ITFP WORKBOOK

Q3. Mr. Sharma has taken a personal loan of Rs.5 lacs for 5 years @ 12% p.a. on flat rate of interest. What would be his EMI? Find the interest p.a. but reducing monthly ofthe same loan? Sol. Flat rate of interest means interest is charged on loan amount initially of the whole duration on principal amount and is amortized interest and principal in loan duration. Therefore interest of first year is 5,00,000*5*12/100 = 60000 Interest of 5 years = 60000*5 = 300000 Total of principal and interest = 500000 + 300000 = 800000 Now monthly repayment as per flat rate of interest = 8,00,000/60 = 13,333.33 Assuming interest is based on reducing monthly balance CMPD SET=END, N=60, PV=5,00,000, PMT=13,333.33, P/Y=12, C/Y=12, I=20.309% Q4. Mr. S has taken a loan of Rs.30,00,000 at Interest rate is 12.50% p.a. reducing monthly for 25 years. Calculate: 1. Monthly payment which is paid in the at the end of every month 2. Total interest paid from the end of 3rd year to 8th year 3. Total principal paid in first 7 years. 4. Interest paid in 24th installment. 5. Outstanding loan after 11 years 6. Interest paid in last 4 years 7. Principal paid in first 3 years SOL. 1 EMI on Loan: Set: End N = 300 I =12.50 PV = 3000000 PMT = -32710.6241(solve) P/Y = 12 C/Y = 12 2. Total interest paid from 3rd year to 8th year PM1 = 25 PM2 = 96 Solve for INT = 2155787.381 3. Total principal paid in first 7 years. PM1 = 1 PM2 = 84 Solve for PRN = 194631.2391 4. Interest paid in 24th installment. PM1 = 24 51

PM2 = 24 Solve for INT =30856.87 5. Outstanding loan after 11 years PM1 = 1 PM2 = 132 Solve for BAL = 2589569.643 6. Interest paid in last 4 years PM1 = 253 PM2 = 300 Solve for INT = 339461.89 7. Principal paid in first 3 years PM1 = 1 PM2 = 36 Solve for PRN = 63403.511 Q5. Mr. Sharma has taken a personal loan of Rs. 50 lacs for 5 years @ 12% p.a. flat rate of interest. What Would be his EMI? According to you what is the reducing rate of interest of above loan? SOL. Calculate the EMI Press CMPD N = 60 I =12 PV = 5000000 PMT = -11122.22 P/Y = 12 C/Y = 12 Calculate the Flat EMI = =[(600000 X 5) + 5000000]/60 = 133333.33 Put the New EMI In CMPD To calculate the new reducing interest rate Press CMPD SET = END N = 60 I =20.31(solve) PV = 5000000 PMT = -133333.33 P/Y = 12 C/Y = 12 Q6. Mr. X has taken a housing loan of Rs.25 crore for 25 years @ 12.25% p.a. reducing monthly, calculate the following: a. EMI b. Total interest paid in first 4 years c. Principal paid in 16thinstalment d. Total principal paid in 22nd year 52

e. Interest paid in last 8 years f. Outstanding loan after 3.5 years g. Outstanding loan after paying 11yrs h. Total principal paid from beginning of the 8th year till 23th year SOL. a EMI on Loan: Set: End N = 300 I =12.25 PV = 250000000 PMT = -2679359.463(solve) P/Y = 12 C/Y = 12 b. Total interest paid in first 4 years PM1 = 1 PM2 = 48 Solve for INT = 120776113.9 C. Principal paid in 16th installment PM1 = 16 PM2 = 16 Solve for PRN =148221.48 D. Total Principal paid in 22nd year PM1 = 253 PM2 = 264 Solve for PRN = 20893629.7 E. Interest paid in last 8 years PM1 = 17*12+1 PM2 = 25*12 Solve for INT= 93748376.42 F. Outstanding loan after 3.5 years PM1 = 1 PM2 = 42 Solve for BAL = 243367051.5 G. Outstanding loan after paying 11 years PM1 = 1 PM2 = 132 Solve for BAL = 214820698.3 H. Total principal paid from beginning of the 8th year till the end of 23th year PM1 = 85 PM2 = 276 Solve for SPRN = 176427600 53

CASH FUNCTION Q1. An investment is expected to produce the cash flow of Rs.1 5000, Rs. 12000 and Rs. 18000 at the end of every year. If the required rate of return is 14%, what will be the present value of this investment? Sol. CASH: I=14%, 1234 0 15K 12K 18K. NPV=34,540.99 Q2. Given a 12% p.a. interest rate, an asset that generates cash flows (end) of Rs.150000 in year 1, Rs. 250000 in year 2, and Rs. 150000 in year 3, and then sold for Rs.1550000 at the end of year 4 has a present value of ___________________. Sol. Cash: I=12%, 12345 0 150K 250K 150K 1550K. NPV=14,25,047.1 Q3. Mr. Y has decided to deposit Rs.2000 in the beginning of every year for first 2 years and Rs.3000 for next 4 years and Rs.1000 for further 4 years. If ROI is 12% p.a. how much he will have at the time of maturity? Sol. CASH. I=12%, 1 2 3 4 5 6 7 8 9 10 11 2K 2K 3K 3K 3K 3K 1K 1K 1K 1K 0 NFV = SOLVE = 42379 Q4. Mr. X starts depositing Rs.40000 in the beginning of every year for 4 years in scheme and Rs.50000 p.a. for next 4 years getting ROI 8% p.a. Calculate Future Value after 12 years? Sol. CASH: I=8%, 123456789 10 11 12 13 -40K -40K -40K -40K -50K -50K -50K -50K 0 0 00 0 NFV = 6,91,357.39 Q5. Mr. X is being offered 2 investments which have periodic cash flows. Please advise him which one is better? Scheme 1: Scheme 2: Initial outflow 37,000 40000 Cash Inflows 3000 6000 5000 NIL NIL 5000 54

8000 4800 1250 NIL 98000 90600 Sol. CASH T: 1 2 3 4 5 6 7 IRR S1: -37 3 5 0 8 1.25 98 23.6 S2: -40 6 0 5 4.8 0 90.6 20.3 S1 is better. Q6. Determine the internal rate of return for a project that costs Rs.1,78,000 and inflows are of Rs.22,000 in the first year, Rs.16,000 in the second year, Rs.18,000 in the third year and Rs.2,00,000 in the sixth year. Sol. Cash 1234567 -178K 22K 16K 18K 0 0 200K IRR = 7.54% Q7. Determine the internal rate of return for a project that costs Rs.45362 and isexpected to yield Rs.2500 per year for the first five years, Rs.3500 per year for the next two years, and Rs.58000 at the end? Sol. Cash 1 234 56 7 8 9 -45632, 2500, 2500, 2500, 2500, 2500, 3500, 3500, 58000 IRR=8.07% Q8. Project A has a 10 percent cost of capital and the following cash flows: Project A Year Cash Flow 0 - Rs.3000 1 1000 2 1500 3 2000 4 500 What is Project A‘s payback period? Sol. Press cash and then press exe on your calculators I = 10 1=-3000 2=1000 3=1500 4=2000 5=500 PBP = Solve = 2.5665 Q9. Your friend has agreed to deposit Rs.3000 in your brokerage account at the beginning of each of the next five years. You estimate that you can earn 9 percent a year on your investments. How much will you have in your account immediately after your uncle makes his last deposit (at the beginning of year? 55

Sol. Go to cash function I=9 Cash: EXE 1 = 3000 2 = 3000 3 = 3000 4 = 3000 5 = 3000 NFV = Solve = 17954.13 Q10. Given a 9% p.a. interest rate, an asset that generates cash flows of Rs.10000 in year1, Rs. 20000 in year 2, and Rs. 10000 in year 3, and then sold for Rs. 150000 at the end of year 4 has a present value of______ Sol. Go to Cash I=9 Cash = Exe 1=0 2 = 10000 3 = 20000 4 = 10000 5 = 150000 NPV = Solve= 139993.52 Q11. Vinay is evaluating an investment that will provide the following returns at the end of each of the following years: year 1, Rs. 12,500; year 2, Rs. 10,000; year 3, Rs. 7,500; year 4, Rs. 5,000; year 5, Rs. 2,500; year 6, Rs. 0; and year 7, Rs. 12,500. Vikas believes that he should earn an annual rate of 9 percent on this investment. How much should he pay for this investment? Sol. Set I = 9 CF1 = 0 CF2 = 12,500 CF3 = 10,000 CF4 = 7,500 CF5 = 5,000 CF6 = 2,500 CF7 = 0 CF8 = 12,500 Set I = 9 and Solve for NPV = Rs. 37,681. 56

