Challenge Status Stage I Question

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Challenge Status � Stage I Examination (Jan-21, 2007)

Maximum Marks: 140

Test Duration: 2 Hours

1) All of the following Rules relate to the Principle of Fairness except: 1

A A CFP certificant shall disclose sources of compensation to ongoing clients annually

B A CFP certificant shall exercise reasonable and prudent professional judgment in providing

professional services.

C In rendering professional services, a CFP certificant shall disclose to the client material information

relevant to the professional relationship, as well as information required by all laws applicable to the

relationship in a manner complying with such laws.

D A Financial Planning practitioner shall make timely written disclosure of all material information relative to

the professional relationship including, but limited to, conflicts of interests and sources of compensation.

2) Jaikishen, a Certified Financial Planner, is preparing a letter to circulate among prospective clients and the

letter contains information on services provided by his firm. According to the Code of Ethics and Rules of

Professional Conduct, all of the following information should appear in the letter except ________.

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A Details of firm�s portfolio size and composition

B The fees and commission sources of the firm

C Any significant financial relationships or connections with product providers

D Identity of the firm providing the service and the nature of services offered

3) While presenting and reviewing a Financial Plan to the client, you would do all of the following except

______. 1

A Present the plan in writing to the client

B Take the client through the plan

C Share the assumptions on which the plan is made

D Express your opinion as a matter of fact

4) Which of the following is not a correct interpretation of the Rules of Conduct pertaining to the Ethic of

Diligence for CFP Certificant? 1

A The Certificant shall enter into an engagement only after securing sufficient information to satisfy the

Certificant that the individual�s needs and objectives warrant the relationship.

B A significant recommendation may be given orally if it is not practicable to give it in writing.

C A Certificant is considered to be more knowledgeable than the client and hence may not need to

explain the recommendation and basis in a manner that the client comprehends.

D A Certificant shall confirm in writing to the client where a subsequent instruction given by the client alters

the financial strategy of a portfolio under the certificant�s supervision

5) The following statements relate to the responsibilities of the Financial Planner while implementing the

Financial Plan. Which of them appears to be the most appropriate? 1

A As soon as the client agrees to the recommendations while the financial plan is presented to the client, the

Financial Planner must proceed with the implementation activities.

B The Financial Planner may share client information with other professionals/experts if it helps the client.

C The FPSB India clearly prescribes all activities to be followed by Financial Planners during

implementation.

D The activities that will form part of the implementation of the financial plan are to be decided

mutually between the Client and the Financial Planner.

6) Which of the following is a reasonable assumption to make about the understanding of a client, on the

Financial Planning process? 1

A Client would have identified a desirable asset allocation.

B He would have some knowledge of the assumptions on which Financial Plans are made.

C He would understand the financial products being recommended.

D He would be able to identify his financial goals.

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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 ________. 1

A Compliance

B Professionalism

C Fairness

D Integrity

8) Protector International is a financial services firm that specializes in investment advisory services. In its

brochure for Financial Planning services, it may state _______. 1

A Its competence in investment advisory services and the arrangements to offer advice in other

areas

B It has the competence to take care of all Financial advisory requirements of the customer

C It can offer superior investment returns on customer portfolios and talk of the arrangements to offer advice

in other areas

D Its Financial Planning services are the best available in the market in light of its investment advisory

capabilities and arrangements to offer advice in other areas

9) An individual has decided to purchase life insurance and comes to you as his Financial Planner. You also

hold an Insurance Agency License in order to program a system of life insurance to meet the individual�s

needs, which among the following would be the first step: 1

A Determining the rate of return that the individual would like to receive.

B Analyzing the individual�s needs and determining the amount of life insurance coverage needed.

C Selecting an insurance company.

D Selecting the type of policy that the individual wants to purchase.

