Banking Financial Awareness · Economics

Financial Markets and Instruments

1,985 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

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Window dressing is one of the limitation of financial analysis.

  1. True

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

True. Window dressing a limitation of financial analysis. Window dressing means where the company shows a better financial position of the company than actual. It Is usually done to impress the lenders or to existing investors. 

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Which of the following is not incorporated in Capital Budgeting?

  1. Tax-Effect

  2. Time Value of Money

  3. Required Rate of Return

  4. Rate of Cash Discount
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

Capital budgeting decisions involve huge funds and are long term decisions. As they involve huge costs one wrong decision would have a big effect on the business. The company understands how much tax benefit will the company have after the investment, whether the rate of return is more than the cost of capital and how much is to be paid in terms of present value. All these are taken into account but rate of cash discount is not. 

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Which of the following is not followed while taking Capital budgeting decisions?

  1. Cash flows be calculated on incremental terms

  2. All costs and benefits are measured on cash basis

  3. All accrued costs and revenues be incorporated

  4. All benefits are measured on after-tax basis
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

Capital budgeting is evaluating all the big expenses and cost that the business will incur on a project. They only take into consideration all the cash expenses and revenues and not accrued cost and revenues.

 In capital budgeting cash is more important than profit. All benefits are measured on cash basis, tax is taken into consideration to understand the tax benefit. 

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Which of the following is not true with reference to capital budgeting?

  1. Capital budgeting is related to asset replacement decisions

  2. Cost of capital is equal to minimum required return

  3. Existing investment in a project is not treated as sunk cost

  4. Timing of cash flows is relevant
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

Sunk cost is a cost that cannot be recovered and has been incurred already. Existing investment in a project is treated as a sunk cost as it is incurred in the past and cannot be recovered. 

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Which of the following is not true for capital budgeting?

  1. Sunk costs are ignored

  2. Opportunity costs are excluded

  3. Incremental cash flows are considered

  4. Relevant cash flows are considered
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Capital budgeting decisions involve huge funds and are long term decisions. As they involve huge costs one wrong decision would have a big effect on the business. They include all the potential expenses/costs. It includes opportunity cost, actual cost, incremental and relevant cash flows. It does not include sunk costs.

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Risk in Capital budgeting implies  _____________.

  1. Uncertainty of Cash flows

  2. Probability of Cash flows

  3. Certainty of Cash flows

  4. Variability of Cash flows
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

Risk is the probability of damage, loss or threat. Risk in capital budgeting implies that the decision maker knows the probability of cash flows. Therefore, risk in capital budgeting means uncertainty of cash flows. 

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Feasibility Set Approach to Capital Rationing can be applied in ____________.

  1. Accept-Reject situations

  2. Divisible projects

  3. Mutually Exclusive Projects

  4. None of the Above
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

Feasibility Set Approach to capital Rationing can be applied in Accept-reject situations.  Accept-Reject situations are the situations which the company is not sure about, so conducting a feasibility test would ensure if the project is suitable or not for the company. 

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In case of the indivisible projects, which of the following may not give the optimum result?

  1. Internal Rate of Return

  2. Profitability Index

  3. Feasibility Set Approach

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

Feasibility Set Approach to capital Rationing can be applied in divisible projects. Indivisible projects are the one which can be accepted or rejected wholly. So conducting a feasibility test would ensure if the project is suitable or not for the company. 

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Risk in capital budgeting implies that the decision-maker knows _______ of the cash flows.

  1. Variability

  2. Probability

  3. Certainty

  4. None of the Above
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Risk is the probability of damage, loss or threat. Risk in capital budgeting implies that the decision maker knows the probability of cash flows. The decision maker after analysing the risk will have of fair idea of the cash flows that might arise from the decision that is made. 

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A proposal is not a capital budgeting proposal if it____________.

  1. Is related to fixed assets

  2. Brings long-term benefits

  3. Brings short-term benefits Only

  4. Has very large investment
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

A proposal is not a capital budgeting proposal if it brings short-term benefits only. Capital budgeting decisions involve huge funds and are long term decisions, it benefits the firm in long term. As they involve huge costs one wrong decision would have a big effect on the business.

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Evaluation of capital budgeting proposals is based on cash flows because_____________.

  1. Cash rows are easy to calculate

  2. Cash flows are suggested by SEBI

  3. Cash is more important than profit

  4. None of the above
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

Capital budgeting is based on cash flows because there is discounting and other factors used which can be done only on cash. Moreover, cash can be spent and not profit. Cash is more important than profit as the company has to focus on many costs. As in the long run the company will succeed if it focuses mote on cash flow statement. 

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NPV of a proposal, as calculated under Risk Adjusted Discount Rate(RADR) & Real Certainty Equivalent(CE) Approach will be __________.

  1. Same

  2. Unequal

  3. Both A and B

  4. None of A and B
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

The Risk Adjusted Discount Rate (RADR) and Certainty Equivalent (CE) approaches are different methods for incorporating risk into capital budgeting. They generally yield different NPV results because they adjust for risk in different ways.

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What factors increase the riskiness of  a Capital budgeting Project?

  1. Industry specific risk factors

  2. Competition risk factors

  3. Project specific risk factors

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

The factors that increase riskiness of a capital budgeting project are industry specific risk, competition risk and project risk. Industry specific risk/market risk are the risks that might occur due to change in the industry, competition risks are the risk that can occur because of the competitors strategy and lastlyt project risk are the risk that are associated with the project as whether or not the project will be profitable or not. 

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Risk-aversion of an investor can be measured by______________.

  1. Market Rate of Return

  2. Risk-free Rate of Return

  3. Portfolio Return

  4. None of the above
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

Risk aversion means the tendency of a person to avoid a decision/investment when there is risk involved. Risk aversion is a personal trait of a person. Risk-aversion of an investor cannot be measured by market rate of return, risk free rate of return or portfolio profit. 

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The most commonly used tools for financial analysis are _______________.

  1. Horizontal analysis

  2. Vertical analysis

  3. Ratio analysis

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

Commonly used tools of financial analysis are: Comparative statements, Common size statements, trend analysis, ratio analysis, funds flow analysis, and cash flow analysis.