Questions Based on Inflation The following information given below to solve first 9 questions Current age of a person = 30 Retirement age = 60 Life expectancy = 85 Rate of Interest = 12% p.a. Inflation = 7% p.a. Current house hold expenses = 4 lacs p.a. Current cost of marriage = 25 lacs Current cost of education = 10 lacs Current cost of house= 50 lacs Current cost of world tour =10 lacs Q1. How much should be saved monthly for 10 years for higher education if required after 10 years? Cost of education today=10L, Cost after 10 years @7% inflation=10L*(1.07)^10=19.67L Set: Begin N = 120 I = 12 FV= 19.67 P/Y = 12 C/Y = 1 PMT = Solve (-8780.51) Q2. How much should be saved monthly for 15 years for house if required after 15 years Cost of house today=50L, cost after 15 years @7% inflation=1,37,95,157 Begin N = 180 I = 12% PV = 0 FV = 1,37,95,175 PMT = Solve (-28,985) P/Y = 12 C/Y = 1 Q3. How much should be saved quarterly for 20 years for marriage if required after 20 years? Cost of marriage after 20 years = 25L*1.07^20 = 96,74,211 Sol Set Begin, N = 80 I = 12 PV = 0 FV = 9674211 PMT = Solve (-31255) P/Y = 4 C/Y = 1 Q4. How much should be saved half yearly for 30 years for marriage if required after 30 years Cost of marriage after 30Y = 25L*1.07^30 = 19030637.61 57

SOL: Set Begin N = 30*2 I = 12% FV = 19030637.61 PMT = Solve(-36,200) P/Y = 2 C/Y = 1 Q5. What would be annual house hold expenses at age 60 a, Household expense at 60 = 4L*1.07^30 = 30,44,902 How much corpus will be required at age 60 if require Rs.10 lacs per annum fixed during post retirement life. Sol :Set Begin N = 25 I = 12% PMT = 10,00,000 FV= 0 PV = Solve 87,84,315 P/Y = 1/ C/Y=1 Q6. How much corpus will be required at age 60 if require Rs.10 lacs per annum inflation adjusted during post retirement life. RRR= (12 – 7)/( 1+ .07) = 5/1.07 = 4.6728% Begin, N=25, I = 4.6728....%, Pmt=10,00,000, fv=0, PV= Solve-1,52,48,586.44 Q7. If Rs.100 lacs required at age 60 , how much should be saved monthly during pre-retirement life Set Begin, N=30*12, i=12%, PV=0, Fv=100,00,000, PMT = SOLVE 3,245.72 P/Y = 12 C/Y = 1 Q8. If saving Rs.5000 pm during pre-retirement life, how much corpus would be at age 60? How much can be withdrawn monthly fixed amount during post retirement life? And how much can be withdrawn annually inflation adjusted during post retirement life? 58

Step 1 step 2 Step 3 Set Begin, set begin set begin N=360, N=300 i=(12-7)/1.07 i=12, I= 12 PV =-15404866 PV=0, PV=-1,54,04,866 PMT = SOLVE=10,10,248.79 Pmt=-5000, p/y=12 P/Y = 1 P/y=12, c/y=1 C/Y = 1 C/y=1, Pmt=Solve 1,53,849 N = 25 Fv=Solve1,54,04,866 Q9. If saving Rs.50000 half yearly during Pre- retirement life, how much corpus would be at age 60? How much can be withdrawn quarterly fixed amount during post retirement life? And how much can be withdrawn monthly inflation adjusted during post retirement life? Begin, Begin Begin n=60, n=100 n=300 i=12, i=12 i=(12-7)/1.07 pv=0, pv=ans pv=2,62,84,755 pmt=-50,000, p/y=4 p/y=12 p/y=2, c/y=1 c/y=1 c/y=1, pmt=7,80,144 pmt=1,46,671.69 fv=2,62,84,755 Q10. Your Uncle expects to live another 10 years. (Should he live longer, he feels you would be pleased to provide for him.) He currently has Rs.50000 in savings which he wishes to spread evenly in terms of purchasing power over the remainder of his life. Since he feels inflation will average 6 percent annually, his annual beginning-of-year withdrawals should increase at a 6% growth rate. If he earns 8 percent on his savings not withdrawn, how much should his first withdrawal be to be made in the beginning of each year? Sol Set: Begin n = 10 I = RRR = 1.8867 PV = - 50000 PMT = Solve = 5430 P/Y = 1 C/Y = 1 Q11. Mr. Aman aged 25 has invested Rs. 1,00,000 for a world tour with his family after12 years .The current cost for the tour is Rs.5lacs and the inflation rate is expected to be 5.5% per annum for first 5 years and 6.5% per annum thereafter. He is also planning to invest around Rs 60,000 in the gold ETF after 5 years so that he is able to enjoy the trip probably without any deficit. Rate of interest for the entire period on investments is 11% per annum. Calculate the surplus or deficit amount for him to achieve this target? Sol. STEP 2 STEP 1 SET : END/BEGIN SET : END/BEGIN 59

N=5 N=7 I = 5.5 I = 6.5 PV = -500000 PV = -653480 FV = 653480 Solve FV = 1015499.12 Solve Total cost of world tour after 12 years = Rs.1015499.12 STEP 3 STEP 4 SET: END SET : END N = 12 N=7 I = 11 I = 11 PV = -100000 PV = -60000 FV = 349845.05 Solve FV = 124569.60 Solve Total maturity value after 12 years of both investments = 349845.05+124569.60= Rs.474414.65 Thus Aman would be facing a deficit = 1015499.12 - 474414.65= Rs.541084.47 Q12. Mr. Dinesh has invested in a fund Rs.75, 000/- for his daughter‘s marriage which is expected 18 years down the line. The cost of marriage in today‘s monetary term costsRs.90000/- and inflation is expected to be at 6% for the first ten years and 5% for the next eight years. Mr. Dinesh will also be contributing Rs.25000/- at the end of 9 years from now to the above said fund. Interest Rate for the entire period is assumed to remain fixed at 12%p.a. Calculate surplus or deficit amount for Mr. Dinesh to achieve his target? Sol To solve this problem, we need to know actual marriage expenses after 18 years. STEP 1 STEP 2 SET: END SET: END N = 10 N=8 I= 6 I = 5 PV = -90000 PV = -161176.29 FV = S= 161176.29 Solve FV = 238130.79 Solve So, marriage expenses after 18 yrs. will be Rs.238130/- Now, we have to calculate future value of Rs.75000/- for a period of 18 years and Future Value of Rs.25000/- for a period of 9 years STEP 3 STEP 4 SET: END SET: END N = 18 N=9 I = 12 I = 12 PV = -75000 PV = -25000 FV = 576747.43 Solve FV = 69326.96 Solve So, the amount he will have at the end of 18 years will be 576747+69327 = Rs.646074/- Marriage Expenses after 18 years are Rs.238130/- He will have a surplus of Rs. (646074-238130) = Rs.407944/- 60

Q13. Rahul aged 36 wants to generate the corpus Rs. 10lacs for his daughter wedding 20 years down the line in today‘s term. What amount he should invest starting today to generate this corpus. Expected return is around 8.5% per annum compounded semiannually and inflation rate is 6% per annum. Sol STEP 2 STEP 1 SET : END SET : END N = 20 N = 20 I = 8.5 I=6 PV = -606840.78(SOLVE) PV = -1000000 FV = 3207135.47 FV = 3207315.47 Solve P/Y = 1 P/Y = 1 C/Y = 2 C/Y = 1 Q14. Mr. X is planning to send his son for higher education for 5 years after 7 years and the current cost of education is approximately Rs. 6lacs which are expected to inflate at 4% per annum. Talking about the current situation he has around Rs. 50000invested in a fixed deposit giving him 8.5%per annum for seven years .What additional amount should be invested today so that he is able to meet the gap. Expected rate of return is 8.25% per annum compounded quarterly. Sol STEP 2 STEP 1 SET: END SET: END N=7 N=7 I = 8.5 I=4 PV = -50000 PV = -600000 FV = 88507.11 Solve FV = 789559.06 Solve The gap = 789559.06-88507.11 = 701051.95 STEP 3 SET: END N=7 I = 8.25 PV = -395818.91(SOLVE) FV = 701051.95 P/Y = 1 C/Y = 4 Q15. Ram requires Rs. 500000 after 12 years for his children education in today‘s term. In order to meet the goal he has invested Rs. 250000 in a fixed deposit offering 9.50%per annum compounded semiannually for first 4 years. The maturity proceeds will be invested @ 8.5% p.a. compounded quarterly for next 5 years. The amount received at the end of 9th year will be invested in equity for remaining tenure to meet the corpus requirement, what return should be offered by equity if interest rate is compounded annually to satisfy his requirement? Expected inflation is 6% per annum. Sol STEP 2 STEP 3 STEP 1 SET : END SET : END SET : END 61

N = 12 N=4 N=5 I=6 I = 9.5 I = 8.50 PV = -500000 PV = -250000 PV = -362386.70 FV = 1006098 (SOLVE) FV = 362386.70 (SOL) FV = 551840.58 (SOL) P/Y = 1 P/Y = 1 C/Y = 1 C/Y = 2 P/Y = 1 C/Y = 4 STEP 4 SET : END N=3 I = 22.16(SOLVE) PV = -551840.58 FV = 1006098 P/Y = 1 C/Y = 1 Q16. Vinay is planning to buy a car 8 years down the line costing him Rs. 350000 in today‘s term. Currently he has made the investment in a fixed deposit amountingRs.250000 for a period of 3 years @ 9.75% per annum compounded monthly. For how long he should invest the maturity proceeds @ 11% per annum compounded monthly to achieve his goal? (Assuming inflation rate to be 5% per annum.) Sol. STEP 2 STEP 3 STEP 1 SET : END SET : END SET : END N=3 N = 3.97 (SOLVE) N=8 I = 9.75 I = 11 I=5 PV = -250000 PV = -334547 PV = -350000 FV = 334547 (SOL) FV = 517109.40 FV = 517109.40 (SOL) P/Y = 1 P/Y = 1 P/Y = 1 C/Y = 12 C/Y = 12 C/Y = 1 Q17. Ms. Shalu daughter of Mr. Rohan is 10 year old. Mr. Rohan wants to spendRs.15,00,000 (current terms) on her marriage. Presently he has got some equity investments in his portfolio worth Rs.1,50,000 which could earn 14% p.a. for a period of 7 years. Assuming he invest the equity proceeds and an additional amount ofRs.4,50,000 @ 15% p.a., calculate the age of his daughter at which she can get married? (Assuming Inflation @ 4%) Sol STEP 1 SET : END N=7 I = 14 PV = -150000 FV = 375340.31(SOLVE) P/Y = 1 C/Y = 1 Inflating Rs.1500000 for 16 years at 4% 62

