RBI GRADE B | SEBI GRADE A 2019

Finance (Theory)

MCQ Series
Lecture – 2

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 Question

Q1. In which of the following case(s) shall puttable bonds be more

advantageous than callable bond from investor perspective?

A. Banks offering higher interest rate on deposit

B. Banks offering Lower interest rate on deposit
C. There is no change in interest rate on deposit
D. Both A and B
E. None of the above

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 Explanation
Based on redemption features

Callable Bonds Puttable Bonds

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 Explanation
Puttable Bonds

 Bond holder has the right to sell the bonds back to

bond issuer before the maturity date.

Usually done when Interest rates on fixed

interest rates on fixed deposits become even more
deposits increases. than the Coupon rates.

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 Explanation

Investor holds bonds Fixed Deposit rate in

at 10% coupon rate bank is 12% Investor will
sell those
bonds at 10%

Deposit that money

Earn extra 2% p.a.
in FD
 Question

Q1. In which of the following case(s) shall puttable bonds be more

advantageous than callable bond from investor perspective?

A. Banks offering higher interest rate on deposit

B. Banks offering Lower interest rate on deposit
C. There is no change in interest rate on deposit
D. Both A and B
E. None of the above

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 Question
Q2. Given below are following points related to debt-financing. How many
points are its advantage(s) for issuer?
a) Interest is tax-deductible
b) It reduces WACC
c) Does not dilutes ownership
d) Periodic dividends

A. 1 only
B. 2 only
C. 3 only
D. 4 only
E. None of the above.

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 Explanation
Advantages of Debt-financing for issuer

• No dilution in ownership. Retain Control.

• Retaining business profit.

• Interest charges and fee, are tax-deductible

• Reduces Weighted Average Cost of Capital.

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 Question
Q2. Given below are following points related to debt-financing. How many
points are its advantage(s) for issuer?
a) Interest is tax-deductible
b) It reduces WACC
c) Does not dilutes ownership
d) Periodic dividends

A. 1 only
B. 2 only
C. 3 only
D. 4 only
E. None of the above.

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 Question

Q3. In a loan repayment schedule, the portion of interest paid in each

periodic installment ___________.

A. Remains constant
B. increase
C. decreases
D. Initially decreases then increases
E. None of the above

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 Explanation
Loan Repayment Schedule

EMI

Interest Principle

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 Explanation
Loan of Rs 100. @ 10% p.a. EMI = Rs. 20

0 Year 1st Year 2nd Year 3rd Year 4th Year

EMI Paid 20 20 20 20

Interest 10 9 7.9 6.7

Principle 10 11 12.1 13.3

Left Principle 100 90 79 66.9 53.6

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 Question

Q3. In a loan repayment schedule, the portion of interest paid in each

periodic installment ___________.

A. Remains constant
B. increase
C. decreases
D. Initially decreases then increases
E. None of the above

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 Question

Q4. Which of the following is/are the bonds which are first to be paid in case
the issuing company goes for a liquidation process?

A. Subordinated Bond
B. Senior Bond
C. Unsubordinated Bond
D. Junior Bond
E. Both B and C

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 Explanation
Based on Priority

Unsubordinated Subordinated
Bonds Bonds
• Senior Bonds • Junior Bonds
• Paid 1st in case of • Paid after the payment to
liquidation. senior bondholders.

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 Question

Q4. Which of the following is/are the bonds which are first to be paid in case
the issuing company goes for a liquidation process?

A. Subordinated Bond
B. Senior Bond
C. Unsubordinated Bond
D. Junior Bond
E. Both B and C

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 Question

Q5. Cost of capital for Government Securities is also known to be as?

A. Maximum rate of return

B. Risk free rate of return
C. Rate of Interest on fixed deposit
D. Both B and C
E. None of the above

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 Explanation
Based on Priority

Unsubordinated Subordinated
Bonds Bonds
• Senior Bonds • Junior Bonds
• Paid 1st in case of • Paid after the payment to
liquidation. senior bondholders.

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 Question

Q5. Cost of capital for Government Securities is also known to be as?

A. Maximum rate of return

B. Risk free rate of return
C. Rate of Interest on fixed deposit
D. Both B and C
E. None of the above

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 Explanation
Feature of G-Sec

• Zero Income Default.

• Almost no risk.

• Extremely high liquidity.

Most common example is Treasury

Bill (T-Bills)

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 Question

Q5. Cost of capital for Government Securities is also known to be as?

A. Maximum rate of return

B. Risk free rate of return
C. Rate of Interest on fixed deposit
D. Both B and C
E. None of the above

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 Answers to MCQs

Answers:
Q1 : A
Q2 : C
Q3 : C
Q4 : E
Q5: B

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 Extra - Question

Q6. Which of the following bond is always issued at a

discount to its face value?

A. Convertible Bond
B. Subordinate Bond
C. Zero-Coupon Bond
D. Callable Bond
E. None of the above

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 Query
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