10) Subrogation means substitution of insured by insurer for claim from third parties. 1

A No

B Yes

C In certain Cases

D None of the above

11) A type of risk with high frequency but low severity is probably best handled by: 1

A Transfer

B Avoidance

C Insurance

D Self-insurance

12) As per risk retention strategy one should not retain the risk if

(i) Chances of peril occurring and

(ii) Severity of peril is _________. 1

A (i) High (ii) High

B (i) Low (ii) Low

C (i) High (ii) Low

D (i) Low (ii) High

13) Insurance is ________. 1

A Sharing of risk and sharing of losses

B Spreading of risk and spreading of losses

C Spreading of risk and sharing of losses

D Sharing of risk and spreading of losses

14) LALGI is _________. 1

A Private insurance

B Social insurance

C Public benefit guarantee scheme

D Actuarial technique of determining insurance premium

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15) For risk to be insurable which one of following is not correct? 1

A There must be a sufficiently large number of heterogeneous exposure units to make the losses

reasonably predictable.

B The loss produced by the risk must be definite and measurable.

C The loss must be fortuitous or accidental.

D The loss must not be catastrophic.

16) A client explains that she only wants an insurance policy that will cover her family against financial risk

over the next five years, while she still has dependent children and a large mortgage. It is unlikely her

income will increase over this period. What type of insurance is she looking for? 1

A Whole of life assurance to be paid up after five years.

B Single premium life insurance.

C Pure endowment assurance.

D Term insurance with a level premium.

17) The principal of �subrogation� means: 1

A An insurer undertakes to take legal action on behalf of its insured and to pay to the insured the net

proceeds of such legal action.

B An insured may not take legal action in respect of matter which is the subject of a claim.

C An insurer may bring an action against a third party in the name of the insured after satisfying a

claim.

D An insurer which has satisfied a claim may recover from the insurer of a third party who admits liability.

18) Which of the following is type of pecuniary insurance? 1

A Workman�s compensation

B Commercial vehicle insurance

C Engineering insurance

D Money policy

19) Tort is defined as: 1

A Justice to all

B Money damage for Legal wrongs

C Compensation for breach of contract

D None of the above

20) For defined benefit plans, which of the following changes in actuarial assumption would increase plan

costs to an employee?

1. Early retirement without a reduction in benefits.

2. Longer life expectancy predicted

3. An increase in inflation expectations regarding labor costs. 1

A 1 only

B 1 & 2 only

C 2 & 3 only

D 1, 2 & 3

21) Savita has been working and is covered by the Provident Fund Act, 1952. She hopes that the savings in

the scheme would be adequate to fund her retirement. She would like to enhance her contribution and

make an additional monthly contribution of Rs. 5000. Can Savita take an advance from her PF account for

funding her medical expenses? 1

A Yes. She can take an advance provided she can repay it within 5 years.

B No, she cannot take an advance for medical expenses. These have to be covered by insurance.

C Yes, she can take all of her voluntary contribution and upto three-fourths of her total contribution.

D Yes, she can take an advance of half of the amount in her credit, or 6-months pay, which ever is

less.

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22) Sundar has been an employee of a public sector undertaking for the past 25 years and is retiring the next

year. He is eligible for gratuity as per the provisions of the Payment of Gratuity Act, 1972. In the event of

Sundar�s untimely death before retirement, what happens to the Gratuity payable to him? 1

A Gratuity is payable to his nominee, or his heirs as the case may be.

B Gratuity is not payable if the employee dies before retirement from service.

C Gratuity is payable only if the employee has 5 years of continuous service as defined by the Act.

D Gratuity is paid at a lower rate.

23) Which of the following is FALSE about Gratuity as per Payment of Gratuity Act 1972? 1

A Gratuity is payable only in the case of retirement or superannuation, not in the case of resignation

or termination of service.

B The amount of gratuity payable cannot exceed Rs. 350000.

C The terms of gratuity can be better than what is stipulated in the Act.

D Gratuity payable can be forfeited by the employer for specific offences committed during employment.

24) As an employee Rajesh has come to you with his questions on superannuation plans/ Annuity Plans to get

more educated with current scenario. What is the maximum benefit allowed under Employees Deposit

linked Insurance? 1

A Average Balance in the provident fund account during the past 12 months or during the period of

membership whichever is less.