After 7 years maturity proceeds of equity investments(375340) and additional amount of Rs.450000 i.e. Rs.825340 will be invested further STEP 2 SET : BEGIN N = 9 (SOLVE) I = 15 PV = -825340 FV = 2903444 P/Y = 1 C/Y = 1 STEP 3 Cost of marriage after 16 years SET : END/BEGIN N = 16 I=4 PV = -1500000 FV = 2809471.86 (SOLVE) P/Y = 1 C/Y = 1 Surplus = 2903444-2809471.86 = Rs.93972 Q18. Mr. X aged 30, is planning a trip at his retirement which costs Rs.150000 in present term. He will retire at 58. The cost of trip is expected to rise by 5% per annum. Assuming he has made an investment of Rs. 50000 @12% per annum compounded quarterly, check whether he can take the trip at retirement or not? Sol. STEP 2 STEP 1 SET : END SET : END N = 20.84 (SOLVE) N = 28 I = 12 I=5 PV = -50000 PV = -150000 FV = 588019.37 FV = 588019.37 (SOLVE) P/Y = 1 P/Y = 1 C/Y = 4 C/Y = 1 63

Financial Ratios Ratios help to go in deep insight analysis of the client‘s financial health. These ratios provide information either predictive or diagnostic about the client‘s financial situation. Ratios provide information about the following 4 aspects of the client‘s financial situation. • Liquidity • Debt • Risk Exposure • Net Worth From Personal Financial Planning point of view the following ratios are important to study: • Basic liquidity ratio • Expanded liquidity ratio • Life Insurance Coverage Ratio • Tax burden ratio Liquidity Ratios Liquidity ratios are useful in interpreting an individual‘s ability to handle financial needs when faced with a decline in income, or to take advantage of a financial opportunity that may suddenly appear. To measure a liquidity following two information/ financial variables of the client are required: 1. Liquid Assets: Cash or cash equivalent, Cheque on hand, Bank balance, Money Market Fund etc. 2. Monthly expenses : Interest expenses, Living expenses, Real estate tax, but not Income tax, TDS etc. Types of Liquidity Ratios: 1) Basic Liquidity Ratio: This ratio indicates how long can a person survive or sustain his monthly expenses with his present liquid assets. A basic liquidity ratio can be derived from the following equation: Basic Liquidity Ratio = Liquid Assets/ Monthly Expenses Liquid Assets include cash and Near Cash assets like cash in hand Mr. Manish has following information as on 31/03/2007 His value of total liquid assets Rs. 1,50,000 His total monthly expenses Rs. 35,000 So, Mr. Manish‘s Basic Liquidity ratio will be Rs. 150000/35000 = 4.285 2) Expanded Liquidity Ratio = Liquid assets and other financial assets/ Monthly expenses Other Financial Assets are Fixed Deposit, Blue chip stocks, Bonds, Mutual Funds etc. (which are easily en cashable). It is not advisable to take above assets in their current value. Fixed deposits are taken at 100%. Stocks, bonds, mutual funds have lower liquidity and volatility in their market value can decline their market value. Generally these are taken at 50% of their current value. 64

DEBT Ratios Debtor owes money to others. Q of debts are credit card balance, Housing loans, EMI, Tax liability etc. Client‘s financial position can be improved through the prudent use of debt financing. But often debt financing is used in an inappropriate manner and causes falling into debt trap. From adequate liquid assets debt can be repaid if necessity arises. Types of Debt Ratios: 1) Liquid Asset Coverage Ratio = Liquid Assets / Total Debt 2) Solvency Ratio = Liquid and other Financial Assets / Total Debt Other Financial Assets to be taken at Full Value for Solvency Ratio Life Insurance Coverage Ratio Life Insurance coverage ratio determines how the individual‘s dependants are adequately provided for in caseof death of the individual. It also determines the individual‘s quantum of current cash flow which comes out from his salary. Life Insurance Coverage Ratio = (Net Worth + Death Benefits of Principal Wage earner)/ Salary of Principal Wage Earner Mr. Manish has following information as on 31/03/2018: His Net Worth Rs. 15,50,000 His Death Benefits Rs. 20,00,000 His Salary for the year Rs.6,00,000 So, Mr. Manish‘s Life Insurance Coverage Ratio will be as follow: Life Insurance Coverage Ratio = (15.50.000+20.00.0000)/6,00,000 = 5.92 Normally a ratio of 7 to 10 would indicate that beneficiaries of the main bread earner‘s life insurance policy could support themselves for an extended period of time. But this ratio must be carefully understood as the liquidity of each person‘s net worth is quite different. Q1. Mr. Sumit is 32 years old and is working in a multinational company. He is married and has two children aged 6 and 2.He gets a salary of Rs.36000 p.m. net of taxes His expenses are Rs.14000 p.m. Other than his living expenses, he pays an EMI ofRs.10032 p.m. for the housing loan of Rs.1200000 which he has taken recently. His sister is getting married in the month of September for which he wishes to spend an amount of Rs.2, 00,000.His investments are as follows: (Present Value) Rs. Residential House 25, 00,000 Mutual Fund Units 3, 00,000 Bank FD maturing this month 1, 80,000 Term Insurance Policy 20, 00,000 Cash at bank 50,000 Compute Life Insurance Coverage Ratio? SOL. Life Insurance coverage ratio = (Net worth + Death Benefit) / Salary of the principal wage earner Net Worth = Assets – Liabilities Assets = Residential House + Mutual Funds + Bank FD + Cash at bank Assets = 2500000 + 300000 + 180000 + 50000 = 3030000 Liabilities = 1200000 Net worth = 3030000 – 1200000 = 1830000 Life insurance coverage ratio = (1830000 + 2000000) / 432000 = 8.86 65

Q2. Mr. Kumar is 56 years old going to retire in 2 years time. He is getting a salary ofRs.62000 p.m. net of taxes and expenses are Rs.32000 p.m. He assumes that after retirement in the beginning of 2018, he will require only Rs, 22000 p.m. He will get a pension of Rs.19000. His salary is increasing @10%p.a. His other investments are as follows: Rs. Cash at Bank 122000 Fixed Deposit Maturity amount 750000 (Maturing in Jan, 2007) Retirement Benefits 2675000 Outstanding Loan amount on House 400000 Other Liabilities 420000 Mutual Funds (Equity) 1025000 Balanced Funds 520000 He has to spend Rs.1000000 on daughter‘s marriage in 2009.On his outstanding loan he pays an EMI of Rs.18000 p.m. On retirement he has planned to invest Rs.1500000 in Senior Citizen Saving Scheme and submit form 15 G to avoid tax deduction at source. Calculate Net worth of Mr. Kumar? Sol.Net Worth= Assets-Liabilities Assets = 122000 + 750000 + 1025000 + 520000 = 2417000 Liabilities = 400000 + 420000 = 820000 Net worth = 2417000 – 820000 = 1597000 Q3. Sohan has following assets. Calculate his Expanded Liquidity Ratio. Cash In Hand : Rs. 42,000/- Cash at Bank : Rs. 50,000/- FD at Bank : Rs. 1,25,000/- Shares : Rs. 1,00,000/- Post Office MIS : Rs. 2,00,000/- Mutual Funds : Rs. 60,000/- Monthly expenses : Rs. 20,000/- SOL. Liquid Assets = Rs. (42,000 + 50,000) = 92,000 Other Financial Assets = Rs. (1,25,000 + 50,000 + 30,000) = 2,05,000 (Bank FD at 100 %, Shares and Mutual Funds at 50 %). Monthly Expenses = Rs. 20,000/- So, Expanded Liquidity Ratio = 92,000 + 2,05,000/20,000 Answer = 14.85 (Should be more than 6) 66

Q4. Following are the income and expenditure details of Mr. Arun. Calculate the Savings Ratio. Gross Income 800,000 Social security contributions (EPF) 85,000 Taxes 70,000 Household expenses 250,000 EMIs (for the year) 220,000 PPF Contribution 60,000 LIC premium 20,000 Medical insurance 15,000 Mutual funds (mainly ELSS) 30,000 Sol: Savings Ratio = Take home pay/Income available for saving Take home pay = Income –taxes - social security contributions = 800000 - 70000 - 85000 = 645000 Income available for saving = Take home pay – household expenses – EMI = 645000 – 250000 – 220000 = 175000 Savings Ration = 175000/645000 = 27.13% 67

