Banking Financial Awareness · Economics

Financial Markets and Instruments

1,955 Questions

Financial markets and instruments cover mutual funds, risk management, portfolio optimization, and investment strategies. These topics are critical for banking and financial awareness sections in competitive exams. Practice these questions to understand operational risk, asset valuation, and market regulations.

Portfolio optimizationOperational risk managementMutual funds valuationInvestment income typesHedging strategies

Financial Markets and Instruments Questions

Multiple choice long-term and short-term finance sources of business finance business studies

Short-term planning covers short-term financial plan called budget.

  1. True

  2. False
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

Companies develop short-term financial plans to meet budget and investment goals within one fiscal year. These plans have a higher degree of certainty compared to long-term plans. Short-term plans often are amended as financial and investment goals change. Businesses and individuals alike use short-term plans to manage short-term cash deficits

Multiple choice long-term and short-term finance sources of business finance business studies

Preference shares are helpful for raising funds for a long period since they do not create any charge over the assets.

  1. True

  2. False
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

The issue of preference shares does not restrict the company's borrowing power, at least in the sense that preference share capital is not secured against assets in the business.

Therefore, it is beneficial for raising funds for a long period since they do not create any charge over the assets.

Multiple choice long-term and short-term finance sources of business finance business studies

Factor(s) determining long-term finance include(s) ________.

  1. nature of business

  2. nature of goods produced

  3. technology used

  4. all of the above
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation
Nature of Business:
The nature and character of a business determines the amount of fixed capital. A manufacturing company requires land, building, machines etc. So it has to invest a large amount of capital for a long period. But a trading concern dealing in, say, washing machines will require a smaller amount of long term fund because it does not have to buy building or machines.
Nature of goods produced:
If a business is engaged in manufacturing small and simple articles it will require a smaller amount of fixed capital as compared to one manufacturing heavy machines or heavy consumer items like cars, refrigerators etc. which will require more fixed capital.

Technology used:

In heavy industries like steel the fixed capital investment is larger than in the case of a business producing plastic jars using simple technology or producing goods using labour intensive technique.

Multiple choice long-term and short-term finance sources of business finance business studies

A long-term investment decision is also called a Capital Budgeting decision.

  1. True

  2. False
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

A long term investment decision is also called a capital budgeting decision. It involves committing the finance on a long term basis, e.g. making investment in a new machine to replace an existing one or acquiring a new fixed assets or opening a new branch etc.

These decisions are very crucial for any business.

Multiple choice long-term and short-term finance sources of business finance business studies

Which of the following is/are the purposes of short term finance?

  1. It facilitates the smooth running of business operations by meeting day to day financial requirements.

  2. It enables firms to hold stock of raw materials and finished product.

  3. To increase the volume of production at a short notice.

  4. All of the above
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

The short-term financial needs of the companies are generally met from the following sources:

  1. Trade Credit.
  2. Consumer Credit.
  3. Installment Credit.
  4. Account Receivable Financing.
  5. Bank Credit

Importance of short term finance.
Other Source businesses depend on short-term finance to continue operations through economic downturns. Without short-term financing, new businesses might never be launched, or growth and expansion might be compromised. Businesses might rely on access to short-term capital in order to obtain equipment, although in certain similar instances long-term financing might apply instead. Short-term loans also facilitate international trade and support commerce between nations.

Multiple choice long-term and short-term finance sources of business finance business studies

Which of the following is/are pitfall(s) and trap(s) to be on the lookout for when dealing with short term finance companies?

  1. Hidden Fees and charges

  2. Upfront fees

  3. Misleading time frames

  4. All of the above
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

Many lenders will advertise a low interest rate but will have a huge application fee, valuation fee, documentation fee or commitment fee attached to the loan which ends up making it very expensive. Many lenders will promise that they can fund within a short period of time but end up pushing back deadlines and blame the client when in fact they have never been able to do what they promised.

Multiple choice long-term and short-term finance sources of business finance business studies

Inadequacy of short-term funds may even lead to closure of business.

  1. True

  2. False
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

Inadequate working capital may be the major causes for closing down the business organization. Due to shortage of working capital, raw materials can not be purchased on time and payment of labor and other expenses can not be made on time. Due to this companies financial reputation will go down and on the same time business cannot run properly.