B 25000+40% of the amount in excess of Rs. 25000.

C 25000+25% of the amount in excess of Rs. 25000.

4 Rs. 60000.

25) Akash is a self employed, moderate risk taking person. He is 10 years away from retirement. Before he

decides to invest he has come to you to educate himself regarding investment risk, return and

diversification. Akash wants to know which among the following investment avenues normally has highest

number of compounding periods in a year. 1

A PPF

B Time Deposit

C NSC

D RBI Bonds

26) Bond prices are sensitive to both the coupon rate of the bond and the maturity term of the bond. Bond

prices are less sensitive to changes in interest rates when the bonds have_______. 1

A small coupons and long maturity

B small coupons and short maturity

C large coupons and long maturity

D large coupons and short maturity

27) All stock market indexes are most accurately characterized by which of the following statements about the

degree to which they co-vary together? 1

A They are uncorrelated.

B They are perfectly positively correlated.

C They are highly positively correlated.

D They are negatively correlated.

28) Any lead manager for an IPO of a company requires_______. 1

A SEBI Category-2 Certificate with 2% fee of issue amount

B SEBI Category-1 Certificate

C SEBI Category-2 Certificate

D SEBI Category-3 Certificate with 2.5% fee of issue amount

29) An equity shareholder has the following right_______.

1) He can legally demand information from the company and gain access to its books.

2) He can vote for the common shareholders� dividend.

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3) He can vote for the preference shareholders� dividend. 1

A 1

B 2

C 3

D 1, 2 & 3

30) A Preference Shareholder enjoys priority over common stockholders in respect of_______.

1) Dividends cannot be paid to common stockholders unless he receives the stated dividend.

2) In the event of liquidation, he is paid before the common shareholders.

3) He can elect the Chairman of the Board of Directors.

4) He can vote for dividend to be paid to the equity shareholders. 1

A Both (3) & (4) are true, but (1) & (2) are false.

B (1), (2), (3) & (4) are true.

C Both (1) and (2) are true, but (3) and (4) are false.

D None of the above

31) In the derivatives market, hedgers, speculators and arbitrageurs trade. Hedger is a trader _______.

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A who enters derivatives market in order to reduce a pre-existing risk

B who enters derivatives market in anticipation of a need in the near future

D whose net wealth change, at the time the derivative contract expires, is expected to be zero (Perfect

hedge assumed)

C All of the above

32) Which of the statements given below is not correct with regard to futures transactions? 1

A Cash flow management.

B Leveraging exposure.

C Benefit from premium payments.

D Portfolio substitution.

33) X owns a house property. It is used by him throughout the previous year 2005-06 for his (and his family

members) residence. Municipal value of the property is Rs. 166000, whereas fair rent is Rs. 176000 and

standard rent is Rs. 150000. The following expenses are incurred by X, repairs Rs. 20000, municipal tax

Rs. 16000, insurance: Rs. 2000: interest on capital borrowed to construct the property: Rs. 136000 interest

on capital borrowed by mortgaging the property for daughter's marriage: Rs. 20000 (in either case capital

is borrowed before April 1, 1999). Income of X from business is Rs. 710000. Find out the net income

chargeable to tax of X for the AY 2006-07. 1

A Rs. 642000

B Rs. 524000

C Rs. 544000

4 Rs. 680000

34) For investors, while computing capital gains on sale of securities (shares and units), is the STT paid

allowed as a deduction? 1

A Yes

B No

C Not specified

D Can�t say

35) Perquisites, on which tax is paid or payable by the employee, are not included as Fringe Benefits u/s -

115WB. 1

A This statement is true.

B This statement is false because perquisites payable to eligible employees are defined as fringe benefit

under the Finance Act.

C Can�t say.

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D None of the above.

36) Can the NRI extend his old PPF account for 5 years after its maturity? 1

A Yes

B No

C Can�t say

D None of the above

37) In an unfortunate incident, Mr. Charan's plant catches fire and the machinery gets destroyed. Luckily, Mr.