Different types of Returns 1 Holding Period Return ―It is the total returns inclusive of capital appreciation and regular income in the form of rent, dividends etc. right from the point when investor buys the assets till the point of sale or calculating return.‖ HPR =(Ending Price - Beginning Price + Cash Dividend)/ Beginning Price Where, Ending Price = E1 Beginning Price = B0 Cash Dividend / Interest = D Ex1. Swami Krishnamurthy bought a house five years ago for Rs.1500000. Today thehouse is worth Rs.2250,000. What is the Holding Period Return? Sol. We have, E = Rs.2250000 B = Rs.1500000 D=0 By applying the formula we get, (2250000-1500000)/1500000 = 0.50 or 50% Ex. 2 Suppose by selling an investment for Rs.1500 a person yield 60% returns during ―n‖ years. During the period he also earns Rs.100 as the interest. What amount has the person invested? Sol. We have, E= Rs.1500 B=? D= Rs.100 HPR = 60% by applying the formula we get, (1500- B0) +100 = 0.6 B= Rs.1000 Ex.3A building that is held for 8 months, during which time it generates Rs.24000 in rental income (in excess of costs), and then sold for an Rs.30000 profit. Its original purchase price was Rs.250000. Calculate the holding period return? Sol. We have, E= 250000+30000= Rs.280000 B= Rs.250000 D= 24000 HPR =? By applying the formula we get, [(280000- 250000) + 24000]/250000 = 21.6% 68

Ex4. What will be the holding period return of a 30 years bond paying an annual coupon of Rs. 80 and selling at face value (Rs. 1000)? Assuming the bond holder sells the bond after a period of one year at par value. Sol. We have, End Value = Rs.1000 Begin Value = Rs.1000 Interest = Rs.80 HPR =? By applying the formula we get, [(1000 + 80) – 1000]/1000 = 0.08 or 8% 2. Compounded annual growth rate (CAGR) Compounded Annual Growth Rate is the year - over - year growth rate of an investment over a specified period of time. The compound annual growth rate is calculated by taking the Nth root of the total percentage growth rate, where n is the number of years in the period being considered. Ex.1 If the annual growth rates of a factory in 5 years are 3.5%, 5.4%, 6.8%, 7.3% and6.5% respectively, then the compounded growth of output per annum for the given period is Sol. We know that, CAGR = [(1+R1)(1+R2)(1+R3)…………..(1+RN)]1/5-1 = [(1.035)(1.054)(1.068)(1.073)(1.065)]1/5 – 1 = 5.89% Ex.2 Sharma made an investment of Rs.100000/- in a listed company 4 years ago. Calculate the compounded annual rate of return if Sharma sells his investment for Rs. 560000/- Sol. We know that, CAGR = (ending value /starting value)1/n – 1 = (560000/100000)1/4– 1 = 53.83% Ex.3 Rs.1,00,000 invested 5 years ago is now Rs.6 lakh, what is the compounded annual growth rate? Sol. We know that, CAGR = (ending value /starting value) 1/n – 1 = (600000/100000)1/5 – 1 = 43% 69

EX.4 As a college student thirty years ago, Amit purchased Rs.5000 shares of Wall Chand agar Industries. He recently sold the stock for Rs.105000. During his holding period, he received a total of Rs.12000 as cash dividends. Both his original and selling commissions were Rs.50 each. Calculate the CAGR. Sol. CAGR = [(105000 + 12000 - 50) / 5000 + 50]1/30- 1 x 100 = (23.158)1/30 - 1 x 100 = 11.04% EX.5 Calculate CAGR from the data given below On 1st Jan 2015, I started my investment portfolio with Rs.10000 On 1st Jan 2016, I made a loss, so my portfolio drops to Rs.8000 On 1st Jan 2017, I recouped my loss somewhat and my portfolio stands at Rs.9500 On 1st Jan 2018, my portfolio ends at Rs.12000 Sol We know that, CAGR = (ending value /starting value) 1/n – 1 = (12000/10000)1/3– 1 = 6.26% 3. Nominal and Effective rate of return Nominal Interest Rate: The nominal interest rate is the periodic interest rate times the number of periods per year; for Question, a nominal annual interest rate of 12% based on monthly compounding means a 1% interest rate per month. For example: 12% p.a. compounding monthly 16% p.a. compounding half yearly For easy to understand we can say that nominal rate of interest is difficult to understand for a layman. Effective Interest Rate: The actual interest rate that accrues, after taking into consideration the effects of compounding (when compounding occurs more than once per year). The effective interest rate is always calculated as if compounded annually. People can understand effective rate of interest easily. Ex. 12% p.a., 15% p.a. The effective rate is calculated in the following way, where r is the effective rate, i is the nominal rate and n is the number of compounding periods per year r = (1 + i / n)n– 1 Use of Financial Calculator: CNVR, ie conversion mode is used for calculating EFF (Effective rate) When we press CNVR in our calculators we get 4 options: 1. N = 0, 2. I% = 0, 3. EFF : 4. APR: where N is the number of times compounding is done 70

I is the interest rate EFF is the effective rate of interest APR is the nominal rate of interest Questions: Ex1. What is the effective rate of interest for 12%p.acompounded monthly, quarterly, semiannually? Sol. Press = CNVR Press = CNVR Press = CNVR N=2 N = 12 N=4 I = 12 EFF = Solve = 12.36 I = 12 I = 12 EFF = Solve = 12.68 EFF = Solve = 12.55 Ex2. What is the effective annual yield of an investment paying at a 10% annual rate, compounded quarterly? Sol. Press = CNVR N=4 I = 10 EFF = Solve = 10.38 Ex.3 15% p.a. return is equal to ………p.a. compounded monthly Sol. Press = CNVR N = 12 I = 15 APR = Solve = 14.057% EX4. If the continuous time return is 10%, find the annual return. Sol Effective rate of return = e -10.10 = 10.52% Q4. If the continuous time return is 11.8% find the monthly return Sol Effective rate of return = e -10.118 = 12.51% Monthly return = (1.1251)1/12-1 = 0.99% Q5. If the continuous time return is 10.5% find the quarterly return Effective rate of return = e -10.105 = 11.07% Quarterly return = (1.1107)1/4-1 = 2.66% Q6. If the nominal rate of interest is 8.5% and compounding is done half yearly, the effective rate of interest will be: Sol Press: CNVR 71

N=2 I = 8.5 EFF: Solve = 8.68 Q7. The difference between the effective rate of return of a bond with a coupon rate of10.75% when compounded weekly and semiannually is Sol Press: CNVR Press: CNVR N = 52 N=2 I = 10.75 I = 10.75 EFF : Solve = 11.34 EFF : Solve = 11.04 Difference = 11.34 - 11.04 = 0.30% 4. Tax adjusted rate of return & Inflation adjusted rate of return Inflation Adjusted Rate of Return: Inflation adjusted rate of return is a measure that accounts for the return period‘s inflation rate. Inflation adjusted returns reveals the return on an investment after removing the effects of inflation. It is calculated as follows: Inflation Adjusted Return ={(1 + Return)/(1 + Inflation Rate)– 1} * 100 Or We can use this formula: RRR = (return – inflation)/(1+ return ) Tax adjusted rate of return: Tax adjusted rate of return is more appropriate return as it takes in to consideration both tax and inflation. Purpose: one can know the required rate that is required to be maintained for the same level of investments given both the inflation and tax rate. 1. Formula used to calculate the required rate for maintaining same level of investment taking the effect of tax and inflation: = {(Inflation)/(100 - tax rate)} x 100 72

Questions Q1. Calculate the real rate of return if the rate of inflation to be 4.5% and rate of interest is 16%? Sol. RRR = (16-4.5)/1.045 = 11% p.a. Q2. A bond that pays interest annually yields a 7.25 percent rate of return. The inflation rate for the same period is 3.5 percent. What is the real rate of return on this bond? Sol. RRR = (7.25-3.5)/1.035 = 3.62% Q3. If you are promised a nominal return of 12% on a one year investment, and you expect the rate of inflation to be 3%, what real rate do you expect to earn? Sol. RRR = (12-3)/1.03 = 8.74% Q4. If the real interest rate is 5.3% p.a. and inflation is 4%, find the nominal rate of interest. Sol. RRR = (ROI – INF)/1+INF 5.3 = (ROI – 4)/1.04 5.3*1.04 + 4 = ROI ROI = 9.51% Q5. If the real interest rate is 5.3% and inflation is 7.5%, find the nominal rate of interest. SOL. 13.2% Q6. If the nominal interest rate is 12.3% and inflation is 7.6%, find the real rate of interest SOL. 4.37% Q7. If the nominal interest rate is 12.4% and inflation is 7.8%, find the real rate of interest? Sol3.99% Q8. If the interest rate is 12% and the real interest rate is 2%, find the inflation rate. Sol. RRR = [(1 +ROI)/(1+INF) – 1] * 100 2 = [(1.12)/(1+INF) – 1] * 100 2/100 = [(1.12)/(1+INF) – 1] .02+1 = (1.12)/(1+INF) (1+INF) = 1.12/1.02 (1+INF) = 1.098 INF = 1.098 – 1 = .098 = 9.8% p.a. Q9. If the interest rate is 15% and the real interest rate is 4%, find the inflation rate? Sol. 10.577% 73

