ITFP WORKBOOK

101. You wish to save for your daughter‘s education, the present cost of which is around Rs. 2,40,000 and is expected to grow every year at the rate of 7%. If your daughter is 10 years old and is likely to be in the college in another 8 years‘ time, what is the amount of investment to be made if it is likely to earn 11% return? a) 178936 b) 179836 c) 173896 d) 178930 102. While choosing a product for your client which involves investment predominantly in Government securities you make the following remarks: 1. The portfolio will have low risk. 2. The rate of return earned by the fund in the past is 8%. In the light of the AFP code of ethics, which of the above statements are incorrect as it is violative? a) Statement 1 b) Statement 2 c) Both d) None 103. If you are managing a balanced portfolio and frequent changes are made in allocation of assets, 104. it will result in, a) Increase in transaction costs 105. b) Decrease in transaction costs A person holds exposure in a particular equity and fears of downward slide in its value) To protect his investment he has to enter into: a) Buy call option b) Sell call option c) Buy put option d) Sell put option The difference between Estate Planning of a salaried employee and self employed person: a) Both have to provide for dependents b) Have to write wills c) Take insurance policies d) Employee benefits 101

Suggested Answers and Solutions 1. b) as the rest of the options can be eliminated: Disclaimers only limit liability; for liability Purposes, recommendation may be considered part of advice; Nobody, including an advisor can predict economic changes with certainty. 2. D) All the professions require licenses/certificates from SEBI for broker and sub-broker and From IRDA for insurance agent. 3. D) since you have to match products to client needs. 4. D) Refer indicators for each stage of economic cycle from Topic 6 of Module 1 (after a trough (downturn or depression) in all economic indicators, this period marks a recovery (upturn or upswing) in all economic indicators). 5. D) since other factors may influence short unemployment is unlikely to affect short term Interest rate movements while the rate of long term interest rates. 6. B) by definition of fiscal policy 7. c) since it is a widely used measure of the increase/decrease in prices in India. 8. B) as interest rates are determined by the demand and supply of money. 9. A) By definition of term insurance which ispure risk cover with no savings element 10. A) All the others would give reasonable returns only in the long term 11. c) Since access to broad asset portfolio would automatically reduce risk in the portfolio 12. D) All the Skills are required 13. d) Appointment of special power of attorney, if any, would have been done by the person who wrote the will, when alive 14. B) Deductible loan implies tax deductible loan, therefore after tax interest cost on the loan will be lower, however in II we do not know the rate of taxation to be able to arrive at a decision 15 a) since c) needs to be done much earlier and comprehensive financial planning goes much beyond just recommending investments 16. A) All the above are steps in the financial planning process as defined by the CFP Board of Standards 17. c) In the case of limited financial planning advice, a statement of advice is doubly important as Limited advice entails special mention to avoid legal liability 18. c) A professional financial planner may also provide limited advice 19. c) Commission is a legitimate form of remuneration for financial planners 20. D) as described in the text of Module 1 21. D) as described in the text of Module 1 22. B) since at present, the only regulatory body for financial planners is the AFP. 23. D) as mentioned in the AFP Rules of Professional Conduct 24. E) Disclosure also needs to be made each time there is a change in the terms/conditions of 102

25. c) Engagement Because, it re-assures most people and is also a smart marketing gimmick for the 26. D) Investments in 27. c) Your business 28. A) Not b) as it should be to prevent harm to your clients 29. A) As given in the text (trustworthy). 30. A) As Nominal interest rate = Real interest rate + Inflation rate. As different legislation usually affects different sectors 31. c) Hirer is one who hires and lessor is one who leases. Under tax law, ownership changes 32. B) hands 33. c) in hiring but not in leasing 34. c) As discount rate = 1/(1+r) The effective yield is coupon/mkt. Price=Rs. 100/1250=8% 35. c) By definition a As the objective is to add value to the client and not impose an unnecessary system of cash flow planning on him/her 36. B) By definition a 2-in-1 account is a combination of a savings and a term deposit (and pays 37. D) rate 38. c) higher-than a SB account). 39. A) = Inflation rate/(1-tax rate) = 3/(1-0.4)= 5% Shares represent ownership rights in a company and in case of liquidation, shareholders 40. A) are the last to be paid off after all secured and unsecured creditors. 41. B) In fact for more complicated cases, you may even refer them to a tax consultant 42. D) Progressive refers to increasing tax rates with increasing income and regressive refers 43. D) to decreasing tax rates for increasing income) 44. B) By definition equity shares held for more than 12 months are long term capital assets. 45. c) 46. B) as given in the AFP‘s Rules of professional conduct. 47. c) as given in the AFP‘s Rules of Professional Conduct as given in the AFP‘s Rules of Professional Conduct 48. D) As defined in the regulation for brokers and sub-brokers issued by SEBI 49. B) as prescribed in the IRDA regulations for insurance agents 50. B) Though discouraged by sales experts, tele selling is not prohibited by IRDA, also 51. A) insurance Agent may work for one life insurance and one general insurance company. as defined in the text. 52. d) as defined in the Act Use the effective interest rate function on your calculator or the formula: i eff = ((1+i/n)n) – 1where i eff – effective interest rate i – nominal interest rate n – the number of compounding periods Find out the present value of all the options and add to it the upfront payment for each Option respectively. The lowest value will be most favourable since it involves the lowest outgo. 103

53. D) From the AFP Rules of professional conduct 54. A) From the AFP Rules of professional conduct 55. B) From the AFP Rules of professional conduct 56. A) since you have obviously invested for the long term based on his stage of life. 57. A) since you would always act in the interest of the client 58. B) seems the only adult thing to do! 59. D) Find out the present value of all the options and whichever is highest is the best option. n=12, i=1% For a)=50,000 b)=53246.95 c)=53398.38 d)= 53489.23 60. D) you would do d) much earlier. 61. A) this is the primary area of work while implementing the plan. 62. D) this is the least relevant 63. D) Bus. Expenses borne by employer are his own concern 64. E) some exposure to equity is requted 65. c) His life insurance needs (in the unfortunate event that he passes away) for his depenedants are greatest. 66. b) Since he has nominal income, in the case of any unfortunate event, his first priority will be Protection of income) 67. a) Try one transaction in each case and see if it meets the ratio. If the first transaction fits, the second transaction to be tried) 68. b) Opportunity cost is the rate at which you would alternatively have been able to invest. 69. c) = 180000/50000= 3.6 for 8 years, therefore annualised rate of return = 3.6^(1/8) = 1.1736 – 70. b) 1 = 0.1736, therefore return = 17.36% PV of 2nd option is PMT= 100,000, n=20, i=7%, find PV = 1059401.42 and compared 71. a) with 1000000, 2nd option is better You need to calculate the discount rate, since PV of asset A and cash flows 72. d) corresponding are given, you can calculate the discount rate to be 10%, at 10%, the 73. a) other two PVs are lower 74. d) As 72/8=9 75. b) The term structure of interest rates is simply another name for the yield curve 76. d) Self-explanatory 77. a) As debt has lower risk, it implies lower return for the investor or lower cost for the firm By definition of convertible debt 78. a) Shares are an ownership in the firm and are always paid last, Sr. bond holders are paid before Jr. bond holders. 79. c) As higher variability implies higher risk and demand for higher returns for such risk is 1.99 Consistent with risk aversion PV of the contract is 7.29 Mn., therefore required PV is 8.29 Mn., the annuity due will be of 80. b) Mn. i.e) PMT at 10% for 5 years for a PV of 8.29 with payments coming at the beginning of the year Core industries are always affected more, faster and earlier, similarly they are also the first to recover. 104

81. b) Systematic risk is non-diversifiable, market risk of which beta is a measure while Unsystematic risk is diversifiable, firm specific risk 82. a) By the law of supply and demand in micro-economics which states that with increase in price, demand decreases, with decrease in price, demand increases. 83. b) By definition 84. c) Insurance is distinct from speculation as there is no possibility of gain, only loss or no loss 85. c) Cash flows are always after tax unless mentioned otherwise) Use the IRR function for the following cash flows -9200, 600, 2300, 2200, 6800, 9500. 86. d) (1) is true by definition, (2) is true because IRR has already been calculated and IRR is the Discount rate at which NPV is 0 (3) is true because reinvestment at IRR is an 87. d) assumption of IRR. 88. d) By definition 89. e) Due to diversification, risk reduces 90. a) By definition 91. d) By definition 92. a) By definition ADRs may be issued by Indian cos. to raise capital in the U.S. Aggregate demand is a function of demand for capital goods and disposable income 93 b) which will go to buy consumer goods. 94. d) It is a use asset as opposed to an investment asset, also it is an cash outflow whose 95. c) value is Discretionary according to client needs 96. b) By definition 97. b) Calculate the Rate of interest for PV=Rs. -4,000, FV=Rs. 4,985 for 7 periods 98. b) Self explanatory 99. a) From the text 100. a) By definition 101. a) The sum of 28,093.61 and 26768.14 It is a fiscal measure 102. b) Cost of daughter ‘s education is FV of 240000 at 7% for 8 years, investment required is 103. a) the present value of the cost of education at 11% for 8 periods 104. a) Past performance is no definitive indicator of future performance 105. d) Self explanatory In case of slide in value, below exercise price of call, you can exercise call option Self explanatory 105

