Assessment - Credit Analysis & Risk Management (Carm) MBA-4th Semester Lmtsm

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Assessment - Credit Analysis & Risk Management (Carm) MBA-4th Semester Lmtsm - Quiz


Questions and Answers
  • 1. 

    Which of the following is an advantage of using equity as a source of funding?

    • A.

      It doesn't have additional financial commitments.

    • B.

      It’s very liquid and always accepted.

    • C.

      The cost of equity is usually lower than the cost of credit.

    • D.

      It won’t dilute existing shareholder’s value of change ownership percentage.

    Correct Answer
    A. It doesn't have additional financial commitments.
    Explanation
    Equity as a source of funding does not have additional financial commitments because it does not require regular interest payments or fixed repayment schedules like debt financing does. Equity financing involves selling ownership shares in the company to investors in exchange for capital. This means that the company does not have the obligation to make regular payments to investors, which can help to reduce financial strain and provide more flexibility in managing cash flow.

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  • 2. 

    If you borrow Rs 5,000 with 4% interest compounded annually, how much total interest do you need to pay after 2 years?

    • A.

      408

    • B.

      404

    • C.

      400

    • D.

      412

    Correct Answer
    A. 408
    Explanation
    To calculate the total interest, we use the formula A = P(1 + r/n)^(nt), where A is the final amount, P is the principal amount, r is the annual interest rate, n is the number of times the interest is compounded per year, and t is the number of years. In this case, the principal amount is Rs 5,000, the interest rate is 4%, the interest is compounded annually (n = 1), and the time period is 2 years. Plugging in these values, we get A = 5000(1 + 0.04/1)^(1*2) = 5000(1 + 0.04)^2 = 5000(1.04)^2 = 5000(1.0816) = 5408. The total interest paid is A - P = 5408 - 5000 = 408. Therefore, the correct answer is 408.

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  • 3. 

    Assuming all else is equal, which of the following loans is most likely to have the lowest total interest cost?

    • A.

      Secured non-amortizing loan

    • B.

      Unsecured amortizing loan

    • C.

      Secured amortizing loan

    • D.

      Unsecured non-amortizing loan

    Correct Answer
    C. Secured amortizing loan
    Explanation
    A secured amortizing loan is most likely to have the lowest total interest cost because it is backed by collateral, such as property or assets, which reduces the risk for the lender. Additionally, an amortizing loan requires regular payments of both principal and interest over a set period of time, which helps to reduce the total interest cost compared to a non-amortizing loan where the interest is not paid off over the term of the loan.

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  • 4. 

    What is the advantage of a variable-interest loan?

    • A.

      Makes it easier for the borrower to plan for future payments

    • B.

      Protects the borrower from rising interest rates

    • C.

      Reduces the total interest payments

    • D.

      Borrower can capitalize on a reference rate decrease

    Correct Answer
    D. Borrower can capitalize on a reference rate decrease
    Explanation
    A variable-interest loan allows the borrower to take advantage of a decrease in the reference rate. This means that if the reference rate decreases, the interest rate on the loan will also decrease, resulting in lower monthly payments for the borrower. This can be beneficial as it allows the borrower to save money and potentially pay off the loan faster.

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  • 5. 

    What do the liquidity ratios tell you in the financial analysis?

    • A.

      The efficiency of inventory

    • B.

      The capital structure of a company

    • C.

      The company’s ability to pay off debt obligations

    • D.

      The profitability of the company

    Correct Answer
    C. The company’s ability to pay off debt obligations
    Explanation
    Liquidity ratios provide information about a company's ability to meet its short-term debt obligations. These ratios measure the company's ability to convert its assets into cash quickly to pay off its debts. By analyzing liquidity ratios such as the current ratio and the quick ratio, investors and analysts can assess whether a company has enough liquid assets to cover its short-term liabilities. Therefore, the correct answer is "The company's ability to pay off debt obligations."

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  • 6. 

    Where would ‘accounts payable’ most likely appear in a set of financial statements?

    • A.

      In the balance sheet under 'non-current liabilities'

    • B.

      In both the income statement and the balance sheet

    • C.

      In the balance sheet under 'current liabilities'

    • D.

      In the income statement before operating profit

    Correct Answer
    C. In the balance sheet under 'current liabilities'
    Explanation
    'Accounts payable' represents the amount of money owed by a company to its creditors for goods or services received but not yet paid for. Since it represents a current liability, it is expected to be paid within a year. Therefore, it would most likely appear in the balance sheet under 'current liabilities', which lists all the short-term obligations of the company. The balance sheet provides a snapshot of a company's financial position at a specific point in time, and it includes assets, liabilities, and equity.

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  • 7. 

    What is the best definition of a non-current asset?

    • A.

      An asset intended for use on a continuing basis in the company's activities

    • B.

