Business Finance MCQ Quiz - Objective Question with Answer for Business Finance - Download Free PDF

The correct answer is - 64.47

Key Points

• Forward Rate Calculation
  • The formula for calculating the forward exchange rate is based on the Interest Rate Parity:
    Forward Rate = Spot Rate × (1 + Interest Rate of Domestic Country) / (1 + Interest Rate of Foreign Country).
  • In this case:
    • Spot Rate (₹/$): 62.10
    • Interest Rate in India: 8.5% or 0.085
    • Interest Rate in America: 4.5% or 0.045
  • Substitute values into the formula:
    Forward Rate = 62.10 × (1 + 0.085) / (1 + 0.045)
    Forward Rate = 62.10 × 1.085 / 1.045
    Forward Rate = 64.47
• Correct Answer Explanation
  • The option 64.47 correctly applies the formula and aligns with the given data.
  • The forward rate reflects the effect of the difference in interest rates between India and the US.

Additional Information

• Interest Rate Parity
  • It is a fundamental concept in foreign exchange markets that links spot exchange rates, forward exchange rates, and interest rates of two countries.
  • The formula assumes no arbitrage opportunities in the currency markets.
  • Higher interest rates in one country typically result in a depreciation of its currency in the forward market.
• Spot Exchange Rate
  • Defined as the current price of one currency in terms of another currency for immediate delivery.
  • It is influenced by factors such as economic stability, trade balances, and market demand.
• Forward Exchange Rate
  • The rate agreed upon today for exchanging currencies at a specific future date.
  • Used to hedge against exchange rate risk in international trade and investments.
  • Forward rates reflect differences in interest rates between two countries.

The correct answer is - American Depository Receipts (ADRs)

Key Points

• American Depository Receipts (ADRs)
  • ADRs are financial instruments issued by a non-American company but listed on US stock exchanges.
  • They allow Indian companies to raise capital from American investors without directly listing their shares on US exchanges.
  • ADRs are denominated in US Dollars, making them accessible and convenient for US-based investors.
  • ADRs are handled by US banks that act as depositories and issue receipts representing a specified number of shares in the foreign company.
  • They provide an efficient mechanism for Indian companies to access global equity markets and attract investments from the US.

Additional Information

• Global Depository Receipts (GDRs)
  • Similar to ADRs, GDRs are issued by non-US companies to raise funds in the global market and are listed on international stock exchanges outside the US.
  • While ADRs target US investors, GDRs are aimed at European and other international investors.
• External Commercial Borrowings (ECBs)
  • ECBs refer to loans or borrowings by Indian companies from foreign lenders, such as banks or financial institutions, rather than equity instruments.
  • They are used for funding infrastructure projects, capital expansion, and other large-scale investments.
• Promissory Notes
  • Promissory notes are legal financial instruments where one party promises to pay a certain amount to another party, but they are not used for equity fundraising.
  • They are commonly used for short-term debt or private transactions.
• Comparison Between ADRs and GDRs
  • ADRs: Issued for the US market and denominated in US Dollars.
  • GDRs: Issued for markets outside the US, often denominated in Euros or other foreign currencies.

The correct answer is - Spot

Key Points

• Spot transactions are not considered a hedging technique.
  • Spot transactions involve immediate settlement of currency or asset trades at the current market price.
  • Unlike hedging tools like swaps, options, and futures, spot transactions do not allow for managing future price risks.
  • Hedging focuses on mitigating or offsetting potential losses due to price fluctuations, whereas spot transactions focus on immediate trade execution.
  • Spot transactions are commonly used in trading and investments but are unrelated to hedging strategies.

Additional Information

• Swaps
  • A swap is a financial agreement between two parties to exchange cash flows or liabilities to hedge against interest rate or currency risks.
  • Swaps are widely used by institutions to stabilize cash flows or manage financial uncertainties.
• Options
  • An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an asset at a predetermined price before a specified date.
  • Options are effective for hedging against potential adverse price movements in underlying assets.
• Futures
  • Futures contracts obligate the buyer or seller to trade an asset at a predetermined price on a future date.
  • They are commonly used to hedge against price volatility in commodities, currencies, and financial instruments.

The correct answer is - It is not an organised market like other financial market

Key Points

• Foreign Exchange Market
  • The foreign exchange market is decentralized and does not have a physical location like traditional financial markets (e.g., stock exchanges).
  • It operates on a global scale with 24x7 availability, ensuring continuous trading across different time zones.
  • The market is characterized by its mammoth size, with daily transactions amounting to trillions of dollars.
  • Unlike other financial markets, it is not organized in the conventional sense, meaning it does not have a centralized governing body or structure regulating its operations.
• Correct Answer Explanation
  • The statement "It is not an organized market like other financial markets" is true, distinguishing the foreign exchange market from centralized and regulated financial markets like stock exchanges.
  • This feature makes foreign exchange trading more flexible but also introduces higher risks due to the lack of centralized oversight.