Mock Test 1 1. The new Senior Citizens Savings Scheme offers % Interest. (1 Mark) a. 8.5% b. 8.7% c. 9.25% d. 8.75% 2. The maximum amount that can be invested in Public Provident Fund is Rs. (1 Mark) a. 150000 b. 70000 c. 100000 d. 90000 3. is regulated by the Reserve bank of India. A. Bank Deposit Rates; B. Bank Lending Rates; C. Certificate of Deposit Rates (1 Mark) a. A b. B c. C d. None 4. is / are governed by SEBI. (1 Mark) a. Mutual Funds b. Stock Brokers c. Portfolio Managers d. All of the above 5. A person can be qualified as an Associate Financial Planner after he/she passes modules of the CFP Certification Course. (1 Mark) a. 6 b. 1 c. 3 6. The first step of the financial planning process is . (1 Mark) a. Evaluating the various Alternatives b. Data gathering and goal setting c. Establishing the Client Planner relationship d. Plan Review 7. How many years will it take for a sum of Rs. 10000 to double if the rate of return is 9% p.a.? (2 Mark) 106

a. 9.5 b. 8.5 c. 10 d. 9 e. 8 8. If the post tax rate of return on an investment is 8% and the inflation rate is 5% the real rate of return is (2 Marks) a. 3.5% b. 3.0% c. 2.86% d. -3.0% e. 2.74% 9. Seema and Arun are co-applicants of a mortgaged house. They are on the verge of a divorce. The Housing Finance Company will . (2 Mark) a. not interfere as long as the EMIs are being paid on time b. repossess the house after divorce c. insist on the house being transferred to one of them d. mediate reconciliation between the couple. e. Increase the interest rate in order to compensate for the increased risk 10. Domestic GOI bond holders (holding them up to Maturity) have to deal with risk. (2 Mark) a. Volatility b. Default c. Inflation d. Price e. Currency 11. Refinancing is . (2 Marks) a. Borrowing at lower cost in order to pay off higher cost debt b. Repaying debt by selling off assets c. Lending at a higher rate of interest\\ d. Securitizing your receivables e. None of the above 12. Asset Allocation is not a text book Asset Allocation Model. (2 Marks) a. Tactical b. Discretionary c. Strategic d. All of the above e. None of the above 107

13. Jack and Jill approach you to be their Financial Planner their funds are limited and their needs are many. Some of their needs are: a) To start an investment plan for funding their childs education; b) To set up a Testamentary Trust for their child; c) To set up a contingency fund amounting to 3 months of living expenses d) To start saving for retirement; e) To purchase life and health insurance. Arrange these needs in the descending order of priority. (2 Marks) a. c e a d b b. d e b c a c. b d e a c d. b e a c d 14. For a nominal interest rate of 6% payable monthly, quarterly, and semi-annually, the effective rates Respectively would be . (2 Marks) a. 6.04, 6.02, 6.01 b. 6.16, 6.13, 6.09 c. 6.10, 6.07, 6.03 d. 6.11, 6.08, 6.06 15. A 10 year 9 % Bond (Face Value of Rs. 100, interest payable annually) maturing 3 years from today is Available at a YTM of 5.8%. Therefore the current price is . (2 Marks) a. 112.50 b. 104.10 c. 108.59 d. 102.00 16. Sanjeev invests Rs. 5000 in a Bank Deposit today @ 8% p.a compounded monthly.. He hopes that this investment will enable him to fund his college education (estimated to cost Rs. 9000) which commences after 4 years. What will be the value of this investment in four years? (4 Marks) a. 6802 b. 6870 c. 6878 d. 6925 17. Sudha invests Rs. 5000 per year (at the beginning of each year) for 5 years @ 5% p.a. in a bank deposit. She then withdraws the accumulated sum over a period of 3 equal annual installments. What is the value of the deposit at the end of 5 years and the quantum of withdrawal each year? (4 Marks) a. 28505, 9954 b. 29010, 10653 c. 29568, 10653 d. 29010, 10042 108

18. Amar wants to purchase a Car 5 years from now. His investments are currently worth Rs. 50,000/- and he intends to contribute Rs. 10,000/- at the beginning of every six months period to fund his purchase. Assuming that the annual investment rate of return is 8% compounded semi annually, what will be the value of the investment in five years time? (4 Marks) a. 1,98,876 b. 1,95,555 c. 1,97,240 19. Neeta wants to accumulate Rs. 1, 50,000 in three years time for a one month trip to the USA. Assuming she can get an 8% annual return on her investments, compounded quarterly, how much must she invest today in order to achieve her goal? (4 Marks) a. 117591 b. 119487 c. 118274 20. John has estimated that the following will be his outgoings over the next few years: (4 Marks) End of Year Cash Outflow 1st Rs.10000 2nd Rs.15000 3rd Rs.12000 4th Rs.13500 5th Rs.11000 If John wants to cater to these cash outflows, how much should he have today, assuming an annual rate of return of 5%? (4 Marks) a. 54126 b. 53220 c. 52483 d. 50483 21. Mohan invested Rs. 420000 for 7 years @ 7% where it was compounded annually for the first 5 years and quarterly for the last 2 years. What did he receive on maturity? (4 Marks) a. 676774 b. 776774 c. 931095 d. 609870 109

SOLUTIONS 1. b 8.7% (As on 01/01/2019). (Interest rates change quarterly). 2. a. 150000 3. d. None 4. d. All of the above 5. b. 1 6. c. Establishing the Client Planner relationship 7. e. 8 8. c. Working Note: Use Rule of 72 i.e. r = 72/n Therefore, n = 8 years 2.86% 9. a. Working Note: Inflation adjusted return: (1+r/1+i).1; Therefore, (1+0.08/1+0.05).1 10. c. =2.86% 11. a. Not interfere as long as the EMIs are being paid on time 12. b. Inflation 13. a. Borrowing at lower cost in order to pay off higher cost debt 14. b. Discretionary ceadb 15. c. 6.16, 6.13, 6.09 16. c. Working Note: Use .Future Value. Function to get the rates. For monthly compounding: If PV=Re.1 i=6%/12 n = 1*12 Therefore FV = 1.0616 and therefore rate = 6.16%. Similar 17. b. calculations for quarterly and semi annual com- pounding. 108.59 18. a. Working Note: Use YTM Function to get the price. 6878 19. c. Working Note: Use Future Value Function where PV = Rs.5000; r = 8%/12; n = 48; Therefore, FV=Rs. 6878/- 20. b. 29010, 10653 Working Note: Use Future Value function to get the value of deposit at the end of 5 years. PMT = Rs.5000 i= 5% n = 5 years Future Value = Rs.29010. Then Use PMT Function to find the annual withdrawal where PV = Rs.29010 r = 5% n = 3 therefore PMT = Rs. 10656. 1,98,876 Working Note: PV = Rs.50,000 Rate of Return = 8%/2 = 4%; No. of compounding periods = 10; Type of Annuity: Immediate; Annuity Amount = Rs.10,000;Therefore the Future Value at the end of five years = Rs.1,98,875 118274 Working Note: PV = To be found Rate of Return = 8%/4 = 2%; No. of compounding periods = 12; Future Value at the end of three years = Rs.1, 50,000/-; Therefore the amount to be invested today is Rs. 118273.98 53220 Working Note: We have to find out the Net Present Value of these cash outflows. Using the NPV Formula; The Amount he should have today amounts to Rs. 53220.57 110

21. a. 676774 Working Note: Use FV Function; Stage I: PV = Rs. . 420000; r = 7%; n = 5 years; Therefore FV= Rs. 589072; StageII: PV = Rs. . 589072; I = (7/100)/4; n = 8 quarters; Therefore FV = Rs. 676774 111