Q10. If the interest rate is 8% and the real interest rate is 2%, find the inflation rate? Sol. 5.8823% Q11. What rate of return is required to maintain the same level of investment if the inflation rate is 7.14% and the tax rate is 30%. Sol Required rate to maintaining the same level of investment =( Inflation/1-tax rate) * 100 = 0.0714/(1-0.30) x 100 = 0.1020 x 100 = 10.20% Or We can solve in the following way 7.14/(1-0.30) = 7.14/.7 = 10.2% Q12. What rate of return is required to maintain the same level of investment if the inflation rate is 6% and the tax rate is 20%. Sol Required rate to maintaining the same level of investment = 6 / (1-0.20) = 7.5% 5. Internal Rate of Return The internal rate of return (IRR) is a capital budgeting metric used by firms to decide whether they should make investments. The IRR is the annualized effective compounded return rate which can be earned on the invested capital, i.e., the yield on the investment. A project is a good investment proposition if its IRR is greater than the rate of return that could be earned by alternate investments (investing in other projects, buying bonds, even putting the money in a bank account). Thus, the IRR should be compared to any alternate costs of capital including an appropriate risk premium. In general, if the IRR is greater than the project‘s cost of capital, or hurdle rate, the project will add value for the company. IRRs can also be compared against prevailing rates of return in the securities market. If a firm can‘t find any projects with IRRs greater than the returns that can be generated in the financial markets, it may simply choose to invest its retained earnings into the market. 74

Questions Q1. Your required rate of return is 11%. If you invest Rs.250 today you will receive the following cash flows: At the end of year 1 Rs.97 At the end of year 2 Rs.65 At the end of year 3 Rs.99 At the end of year 4 Rs.152 What is the IRR of the project? Sol 1 Step 1: Press cash button Step 2: Go to cash editor and press execute (EXE) Step 3: Insert cash inflows and outflows as shown below. Keep in mind cash outflows will be negative 1 = -250 2 = 97 3 = 65 4 = 99 5 = 152 Press ESC and solve IRR = 21.26% Q2. Determine the internal rate of return for a project that costs Rs.188, 419 and is expected to yield after-tax cash flows of Rs.29,000 per year for the first five years,Rs.37,000 per year for the next five years and Rs.50,000 per year for the following five years. Sol. Step 1: Press cash button Step 2: Go to cash editor and press execute (EXE) Step 3: Insert cash inflows and outflows as shown below. Keep in mind cash outflows will be negative 1 = -188419 2 = 29000 3 = 29000 4 = 29000 5 = 29000 6 = 29000 7 = 37000 8 = 37000 9 = 37000 10 = 37000 11 = 37000 12 = 50000 13 = 50000 14 = 50000 75

15 = 50000 16 = 50000 Press ESC and solve IRR = 16.13% Q3. Determine the internal rate of return for a project that costs Rs.98,000 and would yield after-tax cash flows of Rs.2,000 for the first year, Rs.4,000 for the second year, Rs. 17,000 for the third year, Rs. 39,000 for the fourth year, Rs. 23,000 for the fifth year, and Rs. 29,000 the sixth year. Sol 1 = - 98,000 2 = 2000 3 = 4000 4 = 17000 5 = 39000 6 = 23000 7 = 29000 Press ESC and solve IRR = 3.48% 6. Arithmetic Mean and Geometric Mean Arithmetic Return ―An average of the sub period returns, calculated by summing the sub period returns and dividing by the number of sub periods‖ Formula used, Arithmetic Return = (R1 + R2 + R3 + ……..Rn) / n where R1 + R2 + R3 + ……..Rn are the returns for the different periods n = The no of periods over which returns are calculated Geometric Return The geometric return measures the compound growth overtime. The geometric mean of a collection of data is defined as the nth root of the product of all the members of the data set, where n is the number of members. G.M. = [(1 + TR1) (1 + TR2) ................. (1 + TRn)]1/n- 1 where TR is a series of total returns in decimal form. By adding 1.0 to each total return produces a return relative. Return relatives are used in calculating geometric mean returns because TRs which can be negative cannot be used. 76

Q1. What is the arithmetic mean for the following returns? Year 1 5% Year 2 -3% Year 3 12% Sol. Arithmetic mean = (5-3+12)/3 = 4.67% Q2. What is the geometric mean for the following returns? Year 1 5% Year 2 -3% Year 3 12% Sol. Geometric mean = [(1.05)(0.97)(1.12)]1/3-1 = 0.04486 OR 4.49% Q3. The arithmetic return of 12%, 14% and 16% is _________. Sol. Arithmetic return = (12+14+16)/3 = 14% Q4. The geometric return of 10%, 18% and 24% is __________. Sol. Geometric return = [(1+0.10)(1+0.18)(1+0.24)]1/3-1 = 0.1719 or 17.19% 77

Sample Paper MODULE I: Introduction to Financial Planning (Realized By FPSB India) 1) Money has time value. It derives this value due to existence of several conditions. Which one of the following is not one of the conditions contributing to the existence of this value? A) The fees and commission sources of the firm B) Possibility of increase in tax rates over time. C) Ability to buy/ rent assets generating revenue D) Cost of foregoing present consumptions Sol 2) You are applying for an overdraft facility with the bank. What is the rate of interest you will pay on this facility? A) The bank will apply a flat rate of interest on the amount of overdraft allowed to actually utilize. B) The bank will apply a flat rate of interest on the amount of overdraft allowed to you. C) The bank will apply rate of interest linked to the term deposit rate, on the amount of overdraft utilized. D) The bank will apply rate of interest linked to the term deposit rate, on the average amount of overdraft remaining unutilized from the OD limit. Sol 3) The Nifty has doubled since the last time you advised your client to reduce his equity exposure. The client is annoyed. What might be the most appropriate action to take immediately?(1) A) Apologize for wrongly forecasting the market B) Change his asset allocation by increasing his equity exposure C) Help the client understand the logic of his asset allocation D) Rebalance his asset allocation by reducing equity investments Sol 4) A professional indemnity policy protects the insured from risk arising out of______________. A) Intentional misconduct B) Misrepresentation of professional competence C) Negligence D) Undisclosed conflict of interest Sol 5) Which of the following is a concurrent indicator of the phase of the business cycle? A) Wholesale price Index B) Index of Industrial production C) Labor costs and capacity utilization D) Order levels in the manufacturing sector Sol 78

6) What is the main difference between the personal Financial Planning needs of the employed and the self-employed? A) Attitude to risk/Risk appetite B) Need to fund children‘s education C) Need to fund retirement D) The extent of employer-provided pension benefits, if any Sol 7) Consider a portfolio of two investments viz. A & B. The sum total of volatility of A and B respectively, represented by standard deviation of the two investments, will be equal to the volatility of the portfolio as a whole if _________________. A) A and B have a correlation of Zero B) A and B have a correlation of 1 C) The portfolio is equally divided between A and B D) The return on the portfolio is equal to the sum of returns of A and B Sol 8) Which of the following is a correct interpretation of the Rules of Conduct pertaining to the Ethic of Confidentiality? A) A Member must when requisitioned by the client, provide to a person authorized by the client, all original documents prepared or received by the Member in undertaking the advisory task. B) A Member owes to the Member‘s partners or co-owners a responsibility to act in good faith (expectations of confidentiality) only while in business together, not thereafter. C) The Member shall maintain the same standards of confidentiality to employers as to clients. D) Under no circumstance, will any Member divulge any information or knowledge regarding the FPSB India or its members that they may know or be exposed to. Sol Sample Paper Module I : Introduction to Financial Planning (Realized By FPSB India) 9) Mr. Rajan‘s investment portfolio comprises Rs.2 lakh in equity, Rs.5 lakh in debt and Rs.1 lakh in his bank current account. Over one year the returns on equity and debt are 5%and 12%. At the end of the year to maintain his current asset allocation, he needs to___________. A) Do nothing. B) He needs to move Rs, 10000/- from equity and Rs. 60000/- from debt to cash. C) He needs move Rs.7500/- to equity from debt and Rs. 8750/-to cash from debt D) He needs to invest Rs. 70000/- in debt and equity. Sol 10) A 10 year 8.0% bond (Face Value- Rs.1000, interest payable semi-annually) maturing 6years from today is available at a yield to maturity of 6.0%. It is likely to be priced at_______________. A) Rs. 1100 B) Rs. 1149 79

C) Rs. 1168 D) Rs. 1498 Sol 11) Raykar is an accomplished Financial Planner and is also an expert on derivatives and high yielding bonds. He understands client requirements well and is able to come up with appropriate portfolio restructuring ideas for clients. He believes in quickly moving clients from one investment to another through a dynamic process of research and recommendations. What according to the Rules relating to the Code of Ethics is the most applicable in this case? A) He does not violate the Rules if he explains to the client the reasons and is able to show that the moves are appropriate to the client. B) He does not violate the Rules since he conducts and has access to research and advises on products relevant to clients based on an understanding of their requirements. C) He does not violate the Rules since he is an acknowledged expert and knows what is best for his clients. D) He violates the Rules as it amounts to active churning of client portfolios. Sol 12) Mrs. & Mr. Arora are aged 55 and 58 years respectively. Both expect to work till they turn 65. Their only goal is to fund their retirement. Which of the following is likely to be an appropriate asset allocation strategy for them? A) 10% sectoral equity, 20% diversified equity, 30% long-term debt, and 40% medium term debt B) 20% Sectoral equity, 60% diversified equity, 20% long-term debt C) 30% Sectoral equity, 30% diversified equity, 40% cash/ liquid investments. D) 80% long-term debt, 20% medium term debt Sol 13) If the post tax rate of return on an investment is 8% and the inflation rate is 5% the real ratio return is_______________. A) 3.5% B) 3.0% C) 2.85% D) -3.0% Sol 14) Which of the following is a tort of negligence? A) Mr. Joy was playing golf. He swings a new golf club on the fairway and the head of the club flies off, and hit another golfer who was standing 20 feet away. B) Mr. Vishal takes medication that he knows makes him drowsy and then proceeds to drive. He gets into an accident injuring the passengers in another car. C) Mrs. Jaya locks Ms. Rani in a room to prevent her from leaving the building D) Mrs. Priti experienced a sudden surge of chest pain while driving, which causes her to lose control of her car and hit another car. Sol 15) Any possible occurrence which may have a negative financial implication can be plotted ona graph with X axis measuring the frequency (low-high) and Y axis measuring the financial impact (low-high). You can view the classification in four quadrants. Quadrant I –Low frequency, Low 80