Additional Information

• Key Features of the Foreign Exchange Market
  • No physical location: The market operates electronically through networks of financial institutions, banks, and traders.
  • High liquidity: The foreign exchange market is the most liquid financial market globally due to its extensive volume of transactions.
  • Global reach: It spans multiple countries and time zones, facilitating trade and investment across borders.
  • Participants: Includes central banks, commercial banks, institutional investors, corporations, and individual traders.
• Types of Transactions
  • Spot transactions: Immediate exchange of currencies at current market rates.
  • Forward contracts: Agreements to exchange currencies at a future date and predetermined rate.
  • Options: Provides the right, but not the obligation, to exchange currencies at a specified rate within a set timeframe.
• Risks in the Foreign Exchange Market
  • Exchange rate risk: Fluctuations in currency values can result in losses.
  • Counterparty risk: The risk that the other party in a transaction fails to fulfill its obligations.
  • Liquidity risk: Difficulty in executing large trades without affecting market prices.

The correct answer is - Operating risk

Key Points

• Operating risk
  • Operating risk is classified as a diversifiable risk, which means it can be mitigated or reduced by diversifying the investment portfolio.
  • This type of risk arises from the internal operations of a company, such as management decisions, production processes, or employee performance.
  • Unlike other risks mentioned in the options, operating risk is specific to individual companies and is not influenced by broader market or economic changes.

Additional Information

• Non-diversifiable risks
  • Non-diversifiable risks, also known as systematic risks, cannot be eliminated through diversification and affect the overall market or economy.
  • Examples of non-diversifiable risks include:
    • Interest rate risk: The risk of fluctuation in interest rates, impacting investments like bonds.
    • Purchasing power risk: The risk of inflation eroding the real value of money over time.
    • Market risk: The risk of overall market downturns affecting asset prices.
  • Investors typically address non-diversifiable risks through strategies such as hedging or asset allocation.
• Diversifiable risks
  • These risks are specific to individual companies or industries and can be reduced by holding a variety of assets in a portfolio.
  • Examples include:
    • Operational risk: Arising from internal processes or decisions.
    • Credit risk: The risk of default by a borrower.
    • Legal risk: The risk of litigation or regulatory changes affecting a company.

The correct answer is 60,000 crore.

Key Points

• An allocation of Rs 60,000 crore has been made to cover 3.8 crore households in 2022-23 under Har Ghar, Nal Se Jal Scheme.
• Finance Minister said that the current coverage of Har Ghar, Nal Se Jal is 8.7 crores.
  • Out of which 5.5 crore households were provided tap water in the last 2 years itself.
• Nirmala Sitharaman also announced an allocation of Rs 48,000 crore for the completion of 80 lakh houses.
  • ​For the identified eligible beneficiaries of PM Awas Yojana, both Rural and Urban, in 2022-23.
• The Central Government will work with the state governments to reduce of time required for all land and construction-related approvals.
• It will also work for promoting affordable housing for the middle class and Economically Weaker Sections (EWS) in urban areas.

Additional Information

• Jal Jeevan Mission (Har Ghar Nal se Jal)
  • Launched in 2019.
  • Aim: To provide every single rural household with functional household tap connections (FHTC) ‘Har Ghar Nal Se Jal’ by 2024.
  • A decentralized approach is implemented at national, state, district levels for specific needs and purposes (Targeted Area approach).
  • The major role played by Paani Samitis and women in mobilizing the population.
  • The Jal Jeevan Mission will be based on a community approach to water and will include extensive Information, Education and communication as a key component of the mission
• Objectives:
  1. Piped water supply
  2. Augmenting existing drinking water resources.
  3. Using technology to treat water and make them portable and safe for drinking.
  4. Greywater treatment and management.
  5. Integration with other water resource management programs like Atal Bhujal Yojana, Swajal Scheme, Swachh Bharat Mission, for better and overall management and conservation of water.

The correct answer is Most people will expect the interest rate to rise in the future.Key Points

• When the general interest rate reaches a very low level, most people will expect the interest rate to rise in the future because they anticipate that the central bank will try to stimulate the economy by increasing interest rates.
• As a result, most people will prefer to hold cash or short-term securities rather than long-term bonds because the latter are more sensitive to changes in interest rates and may lose value if rates rise.
• Some investors may speculate that the interest rate will decline further, but this is less likely because interest rates cannot fall below zero and there are limits to how much the central bank can ease monetary policy.
• Any increase in the money supply may cause inflation and inflation expectations to rise, which would put upward pressure on interest rates, not downward pressure.