Mock Test II Instructions to candidates a) There are four alternatives for each question b) Tick the answer which you feel is closest to the correct answer c) Each Question carries one mark 1. Non-repayment of deposit on maturity a) is not admissible as a complaint under the Consumer Protection Act b) is a deficiency in service under the Consumer Protection Act c) can be addressed to the Department of Company Affairs d) can be addressed to RBI 2. A contract with a minor b) is absolutely void a) is voidable at the option of either party d) None of the above c) may be admissible in special cases 3. A contract may be discharged by b) impossibility of performance a) performance d) All of the above c) breach 4. Mr. X plans to invest Rs. 10,000 today for a period of 4 years. If interest rate is 10% p.a., how much income per year should he receive to recover his investment? a) Rs. 3,155 b) Rs. 2,500 c) Rs. 2,750 d) None of the above 5. The AMC of a mutual fund reports to b) AMFI a) the sponsor d) The trustee company c) SEBI 6. An investor expects a perpetual sum of Rs. 50,000 annually from his investment. What is the present value of this perpetuity if interest rate is 10% p.a? a) Rs. 15 lakh b) Rs. 5 lakh c) Rs. 10 lakh d) None of the above 7. The compound value of Rs. 1,000 after two years interest rate being 12% p.a. compounded continuously is a) Rs. 1271 b) Rs. 1254 c) Rs. 1262 d) None of the above 112

8. Ten years from now, Mr. X will start receiving a pension of Rs. 3,000 a year. The payment will continue for 16 years. If interest rate is 10%, what is the worth of the premium now? a) Rs. 10,854 b) Rs. 9,954 c) Rs. 8,744 d) None of the above 9. The NAV of a fund is based on b) accrual basis a) cash basis d) none of the above c) Income basis 10. A combination of two or more mortgage types is called a a) Usufructuary mortgage b) equitable mortgage c) anomalous mortgage d) none of the above 11. If the NPV of buy alternative is positive and NPV of incremental lease effect is negative, then the asset should be a) leased b) bought c) neither leased nor bought d) (incomplete information) 12 While considering the lease vs. buy decision, the incremental lease cash flow should be discounted at a discount rate which is a) higher than buy alternative b) lower than buy alternative c) same as with buy alternative d) could be any of the above 13. For the rural sector, the refinancing arm is primarily a) RBI b) Regional rural banks Nabard c) Commercial banks d) 14. In hire-purchase, ownership of assets passes on to hirer a) on commencement of the hire-purchase agreement b) on completion of installments c) on cash down payment d) none of the above 15. Entire hire-purchase installment is tax deductible as an expense a) The above statement is true b) The above statement is false c) Only the interest expense is tax deductible d) b) and c) 16. An emergency fund could be kept in the form of a) gold and silver b) Saving bank account All of the above c) Fixed deposits d) 17. Consumer credit is prompted by b) contingency d) All of the above a) consumerism c) children‘s education 113

18. Liquidity is needed b) to ensure smooth running of day to day life a) to avail discounts d) all of the above c) to ensure peace of life 19. The yield to maturity of a bond may also be called its a) interest rate b) NPV c) IRR d) None of the above 20. Deflation is a) a boon b) good for developing economies c) a phenomenon which has a number of negative aspects d) good for developed economies 21. A probate is a) a special type of trust b) joint trust Distribution of estateundercourt c) A trust formed under the Indian Trusts Act d) supervision 22. The minimum number of members of a society are 10 7 a) no minimum is prescribed b) c) 20 d) 23. Market surveillance activities of SEBI are mainly concerned with a) Merchant bankers b) Erring companies c) Stock exchanges d) Department of Company Affairs 24. A small depositor is defined under the Companies Act as one who a) Deposits less than Rs. 50,000 in a year b) Deposits less than Rs. 50,000 in the last two years c) Deposits less than Rs. 20,000 in a year d) Deposits less than Rs. 10,000 in each of the last two years 25. Fiduciary relationship requires b) a written agreement a) the use of the word trust d) none of the above c) a constructive trusteeship 26. If a planner does not receive sufficient and relevant information from a client he/she should: a) terminate the relationship b) give restricted (limited) advice c) go ahead but give a disclaimer disclaiming all responsibility d) either a or b 114

27. 1)Investment experience, 2) Investment time horizon 3)concern for liquidity/flexibility are all examples of qualitative information about a client. a) True b) False c) Only 1) and 3) are examples d) None of them are examples 28. It is best to start a data gathering client interview with a) qualitative details b) client‘s finances Quantitative information c) planner‘s fees details d) 29. Which of the following is true ? a) Needs take precedence over wants b) Needs are the same as wants c) Financial planning addresses both needs and wants d) a and c 30. A financial planner should a) confine himself strictly to the client‘s brief b) point out all flaws in a client‘s financial position that he may notice c) not agree to providing limited or restricted advice d) always provide comprehensive financial planning advice 31. The client questionnaire records quantitative data and record/s qualitative data. a) the planner‘s mind b) the same client questionnaire c) file notes d) a separate questionnaire 32. As part of their job, financial planners have to predict future economic indicators which impact clients. a) The above statement is true b) The statement is false c) It is true in cases of economic turmoil d) The statement is true for CFPCM Certificants 33. Micro-economics refers to the study of economics at a) national level b) level of the firm b and c c) personal level d) 34. Construction is classified as a b) manufacturing industry a) service industry d) none of the above c) agricultural activity 35. High level of employment, faltering business, slackening rate of investment activity, higher costs for business firms are indicators of which stage of the business cycle a) Contraction b) Recession c) Recovery d) Boom 115

36. M3 growth refers to b) growth in GDP a) growth in money supply d) growth in demand for money c) growth in inflation 37. The bank rate, CRR and SLR are key determinants of the long term interest rates in the economy. a) The above statement is true b) The above statement is partly true c) CRR and SLR do not affect interest rates d) The above statement is false 38. If the long term interest rate sought is 9%, the real rate of interest is 6%, then inflation is likely a) 2.83% b) 3% c) 4% d) 6% 39. A higher exchange rate can a) increase GDP b) have no effect on GDP c) decrease GDP d) improve India‘s export competitiveness 40. A% cap has been kept on foreign shareholding in an insurance company a) 49 b) 51 c) 75 d) 40 41. The first step in the strategy development process is to: a) Check that you have all the information b) Secure the client‘s current financial position c) Establish the client‘s goals and financial concerns d) None of the above 42. Asset allocation strategy is guided by b) objectives of the client d) all of the above a) portfolio diversification c) client‘s risk profile 43. The following is not an essential component of a financial plan: a) Executive summary b) Financial Planning strategy c) Letter of engagement d) Summary of services provided 44. There is no need to clutter the financial plan with your calculations/analysis a) True b) False c) False, only if it is a new client d) True, you should keep the calculations only for possible use in case of litigation. 45. Usually a time lag of week/s is recommended between the tabling of the plan and the next meeting with the client. a) one b) two c) three d) four 116

46. Once a client is ready for implementation of the plan, there is need to prepare a) a letter of engagement b) an Authority to proceed c) an Action plan d) authorization letters 47. A strategic review of a client‘ s situation is required in case of a) Macro level changes b) Micro level changes c) Neither d) Both 48. The most appropriate criterion for deciding on the frequency of portfolio reviews of a client is: a) Client profile b) Funds under management c) Fees received from client d) Planner‘s discretion 49. A letter of engagement is: a) a legal document b) a requirement of the FPSB rules of professional conduct c) essential for client-planner relationships d) like a memorandum of understanding 117

Mock Examination Answer Sheet 1. b 2. b 3d 4. A 5. d 6. b 7. a 8. B 9. b 10. c 11. b 12. C 13. d 14. b 15. b 16. D 17. d 18. b 19. C 20. C 21. d 22. B 23. c 24. C 25. b 26. D 27. c 28 d 29. d 30. D 31. b 32. B 33. d 34. D 35. a 36. A 37. d 38. A 39. d 40. A 41. a 42. D 43. d 44. B 45. b 46. a 47. d 48. B 49. d 118

