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 functional area of management financial management nature and significance of management organisation of commerce and management business studies

Which of the following factors dominate the dividend policy?

  1. Ownership considerations

  2. Firm-oriented considerations

  3. Both (a) and (b)

  4. Legal considerations
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Dividend policy is primarily driven by internal factors related to the firm, such as liquidity, profitability, investment opportunities, and growth requirements, collectively known as firm-oriented considerations.

Multiple choice functional area of management financial management nature and significance of management organisation of commerce and management business studies

Which of the following dividend payments lead to a transfer of stock from a speculative class into an investment category?

  1. Regular dividend payments

  2. Stable dividend payments

  3. Irregular dividends

  4. Extra dividends
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Stable dividend payments signal financial health and reliability to the market, which helps attract long-term investors and shifts the perception of the stock from a speculative asset to a stable investment.

Multiple choice functional area of management financial management nature and significance of management organisation of commerce and management business studies

Mutually exclusive projects can be more accurately ranked as per:

  1. Internal rate of return method

  2. Net Present Value Method

  3. Modified Internal Rate of Returns Method

  4. Accounting or Average Rate of Return Method
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Projects with a positive $NPV$ are expected to increase the value of the firm. Thus, the $NPV$ decision rule specifies that all independent projects with a positive $NPV$ should be accepted. When choosing among mutually exclusive projects, the project with the largest (positive) $NPV$ should be selected.

Multiple choice functional area of management financial management nature and significance of management organisation of commerce and management business studies

_______comprises two decisions, viz., (i) Financial Planning; and (ii) Capital structure decision.

  1. Investment decisions

  2. Financing decisions.

  3. Dividend decisions

  4. All of above
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation
Financial decision is yet another important function which a financial manger must perform. It is important to make wise decisions about when, where and how should a business acquire funds. Funds can be acquired through many ways and channels. Broadly speaking a correct ratio of an equity and debt has to be maintained. This mix of equity capital and debt is known as a firm’s capital structure.

A firm tends to benefit most when the market value of a company’s share maximizes this not only is a sign of growth for the firm but also maximizes shareholders wealth. On the other hand the use of debt affects the risk and return of a shareholder. It is more risky though it may increase the return on equity funds.

A sound financial structure is said to be one which aims at maximizing shareholders return with minimum risk. In such a scenario the market value of the firm will maximize and hence an optimum capital structure would be achieved. Other than equity and debt there are several other tools which are used in deciding a firm capital structure.
Multiple choice functional area of management financial management nature and significance of management organisation of commerce and management business studies

Financial Management is concerned with -
A.Investment decisions.
B. Labour turnover decisions.
C. Financing decisions.
D.Personnel policy decisions.
E.Dividend decisions.
Select the correct answer from the options given below.

  1. D B & C

  2. A C B & E

  3. A and C only

  4. E C & A
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation
  1. Investment decisions includes investment in fixed assets (called as capital budgeting). Investment in current assets are also a part of investment decisions called as working capital decisions.
  2. Financial decisions - They relate to the raising of finance from various resources which will depend upon decision on type of source, period of financing, cost of financing and the returns thereby.
  3. Dividend decision - The finance manager has to take decision with regards to the net profit distribution. Net profits are generally divided into two:
  • Dividend for shareholders- Dividend and the rate of it has to be decided.
  • Retained profits- Amount of retained profits has to be finalized which will depend upon expansion and diversification plans of the enterprise.
Multiple choice functional area of management financial management nature and significance of management organisation of commerce and management business studies

Which of the following is an aspect of financial management?

  1. The quantum of current assets as well as its break-up into cash, inventories and receivables

  2. The size as well as the composition of fixed assets of the business

  3. The amount of long-term and short-term financing to be used

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

The financial management aspect of planning involves accurately forecasting the company's revenues, expenses, and resulting net profit. The business owner uses the budget, sometimes called a forecast, as a tool to manage the company.

The aspects are:
1. Investment Decision
2. Financing Decision
3. Dividend Policy Decision

Multiple choice functional area of management financial management nature and significance of management organisation of commerce and management business studies

Short term investment decisions are also called as __________ decisions. 

  1. capital budgeting

  2. wealth maximization

  3. working capital

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

Working capital is the amount of liquid assets which an organization has at its disposal. Working capital investments are required to pay for unexpected and unplanned expenses to build a business and meet the business’s short-term duties and obligations. 

Multiple choice functional area of management financial management nature and significance of management organisation of commerce and management business studies

The _________ decision relates to how the firm's funds are invested in different assets.

  1. profit

  2. invetment

  3. financing

  4. dividend
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Investment Decision relates to the determination of total amount of assets to be held in the firm, the composition of these assets and the business risk of the firm as perceived by its investors. It is the most important financial decision. Since funds involve cost and are available in a limited quantity, its proper utilization is very necessary to achieve the goal of wealth maximization.