Impact Quadrant II - Low frequency, High Impact Quadrant III –High frequency, High Impact Quadrant IV - High frequency, Low Impact It would not be practical to purchase insurance for events falling in _________________. A) Quadrant I & IV B) Quadrant I, II & IV C) Quadrant I, III & IV D) Quadrant III Sol 16) Karan wants to withdraw Rs. 1200/- at the end of each month for the next 5 years. He expects to earn 10% interest compounded monthly on his investments. What lump sum should he deposit now?(4) A) Rs. 56949 B) Rs. 58630 C) Rs. 56478 D) Rs. 59119 Sol 17) 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? A) Rs. 6802 B) Rs. 6870 C) Rs. 6878 D) Rs. 6925 Sol 18) Sudha invests Rs.5000 in the beginning of every 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) A) Rs. 28505, Rs. 9954 B) Rs. 29010, Rs. 10652 C) Rs. 29568, Rs. 11054 D) Rs. 28804, Rs. 10042 Sol 19) Mr. John has purchased 100 convertible debentures of Essar Oil on 1/1/94 at Rs.500 each.40% of the value of the debentures is convertible into one share of Rs. 50 each after seven years. Mr. John exercised his option on 1/4/2001 and received 100 shares. Compute the cost of acquisition of these shares. A) Rs. 200 B) Rs. 205 C) Rs. 195 D) Rs. 185 Sol 81

Answers Ans 1 B Ans 2 C Ans 3 C Ans 4 C Ans 5 B Ans 6 D Ans 7 B Ans 8 C Ans 9 C Ans 10 A Ans 11 A Ans 12 A Ans 13 C Ans 14 B Ans 15 C Ans 16 C Ans 17 C Ans 18 B Ans 19 A 82

CONCEPT CHECKER Instructions to candidates a) There are multiple alternatives for each question b) Tick the answer which you feel is closest to the correct answer 1. Which of the following is true in regard to a financial planner ‘s liability? a) A disclaimer removes all liability. b) A principal adviser is liable for actions of representative. c) Advice is distinguishable from a recommendation. d) An adviser may be held liable for failure to predict economic changes. 2. Which of the following is not a license/certificate according to present licensing/certification regulations? a) stock broker b) sub-broker c) insurance agent d) all of the above are licences/certificates 3. Which of the following tests apply to reasonable basis for recommendations? i) Know your client ii) Obey Trade Practices Acts iii) Know relevant rules and regulations IV. iv) Know your products a) I and II b) I and III c) II and IV d) and IV 4. The stage of the business cycle which is marked by increased consumer and investment spending, higher price levels and money wages, and rising employment and national income, is: a) boom b) contraction c) recession d) recovery 5. Which of the following is not normally an influence upon short-term interest rate movements? a) movements in the current account deficit b) the trend of interest rates overseas c) fiscal policy d) the rate of long-term unemployment. 83

6. When the government adjusts economic policy through the central budget, it is exercising: a) Monetary policy b) Fiscal policy c) Incomes policy d) Exchange rate policy 7 Which of the following measures is most widely used as an indication of inflation? a) GDP Implicit Price Deflator b) GDP c) WPI d) CPI 8 Assuming all other things being equal, if the government increases the circulation of money, interest rates will: a) Increase b) decrease c) stabilise d) remain unaffected 9. A life policy that has no savings elements or cash value is: a) term insurance b) whole of life insurance c) endowment insurance d) an annuity. 10. Of the following investments, which is the most suited for short term parking of readily accessible cash? a) Money market mutual fund b) Govt. securities c) a piece of property d) Shares 11. What would be the main reason for a small investor using a mutual fund instead of direct investments in shares? a) lower market risk b) lower charges c) access to broad asset portfolio d) higher return 12. Which are the qualities of a good Financial Planner? a) Technical Skills b) Communication Skills c) Convincing attitude d) All of the above 84

13. Which of the following is not the role of an executor? a) To pay any debts b) To distribute the estate to those entitled to residuary estate c) To secure and preserve the assets d) To appoint the special power of attorney 14. Which of the following is appropriate behavior regarding a client‘s debts? I plans should be made to reduce and eliminate high interest non-deductible loans II a non-deductible 6 per cent home loan should be paid out before a 10 per cent deductible investment loan III sources and cost of finance should be identified IV the after tax cost of a deductible loan should be compared to the cost of a non- deductible loan before a decision is made on which debt should be reduced first a) I,II and III b) I,III and IV c) II,III and IV d) I,II,III and IV 15 Which of the following applies at the time alternatives and recommendations are made? a) The plan should be flexible enough to cope with the client‘s situation should it change in any way b) The main focus should be on the performance of recommended investments c) The client should be asked to think about plans for the future d) all of the above 16. Which of the following are steps used in preparing a financial plan? I goal setting II identification of financial problems III preparation of alternatives/recommendations IV implementation of the agreed recommendations a) I, II, III and IV b) I, II and IV c) III and IV d) II, III and IV 17. A statement of advice is not needed in providing limited financial planning advice) a) There is no such thing known as a statement of advice b) The above statement is true c) The above statement is false d) There is no such thing as limited financial planning advice, by definition financial planning is comprehensive) 18. Which of the following is true? 85

A) A professional financial planner provides only comprehensive financial advice to clients encompassing, estate planning, insurance risk management, income and expenditure (cash flow), retirement benefits, investment planning and taxation. B) A professional financial planner may provide limited advice, if he discloses the fact at the outset to the client. a) Both A and B are false b) A is true but B is false c) A is false but B is true d) A is true provided, the financial planner is a CFP CM certificant 19. A financial planner who receives commission from companies on sale of investment/insurance products to a client is being unprofessional. a) The above statement is true b) The above statement is false c) The above statement is false, provided the financial planner discloses the fact to the client at the beginning of the relationship. d) The above statement is true, provided he also charges service fees from the client. 20. A financial planner in Australia may call his/her services ‗independent‘ provided a) He/she avoids commissions/trailing commissions, soft dollar arrangements and other benefits from product providers which may tend to create a product bias b) Operates free from any direct or indirect restrictions relating to the securities recommended c) Operates without any conflict of interest by ownership links to product providers d) All of the above 21. A professional financial planner is one who a) takes pride in his/her work b) is committed to quality c) is dedicated to the interest of the client d) all of the above 22. In India, formalized/written complaints handling procedures for financial planning businesses are a must. This is a requirement of a) The law b) The FPSB c) It is not a requirement d) It is expected to be introduced shortly in the law. 23 Under the rules of professional conduct of the FPSB, a planner may charge a) any amount of fees b) only service fees c) only investment placement fee d) any fees provided it is fair and reasonable 86

24. According to the FPSB rules of professional conduct, disclosure regarding compensation needs to be made only at the time of establishing the relationship with a new client. a) True b) False c) Sources of compensation need not be disclosed d) Need to be disclosed whenever there is a change in status e) Both b and d 25. Telling a client about research capabilities or the use of computers in your financial planning firm amount to a) Unprofessionalism b) Advertising c) smart thinking d) waste of time 26. Any personal information about the client may not be used by the financial planner except a) To comply with legal requirements b) If it causes harm to the client c) To carry out the client engagement d) a) and c) 27. A CFPCM Certificant shall act in a capacity as regards client‘s funds a) Trustee b) Beneficiary c) fiduciary d) professional 28. In periods of inflation, nominal interest rates are —————— than real interest rates a) Higher b) Lower c) Equal d) None of the above) 29. Legislation risk ------------- minimized by diversifying investment across sectors a) Can be b) Can‘t be c) legislation does not have any impact d) none of the above 30. ------------- is entitled to claim depreciation but not a ----------- a) hirer, lessee b) lessees, hirer c) lessor, hirer d) lessees, lessor 87