Mock Test-III Instructions to candidates a) There are four alternatives for each question b) Tick the answer which you feel is closest to the correct answer c) Each Question carries one mark There are three sections in the mock examination as follows: 1. Section I consists of miscellaneous questions 2. Section II contains some questions on tax 3. Section III contains some questions on Financial Mathematics Section - I 1) Observing an appropriate standard of care as a professional means that: a) A Mistake or error constitutes a breach of standard b) Standards are defined by the relevant professional body c) Conformity with current professional standards is always sufficient d) The professional is expected to demonstrate the standard of the ordinary person professing to have that skill Answer : 2) In simple terms, the legal term negligence is: a) Not acting as a reasonable person b) A basis for liability c) A breach of contract d) The same as a tort Answer : 3) Which of the following is least like to be used to define appropriate standard of care for a professional? a) Code of the profession b) Expert advice c) A client‘s perception of the professional‘s duty d) Conformity with current standards Answer: 4) Donna G hold a proper authority from ABC financial planners, which holds a dealer‘s licence. Which of the following descriptive wordings is acceptable for Donna‘s letterhead? a) Donna G, Financial Planner Authorise representative ABC Financial Planners b) Donna G, Authorised Representative ABC Financial Planners Financial Planners c) Donna G, Financial Planner Authorised Representative for ABC Financial Planners Licensed Dealer in Securities 119

d) Donna Authorised to deal in securities for ABC Financial Planners Licensed dealer in Answer: securities 5) A disclaimer or exclusion clause would be most useful to a financial planner: a) In avoiding liability for acts of representatives b) In cases where a client has directed investment in a specific security c) Who has not met the requirements of ‗reasonable basis‘ d) Who deals with highly speculative clients Answer : 6) A representative advising on a single-premium life insurance policy: a) Must satisfy the disclosure requirements of the corporations law b) Must disclose in writing any commission arising from sale of the policy c) Must provide a copy of the life company‘s explanatory brochure d) Must hole a proper authority to refer a client to an insurance broker Answer : 7) Fred Brown hold‘s a proper authority from a licensed dealer. He is also managing director of a company that acts as a trustee of a family trust through which a number of securities are held for the benefit of himself and his family. Fred Brown is: a) Not required to include the securities in his register of interests as he is only the managing director of the company b) Not required to include the securities in his register of interests because the company only acts as a trustee c) Not required to include the securities in his register of interests because the securities are held in a family tryst d) Required to include the securities in his register of interests as this situation comes with the definition of ‗relevant interest‘ Answer : 8) A disclaimer may operate with respect to: a) Contractual representations as will as negligent misstatement b) Client only, never third parties c) Contracts only d) Negligent misstatement only Answer : 9) Which of the following can generally be excluded from the definition of ‗securities‘ for general purposes? a) A prescribed interest in a unit trust b) An option contract c) Interest in a business undertaking d) Bank certificates of deposit 120

Answer: 10) Which of the following is not true in relation to advertising and promoting securities? a) A copy of the prospectus must be attached to applications for securities issues b) An advertisement including an invitation to buy securities must include the interest held by the person publishing the advertisement. c) An advertising notice can be published by a representative d) Securities cannot be ‗hawked‘ Answer : 11.) A client of a financial planner who sustains losses and claims the financial planner is at fault, may be able to base a claim under: a) Law of contract only b) Law of tort only c) The law of contract and the law of tort d) Criminal law Answer : 12.) Which of the following is most likely to give a raise to liability for a financial planner.? a) A failure to advise on the effects of a remote part of the law b) A particular estimated result for a client not occurring because of an unpredicted rate change c) A failure to advise a client about investment risk d) A matter covered by a disclaimer Answer : 13.) Mr. Jones had an agreement with XYZ Financial planners. Acting on their advice, which he later considered to be negligent, he made investments that led to a loss of profit for his firm. If Mr Jones can prove his case: a) He may be reimbursed for his lost profits if he claims a breach of contract b) He may be reimbursed for his lost profits only if he claims negligence in tort c) He will be put in the position he was in before the agreement if he claims under tort d) The damages awarded are likely to be the same under tort or contract Answer : 14.) A financial planner neglects to invest a client‘s funds as directed until after a certain date, and the client suffers loss as a result. This is an example of: a) Negligent misstatement b) A negligent act c) Non-recoverable damage d) A mere lapse of judgment Answer : 121

15.) Mrs. Lee, your client, is involved in a car accident where she collides with another vehicle after going through a red light. She has a third party property damage insurance policy on her car with a 500 excess clause. The damage to Mrs. Lee‘s car is 300 and the damage to the other car is 750. Mrs. Lee‘s insurance company admits liability. If both cars are repaired, Mrs. Lee must pay: a) 250 b) 800 c) 1250 d) 1750 Answer: 16.) Jack Mc Gregor is a financial planner and believes he is an expert on negligence. During a conversation with you he made the following statements: a) Liability for negligent misstatement in relation to professional persons is now based upon the notion of reliance and the reasonableness of reliance, which means that disclaimer clause may offer little protection to the adviser b) Negligence on the part of the professional person may consist of failing to do what an ordinary and reasonable person in the same circumstances would do c) An error in judgement in advising a client would leave an adviser liable for an actin in negligence d) Advice given in the normal course of business by any members of an organisation, Whether expert or not, is judged to be liable to action under ‗duty‘ of care‘ Which of the statement are correct? a) I, II and III only b) II, III, and IV only d) I, II and IV only Answer : 17.) Jack Jones, an adviser, wants to make a forecast regarding the future performance of an investment. Jack must be able to prove that he: a) Contacted at least six different fund managers for their opinions b) Relied upon a team of an accountant, an economist, an academic and a solicitor who jointly provided a written option c) Used a reasonable basis for making the recommendation d) Read a prominent investment magazine for a substantial periods of time Answer : 18.) Mr Ablett, your client, stepped off a pavement. A car swerved to avoid him but while successfully avoiding him it collided with another car. Mr. Albett was uninjured, but both cars suffered extensive damage and both drivers suffered personal injury. The type of insurance policy covering this situation is a : a) Personal liability policy b) Personal property policy c) Third party property damage policy d) Public liability policy Answer : 122

19.) The goal setting step in financial plan development would generally not include which of the following? a) Determining objectives b) Cash flow analysis c) Assessing priorities d) Establishing basic needs Answer : 20.) An adviser can call his or her advisory services independent when: I. Making a referral to a product provider who only pays trailing commissions II. Operating with some restriction relating to the securities recommended III. Operating without any conflict of interests created by ownership links to product providers a) I and II only b) II and III only c) III d) II Answer : 21.) You meet an analyst who believes that a share has specific, intrinsic value that can be determined any point in time. She states that although the market price will differ from this intrinsic value, it will eventually move back to this value. Such an analyst is: a) Technical analyst b) Fundamental analyst c) Chartist d) Theoretical analyst Answer : 22.) Performance measurement by benchmarking normally refers to comparing performance of a fund to: a) The performance achieved by comparable investment funds b) The results of key economic data c) The results achieved by key investment indexes d) The results achieved by recognized superannuation funds Answer: 23.) Fred Kelly, a financial planner, has prepared a financial plan for a client and at the end of a complex plan provides a disclosure which states ‗on the acceptance of this plan commissions ranging from 0-6% will be payable‘ Fred: a) Has met the disclosure requirements because a complex plan will not allow a more practical detailed disclosure b) Is required to provide only such general disclosure until the client has accepted the plan c) Has not met the disclosure requirements as such a ‗blanket disclosure‘ is deemed not to adequately inform the client d) Under ‗buyer-beware‘ requirements is only required to provide detailed disclosure when requested to do so by the client Answer: 123

24.) A research house wishes to carry out qualitative research. Which of the following is an example of qualitative research? a) Collecting data on the historic performance of funds b) Comparing the returns from funds c) Comparing the strengths and weaknesses management d) Ranking funds according to assets Answer : 25.) A research house wishes to carry out quantitative research. Which of the following is an example of quantitative research? a) Comparison of relative performance against fund managers b) Comparison of product features c) Consideration of quality of assets d) Quality and experience of investment team Answer: 26.) Which of the following aspects of the adviser/client relationship underlies the fiduciary nature of that relationship? The adviser is making recommendations about the future interests of he client The client is buying a service from the client The adviser has special knowledge of various types of investment The client is required to rely on the expertise of the adviser Answer : 27.) Your client is very conservative and is more concerned about preserving capital than earning a high return. Which of the following two securities should you recommend and why? Security A Security B Expected return 10% 18% Standard deviation 6% 8% a) Security B because it has a 95% chance of a positive return b) Security B because it has a lower coefficient of variation c) Security A because it has a lower variance of returns d) Security A because it has lower standard deviation Answer: 28.) Client risk profiling by questionnaires is best used a) Rather than indirect methods of assessing client risk b) As an equally valid method of assessing risk compared to more indirect methods c) As a supplementary adjunct to other means of assessing risk d) As the only way of assessing the risk profile for the client Answer : 124