Additional Information

• Most people will prefer to hold bonds:
  •  It is unlikely to be true when interest rates are very low because bonds become less attractive as their yields decline and their prices rise.
  • However, it is possible that some investors may still prefer to hold bonds because they need income or because they believe that interest rates will remain low for a long time.
• Most people will speculate a further decline in the rate of interest: 
  • May be true in some cases, especially if investors believe that the central bank will continue to ease monetary policy or that the economy will remain weak.
  • However, this is not a universal expectation and may depend on the specific circumstances.
• Any increase in the money supply will cause the interest rate to fall further: 
  • It is incorrect because the relationship between the money supply and interest rates is not straightforward and depends on many factors, such as the demand for money, the velocity of circulation, and the role of banks in creating credit.
  • In general, an increase in the money supply may lead to higher inflation expectations and higher interest rates, not lower ones.

The correct answer is Unsecured term loans.

Key Points​The Unsecured term loans is not a source of working capital.

What is working capital?

• It is the excess of current assets over current liabilities.
• It is also known as revolving capital, circulating capital, and fluctuating capital.​

Important PointsThere are different Sources of Working Capital based on the time period of loan-

[A] Spontaneous Source of Finance (For 1-3 months) 

• Trade Credit
• Bills Payable
• Notes Payable
• Accrued Expenses

[B] Short-Term Source of Finance (For 1-12 months) 

• Bank Overdrafts
• Cash Credits
• Trade Deposits
• Bills Discounting
• Commercial Paper
• Inter-Corporate Loans
• Short-term Loans

[C] Long-term loans (1-5 or more years)

• Retained Earnings
• Share Capital
• Long-term Loans
• Debentures

Additional Information Commercial Paper- 

• Commercial Paper (CP) is a 'Money Market' financial product issued by large corporations to cover their temporary funding needs.
• This is an unsecured instrument backed by the issuer or his banker's guarantee to pay the face value by the due date indicated on the paper.
• Since CP is not backed by collateral, only large enterprises with a high level of goodwill and credit rating can get financing at reasonable rates through this approach.

Bank Overdraft- 

• A credit facility under which a banker permits a current account customer to withdraw in excess of the account's balance.
• This service is exclusive to current account holders. Repayment can be made at any time, if a business desires to do so.

Bill Discounting/Discounting of Bills-

• Through discounting bill of exchange, banks also provide advances to customers.
• The discount relies on the quantity of the bill, the length of its maturity, and the bank rate.

The correct answer is investment, financing, and asset management.

There are three major decision areas in financial management i.e. investment decision, financing decision, and dividend decision.

Key Points Investment decision-

• It's asset creation for revenue. Investment decisions involve asset selection. 
• A company's assets can either generate income over a year or be converted into cash quickly.
• Capital budgeting and working capital management are the two investment decisions.

Financing decision-

• The capital structure, or the right mix of debt and equity, is an element of the financing decision.
• When, where, and how much money should be invested is decided under this decision area.

Dividend decision-

• The dividend decision determines what proportion of net earnings will be distributed to shareholders as dividends and what proportion will be maintained for future investment opportunities.

​Asset management decision-

• Asset management decisions involve investing, retaining, and trading money judiciously to optimize an organization's total wealth.

The correct answer is 1992.

Important Points

• Securities Appellate Tribunal is a statutory body established under the provisions of Section 15K of the Securities and Exchange Board of India Act, 1992.
• Securities Appellate Tribunal deals with cases with respect to SEBI, IRDAI and PFRDA.
• The jurisdiction of the Securities Appellate Tribunal is the whole of India.
• The Securities Appellate Tribunal has only one bench which sits in Mumbai.

The correct answer is 14 per cent.

Key Points

• Both Centre and States govt employees’ tax deduction limit to be increased from 10% to 14%
• This will help the social security benefits of state government employees and bring them at par with the Central govt employees.
• A new tax rule for taxpayers was also announced where a taxpayer can file an updated return on payment of taxes within two years from the end of the relevant assessment year.
• Income from transfer of digital assets (Cryptocurrency) to be charged 30% tax, plus 1% tax on the transaction.