      Expenditure made to fulfil a revenue obligation

    • C.

      An asset purchased for resale

    • D.

      The total of current assets less current liabilities

    Correct Answer
    A. An asset intended for use on a continuing basis in the company's activities
    Explanation
    A non-current asset is an asset that is intended for use on a continuing basis in the company's activities. This means that it is not expected to be sold or converted into cash within the next year. Non-current assets are typically long-term investments that provide future benefits to the company, such as property, plant, and equipment. They are recorded on the balance sheet and are essential for the company's operations and growth.

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  • 8. 

    What is the principal purpose of charging depreciation on non-current assets?

    • A.

      To show the assets at their market value in the balance sheet

    • B.

      To spread the cost of the assets over their estimated useful lives

    • C.

      To ensure that sufficient funds are available to replace the assets

    • D.

      To comply with the fundamental concept of prudence

    Correct Answer
    B. To spread the cost of the assets over their estimated useful lives
    Explanation
    The principal purpose of charging depreciation on non-current assets is to spread the cost of the assets over their estimated useful lives. Depreciation is a systematic allocation of the cost of an asset over its useful life, reflecting the wear and tear, obsolescence, and loss of value over time. By spreading the cost, it ensures that the expense is recognized gradually and matches the revenue generated by the asset. This helps in accurately representing the financial position of the company and provides a more realistic view of the asset's value on the balance sheet.

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  • 9. 

     Which of the following most likely indicates strong “Capital” for a company?

    • A.

      Unutilized lines of credit or loans

    • B.

      Increasing interest-bearing debt

    • C.

      Limited equity has been invested by the owners

    • D.

      Low-quality inventory

    Correct Answer
    A. Unutilized lines of credit or loans
    Explanation
    Unutilized lines of credit or loans indicate strong "Capital" for a company because it means that the company has access to additional funds that can be used for various purposes such as expansion, investment, or managing cash flow. This shows that the company has financial flexibility and resources available to support its operations and growth.

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  • 10. 

     Which of the following ratios most likely indicates strong “Capacity” for a company?

    • A.

      Increasing accounts payables

    • B.

      High asset turnover ratio

    • C.

      High debt to equity ratio

    • D.

      Positive investing cash flows

    Correct Answer
    B. High asset turnover ratio
    Explanation
    A high asset turnover ratio indicates that a company is effectively utilizing its assets to generate revenue. This suggests that the company has a strong capacity to generate sales and efficiently use its resources. Increasing accounts payables, high debt to equity ratio, and positive investing cash flows do not directly indicate strong capacity.

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  • 11. 

    Which of the following tools or methods is used to assess the general business environment?

    • A.

      MAST framework

    • B.

      PEST analysis

    • C.

      Cash flow analysis

    • D.

      SWOT analysis

    Correct Answer
    B. PEST analysis
    Explanation
    PEST analysis is a tool used to assess the general business environment. It stands for Political, Economic, Social, and Technological factors. It helps businesses understand the external factors that may impact their operations and make informed decisions. MAST framework is a strategic planning tool, Cash flow analysis is used to assess the financial health of a business, and SWOT analysis is used to evaluate the internal strengths and weaknesses of a business. Therefore, PEST analysis is the most appropriate tool for assessing the general business environment.

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  • 12. 

    Select the loan contract with the lowest risk.

    • A.

      A demand loan with monthly payments secured by assets

    • B.

      A term loan with a bullet principal payment at loan maturity secured by assets

    • C.

      An unsecured term loan with a bullet principal payment at maturity

    • D.

      An unsecured demand loan with monthly payments

    Correct Answer
    A. A demand loan with monthly payments secured by assets
    Explanation
    A demand loan with monthly payments secured by assets is the loan contract with the lowest risk because it has both regular monthly payments and assets serving as collateral. This means that the borrower is required to make consistent payments, reducing the risk of default, and the lender has the security of assets that can be used to recover the loan amount in case of default. This combination of regular payments and collateral provides a higher level of security for the lender, making it the lowest risk option among the given choices.

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  • 13. 

    What form of business ownership is generally the simplest for a small business?

    • A.

      Corporation

    • B.

            Partnership

    • C.

      Franchise

    • D.

      Sole proprietorship

    Correct Answer
    D. Sole proprietorship
    Explanation
    Sole proprietorship is generally the simplest form of business ownership for a small business. This is because it is owned and operated by a single individual, without the need for any formal legal entity or separate business structure. It offers simplicity in terms of decision-making, management, and taxation. Additionally, there are fewer legal requirements and regulations compared to other forms of business ownership such as corporations or partnerships.

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  • 14. 

    Which of the following statements about business structures is not true?

    • A.

      In a general partnership, partners are only liable for the portion of capital they invested in the business

    • B.