29.) Mr. Malcolm, your client, believes that he is an expert on wills. During your interview with him he makes a number of statements about wills of which only one is correct. Which of the following statements concerning wills is correct.? a) A beneficiary cannot be an executor b) When a person who dies has been a contributor to a superannuation fund, the amount payable following the death is frequently not an asset in the estate of a deceased contributor c) A person may leave articles to people by putting name tags on them and giving a note to the executor asking him or her to give the articles to the designated persons. d) The family of a first marriage is still provided for under an existing will when the maker of the will remarries Answer : 30.) The underlying principle to business continuation planning and the reason why it must be factored into a long term financial plan is to ensure that: I. the income and/or capital value of the business is protected II. the value of the business is available to fund the client‘s retirement or estate planning III there is III. minimal impact and cost to the remaining owners IV there is sufficient superannuation in retirement a) I, II and IV b) I, III, an IV c) I, II, III, and IV d) I, II, III, and IV Answer : 31.) Which of the following is not a characteristic of the equity asset class (restricted to listed securities)? a) The market is highly liquid b) Transaction costs are high relative to other asset classes c) Prices and yields can be highly volatile in both the long term and short term d) Long-term yields are relatively unaffected by high inflation levels Answer : 32.) All recommendations concerning the financial affair‘s of a client should be presented in writing because: I. It is mandated under Company‘s Law II. It is either mandated or regarded as best practice under the FPSB Code of Ethics and Rules of Professional Conduct III. It gives the client the necessary time to fully consider the recommendations IV. It provides substantial protection from common law claims of negligence a. III and IV only b. II, III and IV only c. I, II and III only d. I, II, III and IV only 125

ANSWERS ANS 1 D ANS 17 C ANS 2 B ANS 18 A ANS 3 C ANS 19 B ANS 4 C ANS 20 C ANS 5 B ANS 21 B ANS 6 C ANS 22 C ANS 7 D ANS 23 C ANS 8 A ANS 24 C ANS 9 D ANS 25 A ANS 10 C ANS 26 D ANS 11 C ANS 27 A ANS 12 C ANS 28 C ANS 13 A ANS 29 B ANS 14 B ANS 30 C ANS 15 A ANS 31 B ANS 16 D ANS 32 B 126

Section-II 1. Your father, to give you a start in life, has promised to give you a gift of Rs. 100,000 when you are 25 years old. You are now 16 years old. a) If your father were to start investing one year from now, how much would he have to put away each year at 8%? b) If your father were to invest a lumpsum one year from now, how much would that be at 8% compounded annually? c) If in the first option, payments are made at the beginning of the year, what would the annual payment be? Answer a. Rs. 8007.97 b. Rs. 50,025 c. Rs. 7414.79 2. One Mr. Babulal Marandi is borrowing Rs. 50,000 to buy a house under a government subsidy scheme. If he pays equal installments for 25 years and 4% interest on the outstanding balance, a) What is the amount of installment? b) What is the amount of installment, if they are to be paid quarterly? Answer a) Rs. 3,200.60 b) Rs. 793.28 3. A firm purchases machinery for Rs. 800,000 by making a down payment of Rs. 150,000 and the remainder in equal annual installments of Rs. 150,000 for 6 years. How much is the rate of interest that the firm is paying? Answer Approx. 10% 4. A company is creating a sinking fund to redeem its preference shares of Rs. 5 lakh issued on April 1, 2007 and maturing on April 1, 2018. The annual payments are to be made at the beginning of the financial year. If the fund earns 12% p.a. and the company expects to make equal payments, what will be the amount of sinking fund required? (Assuming last payment on 1-4-2018). Answer Rs. 21614.02 5. A man who is 75 years old expects to live another 10 years. He has savings of Rs. 80,000 and would not like to think beyond 10 years. Therefore, he wants to exhaust his savings by then. He places the savings in a bank account earning 10% p.a. and plans to start withdrawals one year from now, so that he has zero balance at the end of 10 years. What will be his annual withdrawal? Answer Rs. 13,019.63 127

6. A housing loan company is offering a flat for Rs. 200,000 with Rs. 40,000 down payment. The conditions are a 12-year mortgage requiring end of year payments of Rs. 28,593. The loan processing fee of Rs. 5,000 is deducted from the loan amount. What is the interest amount on the loan amount being charged to you? Answer 15% 7. An investment promises to pay Rs. 2,000 at the end of each of the next three years and Rs. 1000 at the end of each of the next 4 years. What is the maximum amount that you will pay for this investment if your required return is 13% p.a. with the amounts being payableat the beginning of the year b) at the end of the year as stated Answer a. Rs. 7665.65 b. Rs. 6783.76 8. You are planning to retire and your employer gives you an option of Rs. 25,000 lifetime annuity or Rs. 200,000 lumpsum payment. You estimate that you will live for another 20 years. If the discount rate is 12% p.a., which option should you choose? Answer The lumpsum payment is favourable. 9. You are given three options to choose from: a) Rs. 80,000 paid now would yield Rs. 14,000 p.a. for the next ten years b) Rs. 20,000 paid now would yield Rs. 14,000 p.a. for the next 20 years c) Rs. 20,000 paid now would yield Rs. 14,000 p.a. for the next 15 years. You can earn 8% p.a. from money invested elsewhere in the market. Which option would you choose? Answer Option a) 10. Mr. Ravi Mohan has borrowed Rs. 50,000 for a car loan from his employer. The loan is repayable at an interest rate of 10% p.a. in five years with equal end of the year repayments. What is the annual repayment. Answer Rs. 13189.87 11. If you deposit Rs. 10,000 in an account paying 8% p.a. compounded quarterly and you withdraw Rs. 100 per month. a) How long will the money last? b) How much money will you receive? Answer a. 164.45 b. Rs. 16445 12. In January 1991, X Ltd. issued Rs. 10 Cr. of 5 year bonds maturing on January 1, 1996. The interest was 14% payable semi-annually. Let us assume that on January 1, 1992, a new four 128

year bond of equivalent risk could be purchased at face value yielding 12% p.a. What would be the market price of the bonds on January 1, 1992. Answer Rs. 106209793.81 13. You approach a dealer to buy a household appliance for Rs. 10,000 on instalment basis. The dealer says he will charge 13% for four years i.e. Rs. 5,200. The annual payment works out to Rs. 10,000 + Rs. 5,200 = Rs. 15,200/4 = Rs. 3,800. What is the rate of return that the dealer is earning? Answer 19.14% 14. A bank officer informs you that Rs. 2,013 is payable as an annual instalment on a eight year loan of Rs. 10,000. The bank advertises its interest rate as 12%. Is the advertisement correct? Answer Yes 15. An equipment A has a cost of Rs. 75,000 and net cash flow of Rs. 20,000 per year for six years. A substitute equipment B would cost Rs. 50,000 and generate net cash flow of Rs. 14,000 per year for six years. The required rate of return of both equipments is 11%. Calculate the IRR and NPV for each equipment. Which equipment should be accepted and why? Answer Equipment A NPV - Rs. 9,611 IRR - 15.34% Equipment B NPV - Rs. 9,228 IRR - 17.19% 129

Mock Test IV Instructions to candidates a) There are four alternatives for each question b) Tick the answer which you feel is closest to the correct answer c) Each Question carries the marks indicated 1. Deduction in respect of contribution for annuity plan to certain pension fund under section 80CCC allowed to: 1 a. any assessee b. individual assesee only c. individual or HUF d. individual who is resident in India 2. Deduction under section 80C is allowed to the extent of: a. Rs.20,000/- b. Rs.1,50,000/- c. Rs.40,000/- d. None of the above. 3. Amount received from the surrender of annuity plan or amount received as pension from the annuity planby the assessee or his nominee shall be 1 a. Exempt b. taxable c. exempt upto limit balance payable. D None of the above 4. Deduction under section 80 D in respect of medical insurance premium is allowed to a. any assessee b. an individual or HUF c. individual or HUF who is resident in India d. individual only 5. Deduction U/S 80 D is allowed if premium is paid to: a. Life Insurance Corporation b. General Insurance Corporation or any others. c. Life Insurance or General Insurance Corporation d. None of the above. 6. The compound value of Rs.1000/- interest rate being 12% p.a. if compounded annually, semi annually and 2monthly for 2 years is 2 a. Rs. 1254, 1262, 1270 b. Rs. 1262 1267, 1270 c. Rs. 1254, 1262, 1268 d. Rs. 1240, 1262, 1270 7. Laxman will start receiving a pension of Rs.3000/- per year exactly 10 years from now. The payment will continue for 16 years if the interest rate is 10%, the present worth of the pension is 4 a. Rs. 23,472/- b. Rs. 9954/- c. Rs. 48,000/- d. Rs. 33,426/- 130