Charan had insured the factory against fire. The WDV of the machinery was Rs. 268000 and the

replacement cost Rs. 5 lakh. The Insurance Company has paid compensation of Rs. 3 lakh. What is the

taxable amount? 1

A Rs. 32000 as normal income.

B Rs. 200000 as capital loss.

C Rs. 32000 as capital gains.

D Nil.

38) Your client Mr. Saxena expressed his intention to write his Will in his own handwriting. Such a Will which is

wholly in the handwriting of the testator is known as: 1

A Manuscript Will

B A handwritten Will is not allowed as establishing the authenticity of a handwritten document is difficult in

the court of law.

C Nuncupative Will

D Holograph Will

39) Md. Asraf, a pious Muslim calculates that his legacy would be about Rs. 21000 after his death. He

estimates his funeral cost would be around Rs. 1000 and his debt amounts to Rs. 2000 leaving a balance

of Rs. 18000. What is the maximum amount he is allowed to bequeath? 1

A Rs. 6000

B Rs. 18000, being the entire amount of legacy

C NIL

4 None of the above

40) As per The Hindu Succession Act, 1956, the following person is not considered as a Class-I heir of a

person, who dies intestate: 1

A Mother

B Father

C Son/ Daughter

D Widow

41) Santosh sold five Nifty call option strike price 3500, lot size 100 at 45 on 26th Aug 2005. If the brokerage is

0.03%, what is the STT charged to Santosh? 2

A Rs. 175

B Rs. 232.75

C Rs. 297.50

D None of the above

42) Mr. A owes Rs.50000 to you and the interest is 12% pa compounded monthly. What would you prefer?

2

A Take Rs. 60000 after 1 year

B Take Rs. 25000 now and Rs. 32000 at the end of the year.

C Take Rs. 40000 now and Rs.15,200 at the end of the year.

D Take Rs. 50000 now

43) Any possible occurrence which may have a negative financial implication can be plotted on a graph with X

axis measuring the frequency (low-high) and Y axis measuring the financial impact (low-high). It would not

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be practical to purchase insurance for events which would fall in the high frequency, high impact quadrant

because _________. 2

A such a risk cover would be very expensive

B the best way to cover such a risk would be to alter the functioning of the business

C usually this is a business risk, which is rewarded by profit motive

D such occurrences are so few that no insurer would be offering a risk cover

44) You buy a growth-oriented non-dividend paying share for Rs. 200 and 4 years later you sell it for Rs. 350.

The compound annual growth rate is _____. 2

A 10.3%

B 18.8%

C 75%

D 15%

45) Sharad Sharma was supervising the construction of his building when a jeep of the building contractor

accidentally ran over his toes, immobilizing him for 6 weeks. What are the claims that arise from this

situation? 2

A Sharma can claim disability insurance; if the contractor establishes that Sharma was negligent, he is not

liable to pay any third party damage claims raised by Sharma.

B Contractor will pay damages to Sharma from the insurance claim on property; Sharma will get his claims

from an accident insurance he had bought.

C Sharma can claim under personal accident insurance; the contractor can claim third party liability

insurance if he has taken one; Sharma can sue the contractor for damages.

D Sharma can claim a disability insurance if he has bought one; The contractor can claim insurance for

paying the third party liability that arises from Sharma�s claim; Sharma can claim insurance for third party

negligence causing losses to him.

46) Mani is 25 years old and recently taken up his first job at a salary of Rs. 180000 p.a. only. He plans to

retire at the age of 60 years. He is single but has been dating Sonali for the past two years. He plans to

marry her within the next five years. Mani presently stays with his parents, who are financially

independent. What is the amount of Life Insurance cover you will prescribe to Mani as his Financial

Planner? 2

A Rs. 180000*10 = 18 Lakh

B Rs. 180000*6 = 10.8 Lakh

C He does not need any life insurance cover currently

D Rs. 180000*(60-25) = 63 Lakh

47) Medi-claim policy in India doesn�t provide for the following benefits: 2

A Domiciliary treatment.

B Domiciliary hospitalisation expenses.