31. If the discount rate is 17% , the discount factor for a cash flow received one year from now will be — a) 1*1.17 b) 1/0.17 c) 1/1.17 d) None of the above 32. A bond with a coupon rate of 10% is available at Rs. 1,250. The face value of the bond is Rs. 1,000. The effective yield on the bond is a) 10% b) 8% c) 12% d) None of the above 33. A person who carries out the instructions in a will on behalf of the deceased is called a) a beneficiary b) a testator c) an executor d) a lawyer 34. A financial planner should a) Always suggest his own cash flow management system to the client b) Not advise on cash flow planning c) Improve upon an existing system if it is adequately effective d) None of the above 35. For a retired client, a main account (e)g. a 2-in-1 account) is needed because a) It pays a higher rate of interest b) It evens out uneven cash flows c) Both a) and b) d) None of the above 36. If the inflation rate is 3% and the tax rate is 40%, the required rate of return to maintain the value of an investment is a) 4% b) 5% c) 6% d) 7% 37. There is a need for a thorough evaluation of a company before investing in its shares. This is because a) shares represent part-ownership of a business b) shares are risky investments 88

c) shares involve heavy cash outlay as compared to other investment avenues d) a) and b) 38. In the interest of your clients, for tax advice a) Refer them to a tax consultant b) Refer them to a CFPCM Certificant c) Seek expert advice yourself before recommending strategies d) None of the above. 39. The Indian taxation system is: a) Progressive b) Regressive c) Assertive d) None of the above 40. An equity share held for 24 months is a) A long term capital asset b) A short term capital asset c) Not a capital asset d) None of the above 41. Long term capital gains can be saved by investing the gain in an IPO a) The above statement is true b) The statement is false c) Even short term capital gains can be saved the same way d) None of the above 42. The code of ethic of integrity details conduct rules relating to a) member‘s compensation b) promotional activities c) client‘s funds d) b) and c) 43 The code of ethic of fairness requires a) that compensation of a financial planner be fair and reasonable b) That partners in a financial planning firm should act in good faith c) That a member may provide references of other clients to establish a relationship d) All of the above 44. An AFP member is required to keep all office/client records for a period of_____ years a) four b) Seven c) eight d) five 89

45. A broker or sub-broker shall take adequate steps for redressal of grievances within a) one week b) two months c) one month d) None of the above 46. Under the rules of the IRDA, every insurance agent is required to: a) disclose his commission to the prospect b) disclose his commission, if asked for by the prospect c) strive for maximum business for his/her insurance company d) None of the above 47. Under the rules of the IRDA, no insurance agent shall a) sell life insurance on the telephone b) work for two insurance companies simultaneously c) behave in a discourteous manner with the prospect d) All of the above) 48. Professional responsibility is based on a) contractual obligation b) a duty of care to the client c) fiduciary relationship d) All of the above 49. If an employee acts in breach of instructions of the employer, under professional responsibility the employer is a) not held responsible b) held responsible c) not held responsible, if he suspends the employee d) jointly held responsible with the employee 50. If a service is provided free of charge or under a contract of personal service and the consumer suffers harm, a) He can still take action under the Consumer Protection Act b) He cannot take action under the Consumer Protection Act c) He may take action but no penalty is payable d) He can only approach the National Commission to decide the matter of law. 51. What is the effective interest rate for 10% compounded monthly, quarterly, semiannually a) 10.47, 10.38, 10.25 b) 10.47, 10.40, 10.25 c) 10.42, 10.38, 10.25 d) 10.47, 10.36, 10.25 90

52. You have taken a loan of Rs. 100. The interest rate is 10% compounded monthly. Which option is more favorable for you. a) 0% upfront Rs. 8.97 per month in arrears b) 2% upfront Rs. 26.05 per quarter upfront c) 4% upfront Rs. 25.25 per quarter upfront d) 2% upfront Rs. 52.17 half yearly in arrears 53. The code of ethic of fairness requires all of the following except a) The client should be informed of the nature of services offered b) A member ‘s compensation shall be fair and reasonable c) A member may provide references including recommendations from former or present clients d) A members shall show respect for other financial planning professionals and related occupational groups. 54. The code of ethic of professionalism requires a) A member shall not engage in any conduct that reflects adversely on his or her integrity or fitness as a member, upon the marks, or upon the profession b) A members shall provide services diligently and on a timely basis c) A financial planning practitioner shall make and /or implement only recommendations that are suitable for the client d) In all professional activities, a member shall perform services in accordance with applicable rules and policies of the FPSB. 55. The CFPCM Certificant will not indulge in any practices which are detrimental to the profession is a requirement of which code of ethic) a) The code of ethic of fairness b) The code of ethic of professionalism c) The code of ethic of integrity d) The code of ethic of compliance 56. The market has doubled in last 6 months. A retiree client with limited exposure in equities calls you up and complains about the poor returns his bond investments (under your advice) are making. You respond by: a) Explaining the logic of his asset allocation. b) Helping him increase his equity exposure) c) Apologizing for poor performance d) Referring him to a well known equity portfolio manager 57. A client approaches you with a request that requires the intervention of an outside professional. You would: a) Refer the client to the professional b) Go ahead on your own c) Read up on the subject d) Refer him to another professional planner 91

58. A client of another CFP planner approaches you for advice and you find that there are computational errors in his tax returns. You would: a) Approach the FPSB with a complaint b) Advise your client of the error. c) Approach the other planner. d) Initiate legal proceedings against the other planner 59. A friend owes us Rs.50000/-, the interest is 12% compounded monthly what would you prefer a) Take 50,000/- b) Take 60,000/- after 1 year c) Take 25,000/- and 32,000/- at the end of the year d) Take 40,000/- and 15,200/- at the end of the year. 60. While monitoring a financial plan you would do all of the following except a) Undertake a strategic review b) Undertake a portfolio review c) Provide information on new investment opportunities d) Get the letter of engagement signed 61. While implementing a financial plan, you would a) Devise an action to proceed b) Get a letter of engagement signed c) Define the scope of services d) Define mutual responsibilities 62. While monitoring a financial plan, you would consider all of the following except: a) Changes in the economic situation b) Changes in the portfolio of the client c) Changes in the position of the client d) Changes in the social milieu 63. All of the following is relevant information of a client except: a) Residential address of the client b) Family health history c) Number of members in a family d) The business expenses borne by the employer. 64. A well to do individual who has his needs taken care of and is well into his retirement should invest into a) 90% short term debt, 10% cash b) 90% long term debt, 10% cash c) 60% equity, 30% debt, 10% cash d) 50% equity, 40% debt, 10% cash e) 25% Equity, 60% Short term debt. 15% long term debt 92

65. There is a 35 year old man with a wife and 2 children aged 6 and 9 years. Their topmost priority should be: a) Retirement planning b) Income protection c) Life insurance d) Critical illness insurance 66. there is a 22 year old male with no dependants and nominal income) His topmost priority should be a) Retirement planning b) Income protection c) Life insurance d) Critical illness 67. An investor has Rs. 9000 in mutual funds, Rs. 6000 in fixed deposits and Rs. 3000 in the savings bank. He wants to reshuffle his portfolio, keeping the ratio 3.5:2.5:1.5. What should he do? a) Take Rs. 600 from mutual funds and put it in the savings bank b) Take Rs. 1200 from mutual funds and put it in fixed deposits, take Rs. 600 from savings bank and put it in mutual funds c) Take Rs. 600 from mutual funds and put it in fixed deposits, take Rs. 1200 from fixed deposits and put it in savings bank d) Take Rs. 1200 from savings bank and put it in mutual funds 68. You consider yourself a very conservative investor and compare the return on any low-risk investments against the guaranteed rate you could obtain in a fixed deposit (FD) from a reputable bank. This benchmark for alternative investments is called the . a) nominal rate b) opportunity cost rate c) periodic rate d) effective annual rate 69. You invest Rs.50,000 in a commercial real estate property and expect to clear Rs. 180,000 (after selling expenses, closing costs, etc)) when you sell it in 8 years. What is your expected rate of return on this property? a) 17.63% b) 18.36% c) 17.36% d) 17.01% 70. It‘s your lucky day. You‘ve just won a million dollar lottery. But be careful, because the sweepstakes company is offering you two choices for payment: receive all Rs. 1,000,000 now or 20 payments of Rs. 100,000 per year. Under the second scenario, you‘ll receive your first payment a year from now, and the remaining payments at the end of each succeeding year. 93

As a preliminary comparison — until you have a change to talk with your accountant about tax implications, you assume the following: 1. No taxes are deducted from any money you receive) (Of course that‘s not true, but you haven‘t had a chance to talk with your accountant about tax implications) 2. You will immediately invest all your sweepstakes winnings, whether it‘s the $1,000,000 lump sum or annual $100,000 payments. (You can safely earn 7% annual interest on any sweepstakes winnings you receive) Which option is more suitable? a) Option 1 b) Option 2 c) Both are same d) None is suitable 71. You have three projects (A, B and C) for which you forecast the following cash inflows: Years from now 1234567 A 1,000 1,000 1,000 1,000 1,000 — — B — — 1,700 1,700 1,700 — — C — — — — 2,000 2,000 2,000 Each of the projects has been evaluated by one of your company‘s trainees. They have given you the following estimates: Asset A: present value today, 3,791. Asset B: present value 3 years from now, 4,650. Asset C: present value 7 years from now, 6,620. Which asset is most valuable? a) Asset A b) Asset B c) Asset C d) All 72. 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 73. The term structure of interest rates plots yield versus: a) all maturities of a particular risk class of bonds at a point in time b) a single maturity of a particular risk class of bonds of time c) all maturities of one category of bonds at a point in time 94

d) all risk classes of bonds at a point in time 74. Which of the following is true? a) YTM is dependent on both interest income as well as capital gains. b) The closer to maturity, the less sensitive a bond is to interest rate risk. c) Callable debt is debt that may be paid off early. d) All of the above are true) 75. Why do firms issue debt? a) managers like to have debt on the balance sheet as it gives them more discretion as to investment than does equity. b) debt has a lower cost than equity. c) Debt decreases the financial leverage of the firm. d) None of the above 76. Convertible debt is debt that . a) The issuing firm can convert into common stock. b) The issuing firm can pay off early. c) The bondholder can sell back to the firm at a guaranteed price) d) The bondholder can convert into shares. 77. In the event of a bankruptcy . a) Bondholders get paid before shareholders. b) Jr. Bonds holders get paid before Sr. Bond holders (ladies and children first!) c) The bondholders and other credit holders are guaranteed their initial investment back. d) all of the above 78. Which of the following statements is most correct? a) When investors require higher rates of return for investments that demonstrate higher variability of returns, this is evidence that is consistent with risk aversion. b) Risk aversion implies that investors will not diversify. c) Risk aversion implies a general dislike for risk, thus, the lower the standard deviation the higher the risk premium. d) In comparing two firms that differ from each other only with respect to risk, the expected returns on the stock of the firms should be equal. e) All of the above statements are false) 79. A baseball player is offered a 5 year contract which pays him the following amounts: a) Year 1: 1.2 million b) Year 2: 1.6 million c) Year 3: 2.0 million d) Year 4: 2.4 million e) Year 5: 2.8 million Under the terms of the agreement all payments are made at the end of each year. 95