8. A Bank has offered to you an annuity of Rs.1800/- for 10 years. If you invest Rs.12,000/- today the effective rate of return in this case is 4 a. 6.67% b. 8% c. 8.15% d. 8.67% 9. The present market value of an equity share is Rs.80/- and the exercisable price of the warrant is Rs.60/- per share. An investor is holding a warrant entitled to purchase 50 equity shares. The profit on sale of the warrant is 2 a. Rs.1000/ b. Rs.4000/ c. Rs.3000/ d. None above 10. Professionalism implies 1 a. Pride in work b. Commitment to quality sincere desire to help c. Dedication to the interest of client d. e. All of the above 11. A client approaches you for some advice on a technical matter, a CFP Planner is not professionally competent in that area then you will 1 a. go ahead on your own b. refer the client to seek the counsel of qualified professionals. c. Read up on the subject d. Refer him to another CFP 12. Which of the following is not true in relation to preparing oral or written recommendations to clients? 1 a. The client should be placed in a position to comprehend the recommendations. b. The client should be in a position to comprehend the basis for recommendations. c. The nature of investment risk should be explained to the client in terms he is likely to understand. d. Same standards of confidentiality should be maintained to employers as are made to clients. 13. Integrity implies: 1 a. Members shall provide financial planning receives in a fair & irrevocable manner. b. Members shall use high standards of honesty in conducting their financial planning business c. Members shall disclose to their client any limitation on their ability to provide objective financial planning services . d. All of the above 14. Which of the following relates to the code of ethics of diligence? 1 a. A Member shall collect sufficient information to ensure appropriate advice can be given. 131

b. A member shall clearly disclose to the client the capacity in which they are able to provide financial planning. c. A member shall have reasonable and appropriate standards for the appointment of the representatives. d. None of the above. 15. C = 100 billion I = 50 billion G = 80 billion X = 90 billion M = 100 billion The value of GDP will be 1 a. 150 billion b. 130 billion c. 320 billion d. 220 billion 16. High powered money includes b. Banker‘s deposit with RBI 1 d. Other deposits with RBI a. Cash with banks c. Currency with Public e. All of the above 17. In an aggressive growth portfolio, the proportion of cash, fixed interest, shares and property should be 1 a. 0- 20%, 0 - 15%, 45 - 85%, 10-30% b. 5% 5% 70% 20% c. 0% 0% 80% 20% d. 10% 20% 70% 0% 18. Which of the following is not an essential component of a written financial plan: 1 a. Statement of current situation b. Financial Plan summary c. Service, fee and commission etc. d. Projections e. All of the above are essential components. 19. A Financial Plan should be reviewed in the light of 1 a. Micro & Macro level changes. b. Micro but not Macro level changes c. Macro but not Micro level changes d. Generally the financial plans do not require review. 20. In which of the following type of mortgage, physical possession of the mortgaged property is delivered to the lender. 1 a. Simple mortgage b. Usufructuary mortgage c. Mortgaged by deposit of title deeds d. None of the above 132

21. Which of the following risks falls under the category of pure risk that people face. 1 a. Loss of use of property b. Risk of injury c. Loss arising from negligence of third party. d. Risk of loss of income through incapacity to work for some extended work. e. All of the above 22. Which of the following is generally excluded in the goal setting step in financial plan development. 1 a. Cash flow analysis b. determining financial objections c. An assessment of priorities d. establishing basic needs. 23. A disclaimer may operate with respect to 1 a. Contracts only b. Negligent misstatement only c. Contractual representations as well as negligent misstatement. d. Third parties only. e. Client‘s only 24. The financial planning process involves the following steps: 1 1. Establishing the relationship 2. Identification of financial problems 3. Review and revision of the plan 4. Data gathering and goal settings. 5. Preparation of written alternatives and recommendations. 6. Implementation of agreed recommendations. Which of the following expression represents the correct order: a. 1, 2, 3, 4, 5, 6 b. 1,4,2,5,6,3 c. 1,2,4,5,6,3 d. 1,4,2,6,5,3 25. A Contract may be discharged by 1 a. supervening impossibility c. performance of contract b. breach of contract d. all of the above 26. A CFP Certificant will cooperate with FPSB in all respects of an investigation is a requirement of code of ethics of 1 a. Professionalism b. Diligence c. Compliance d. Confidentiality 27. Which of the following statements is not true. 1 a. A Lessee is entitled to claim depreciation on the assets leased as per accounting standards in India. 133

b. The Income Tax Act, allows a lesser to claim depreciation on the assets leased. c. The hirer is entitled to claim depreciation on the assets hired under Income Tax Act. d. All the above statements are correct. 28. Which of the following is most likely to give a raise to liability for a financial planner. 1 a. A Failure to advise a client about an investment risk. b. A matter covered by a disclaimer. c. A failure to advice on the effects of a remote part of the law. d. A particular estimated result for a client not occurring because of an un predicting rate change 29. Which of the following statement is not true in relation to a future contract? 1 a. The contract price is transparent b. Contract is exposed to the problem of liquidity. c. Settlement of the contract is done on cash basis. d. None of the above 30. When the income of your client drops, health becomes the primary concern and significant savings can provide for financially dependent spouse in the event of his death, his insurance will be 1 a. Accident Cover. b. Critical Illness Protection c. Income Protections d. Property protection a. 1, 2, 3, 4 b. 1,2,4 c. 1, 2, 3 d. 2, 4 31. Which of the following statements is incorrect about a Will? 1 a. Beneficiary cannot be executor b. The revocation clause revokes all former wills and declares this to be the last will and testament. c. The family of a first marriage is still provided for under an existing Will when the maker of the Will remarries. d. The appointment of an executor is optional. A young couple (both age 30) comes to the financial planner with the desire for assistance in improving their family‘s financial position. They have two healthy children, ages 3 and 6. The husband is a supervisor for a manufacturer of auto parts. His current salary is Rs. 30,000 per year. The wife is a marketing professor for a government university. Her current salary is Rs. 40,000 per year. The couple recently purchased a small home for Rs. 100,000 using their entire savings of Rs. 20,000 as a down payment. In addition to an Rs. 80,000 mortgage, the couple‘s only debt is a two-wheeler loan having a balance of Rs. 12,000. Both husband and wife have very good family health insurance from their employers. The wife has employer-paid life insurance equal to two times her annual salary. 134

32 The couple wants to start an investment program as soon as possible. To correct the weakness in their financial planning before beginning the investment program, they should 1 (1) establish an emergency fund with open-ended mutual funds. (2) start a college savings fund for the children. (3) purchase disability insurance for the wife and the husband. (4) prepare wills for the wife and the husband. (5) secure credit life insurance for the two-wheeler loan. A. (5) only B. (1) and (2) only C. (1) and (3) only D. (3) and (4) only 33. When the couple is able to begin an investment program, they want to begin making investments for their retirement and their children‘s education. Which of the following actions will help accomplish their goals in atax-efficient manner except 1 A. investing in individual pension funds. B. investing through life insurance program for the wife. C. investing in a growth and income mutual fund. D. investing in educational life insurance benefiting each child. 34. Jag Mohan wants to pay one-half of the college costs for his daughter, Rina. She will be attending a private college with annual costs of Rs. 20,000 today. Rina is 10 years old and will be starting college in 8 years. If these costs are expected to increase annually by 8%, how much will Mr. Jag Mohan need to provide for her first year of college? 1 A. Rs.18,509 B.Rs.23,409 C.Rs.27,371 D.Rs. 37,019 E.Rs.74,037 35. The following set of newly issued debt instruments was purchased for a portfolio: 1 Treasury bond zero-coupon bond corporate bond municipal bond The respective maturities of these investments are approximately equivalent. Which one of the investments in the preceding set would be subject to the greatest relative amount of price volatility if interest rates were to change quickly? A. Treasury bond B. Zero-coupon bond C. Corporate bond D. Municipal bond 36. Ramesh asks for your help in preparing his cash flow statement. He tells you that his salary before taxes is Rs. 250,000 and that he has no mortgage on his home. Which of the following statements is true about Robert‘s cash flow statement? 1 A. The value of the home would be an income source since there is no mortgage. B. The value of the home would be an asset. C. The taxes on his salary would be a liability. D. The taxes on his salary would be an expense. 37. Which one of the following factors would be the strongest indication that interest rates might Rise? 1 A. Selling of rupee-denominated assets by foreign investors B. decreasing Indian government deficits C. decreasing rates of inflation D. weak credit demand by the private sector of the Indian economy 135

