Economics And Finance Quiz Questions!

1. What is the term used when your savings bank passbook has got a closing debit balance?

Float

Underdraft

Overdraft

Positive Balance

A debit balance is actually a negative balance meaning you actually owe the bank that much money

Explanation

A debit balance is actually a negative balance meaning you actually owe the bank that much money

2. Which of the following term is used to state the condition of the firm when it tries to finance its long term assets by shot term liabilities or vice versa

Asset Liability Mismatch

Ledger Book mismatch

Short term - Long term mismatch

Trading book mismatch

Asset Liability Mismatch refers to the condition of a firm when it attempts to finance its long-term assets using short-term liabilities or vice versa. This mismatch occurs when there is a mismatch between the maturity and cash flow characteristics of a firm's assets and liabilities. It can lead to financial instability and liquidity problems for the firm if not managed properly.

Explanation

Asset Liability Mismatch refers to the condition of a firm when it attempts to finance its long-term assets using short-term liabilities or vice versa. This mismatch occurs when there is a mismatch between the maturity and cash flow characteristics of a firm's assets and liabilities. It can lead to financial instability and liquidity problems for the firm if not managed properly.

3. Which of the following ratios is related to the amount of capital a bank must have in order to cover the various credit risk it has?

Capital Turnover Ratio

Capital Employed Ratio

Capital Adequacy Ratio

Asset Turnover Ratio

The Capital Adequacy Ratio is related to the amount of capital a bank must have in order to cover the various credit risk it has. This ratio measures the bank's capital in relation to its risk-weighted assets, ensuring that the bank has enough capital to absorb potential losses and maintain financial stability. It is an important measure of a bank's ability to withstand adverse economic conditions and fulfill its obligations to depositors and other stakeholders.

Explanation

The Capital Adequacy Ratio is related to the amount of capital a bank must have in order to cover the various credit risk it has. This ratio measures the bank's capital in relation to its risk-weighted assets, ensuring that the bank has enough capital to absorb potential losses and maintain financial stability. It is an important measure of a bank's ability to withstand adverse economic conditions and fulfill its obligations to depositors and other stakeholders.

4. According to the famous Modgilani - Miller, which of the following would be the most preferred choice of financing for a firm which wants to raise funds?

Debt

Equity

Internal Equity

All eqully preffered

Modgilani Miller state that the mode of financing has no bearing on the value of the firm

Explanation

Modgilani Miller state that the mode of financing has no bearing on the value of the firm

5. What is the IRR (Internal Rate of return) for the following cash flows: Initially : Give out 100 bucks End of 1st year : Get 100 bucks End of 2nd Year: Get 11 bucks

11%

1.1%

11.11%

10%

The IRR (Internal Rate of Return) is the rate at which the net present value (NPV) of cash flows equals zero. In this case, the initial cash outflow of 100 bucks is followed by two cash inflows of 100 bucks and 11 bucks at the end of the first and second years, respectively. To calculate the IRR, we need to find the discount rate that makes the NPV equal to zero. By trial and error, it can be determined that a discount rate of 10% results in an NPV close to zero. Therefore, the IRR for these cash flows is 10%.

Explanation

The IRR (Internal Rate of Return) is the rate at which the net present value (NPV) of cash flows equals zero. In this case, the initial cash outflow of 100 bucks is followed by two cash inflows of 100 bucks and 11 bucks at the end of the first and second years, respectively. To calculate the IRR, we need to find the discount rate that makes the NPV equal to zero. By trial and error, it can be determined that a discount rate of 10% results in an NPV close to zero. Therefore, the IRR for these cash flows is 10%.