Investment decisions includes investment in fixed assets (called as capital budgeting). Investment in current assets are also a part of investment decisions called as working capital decisions.

Multiple choice functional area of management financial management nature and significance of management organisation of commerce and management business studies

Which of the following is not a broad decisions in financial decision-making?

  1. Investment decison

  2. Cost decision

  3. Financing decision

  4. Dividend decision
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation
  1. Investment decisions includes investment in fixed assets (called as capital budgeting). Investment in current assets are also a part of investment decisions called as working capital decisions.
  2. Financial decisions - They relate to the raising of finance from various resources which will depend upon decision on type of source, period of financing, cost of financing and the returns thereby.
  3. Dividend decision - The finance manager has to take decision with regards to the net profit distribution. Net profits are generally divided into two:
  • Dividend for shareholders- Dividend and the rate of it has to be decided.
  • Retained profits- Amount of retained profits has to be finalized which will depend upon expansion and diversification plans of the enterprise.
Multiple choice functional area of management financial management nature and significance of management organisation of commerce and management business studies

Financial management aims at _________ the cost of funds procured, keeping the risk under control and achieving effective deployment of such funds.

  1. increasing

  2. equaling

  3. reducing

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

Financial Management is concerned with optimal procurement as well as usage of finance.

Financial Management aims at reducing the cost of funds procured, keeping the risk under control and achieving effective deployment of such funds. It also aims at ensuring availability of enough funds whenever required as well as avoiding idle finance.

Multiple choice functional area of management financial management nature and significance of management organisation of commerce and management business studies

_________ term investment decision are concerned with the decisions about the levels of cash, inventories and debtors.

  1. Long

  2. Short

  3. Medium

  4. Both a and c
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation
The investment made in the current assets or short term assets is termed as Working Capital Management. The working capital management deals with the management of current assets that are highly liquid in nature.
The investment decision in short-term assets is crucial for an organization as a short term survival is necessary for the long-term success. Through working capital management, a firm tries to maintain a trade-off between the profitability and the liquidity.
Short-term investments are part of the account in the current assets section of a company's balance sheet. This account contains any investments that a company has made that is expected to be converted into cash within one year. 
Multiple choice functional area of management financial management nature and significance of management organisation of commerce and management business studies

Under the risk factor of financing decision, the risk associated with different sources is _________.

  1. same

  2. different

  3. higher

  4. lower
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

The primary goal of both investment and financing decisions is to maximize shareholder value. Investment decisions revolve around how to best allocate capital to maximize their value. Financing decisions revolve around how to pay for investments and expenses. Companies can use existing capital, borrow, or sell equity.

Risk factor for financing decision, the risk associated with different sources is different because every source is different with diff interest, payback period,profitability index etc.

Multiple choice functional area of management financial management nature and significance of management organisation of commerce and management business studies

'Financial management is the activity concerned with planning, raising, controlling and administering of funds used in the business' are the words of ________.

  1. J. F. Brandley

  2. Guthmann and Dougall

  3. Massi

  4. Howard and Upton
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation
According to the Guthmann and Dougall, “Business finance can broadly be defined as the activity concerned with planning, raising, controlling, administering of the funds used in the business”.
Multiple choice functional area of management financial management nature and significance of management organisation of commerce and management business studies

Which of the following is False

  1. Financing Decision comprises of Financial Planning Capital Structure Decision

  2. Investment Decision comprises of Fixed Capital Management and Working Capital Management

  3. Dividend Decision includes Dividend Payment Policy Decision

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

Financing Decisions. Decisions concerning the liabilities and stockholders' equity side of the firm's balance sheet, such as a decision to issue bonds.

The Investment Decision relates to the decision made by the investors or the top level management with respect to the number of funds to be deployed in the investment opportunities.
The Dividend decision refers to the policy that the management formulates in regard to earnings for distribution as dividends among shareholders. The decision, in Corporate finance, is a decision made by the directors of a company about the amount and timing of any cash payments made to the company's stockholders.

Multiple choice functional area of management financial management nature and significance of management organisation of commerce and management business studies

__________ comprises two decisions,viz.,
(i) Financial Planning and
(ii) Capital structure decision.

  1. Investment decisions

  2. Financing decisions

  3. Dividend decisions

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

The Financing Decision is yet another crucial decision made by the financial manager relating to the financing-mix of an organization. It is concerned with the borrowing and allocation of funds required for the investment decisions.

The financing decision involves two sources from where the funds can be raised: using a company’s own money, such as share capital, retained earnings or borrowing funds from the outside in the form debenture, loan, bond, etc.

The objective of financial decision is to maintain an optimum capital structure, i.e. a proper mix of debt and equity, to ensure the trade-off between the risk and return to the shareholders.