38. Jasmine, a CFP licensee, has proof that Madhu, another CFP licensee in her office, has utilized clients‘ funds under management to cover gambling debts. Madhu returned the funds to the clients‘ accounts and made them whole, including the earnings that would have accrued during the time that the funds were withdrawn. Under the Code of Ethics and Rules of professional, Jasmine is obligated to 1 A. Report Madhu‘s action to the local CFP organization for proper processing. B. Report Madhu‘s action to the FPSB Board of Examiners because Madhu has violated the Professionalism Principle. C. Report Madhu‘s action to the FPSB because Jasmine is bound by the AFP Code of Ethics and Rules of professional conduct to do so. D. Not report Madhu‘s action to the FPSB because Jasmine would violate the Confidentiality Principle. E. not report Madhu‘s action to the FPSB because Madhu made full restitution and the clients involved were not harmed by Madhu‘s action. 39. In analyzing the financial statements of a client‘s business, you notice that the collection period for accounts receivable has been increasing. What does this increase suggest about the firm‘s credit policy? 1 A. The firm‘s current ratio is also increasing. B. The collection period has no relationship to a firm‘s credit policy. C. The firm is losing qualified customers. D. The credit policy is too lenient. 40. A client provides a current personal balance sheet to the financial planner during the initial data gathering phase of the financial planning process. This financial statement will enable the financial planner to gain an understanding of all of the following except the 1 A. diversification of the client‘s assets. B. size of the client‘s net cash flow. C. client‘s liquidity position. D. client‘s use of debt. 41. If a client‘s primary goal in making lifetime gifts to his children is to lower his wealth taxes, he should make gifts of property that 1 A. are expected to depreciate significantly in the future. B. are expected to appreciate significantly in the future. C. have already depreciated significantly. D. have already appreciated significantly. 42. A client recently purchased a new home from a builder for Rs. 150,000 including the plot valued at Rs. 40,000. How much insurance would you recommend that your client purchase to cover full replacement ofthe house in the event of a loss? 1 A.Rs. 88,000 B.Rs. 110,000 C.Rs. 120,000 D.Rs.150,000 43. You receive a phone call from an individual you have not spoken with previously. The caller is excited, just having heard that a new mutual fund is positioned to deliver large gains in the coming year. The caller wishes to purchase shares of the fund through you. Keeping in mind 136

stages of the overall personal financial planning process, which of the following questions that address the first two stages of the financial planning process should you ask the caller? 1 (1) What are your goals for this investment? (2) What other investments do you have? (3) What is your date of birth? (4) Do you want your dividends reinvested? A. (1) and (3) only B. (2) and (4) only C. (1), (2), and (3) only D. (1), (2), and (4) only 44. A local businessperson approaches a CFP licensee for assistance with an investment-related tax problem. The client‘s previous tax preparer had suggested the purchase of a variety of tax advantaged investments to reduce the client‘s current and future tax burden. Time passed, the client‘s income dropped, and the tax laws changed. The client does not feel the tax preparer misrepresented the situation on the initial sale, but would still like to know what recourse is available with respect to the tax preparer. The CFP licensee should 2 (1) explain to the client that this issue is beyond the scope of the CFP licensee‘s professional expertise. (2) advise the client that no recourse is available. (3) advise the client to contact an attorney. (4) contact the tax preparer. A. (4) only B.(1) and (3) only C. (2) and (4) only D.(1), (2), and (3) only 45. If the client needs to accumulate wealth but is risk-averse, which of the following is the most crucial action the planner needs to take to have the client achieve the goal of wealth accumulation? Advise investing the client‘s current assets 2 A. in the products which will bring the highest return to the client regardless of risk. B. in products which produce high income for the client because fixed income products are generally safe. C. in diversified mutual funds because of the protection which diversity provides. D. after determining the client‘s risk tolerance. E. in 100% cash equivalents in the portfolio because most software programs recommend this safe approach. 46. The investment portfolio for a defined-benefit retirement plan has declined in value during a year in which most financial market investments have incurred losses. Which one of the following entities would be impacted most by this decline in portfolio value? 1 A. individual participants in the plan B. company sponsoring the plan C. investment banker handling the plan D. plan underwriters 47. Which of the following would result in the largest increase in the price of a diversified common stock mutual fund? 1 A. unexpected inflation B. expected dividend increases C. unexpected corporate earnings growth D. expected increase in the prime interest Rate 137

48. Which one of the following products is designed to provide both growth and income? 1 A. fixed premium annuity B. real estate mutual funds C. aggressive growth mutual fund D. convertible bond 49. The Maheshwaris recently found out that they can reduce their mortgage interest rate from 12% to 8%. The value of homes in their neighborhood has been increasing at the rate of 7.5% annually. If the Maheshwaris were to refinance their house with Rs. 2,000 in closing costs in addition to the mortgage balance (Rs. 120,056) over a period of time to coincide with their chosen retirement age in 22 years, what would the monthly payment be for principal and interest (closing costs are going to be added to the mortgage)? 2 A.Rs. 853.43 B.Rs. 895.60 C.Rs. 945.34 D. Rs. 967.86 E.Rs. 983.99 50. Company ABC is currently trading at Rs. 35 and pays a dividend of Rs. 2.30. Analysts project a dividend growth rate of 4%. Your client Tewari requires a rate of 9% to meet his stated goal. Tewari wants to know if he should purchase shares in Company ABC. 2 A. Yes, the stock is undervalued. B. No, the stock is overvalued. C. No, the required rate is higher than the projected growth rate. D. Yes, the required rate is higher than the expected rate. E. No, the required rate is lower than the expected rate. 138

Answers 1. b 2. b 3. b 4. b 5. b 6. a 7. b 8. c 9. a 10. e 11. b 12. d 13.b 14. a 15. d 16. e 17. a 18. e 19. a 20. b 21. e 22. a 23. c 24. b 25. d 26. c 27. a 28. a 29. d 30. b 31. d 32. c 33. c 34. a 35. c 36. c 37. d 38. d 39. b 40. d 41. b 42. b 43. d 44. d 45. b 46. b 47. c 48. c 49. e 50. d 139

Mock Test V A) There are four alternatives for each question B) Tick the answer which you feel is closest to the correct answer 1. On January 1, 1997, Zibo Products entered into an employment agreement with its president. As part of that agreement, the firm agreed to pay the president 200,000 each year for 10 years after retirement. The payments are scheduled to start on July 1, 2007, and to terminate on July 1, 2016. The company wishes to make these payments out of a fund. This fund is to be built up by equal contributions starting July 1, 1997 and ending July 1, 2007. It is anticipated that the fund will earn 12% a year, compounded annually. How much is each contribution? a) Rs. 61,377 b) Rs. 54,712 c) Rs. 61,477 d) Rs. 61,577 2. The ―Rule of 72‖ says that if you earn 8% per year, your money will double in years. a) 12 b) 6 c) 8 d) 9 e) 72 3. Your lease calls for payments of Rs.500 a the end of each month for the next 12 months. Now your landlord offers you a new 1-year lease which calls for zero rent for 3 months, then rental payments of Rs.700 at the end of each month for the next 9 months. You keep your money in a bank time deposit that pays a nominal annual rate of 5 percent p.a. compounded monthly. By what amount would your net worth change if you accept the new lease? (In today‘s value) a) -Rs.509.81 b) -Rs.253.62 c) Rs.125.30 d) Rs.509.81 4. Person who makes will is known as a) Testator b) Executor c) Decedent d) 8 Beneficiary 5. Ravi wants to arrange a cost of his daughter Shalini‘s college education fee cash of college education is Rs. 1,40,000 for the daughter is 10 years old & will be in college in 8 years. If rate of return of his investment is 8% then how much Ravi amount should invest at the end of every year to issue the expenses of college education of his daughter? a) 20978 b) 13162 140

c) 25168 d) 31010 6. Kamal has invested Rs. 9,000 for 8 years at the rate of interest of 6%. What amount he will get after 8 years if amount is compounding annually for first 5 years & semi-annually in the last 3 years. Compute the amount he will get after 8 years. a) 126824 b) 14381 c) 10598 d) 159282 7. Raj will receive 25,000 & 15,000 at the end of 14 & 15 year respectively. If rate of return is 6%. Compute the present value of the amount. a) 73647 b) 65820 c) 17317 d) 70120 8. Satvik has to incur 10,000 for his household expenses 15,000 for payment of Mortgage Loan & 5,000 for maintenance of car per month. He has 1,50,000 in Bank account, Equity share of Rs. 9,00,000 and house property of Rs. 15,00,00. Compute his liquidity Ratio a) 8 b) 9.5 c) 5 d) 6 Answers: 1. (b) 2. (d) 3. (b) 4. (a) 5. (b) 6. (b) 7. (c) 8. (c) 141