C Reimbursement of Hospitalisation expenses.

D None of the above

48) Mr. Singh bought a Rs. 250000 whole life, double indemnity life insurance policy on August 1 of last year

(premiums were Rs. 200 per month). On Jun 30 of this year, Mr. Singh committed suicide. What is the

amount of benefit payable to Mr. Singh�s beneficiary, assuming the premiums were paid as agreed?

2

A Rs. 2200 + interest

B NIL

C Rs. 2200

D Rs. 250000

49) Manish estimates his opportunity cost on investments to be 12% compounded annually. Which one of the

following is the best investment opportunity for Manish? 2

A To receive Rs. 5000 at the beginning of each six-month period for nine years compounded

semiannually.

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B To receive Rs. 40000 at the end of four years and Rs. 120000 eight years later (at the end of the 12th

year).

C To receive Rs 50000 today.

D To receive Rs. 250000 at the end of 14 years.

50) Mr. Kalpesh decides to accumulate Rs. 50 lakh when he retires. He is 30 years old at present and wants

to retire at the age of 55 years. Assume Interest Rate = 9%, Inflation = 5%. Compounding to be done on

annuity certain basis. If Mr. Kalpesh could save only Rs.45, 000 p.a. for first ten years, how much does he

need to save for next 15 years to meet his retirement nest egg? 2

A Rs. 147008 p.a

B Rs. 98450 p.a

C Rs. 79250 p.a

D Rs. 85477 p.a

51) Mr. Gaurav is working with APE Ltd. since October 1, 1992. He is entitled for the basic salary of Rs.6000

per month and Dearness Allowance is 40% of Basic Salary for retirement benefits. He retired from his job

on January 1, 2006 (3 months before the end of F.Y 2006) and shifted to his village. He is entitled to the

following benefits at the time of retirement.

Gratuity = Rs. 98000.

Pension from January 1, 2005 = Rs. 2000 per month.

Payment from recognized PF = Rs. 300000.

Encashment of earned leave for 150 days = Rs. 36000.

He was entitled to 40 days leave for every completed year of service.

He got 50% of his pension commuted in lump sum w.e.f March 1, 2006 and received Rs. 120000 as

commuted pension.

Gaurav contributes Rs. 900 per month to RPF to which his employer contributes an equal amount.

With these details you are required to help him with the following questions related to Assessment year

2006-07. What is the amount of leave encashment he is eligible for exemption? 2

A Nil

B 10 month�s average salary

C Actual Encashed salary

D None of the above

52) Mr. Gaurav is working for the finance ministry since October 1, 1991. He is entitled for the basic salary of

Rs.6000 per month and Dearness Allowance is 40% of Basic Salary for retirement benefits. He retired

from his job on January 1, 2005 (3 months before the end of F.Y 2005) and shifted to his village. He is

entitled to the following benefits at the time of retirement.

Gratuity = Rs.98000.

Pension from January 1, 2005 = Rs. 2000 per month. Payment from recognized PF = Rs. 300000.

Encashment of earned leave for 150 days = Rs. 36000.

He was entitled to 40 days leave for every completed year of service.

He got 50% of his pension commuted in lump sum w.e.f March 1, 2005, and received Rs. 120000 as

commuted pension.

Gaurav contributes Rs. 900 per month to RPF to which his employer contributes an equal amount.

What is the amount of commuted pension that will be exempted? 2

A NIL

B Rs. 40000

C Rs. 80000

D Rs. 120000

53) Mr. Hitesh Shah has a portfolio with 23 different equities. The portfolio increased by 20% and has a beta of

1.50. Utilizing the Capital Asset Pricing Model, compute by what percent the market changed (round to

nearest 0.5%) (Assume risk free rate of 5%)? 2

A 14%

B 15%

C 16.5%

D 17%

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54) The August call option exercise price of HLL is Rs. 350. The current share price is Rs. 360. The premium

is Rs. 15. The intrinsic value of the call, ignoring transaction costs, is Rs. _______. 2

A Nil

B 5

C 10

D 15

55) A treasury bill of face value of Rs. 1lakh is selling at Rs. 97,500 today. It is slated to mature in 60 days.