Instead of accepting the contract, the baseball player asks his agent to negotiate contract which has a present value Rs.1 million more than that which has been offered) Moreover, the player wants to receive his payments in the form of a 5 year annuity due) All cash flows are discounted at 10 percent. If the team were to agree to the players terms, what would be the player ‘s annual salary (in millions of rupees)? a) Rs. 1.500 b) Rs. 1.659 c) Rs. 1.989 d) Rs. 2.343 e) Rs. 2.500 80. Sofar as employment and production are concerned, which two of the following industries are typically more affected by recession? a) Capital goods b) Consumer durable goods c) consumer non-durable goods d) Services (1) and (3) only. (1) and (2) only (2) and (3) only (3) and (4) only (2) and (4) only 81. Which combination of the following statements about investment risk is correct? (1) Beta is a measure of systematic, non-diversifiable risk. (2) Rational investors will form portfolios and eliminate systematic risk. (3) Rational investors will form portfolios and eliminate unsystematic risk. (4) Systematic risk is the relevant risk for a well-diversified portfolio. (5) Beta captures all the risk inherent in an individual security. a) (1), (2) and (5) only b) (1), (3) and (4) only c) (2) and (5) only c) (2), (3) and (4) only e) (2) and (5) only 82. Which of the following statements concerning supply and/or demand is/are true? 1) If demand increases and supply simultaneously decreases, equilibrium price will rise) 2) There is an inverse relationship between price and quantity demanded) 3) If demand decreases and supply simultaneously increases, equilibrium price will fall. 4) If demand decreases and supply remains constant, equilibrium price will rise) a) (1), (2) and (3) only b) (1) and (3) only c) (2) and (4) only d) (4) only e) (1), (2), (3) and (4) 96

83. Which combination of the following statements is true regarding the investment strategy known as ―rupee-cost averaging‖? 1) invests the same rupee amount each month over a period of time 2) purchases the same number of shares each month over a period of time 3) lowers average cost per share over a period of time (assuming share price fluctuations) 4) invests the same rupee amount each month to protect the investment from loss of capital a) (1) and (2) only b) (1) and (3) only c) (2) and (3) only d) (2) and (4) only e) (1), (2), (3) and (4) 84. Regarding the characteristics of insurance, which of the following is/are fundamental? 1) Probability (possibility and predictability of a loss) 2) Law of large numbers 3) Transfer of risk from individual to group 4) Insurance is a form of speculation a) (1) and (2) only b) (1), (2) and (4) only c) (1), (2) and (3) only d) (4) only d) (1), (2), (3) and (4) 85. Smith invests in a limited partnership which requires an outlay of Rs.9,200 today. At the end of years 1 through 5, he will receive the after-tax cash flows shown below. The partnership will be liquidated at the end of the fifth year. Smith is in the 28% tax bracket. YEARS CASH FLOWS 0 (Rs.9, 200) CF0. 1 Rs.600 CF1 2 Rs.2,300 CF2 3 Rs.2, 200 CF3 4 Rs.6, 800 CF4 5 Rs.9,500 CF5 The after-tax IRR of this investment is a) 17.41%. b) 19.20%. c) 24.18%. d) 28.00%. e) 33.58%. 86. Which of the following statements is/are correct?. 1) The IRR is the discount rate which equates the present value of an investment‘s expected costs to the present value of the expected cash inflows. 2) The IRR is 24.18% and the present value of the investment‘s expected cash flows is Rs. 9,200. 97

3) The IRR is 24.18%. For Smith to actually realize this rate of return, the investment‘s cash flows will have to be reinvested at the IRR. 4) If the cost of capital for this investment is 9%, the investment should be rejected because its net present value will be negative) a) (2) and (4) only b) (2) and (3) only c) (1) only d) (1), (2) and (3) only e) (1) and (4) only 87. Arrange the following financial planning functions into the logical order in which these functions are performed by a professional financial planner. 1) Interview clients, identify preliminary goals 2) Monitor financial plans 3) Prepare financial plan 4) Implement financial strategies, plans, and products. (5) collect, analyze, and evaluate client data a) (1), (3), (5), (4), (2) b) (5), (1), (3), (2), (4) c) (1), (5), (4), (3), (2) d) (1), (5), (3), (4), (2) e) (1), (4), (5), (3), (2) 88. The standard deviation of the returns of a portfolio of securities will be the weighted average of the standard deviation of returns of the individual component securities. a) equal to b) less than c) greater than d) less than or equal to (depending upon the correlation between securities) e) less than, equal to, or greater than (depending upon the correlation between securities) 89. According to fundamental analysis, which phrase best defines the intrinsic value of a share of common stock? a) The par value of the common stock b) The book value of the common stock c) The liquidating value of the firm on a per share basis d) The stock‘s current price in an inefficient market e) The discounted value of all future dividends 90. Which of the following are non-diversifiable risks? 1) Business risk 2) Management risk 3) Company or industry risk 4) Market risk 5) Interest rate risk 98

6) Purchasing power risk a) (4), (5) and (6) only b) (1), (2) and (3) only c) (5), (6) and (2) only d) (1), (3) and (4) only e) (1), (4) and (6) only 91. American depository receipts (ADRs) are used to 1) Finance foreign exports. 2) eliminate currency risk. 3) sell U.S. securities in overseas markets. 4) Trade foreign securities in U.S. markets. a) (1) and (3) only b) (1) and (4) only c) (2) and (4) only d) (4) only e) (1), (2) and (4) only 92. Movement through the phases of the business cycle is initiated by shifts in aggregate demand which create fluctuations in Gross Domestic Product (GDP). Which combination of the following statements would be the most significant contributor to the upward shift in aggregate demand ? 1) increase in demand for capital goods 2) increase in interest rates 3) increase in disposable income 4) Increase in savings a) (1) and (3) only b) (1), (2) and (3) only c) (1), (3) and (4) only d) (2) and (4) only e) (3) and (4) only 93. Six months ago, a client purchased a new bed for Rs. 6,500. For purposes of preparing accurate financial statements, this purchase would appear as a(an) 1) use asset on the client‘s net worth statement. 2) investment asset on the client‘s net worth statement. 3) variable outflow on the client‘s historic cash flow statement. 4) fixed outflow on the client‘s cash flow statement. a) (1), (2) and (3) only. b) (1) and (3) only c) (2) and (4) only d) (4) only e) (1), (2), (3) and (4) 99

94. If R is the real return, r is the portfolio return and I is the rate of inflation, then the formula for calculation of R is: a) R=r-I b) R= 1-(r +I)/(r-I) c) R=1+(r+I)/r-I) d) R = [(1+r)/ (1+I)]-1 95. If you have deposited Rs. 4,000 with a company for a specific interest and if the company wishes to prepay the deposits at the contract rate of interest after a period of 3.5 years and offers you Rs. 4985, what is the effective rate of interest if it is accounted half yearly? a) 6.4% b) 3.19% c) 6.5% 96. As a CFPCM Certificant, you have been appointed by a hospital trust and you have access to the financial details of the company which runs with the help of donations and contributions. One person who purports to be a major contributor to the Hospital Trust wishes to have the financial position before making donations. In those circumstances you will: a) provide the information to the donor b) decline his request as it involves confidentiality c) provide the information and inform the trustee of the hospital. 97. As an Associate Financial Planner (AFP), you have selected a ‗Product‘ which will be most suitable to the clients requirement, but the client/customer is not able to comprehend the product. In the circumstances as per the Code of Ethics: a) You have not violated the code as the product suits the best interest of the client. b) Violated the code as the client is not able to comprehend the product. c) The policy can be cancelled and fresh policy can be issued) 98. Which of the following is ‗incorrect‘ with respect to a proprietorship concern? a) The assets and liabilities of the firm belong to the proprietor. b) The firm has to be compulsorily registered to enable it to get assessed under IT. c) The assessment of firm and individual takes place simultaneously. 99. You are likely to receive Rs. 85,000 and Rs. 91,000 at the end of 19 and 21 years, and if the discount rate is 6%, what is the present value? a) 54862 b) 54678 c) 54863 d) 51234 100. In the regime of ‗soft interest‘, which of the following actions taken by RBI will not increase the bond prices significantly? a) Selling of Treasury bills at low rates. b) Move to privatize and improve tax collections c) Deficit financing 100