Mock Test VI 1. Ms. Rita works at the Post Office. She deposits Rs 1000 on every birthday into a retirement plan which paid an interest rate of 8% from the age of 20 until she retired. If she had Rs 237,941.22 in her retirement plan when she retired, at what age did she retire? A) 55 B) 60 C) 58 D) 57 2. What is the effective annual rate if the stated nominal rate is 12 percent per annum compounded monthly? A) 12.55% B) 12.36% C) 12.68% D) 12.49% 3. As an employee Raghav has come to you with his questions on superannuation plans/ Annuity Plans to get more educated with current scenario. The term ―Employee benefits‖ includes which of the following categories of contributions? A) Unemployment compensation Insurance B) Social Security Scheme C) Group Insurance Scheme D) Non occupation disability Insurance 4. When is the right time to plan for your retirement? A) Should aim to plan once client is at-least 45 years of age B) there is no time like the present to start planning regardless of age. C) It should be done post clearing all loans and commitments D) None of them 5. A in the event of a loss due to an insured event the principle of indemnity ensures that; A) The compensation paid to the insured is always less than the loss; B) The compensation is equal to the loss; C) The compensation paid is never less than the actual loss D) A) a only B) b only C) c only 6. In fire insurance ―pro rate‖ means; A) Rating as per occupancy B) Proportionate C) Condition of average D) None of them 142

7. The statement ―Members shall ensure their conduct does not bring discredit to the Financial planning profession‖, relates to the FPSB Code of Ethics of: A) Integrity B) Professionalism C) Compliance D) Fairness 8. A Promissory note where no time is specified is A) Bill of exchange B) Void C) Payable on demand D) A cheque 9. A statement which shows financial position at particular date is called A) Liquid statement B) Cash flow statement C) Financial statement D) Budget statement 10. Beta measure ––––––––––––––– risk A) Systematic B) Unsystematic risk C) Volatile risk D) Market risk 11. Compute liquidity Ratio cash expenses per month 30,000, salary 60,000. Bank saving A/C 1,50,000 A) 4 B) 5 C) 2 D) 6 12. A person has invested in equity, debt & saving A/c Rs. 8.5, 5 & 1.5 lakhs respectively. If income of equity is 20% (-ve) and of Debt is 18% (+ve) what he should do to maintain the same ratio between his investment. A) He need to transfer 1.1167 and 0.08 lakhs from debt & saving A/c to equity shares. B) He need to transfer 1.6 lakh from equity to saving A/c. C) He need to transfer 2.02 lakh from equity to debt. D) He need not to do anything. 13. Which of the following data cannot be collected through the direct question. A) Current income B) Future income C) Risk Appetite D) Time horizon. 143

14. BSE Sensex is––––––––––index. A) Price weighted B) Market capitalisation C) Market Capitalisation X Price D) None of the above 15. Post office monthly income can be saved through A) Cheque B) Cash C) Draft D) All of the above 16. If A is working with big financial planning Co. & his wife holds share of a particular company. He wants to advice the client to buy shares of the same company of which his wife hold. Should he A) Disclose this fact to the client that his wife hold shares of that company B) No need to disclose the fact of holding shares. C) Sell out shares first and then advice to client 17. Person who declares the will after the death of a person is called A) Testator B) Executor C) Testate D) Deceased 18. If a person is in the mid of 30‘S. He has two children one is boy (10 yrs) and another is girl (12 yrs) he will give preference to A) Life cover B) Child Education C) Property Protection D) Marriage of girl 19. As a financial planner you have purchased shares of a company, now market fall, what you will you do A) You will explain the logic of your decision to client. B) You will buy more share. C) You will sell out those shares D) No step you will take 20. As per IRDA, incontestable of life period of life insurance policy is–––––––yrs. A) 3 B) 2 C) 4 D) 5 144

21. A person is about to be retired. He has taken adequate insurance . He has sufficient income to incur his regular expanses. He has his wife only in the family. Then he should takes A) Life over B) Property Protection C) Health protection D) Retirement Planning 22. If partnership firm is filing its income tax return timely then whether it is required to audit it accounts A) Yes B) No 23. A contract with minor A) Void-ab-initio B) Void from the point of the time when this fact comes into knowledge. C) Valid D) Voidable 24. Testamentary trust comes in the force from the date of Death Retirement Children become major Answers: 1. C 2. C 3. C 4. B 5. B 6. B 7. B 8. C 9. C 10. A 11. B 12. A 13. C 14. C 15. D 16. A 17. B 18. A 19. B 20. B 21. C 22. A 23. A 24. A 145

Mock Test VII 1. Mr. X has purchased a bond of Rs.1000/- face value. Bonds are issued for the duration of 10yrs.Coupon rate of the bond is 10% and current price of the bond is Rs.850/-. Calculate YTM. a) 12.735 b) 10.85 c) 11.56 d) 8.025 Ans: Solution : YTM is nothing but an IRR . We will calculate IRR by taking following cash flows. Cash outflow 850 Cash Inflow At the end of year Amount 1 - 850 2 100 3 100 4 100 5 100 6 100 7 100 8 100 9 100 10 100 11 1100 IRR = 12.735% 2. Krishan has purchased a bond of Rs. 1000/- ( face Value ) @ 10% coupon rate. Bonds are issued for the duration of 10 yrs. YTM of the bond is 8.5% compute current price of the bond. a) 1098 b) 956 c) 1256 d) 1245 Ans: Solution: Current price is equal to the PV of the future cash inflows of the bonds. Pv value of pmt = 100 for 10yrs.@ 8.5% = Rs.656.14 PV of the amount = Rs. 1000/- for 10yrs @ 8.5% = Rs.442.29 Sum of the both PV = 1098 146

3. A member shall clearly disclose to all prospective clients the capacity in which they are able to provide financial Planning services. The above rule come under the following code of ethic a) Competence b) Fairness c) Confidentiality d) Professionalism Ans: 4. Which of the following will help us in stock analysis. a) Standard Deviation of stock b) Beta of stock c) Return from stock d) All of the above Ans: 5. Fundamental Analysis stands for a) Selecting stock on the basis of EPS b) Selecting Stock on the basis of book value c) Selecting stock on the basis of market value d) All of the above e) None of the above Ans: 6. Technical Analysis Stands for a) Timing the market b) Analysing demand and supply of stock c) Comparing book value and market value d) A and B Both e) B and C Both Ans: 7. Standard Deviation is Measure of Return Measure of Risk Measure of Co-movement None of the above Ans: 147

ANSWERS ANS 1 A ANS 2 A ANS 3 B ANS 4 D ANS 5 D ANS 6 D ANS 7 B 148

Mock Test VIII TIME VALUE OF MONEY/ YTM 1. An analyst expects a firm‘s earnings per share to grow at 8% per year. If the firm now earns Rs.3.50 a share, its earnings per share five years from now are expected to be: A) Rs.4.11 B) Rs.4.90 C) Rs.5.14 D) Rs.5.17 2. An investment of Rs.231 will increase in value to Rs.268 in 3 years. The annual compound growth rate is closest to: A) 3% B) 4% C) 5% D) 6% 3. An investment promises to pay Rs.100 one year from today, Rs.200 two years from today and Rs.300 three years from today. If the required rate of return is 14% compounded annually, the value of this investment today is closest to: A) Rs.404 B) Rs.446 C) Rs.462 D) Rs.516 4. An investment has the following stream of annual year-end cash flows: Year-end Cash Flows 1 23 4 -Rs.100 Rs.450 -Rs.200 -Rs.100 If the discount rate is 12%, the present value of this stream of cash flow is: A) -Rs.53.37 B) -Rs.44.65 C) -Rs.33.92 D) -Rs.13.06 Use the following data in answering questions 5 and 6 The annual rate of return for a common stock has been: 2002 2003 2004 2005 Return 14% 19% -10% 14% 149

5. What is the arithmetic mean of the rate of return for the common stock over the four years? A) 8.62% B) 9.25% C) 14.00% D) 14.25% 6. What is the geometric mean of the rate of return for the common stock over the four years? A) 8.62% B) 9.25% C) 14.21% D) It cannot be calculated because of the negative return in 2004. 7. An investor will receive a 5 year annuity of Rs.2500 per year at the best of the year. He will not receive the first payment until three years from today. If the annual interest rate is 8%, the present value of this annuity is closest to: A) Rs.8105 B) Rs.8224 C) Rs.8558 D) Rs.9982 8. One year ago, an investor purchased a 10 year, Rs.1000 par value, 8% semiannual coupon bond. Now, one year later, interest rates remain unchanged at 8%. If the investor sells the bond today (immediately after receiving the second coupon payment and with no transaction costs), he will have a capital: A) gain of Rs.80 B) loss of Rs.80 C) gain of Rs.0 D) gain of Rs.50 9. X purchased land for Rs.100000. Six months later he sold the property for Rs.115000. X‘s annualized return on investment is closest to: A) 15% B) 30% C) 55% D) 110% 10. A Rs. 1000 par value, 10% semiannual, 20-year debenture bond is currently selling for Rs.1100. The bond‘s current yield is: A) 8.9% B) 9.1% C) 10.0% D) 10.5% 150