      In a sole proprietorship, the owner retains all of the after-tax profits of the business

    • C.

      Joint venture allows for sharing of risks with a venture partner

    • D.

      In a limited liability corporation, profit distributions flow through to the members

    Correct Answer
    A. In a general partnership, partners are only liable for the portion of capital they invested in the business
    Explanation
    In a general partnership, partners are not only liable for the portion of capital they invested in the business. They are also personally liable for the debts and obligations of the partnership, which means their personal assets can be used to satisfy the partnership's debts.

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  • 15. 

    Which of the following is not a feature of recently announces Auto Loans for MSME

    • A.

      Borrowers with up to Rs. 25 crores outstanding and Rs. 100 crore turnover are eligible

    • B.

      Loans to have 4-year tenor with moratorium period of 12 months on principal repayment

    • C.

      100% credit guarantee cover to Banks and NBFCs on principal and interest

    • D.

      Personal Asset Guarantee by promotors of the enterprise is must

    Correct Answer
    D. Personal Asset Guarantee by promotors of the enterprise is must
    Explanation
    The correct answer is "Personal Asset Guarantee by promotors of the enterprise is must". This means that one of the features of the recently announced Auto Loans for MSME is not requiring personal asset guarantee by promoters of the enterprise.

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  • 16. 

    Which of the followings is not a feature of Global tenders policy announced as part of COVID 19 financial package

    • A.

      Global tenders will be disallowed in Government procurement tenders up to Rs 200 crores

    • B.

      This will be a step towards Self-Reliant India and support Make in India

    • C.

      MSMEs will be able to attract global investments.

    • D.

      This will help MSMEs to increase their business.

    Correct Answer
    C. MSMEs will be able to attract global investments.
    Explanation
    The correct answer is "MSMEs will be able to attract global investments." This statement is not a feature of the Global tenders policy announced as part of the COVID-19 financial package. The policy focuses on disallowing global tenders in government procurement tenders up to Rs 200 crores, promoting self-reliance in India, supporting Make in India, and helping MSMEs increase their business. However, it does not specifically mention that MSMEs will be able to attract global investments.

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  • 17. 

    What is approximate size if Indian real estate industry as a percentage to GDP

    • A.

      9%

    • B.

      5%

    • C.

      2%

    • D.

      7%

    Correct Answer
    B. 5%
    Explanation
    The correct answer is 5% because it is the closest option to the approximate size of the Indian real estate industry as a percentage of GDP. This suggests that the real estate industry contributes around 5% to the overall GDP of India.

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  • 18. 

    What is the percentage of interest subsidy offered to MIG 1 category under PMAY?

    • A.

      5%

    • B.

      4%

    • C.

      3%

    • D.

      2%

    Correct Answer
    B. 4%
    Explanation
    MIG 1 category under PMAY (Pradhan Mantri Awas Yojana) is offered a 4% interest subsidy. This means that eligible individuals in the MIG 1 category can avail a subsidy of 4% on the interest rate charged on their home loan. This subsidy aims to make housing more affordable and accessible for middle-income groups.

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  • 19. 

    Which of the following about ‘No Cost EMI’ is not true?

    • A.

      Discount is merged towards reducing the interest

    • B.

      Processing Fee is generally charged to cover partial interest cost

    • C.

      Manufacturer sometimes also contribute towards compensating the interest

    • D.

      Lenders do not earn any interest in such transitions

    Correct Answer
    D. Lenders do not earn any interest in such transitions
    Explanation
    No Cost EMI is a payment option where the interest cost is borne by the seller or manufacturer, and not by the customer. The correct answer states that lenders do not earn any interest in such transactions. This means that the lenders offering the No Cost EMI option do not charge any interest on the loan amount, making it a truly interest-free transaction for the customer.

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  • 20. 

    What is approximate sales (units) in Indian Automotive industry in year 2019

    • A.

      5.50 million

    • B.

      4.18 million

    • C.

      3.37 million

    • D.

      6.48 million

    Correct Answer
    B. 4.18 million
    Explanation
    The approximate sales (units) in the Indian Automotive industry in the year 2019 were 4.18 million.

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  • 21. 

    Which of the following is not the recent industry trends in Indian automotive industry?

    • A.

      Low cost electric vehicle

    • B.

      Voluntary vehicle fleet modernization program

    • C.

      Focus of diesel run vehicles

    • D.

      Bharat Stage VI norms

    Correct Answer
    C. Focus of diesel run vehicles
    Explanation
    The recent industry trends in the Indian automotive industry include the promotion of low-cost electric vehicles, the implementation of the voluntary vehicle fleet modernization program, and the adoption of Bharat Stage VI norms. However, the focus on diesel-run vehicles is not a recent trend in the industry.

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  • 22. 