The annual yield is _______. 2

A 13.3%

B 14.27%

C 15.59%

D 16.43%

56) Zarina invested Rs. 45000 in stocks at the beginning of the year. She received bonus shares worth Rs.

4000 at the year end. The value of the portfolio at the end of the year was Rs. 47000. Calculate the returns

of the portfolio during the year? 2

1 8%

2 - 4.45%

3 5.5%

4 - 7.2%

57) Paresh owns a let out house property the net annual value of which is Rs. 200000. The standard

deduction under Sec. 24 that is available to Paresh in respect of the above income would work out to

_______. 2

A Rs. 20000

B Nil

C Rs. 40000

D Rs. 60000

58) Within two years of purchase of his flat, Vaibhav entered into an agreement to sell the same to Mihir for

Rs. 8 lakh. Vaibhav had bought the flat for Rs. 5.5 lakh. Mihir pays Vaibhav earnest money of Rs. 50000 in

respect of the transaction with the balance money payable within a month. However, for some unavoidable

reason, Mihir could not make the rest of the payment and in terms of the agreement between the two; the

earnest money paid was forfeited by Vaibhav. Subsequently, within a month Vaibhav sold the flat to

another buyer for Rs. 9 lakh. Compute Vaibhav�s taxable income under capital gains. 2

A Short-term capital gains of Rs. 4.5 lakh

B Short-term capital gains of Rs. 4 lakh

C Short-term capital gains of Rs. 5 lakh

D Long-term capital gains of Rs. 4 lakh

59) In an unfortunate incident, Mr. Charan�s plant catches fire and the machinery gets destroyed. Luckily, Mr.

Charan had insured the factory against fire. The WDV of the machinery was Rs. 2.68 lakh and the

replacement cost Rs. 5 lakh. The Insurance Company has paid compensation of Rs. 3 lakh. What is the

taxable amount? 2

A Rs. 32000 as normal income.

B Rs. 32000 as capital gains.

C Rs. 2 lakh as capital loss.

D Nil.

60) B Ltd. purchases raw material on credit from A, who holds 20 percent equity share capital in B Ltd. (the

amount of bill being Rs. 36000, market price being Rs. 19000). It is paid in cash on Jul 26, 2006. As per

section 40A (2) & 40A (3), how will it be treated? 2

A Out of the payment of Rs. 36000, Rs. 17000 (being the excess payment to a person holding a substantial

interest) shall be allowed under section 40A (2). The remaining amount (i.e., Rs. 19000) does not exceed

Rs. 20000. Nothing shall be disallowed under section 40A (3) even if the payment is made in cash.

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B Out of the payment of Rs. 36000, Rs. 17000 (being the excess payment to a person holding a substantial

interest) shall be disallowed under section 40A(3). The remaining amount (i.e., Rs. 19000) does not

exceed Rs. 20000. Nothing shall be disallowed under section 40A(2) even if the payment is made in cash.

C Out of the payment of Rs. 36000, Rs. 17000 (being the excess payment to a person holding a

substantial interest) shall be disallowed under section 40A(2). The remaining amount (i.e., Rs.

19000) does not exceed Rs. 20000. Nothing shall be disallowed under section 40A(3) even if the

payment is made in cash.

D Out of the payment of Rs. 36000, Rs. 17000 (being the excess payment to a person holding a substantial

interest) shall be allowed under section 40A(3). The remaining amount (i.e. Rs. 19000) does not exceed

Rs. 20000. Nothing shall be disallowed under section 40A(2) even if the payment is made in cash.

