__________________ occurs in situations where a borrower requires a large

sum of capital that may either be too much for a single lender to provide.
Q
When the sum of funds required is large and a single lender is not willing to
lend this much amount to one company, a lead bank can arrange funds from
a group of banks, called a syndicate. Syndicate means group and this process
Sol of funding is called Loan Syndication.

A bank's GL, records the interest earned on loans, on a daily basis. The
interest however is paid by the borrowers, on a monthly or quarterly basis.
Q This is an illustration of the principle of:
This is an example of accrual concept which suggests: Income and expense
are recognized/recorded when a transaction occurs- not when cash changes
hands;

Sol

A company, building a metro railway system, issues five year bonds.

However, they need capital for 10 years, which is the break-even period for
the project. Which are the risks they face in this scenario?

A. Regulatory risk
B. Interest Rate risk
C. Liquidity risk
Q D. Credit Risk
Since the company requires capital for a period of 10 years and it has issued
bonds for a period of 5 years, it will face two major risks. One, if they will not
be able to get the money again after 5 years i.e. liquidity risk and another risk
is if interest rate they are currently paying increases in this time. So they will
have to pay more interest on the same amount. This is called interest rate
Sol risk.

About 2000 credit card loans are now over 90 days late in repayment. Which
of the following actions does a bank not need to take?
Q
The bank needs to take all the action except option C. As banks need to
maintain CRR with RBI only for the deposits received by the banks. It's not
Sol related to any loans.

An INR 100 Face Value bond is issued with a promise by the Issuer, to pay
interest of INR 8 each year. You buy it at INR100 and sell it at INR 102 after
1 year, making a total profit of INR 10 per bond.
Q What is the coupon, and what is the yield?
Coupon is the interest promised by the Issuer; it remains constant through
out the life of the bond. It is 8% in this case. Yield is the return on your
investment, which you get once you sell the bond . In this case the bond is
purchased at INR 100 and sold at INR 102 after one year. He also receives
the coupon payment INR 8 for that year. So the total amount he received is
INR 110 which is a 10% return on the INR 100 investment.
Sol
 Catalyst Corporation has a capital of INR 100 Million, with a Debt-Equity ratio
of 1:1. The interest rate on Debt Capital is 5% p.a. and the return on
investment is 8% p.a. Assume a tax rate of 20%. What is the company’s
return on equity?
Note: Return on investment = PBIT/Total Investment
Q
Sol
Particulars
Total capital
Debt capital
Equity capital
PBIT: (ROI @ 8% p.a.)
Interest on debt capital @ 5% p.a.
PBT
Tax rate @20%
PAT=
ROE=

Daily Caps Ltd. has seasonal revenues , which total INR 600 million/year, but
outflows occur through the year.
50% of the sales is from export oriented products. The company has a
working capital cycle that can go upto 8 months.

Which of these products would be most suited to the requirements of Daily

Caps Ltd.?
i. Working Capital Term Loan
ii. Cash Credit
iii. Overdraft
Q iv. Working Capital Demand Loan

The correct answer is WCDL as the company can ask for the loan whenever
it's required. WCTL is issued when the working capital is required for more
than a year. Overdraft carries higher interest as compared to WCDL.
Sol

Gita Traders sold goods worth INR 10 lakh to a customer. The customer gave
a post-dated cheque of INR 1 lakh payable after 10 days, and a Bill of
Exchange (BoE) for the rest of the payment, payable after 1 month. Now, Gita
Traders has to make a payment of INR 5,50,000 to their supplier in a week.
What would be the most convenient way to arrange the funds?
Q
There is no need to get the cheque encashed as it can easily be transferred to
the supplier by endorsement.
BoE cannot be used as security, it may be presented to the bank for
Sol discounting.