    The approximate market share of Bajaj Finance in electronic goods financing market is

    • A.

      25%

    • B.

      20%

    • C.

      10%

    • D.

      17%

    Correct Answer
    C. 10%
    Explanation
    The correct answer is 10%. This means that Bajaj Finance holds approximately 10% of the market share in the electronic goods financing market. This indicates that Bajaj Finance is a significant player in the market, but there are other competitors that have a larger market share.

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  • 23. 

    EMI Stands for

    • A.

      Equal Monthly Instalment

    • B.

      Equated Monthly Instalment

    • C.

      Equal Monthly Income

    • D.

      Equated Monthly Income

    Correct Answer
    B. Equated Monthly Instalment
    Explanation
    EMI stands for Equated Monthly Instalment. It is a fixed amount of money that a borrower has to pay to a lender on a monthly basis, as part of a loan repayment. The EMI includes both the principal amount and the interest charged on the loan. This ensures that the borrower pays off the loan in regular installments over a specific period of time, making it easier to manage their finances.

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  • 24. 

    Wrong punching of interest rate structure offered to a client in system while underwriting a loan is an example of

    • A.

      Market Risk

    • B.

      Credit Risk

    • C.

      Operational Risk

    • D.

      Financial Risk

    Correct Answer
    C. Operational Risk
    Explanation
    Wrongly punching the interest rate structure offered to a client in the system while underwriting a loan is an example of operational risk. Operational risk refers to the risk of loss resulting from inadequate or failed internal processes, people, and systems, or from external events. In this case, the error in inputting the interest rate structure is a failure in the internal process of the underwriting system, leading to potential financial losses or negative consequences for the organization.

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  • 25. 

    Below is not a characteristic of retail banking

    • A.

      Risk diversification

    • B.

      Larger outreach

    • C.

      Focus on individual clients

    • D.

      Business lending services

    Correct Answer
    D. Business lending services
    Explanation
    Retail banking focuses on providing financial services to individual clients, such as personal loans, savings accounts, and mortgages. It aims to reach a larger customer base and diversify its risks by serving a wide range of individuals. However, business lending services are not typically associated with retail banking. Instead, business lending is a characteristic of commercial banking, which focuses on providing financial services to businesses and corporations.

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  • 26. 

    Which is not one of the three main financial statements?

    • A.

      Statement of equity

    • B.

      Balance sheet

    • C.

      Income statement

    • D.

      Cash flow statement

    Correct Answer
    A. Statement of equity
    Explanation
    The statement of equity is not one of the three main financial statements. The three main financial statements are the balance sheet, income statement, and cash flow statement. The balance sheet provides a snapshot of a company's assets, liabilities, and equity at a specific point in time. The income statement shows a company's revenues, expenses, and net income over a period of time. The cash flow statement reports the cash inflows and outflows from operating, investing, and financing activities. However, the statement of equity focuses specifically on changes in a company's equity over a period of time and is not considered one of the main financial statements.

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  • 27. 

    What does the balance sheet indicate?

    • A.

      The cash inflows and outflows of the business

    • B.

      The different types of products sold

    • C.

      The revenues and expenses of the business

    • D.

      The financial strength of the business

    Correct Answer
    D. The financial strength of the business
    Explanation
    The balance sheet is a financial statement that provides a snapshot of a company's financial position at a specific point in time. It includes information about the company's assets, liabilities, and shareholders' equity. By analyzing the balance sheet, investors and stakeholders can assess the financial strength of the business, including its liquidity, solvency, and overall financial health. Therefore, the balance sheet indicates the financial strength of the business.

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  • 28. 

    Which Excel formula is used for calculating EMI

    • A.

      PV

    • B.

      FV

    • C.

      PMT

    • D.

      IRR

    Correct Answer
    C. PMT
    Explanation
    The correct answer is PMT. PMT is an Excel formula that is used to calculate the EMI (Equated Monthly Installment) for a loan or mortgage. It takes into account the principal amount, interest rate, and the duration of the loan to calculate the fixed monthly payment that needs to be made. This formula is commonly used in financial analysis and planning to determine the affordability of loans and mortgages.

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  • 29. 

     LTV stand for

    • A.

      Loan to Value ratio

    • B.

      Lowest Trending Value

    • C.

      Loan on Vehicles Value

    • D.

      Loan Termination Value

    Correct Answer
    A. Loan to Value ratio
    Explanation
    LTV stands for Loan to Value ratio. This ratio is used by lenders to assess the risk of a loan by comparing the amount of the loan to the appraised value of the asset being financed. It helps determine the amount of equity in the asset and the level of risk involved in the loan. A higher LTV ratio indicates a higher risk for the lender, as the borrower has less equity in the asset. Therefore, Loan to Value ratio is the correct answer.

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