61) Ajay and Bela Mahera have two children ages 5 and 7. The Mehera�s want to start saving for their

children�s education. Each child will spend 6 years at college and will begin at age 18. College currently

costs Rs. 20000 per year and is expected to increase at 6% per year. Assuming the Mahera�s can earn an

annual compound return of 12% and inflation is 4%, how much must the Mehera�s deposit at the end of

each year to pay for their children�s educational requirements until the youngest is out of school? Assume

that educational expenses are withdrawn at the beginning of each year and that the last deposit will be

made at the beginning of the last year of the younger child�s college education. 4

A Rs. 15230

B Rs. 14,989

C Rs. 12,386

D None of the above

62) Anu and Ravi, a couple in Madras, have the following commitments on a monthly basis:

General household expenses of Rs 15000, mortgage payments of Rs 10000, children tuition expenses of

Rs 2000 and entertainment expenses Rs 3000. Their monthly income on a post-tax basis is Rs 60000.

They have cash and bank deposits of Rs 150000 and other equity shares of value Rs 750000 apart from a

house that is valued at Rs 25 lakh. Based on the above data, calculate the family's Basic Liquidity Ratio?

4

A 2.5

B 2

C 5

D 11.33

63) Any possible occurrence which may have a negative financial implication can be plotted on a 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 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 ______________. 4

A Quadrant III

B Quadrant I, III & IV

C Quadrant I, II & IV

D Quadrant I & IV

64) Manju purchased an annuity for Rs. 26000 in the current year. Under the contract, Manju will receive Rs.

300 each month for the rest of her life. According to actuarial estimates, Manju will live to receive 100

payments and will receive a 3% return on her investment. 4

A If Manju lives to collect more than 100 payments, all amounts received after the 100th payment

must be included in her gross income.

B If Manju collects Rs. 3000 in the current year, this Rs. 3000 is treated as a recovery of capital and thus is

not taxable.

C If Manju dies after collecting a total of 50 payments, she has an economic loss that is not deductible.

D If Manju lives to collect more than 100 payments, she must amend her prior year�s returns to increase her

taxable portion of each payment received in the past.

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65) Derive the 'Policy Cost Per Thousand' with following data;

Policy cost per thousand conversion = 0.001

Interest rate selected equivalent to the after-tax rate of return = 15%

Dividend or Bonus = Rs. 13000

Death benefits = Rs. 20 lakh

Annual Premium = Rs. 23000

Cash surrender value at the end of current policy year = Rs. 6 lakh

Cash surrender value at the end of the previous policy year = Rs. 5.7 lakh 4

A 59

B 49.25

C 28.9

D 31.15

66) A client has the need to provide for his child's college education costs. He envisages that four annual

payments of Rs 20000, in current money terms, would be needed beginning 15 years from now. Assuming

level of inflation rated at 5% per annum and that the fund earns 8% per annum returns throughout;

calculate the present value to be placed on this liability when carrying out a needs analysis for this client.

(Round of your answer to the nearest '000') 4

A Rs. 24000

B Rs. 49000

C Rs. 50000

D None of the above

67) Mr. Nirav, an affluent broker, wants to retire at 45. He wants to maintain his present living standard. He

spends Rs. 3.25 lakh a year. He is expected to live upto 85. Inflation is to be assumed at 4% and expected

returns are 7% p.a. How can he achieve this? He is at present 30 years old. What is the nest egg required

at age 45 and what amount shall he save every year to meet his plan? His present investments are Rs. 10

lakh. 4

1 Nest egg and savings required will be Rs. 13785155 and Rs. 438780 respectively.




68) Mr. Ramesh retired from PTC Ltd after completing service of 29 years and 9 months. His salary at the time

of retirement was Rs. 10500 per month while the average salary drawn for the preceding 10 months

worked out to Rs. 9800 per month. The actual amount of gratuity received by him at the time of retirement

was Rs. 3.25 lakh. Calculate the amount of gratuity exempt from tax assuming that he is covered by the

provisions of Payment of Gratuity Act, 1972? 4

A Rs. 294000

B Rs. 181730

C Rs. 315000

D None of the above.

69) Ms. Reshma is 35 years old and plans to retire at 50. Her life expectancy is 60 years. Ms. Zarina her

Financial Planner, estimates that her client will require Rs.65000 in the first month after retirement.