Given the following exchange rate: EUR 1= USD 1.1060/1.1064. If someone

Q says 'I buy", what does it indicate ?
 Here, EUR is the base currency, and USD is the quoted/variable currency. As
all the sell/buy transactions are for base currency only, the person is buying
EUR here.
Now as is the case here, exchange rate is always quoted on a two-way basis,
one is the bid rate at which the Bank/institution is willing to buy and other
one is the offer rate at which the Bank/institution is willing to sell. While for
the person on the other end of the deal, the situation is just reversed.
Therefore, here the person who is buying will have to give a price at which
the seller is willing to sell i.e. 1.1064.
Sol

Iridium Mutual fund had assets of INR 25,000,000 (incl. Cash) and liabilities
of INR 10,000,000. The mutual fund had incurred expenses of INR 50,000
and received income by way of interest and dividends of INR 100,000. There
are 1,000,000 shares outstanding as of this date. The NAV of the mutual fund
Q is:
(25000000-10000000)/ 1000000=15
Please note we will not include income received and expenses paid here.
Their effect is already considered in cash. We add accrued interest &
Sol expenses for calculating NAV

Jackson created a portfolio of INR 50,000, 75% in equities and 25% in debt.
Equity and debt after 1 yr have given a return of 13% and 9% respectively.
What action must you take to restore the risk profile balance of the portfolio?
Q
Sol

Total Portfolio Investment

Equity
Debt

After 1 year
Return on Equity
Return on Debt

Total Equity
Total Debt
Total Portfolio Investment after 1 year

Individual share in portfolio after 1 year

Equity
Debt

Action to be taken for rebalancing

Equity (Excess)
Debt (Deficit)
 Jackson is an exporter in Singapore, who deals in antiques. He has a proposal
from two importers, Ankur & Pawan, for the same items at the same price.
While Ankur is providing 50% as advance payment, Pawan is providing an LC.
Ankur has a good market reputation and is willing to provide security for
ensuring rest of the payment; Pawan has a reputation for delaying payments.
To whom should Jackson sell?
Choose the correct statement/s.

i. Pawan, as an LC is more secure and credit risk is minimal. Also an LC

enables the exporter, to receive payments in the exporter's own country.

ii. Ankur, as at least half of the payment is received and the rest is secured.

iii. Ankur, only if the exporter has immediate requirement of funds.

iv. Pawan, if exporter has immediate requirement of funds, as LC can be

discounted.

Q
If Pawan provides an LC, this means now the credit risk has shifted from
Pawan to its Bank, which is much more secure.
Bank will be liable to pay after Jackson delivers the items, as per contract.
Also, in case of an LC, the exporter will receive the funds in his country.
An LC can only be discounted after goods have been delivered. So in case of
Sol immediate requirement of funds, he should sell to Ankur.

Puneet approaches a bank for discounting of a bill worth INR 1,00,000 due for
payment in 3 months. How much will Puneet receive from the Bank, if it
Q charges an interest of 12%?
Sol
Interest per month= 12%÷12 = 1%
Tenor= 3 months
Amount to be received= INR 100000
Present value/discounted value=100000/(1+0.01)^3 = INR 97059

Sachin is an owner of a wholesale cloth store in Kolkata. He occasionally

invests a part of his earnings in the stock markets. He bought 100 shares of
HDL Ltd. on 30th September which was Tuesday. 2nd October was a national
holiday on the occasion of 'Gandhi Jayanti'. 3rd October was a holiday in
Kolkata due to a bandh. On which date will the settlement take place?
Q
If "T" is the date of transaction, settlement convention in Indian stock
markets is T+2 that is 2 working days later.
So, ideally the settlement should have happen on 2nd oct., but since that was
a national holiday, it would happen on 3rd oct. Other holidays are not taken in
Sol to consideration.
 Star Finance evaluated the financials and the value of the collateral of Mehul
and Daughters, a solar car manufacturing company, a loan applicant. After
evaluation, the loan was approved for a 5 year tenor, at 11.25%.

The loan was set up on the bank's IT system. Monthly statements as to the
outstanding balance of the loan, are generated and sent to the company.

Which of the divisions are responsible for the respective processes involved in
these actions?

Q
Front office handles the customer facing or sales function - that of selling the
card
Evaluation is handled by the middle office.
Sol All processing functions are taken care of by the Back Office division.

The CAGR of an investment over 5 years, is 6%. What does this mean?

Q
CAGR is the Compounded Annual Growth Rate, which is the compounded rate
Sol at which an investment is growing annually.

