ Insurance Needs: A financial plan assesses insurance needs and recommends coverage to
protect against risks such as illness, accidents, or property loss.
●​ Emergency Fund: It emphasizes the importance of having an emergency fund to cover
unexpected expenses, providing financial security during crises.

5. Ensures Financial Security:

●​ Retirement Planning: It includes strategies for building a retirement fund to ensure financial
independence in later years.
●​ Wealth Preservation: A financial plan helps preserve and manage wealth across generations,
addressing estate planning and inheritance issues.

6. Facilitates Better Decision-Making:

●​ Informed Choices: By providing a comprehensive overview of financial resources and goals, a

financial plan helps individuals and businesses make informed decisions about spending,
investing, and saving.
●​ Long-Term Planning: It helps anticipate future financial needs and plan accordingly, avoiding
short-term thinking and promoting long-term financial health.

7. Reduces Financial Stress:

●​ Peace of Mind: Having a financial plan reduces uncertainty about the future, providing
confidence and peace of mind about managing finances and achieving goals.
●​ Preparedness: It prepares individuals and businesses for potential financial challenges,
 reducing anxiety and enhancing overall financial well-being.

8. Improves Financial Discipline:

●​ Regular Reviews: A financial plan involves regular reviews and updates, encouraging ongoing
financial discipline and adjustments to changing circumstances.
●​ Accountability: It helps individuals and businesses stay accountable to their financial goals and
strategies, fostering responsible financial behaviour.

In summary, a financial plan is essential for effective financial management, achieving goals, managing
risks, and ensuring long-term financial security.

6.What is Time Value of Money [TVM]. Explain its Significance.

The Time Value of Money (TVM) is a financial principle that states that a sum of money today is worth
more than the same amount in the future due to its potential earning capacity. This is because money
can earn interest or generate returns over time. Essentially, TVM reflects the idea that "a dollar today
is worth more than a dollar tomorrow."

Significance of TVM

TVM is important because it helps in making informed financial decisions by considering how money
changes in value over time. It affects how we evaluate investments, savings, loans, and other financial
activities.

Future Value (FV) of Cash Flows

1.​ Future Value of a Single Cash Flow:

○​ Definition: The amount of money that a single sum of money will grow to in the future,
given a specific interest rate over a certain period.
2.​ Future Value of Even Cash Flows (Annuities):
○​ Definition: The amount of money that a series of equal, regular payments (or receipts)
will grow to in the future, given a specific interest rate.
3.​ Future Value of Uneven Cash Flows:
○​ Definition: The amount of money that a series of unequal, irregular payments will grow
to in the future, considering the specific interest rate.

Present Value (PV) of Cash Flows

1.​ Present Value of a Single Cash Flow:

○​ Definition: The current value of a future sum of money, discounted back to the present
using a specific interest rate.
2.​ Present Value of Even Cash Flows (Annuities):
○​ Definition: The current value of a series of equal, regular payments, discounted back to
the present using a specific interest rate.
3.​ Present Value of Uneven Cash Flows:
○​ Definition: The current value of a series of unequal, irregular payments, discounted back
to the present using a specific interest rate.

TVM is a fundamental financial concept that helps understand how money grows or decreases in value
over time due to interest rates.
SECTION-D [Practical Oriented Question]

1.Prepare a sample financial plan for a young adult.

Profile of the Individual:

●​ Age: 23 years
●​ Current Status: Recently graduated and working in an entry-level job
●​ Income: Rs. 40,000 per month
●​ Expenses: Rs. 25,000 per month
●​ Savings Capacity: Rs. 15,000 per month
●​ Debt: None
●​ Emergency Fund: Rs. 50,000

Financial Goals:

1.​ Short-term (1-2 years):

○​ Build an emergency fund.
○​ Save for higher studies (MBA or specialized training).
○​ Develop a savings habit and start a job.
2.​ Medium-term (3-5 years):
○​ Complete higher studies.
○​ Save for buying a car or taking a vacation.
○​ Gain work experience in a corporate role.
3.​ Long-term (6-10 years):
○​ Start a new business/venture.
○​ Achieve financial independence.
○​ Plan for future investments like real estate or retirement.

Short-Term Financial Plan (1-2 Years)

1.​ Goal 1: Build an Emergency Fund

○​ Target: Rs. 1.5 lakh (6 months of expenses)
○​ Action: Allocate Rs. 7,500 per month toward building this fund.
○​ Time Frame: 20 months.
2.​ Goal 2: Save for Higher Studies
○​ Target: Rs. 5 lakh for higher education (MBA/specialized course).
○​ Action: Start saving Rs. 7,500 per month for studies.
○​ Time Frame: 5.5 years (with possible loan consideration).
3.​ Job Pursuit and Income Growth
○​ Focus on building professional skills through certifications.
○​ Network with industry professionals for better job prospects.
○​ Ensure savings from income increases as earnings grow.

Medium-Term Financial Plan (3-5 Years)

 1.​ Goal 1: Complete Higher Studies
○​ Action: Use Rs. 5 lakh saved (along with a loan if necessary) for higher studies.
○​ Post-study job: Expect salary growth to Rs. 80,000 per month after studies.
2.​ Goal 2: Save for a Car/Vacation
○​ Target: Rs. 3 lakh for a car or Rs. 1 lakh for a vacation.
○​ Action: After higher studies, increase savings to Rs. 20,000 per month. Allocate Rs.
10,000 per month toward the car/vacation fund.
○​ Time Frame: 2.5 years for a car, 1 year for vacation.
3.​ Invest in Professional Growth
○​ Begin investing in mutual funds (SIPs) with Rs. 5,000 monthly wealth-building
contributions.
○​ Explore job roles that offer growth opportunities and diversify skills.

Long-Term Financial Plan (6-10 Years)

1.​ Goal 1: Start a New Venture

○​ Target: Rs. 15 lakh capital for the business.
○​ Action: Increase savings allocation to Rs. 25,000 per month post-salary growth (after
MBA).
○​ Invest: Use accumulated savings from the medium-term, SIP investments, and
potentially a business loan.
○​ Time Frame: 5 years to accumulate Rs. 15 lakh.
2.​ Goal 2: Financial Independence
○​ Investments: Continue contributing to SIPs, targeting an equity-based portfolio for
long-term wealth creation.
○​ Diversification: Start investing in real estate or other passive income-generating assets
like fixed deposits and bonds.
○​ Retirement Planning: Set aside Rs. 5,000 monthly for long-term retirement savings in
PPF or NPS.
3.​ Goal 3: Work-Life Balance
○​ Balance business activities with lifestyle goals (vacations, hobbies, etc.).
○​ Set a stable income stream from the venture, ensuring personal financial stability.

Key Assumptions:

●​ No major debts were incurred during the process.

●​ Salary growth over the years.
●​ Consistent saving and investment discipline.​