Inflation rate is 3% p.a. and the rate of return is 5% p.a. What will be the savings per year required in order

to meet this? 4

A Rs. 328300

B Rs. 345897

C Rs. 315894

D Rs. 320458

70) ABC Ltd.'s stock has a current dividend of Rs. 1.75 that is growing at 8%. If the stock is currently selling

for Rs. 100 and your required rate of return is 10%, will you buy the stock at today's price? 4

A Yes, because the stock is a good buy based on a risk-return relationship.

B No, because the stock is overvalued based on the dividend growth model.

C No, because the stock is a bad investment based on a risk-return relationship.

12

D Yes, because the stock is undervalued based on the dividend growth model.

71) A portfolio consists of 3 securities 1, 2 & 3. The proportion of those securities are w1=0.3, w2=0.5 &

w3=0.2. The Standard Deviation of those securities are SD1 = 6%, SD2 = 9% and SD3= 10%. The

correlation coefficient among these securities are r12 = 0.4, r13 = 0.6 and r23 = 0.7. Calculate the

Standard Deviation of the portfolio returns? 4

A 7.13%

B 6.58%

C 8.25%

D 7%

72) The Portfolio consists of two securities, X and Y in the ratio of 70:30. Given that -

i) Standard Deviation of X is 10%

ii) Standard Deviation of Y is also 10% and covariance between them is 16%, what is the portfolio risk?

4

A 13.77%

B 8.04%

C Nil

D 25%

73) X Ltd. engaged in the business of manufacturing software furnishes the following data.

1 - Gifts to employees Rs. 10.25 lakh

2 - Rent-free accommodation given to employees Rs. 45 lakh

3 - Expenses on participation in Trade Fair Rs. 8.75 lakh

4 - Expenses on health and sports club for employees Rs. 5 lakh

Note: Exclude surcharge and education cess for all calculations.

Fringe Benefit Tax payable for 1, 2, 3 & 4 to employees are: 4

A Nil, Rs. 13.5 lakh, Rs.13125 & Nil respectively

B Rs. 307500, Rs. 6.75 lakh, Rs. 131250 & Rs. 150000 respectively

C Rs. 61500, Rs. 270000, Rs. 52500 & Rs. 30000 respectively

D Rs. 153750, Nil, Nil & Rs. 75000 respectively

74) X purchases on May 10, 2005, 1000 equity shares of Rs. 10 each in A Ltd. @ Rs. 55.55. On October 20,

2005, he transfers 800 equity shares @ Rs. 37 per share and remaining 200 shares are transferred on

December 20, 2005 @ Rs. 20 per share. A Ltd. Declares 50 percent dividend (record date: August 3,

2005). During the previous year 2005-06, he has generated long term capital gain of Rs. 76000 on sale of

gold. His LTCG For AY 2006-07 is ____________. 4

A Rs. 58050

B Rs. 59050

C Rs. 73890

D Rs. 72890

75) X (34 years) gifts Rs. 10 Lakh to Mrs. X (29 years). She deposits the same in a bank (on 1st Apr 2005) @

8 percent per annum. Y is minor child of X and Mrs. X. Y has a bank deposit of Rs. 70000 (rate of interest

8.25 percent) on 1st Apr 2005, which was gifted to him by his grandfather. Other income of X and Mrs. X is

follows - X: Rs. 2.9 lakh (salary: Rs. 2 lakh, bank interest: Rs. 90000), Mrs. X: Rs. 1.6 lakh (interest as

company deposits). Out of bank interest, Mrs. X deposits Rs. 1000 in Public Provident Fund. X's

contributions to the recognized provident fund is Rs. 40000.Calculate tax liability of Mr & Mrs X for AY

2006-07. 4

A Tax Liability of Mr. X is Rs. 50734 & Mrs. is Rs. 3366

B Tax Liability of Mr. X is Rs. 50284 & Mrs. is Rs. 3300

C Tax Liability of Mr. X is Rs. 51290 & Mrs. X is Rs. 3366

D Tax Liability of Mr. X is Rs. 51749 & Mrs. X is Rs. 3366

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