The objective of the Insolvency & Bankruptcy Code is

A. Lower the time to resolve an NPA.
B. Ensure a better level of NPA recoveries.
C. Issue financial instruments - securities - against the loans,
so that the NPAs are recovered.
D. Manage the business to ensure payments, by rescheduling payments and
Q repossessing collateral.
IBC is a simpler Code, to help close down or take over ‘sick’ companies and
repay their debts.
IBC mandates a specific time limit – 270 days – of resolving each case,
leading to lower time to resolve NPAs and a higher level of recovery.
Sol

Triocon India, is planning to invest in a project in Mexico, which requires an

initial investment of INR 900 crore. The following are the cash inflows over
the next 5 years.

Time Cash Inflow

Year 1 INR 150 crore
Year 2 INR 200 crore
Q Year 3 INR 300 crore
Year 4 INR 450 crore
Year 5 INR 500 crore

It plans to borrow the funds from Smart Bank which is charging an interest of
11% p.a.
Based on your understanding, should Triocon invest in this project or not?

Soln Comparison rate

 Initial investment (outflow)
Cash Flow: Year 1 (inflow)
Cash Flow: Year 2 (inflow)
Cash Flow: Year 3 (inflow)
Cash Flow: Year 4 (inflow)
Cash Flow: Year 5 (inflow)
NPV=
Use NPV function of excel to calculate NPV

When the NPV is negative, then

Q
NPV is the present value of all future cash flows discounted at a set
discounting rate. IRR defines the return on the amount invested. Negative
NPV implies, you will get a return i.e.IRR, which is less than the discounting
S rate.

When will bank receive funds:

1) Ram does IMPS of INR 10,000 on 30 Sep (Sunday), into Hari's account.
2) Kiran requests Shyam to transfer INR 5,000 into his UPI account on 30 Sep
(Sunday), Shyam approves the request immediately

Q
In case of IMPS and UPI, net settlement, after credit to payee.
So, Hari and Kiran's account will credited immediately, however banks will
S receive funds only next working day because of net settlement.

Which among the following is not a Negotiable Instrument? (More than one
Q option may be correct)
Negotiable Instruments are payment instruments which are transferrable from
one party to another.
Examples of Negotiable Instruments are Cheque, Demand Drafts, Loan
Agrrement promissory note), Certificate of Deposit (also a promissory note)
etc.

Share Ownership Certificate represents only the ownership of shares and is

S not a payment instruments, hence it is not a Negotiable Instrument.

Which of the following are most likely to get a Payment bank license ?
1. Teleflix, a leading Telecom Company, with a subscriber base of 250 million
and 4G-LTE technology network.
2. Phoenix Bank, a leading private sector bank, with a large retail banking
division.
3. Gramin Vikas, a Regional Rural Bank, focusing on the rural areas and
serving the underbanked sector.
4. Prime Finance, owned by the UK based Prime group, which is a Venture
Q Capital fund
 One of the main objective of Payment Banks is to enable transactions. Most of
the payment bank licenses were given to telecom companies, with an existing
large customer base and a technology network, which could enable
payments.

S Hence Telefix, a telecom company is most suitable to get the license.

Which of the following are most likely to get a Payment bank license ?
1. Teleflix, a leading Telecom Company, with a subscriber base of 250 million
and 4G-LTE technology network.
2. Phoenix Bank, a leading private sector bank, with a large retail banking
division.
3. Gramin Vikas, a Regional Rural Bank, focusing on the rural areas and
serving the underbanked sector.
4. Prime Finance, owned by the UK based Prime group, which is a Venture
Q Capital fund
One of the main objective of Payment Banks is to enable transactions. Most of
the payment bank licenses were given to telecom companies, with an existing
large customer base and a technology network, which could enable
payments.

S Hence Telefix, a telecom company is most suitable to get the license.

Which of the following statements is/are false regarding clearing houses and
settlement banks?

Q
Keeping the record of transactions is one of the functions of Clearing House.
Exchange of funds between the banks is carried out through the settlement
bank.
RBI acts as clearing house as well as settlement bank in most of the cases.