Additional Information

• Income tax is the percentage of income paid to the government by the taxpayers for the betterment of the public at large.
  • The limit for deduction under section 80C of the Income Tax Act in India, for the financial year 2021-22 is Rs. 1.5 lakh.
  • The maximum tax exemption limit under Section 80C has been retained as Rs 1.5 Lakh only. 
  • Total Deduction under section 80C, 80CCC and 80CCD(1) together cannot exceed Rs 1,50,000 for the financial year 2016-17. 
  • The additional tax deduction of Rs 50,000 is over and above this 1.5 Lakh limit.
  • Section 80C allows reducing taxable income by making tax-saving investments or incurring eligible expenses.
  • The Income Tax Act 1961 is the law that governs the provisions for income tax in India.

The correct answer is 1992

Key Points

• The Securities and Exchange Board of India (SEBI) is the regulatory body for the securities and commodity markets in India under the jurisdiction of the Ministry of Finance, Government of India.
  • The Securities and Exchange Board of India was constituted as a non-statutory body on April 12, 1988, through a resolution of the Government of India.
  • The Securities and Exchange Board of India was established as a statutory body in the year 1992 and the provisions of the Securities and Exchange Board of India Act, 1992 (15 of 1992) came into force on January 30, 1992.
  • The Securities and Exchange Board of India (SEBI) was first established in 1988 as a non-statutory body to regulate the securities market.
  • The basic function of the Securities and Exchange Board of India is to protect the interests of investors in securities and to promote and regulate the securities market.
  • It monitors and regulates the Indian capital and securities market by framing rules and guidelines, protecting the interests of investors.
  • SEBI was constituted in April 1988 as the regulator of capital markets in India under a resolution of the Government of India.

Additional Information

• The headquarters of SEBI is situated at Bandra Kurla Complex in Mumbai.
• The regional offices of SEBI are located in Ahmedabad, Kolkata, Chennai, and Delhi.
• The SEBI is managed by its members, which consists of the following:
  • The chairman is nominated by the Union Government of India.
  • Two members, i.e., Officers from the Union Finance Ministry.
  • One member from the Reserve Bank of India.
  • The remaining five members are nominated by the Union Government of India, out of them at least three shall be whole-time members.​​ 

The correct answer is 1977.

• In 1977, the companies IBM and Coca Cola shut down their operations for not being able to comply with the Foreign Exchange Regulation Act that mandated foreign investors cannot own over 40% in Indian enterprises.
  • The root cause of the dispute between MNCs and the Government of India was the 1973 amendment to the Foreign Exchange Regulation Act (FERA) which limited foreign equity to 40%.
  • All companies with more than 40% foreign equity had to seek fresh approval from the Reserve Bank of India (RBI) to continue their operations.

Additional Information

• International Business Machines Corporation (IBM) is an American multinational technology corporation headquartered in Armonk, New York, with operations in over 171 countries.
  • Founded: 16 June 1911, Endicott, New York, United States
• The Coca-Cola Company is an American multinational beverage corporation incorporated under the general corporation law of Delaware and headquartered in Atlanta, Georgia.
  • Founder: Asa Griggs Candler
  • Founded: 29 January 1892, Atlanta, Georgia, United States

The correct answer is Ajay Tyagi.

• Ajay Tyagi was appointed as the chairman of SEBI and took charge on March 1, 2017. He was the 9^th chairman of the SEBI.
• SEBI is the protector of the security market in India. It saves the interests of the investors in the capital market of India.
• SEBI was established on April 12, 1988. It was constituted as a non-statutory body through a resolution of the government of India.
• Mumbai is the headquarter of the SEBI.
• The chairman of the SEBI is made for a period not exceeding five years, or till the age of 65 years or until further orders.

Important Points

Capital adequacy ratio (CAR) is the ratio of a bank's capital in relation to its risk-weighted assets and current liabilities. It is decided by central banks and bank regulators to prevent commercial banks from taking excess leverage and becoming insolvent in the process.

CAR is measured as:

• CAR = [Tier 1 + Tier 2 + Tier 3 (Capital funds)] / Risk weighted assets.
• The risk-weighted assets take into consideration credit risk, market risk, operational risk.

Therefore, in order to calculate the capital adequacy ratio, the banks are required to take into consideration credit risk, market risk, operational risk.

Credit risk is a possibility of loss due to the borrower's failure to repay a loan or meet contractual obligations.

Market risk is a possibility of loss due to changes in the market sector.

Operational risk is a possibility of loss due to inadequate or failed internal processes, control, system, people, or external events. 

The Basel III norms stipulated a CAR of 8%. 

However, as per RBI norms, Indian scheduled commercial banks are required to maintain a CAR of 9%, and Indian public sector banks are required to maintain a CAR of 12%.