Multiple choice long-term and short-term finance sources of business finance business studies

The costliest of long-term sources of finance is __________________.

  1. Preference share capital

  2. Retained earnings

  3. Equity share capital

  4. Debentures

  5. Capital raised through private placement.
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

Preference Share is the Costliest Long - term Source of Finance. The costliest long term source of finance is Preference share capital or preferred stock capital. It is the source of the finance. When it is compared to other source of long term sources.

Multiple choice long-term and short-term finance sources of business finance business studies

Decisions for raising funds from long-term sources are called ___________.

  1. capital structure decision

  2. investment decisions

  3. dividend decisions

  4. investment of funds
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

One of the important decisions under financial management relates to the financing pattern or the proportion of the use of different sources in raising funds.

Capital structure refers to the mix between owners and borrowed funds.
Decisions for raising funds from long-term sources are part of capital structure decisions.

Multiple choice long-term and short-term finance sources of business finance business studies

Of the total ________ term finance, the proportions to be raised by way of debt and/or equity is also a financial management decision.

  1. short

  2. medium

  3. long

  4. both a and b
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

Financial management, among others, involves decision about the proportion of long-term and short term funds. An organisation wanting to have more liquid assets would raise relatively more amount on a long-term basis. There is a choice between liquidity and profitability. The underlying assumption here is that current liabilities cost less than long term liabilities.

Multiple choice long-term and short-term finance sources of business finance business studies

Which of the following are factors affecting the choice of source of funds?

  1. Cost

  2. Purpose and time period

  3. Risk profile

  4. All of the above
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

A business cannot function smoothly unless it has adequate funds are made available to them. The need of funds arises from the stage when an entrepreneur decides to start a business. The factors affecting the choice of sources of funds are the cost that it will incur to raise funds, the purpose and the duration for which the funds are to be raised and the risk that a company has to bear to raise those funds.

Multiple choice book keeping and accountancy analysis of financial statements preparation of common size statements comparative statements and common-size statements tools of financial statement analysis - comparative and common-size statements

Which of the following would best explain a situation where the ratio of (net income/Total equity) of a firm is higher than the industry average, while the ratio of (net income/Total assets) is lower than the industry average?

  1. The firm's net profit margin is higher than the industry average

  2. The firm's assets turnover is higher than the industry average

  3. The firm's equity multiplier must be lower than the industry average

  4. The firm's debt ratio is higher than the industry average
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

The DuPont identity shows that Return on Equity (ROE) equals Return on Assets (ROA) multiplied by the equity multiplier. If ROE is higher than the industry average while ROA is lower, the firm must have a significantly higher equity multiplier, which is driven by higher financial leverage (debt).

Multiple choice book keeping and accountancy analysis of financial statements preparation of common size statements comparative statements and common-size statements tools of financial statement analysis - comparative and common-size statements

Common size financial statements make it easier to compare firms ____________.

  1. of different sizes

  2. in different industries

  3. with different degree of leverage

  4. that use different inventory valuation methods (FIFO Vs. LIFO)
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

Common size financial statements make it easier to compare firms of different sizes as they show all items as percentages and not in absolute figures which provides better comparison. 

Multiple choice accountancy analysis of financial statements preparation of common size statements comparative statements and common-size statements tools of financial statement analysis - comparative and common-size statements

Most common approach for analysing the capital structure of a firm is_______.

  1. Ration Analysis

  2. Cash Flow Analysis

  3. Comparative Analysis

  4. Leverage Analysis
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

The most common approach for analyzing the capital structure of a firm is Comparative analysis. Comparative analysis is comparison of various ratios, balances, statements of different years of the company. 

It is basically done to understand the trend off the company. Hence, its also known as trend analysis.  

Multiple choice business organisation introduction to financial markets concept of financial market meaning and definition of financial market concepts and functions of financial markets

The process by which allocation of funds is done is called ____.

  1. financial intermediation

  2. financial integration

  3. financial disinvestment

  4. financial leveraging
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

The process by which allocation of funds is done is called financial intermediation. This process helps to channelize funds from the borrowers to lenders. Financial intermediation generally cause reduction in transaction cost. This process is mainly performed by the financial intermediaries, such as stockbroker, commercial bank, investment bank, etc.