You are a Relationship Manager at a branch. An NRI is asking you "I should
be able to use the funds I deposit, when I need them, back in Canada. I can't
say when I will need the funds, they have to be available to me as and when
I need them."
Q Which type of NR account would you suggest to her, and why?
In case of an NRE account, an NRI can only put in money earned overseas
and they are designated as local currency accounts. The funds are fully
S repatriable, which means they can be taken out of the country.
 Your bank is the lead bank for a funding for Tata Motors. This means that:

i. Your bank has, along with other banks, formed a group which will lend to
Tata Motors.

ii. Your bank will collect the repayments on the loan and pass them on to the
other members of the group.

iii. Tata Motors has agreed to pay your bank an interest rate which is much
higher than what it pays to other lenders.

iv. Your bank has agreed to find an equity investor for Tata Motors.
Q
In loan syndication, funding is done by a group of lenders to a single
borrower. A lead bank is appointed whose role is to co-ordinate among the
other group members, and is the single point of contact for the borrower. He
will collect all the payments from the borrower and distribute them to the
other group members. Generally, a lead bank charges a fees for this service.
Interest rate and all other terms and conditions are common for all the banks
S in the group.
Underwriting Loan syndication Liquidity mismatch Private equity investment

Conservatism Matching Going Concern Accrual

B&C A&B C&D A&D

Step up the collection Keep aside a percentage of Deposit 4% of the value

Classify the loans as 'Non
process to get back the the value of the loans as of the loans with RBI as
Performing Assets'
loan & interest amount provision for loss CRR

The coupon is 10%; the The coupon is 8%; the yield The coupon is 8%; the The coupon is 2%; the yield
yield is 8% is 2% yield is 10% is 8%
 In INR million
100
50 50
50 50
8 8
2.5 2.5
5.5 5.5
1.1 1.1
= 5.5 – 1.1 4.4
8.8 8.80%

Working Capital Demand Working Capital Term

Overdraft Cash Credit
Loan Loan

Endorse the cheque Get the cheque encashed, Endorse the BoE in the Endorse the cheque to the
favoring the supplier and and pay the rest by getting suppliers' name and pay supplier and for the rest, take
get the BoE discounted. the BoE discounted. the rest by encashing the short term funding using the
cheque. BoE as security.

He has bought EUR at He has bought USD at He has bought USD at He has bought EUR at 1.1060
1.1064 1.1060 1.1064
INR 15.10 INR 15.00 INR 15.05 INR 14.95

Sell INR 375 worth of Sell INR 375 worth of Sell INR 375 worth Debt No action required
Equities Equities and Buy INR 375 and buy INR 375 worth
worth debt Equities.

In INR
50000
37500 37500
12500 12500

4875 4875
1125 1125

42375 42375
13625 13625
56000 56000

4200 42000
1400 14000

-375 -375
375 375
i and iii ii and iii Only iv Only ii

3rd October, Friday 4th October, Saturday 6th October, Monday 2nd October, Thursday
Evaluation of application-
Middle Office
Loan Setup- Back office
Loan Servicing- Back
office
Evaluation of application-
Back Office
Loan Setup- Back office
Loan Servicing- Back office
Evaluation of application- Evaluation of application-
Back Office Middle Office
Loan Setup- Back office Loan Setup- Middle Office
Loan Servicing- Front Loan Servicing- Middle Office
office

The investment has grown The investment is being The investment has grown Both A and B
by 30% from the first to compounded at 6% each by 6% in 5 years
the fifth year year

A&B B&C C&D A&D

0.11
 INR crore
-900
150
200
300
450
500
210

The IRR is less than the The IRR is more than the The IRR is negative None of the above
discounting rate used discounting rate used

Both the banks will
receive the funds on
Monday i.e the next
working day.
Both the banks will receive
the funds immediately
Hari's bank will receive Since, Sunday's are non-
the funds on Monday i.e working days the transactions
the next working day. will get declined
Kiran's bank will receive
the funds immediately

Loan Agreement Documentary Credit Share Ownership Certificate of Deposit

Certificate

Only 1 Only 2 3&4 2&4

Only 1 Only 2 3&4 2&4

Clearing house is Clearing house keeps the The Clearing House is not RBI acts as the settlement
responsible for the record of all the responsible for checking bank in most of the cases.
exchange of funds transactions. the authorisation made by
between the banks. a Payer

An NRE account, as the An NRO account, as it An FCNR account, as the An NRE account, as the funds
funds are completely allows her to both deposit funds are completely are completely repatriable
repatriable and it is not for and withdraw funds freely repatriable and it is not for and it is for a fixed term
a fixed term a fixed term
i and ii Only ii Only iii ii and iv