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Archive for May, 2012

Important questions for Retirement Planning – CFP

Posted by Prashant Shah on May 17, 2012

Here are the questions which have been asked by readers as queries. I don’t own any of the question.

1.Chintan borrows from Bharat a sum of Rs 50,000 at the end of 3 years from now and another Rs. 80000 at the end of 5 years from now. What cash amount should be accepted now in lieu of the above 2 payments if interest rate is 5% per annum?

  • (a)   Rs 112842
  • (b)   Rs 115900
  • (c)    Rs 118219
  • (d)   Rs 105874

2. While making an investment in a Debt fund for your client you make the following remarks:

(A) Rate of return by the instrument in past is 8.5% and is expected to continue in future

(B) Investment would have low risk

Which of the statement is voilative with respect to CFP Code of Ethics?

  • (a)   (A) Only
  • (b)   (B)Only
  • (c)    Both (A) and (B)
  • (d)   None of the above

3. Sundar, 40 years young, spends Rs. 100000 pa to maintain his family. He expects his standard of living to grow 3% over and above inflation each year. He would be retiring at age of 60 years. After retirement he expects his expenditure to be 90% of his last years expense What would be his expenditure in the first year after retirement Assume inflation rate is 6%

  • (a)   Rs 490537
  • (b)   Rs 650441
  • (c)   Rs 560441
  • (d)   Rs 504397

4. Kumar, aged 30, is interested in planning for retirement. He saves Rs. 10000 per year (at the yearend) in a bank fixed deposit earning 8% p.a. compounded annually until he retires at age 60. His life expectancy is 80 years. What will be his corpus on the date of retirement? What is the fixed annual amount he can withdraw at the beginning of each year until age 80 presuming that he wishes to leave his heirs an estate of Rs 200000 then? Assume that all post retirement funds are invested in the same instrument. Inflation rate is constant at 6% p.a.

  • (a)   Rs. 1132832. Rs. 102787
  • (b)   Rs. 1105694. Rs. 61375
  • (c)    Rs. 1054875. Rs. 108423
  • (d)   Rs. 1132832.Rs. 59040



  • PMT = 10000
  • N = 30
  • I/Y = 8
  • FV = (?) = 1132832


  • PV = 1132832
  • FV = 200000
  • N = 20
  • I/Y = 8
  • PMT(BGN) = ? = 102787

5. Neha has received an inheritance of Rs. 2.5 lakh. She wants to withdraw equal amounts at the beginning of each month for the next seven years. She expects to earn an annual interest of 10% compounded monthly on her investments. What amount can she receive each month?

  • (a)   Rs.4150
  • (b)   Rs.4116
  • (c)    Rs. 2266
  • (d)   Rs. 2626

6. Nilesh, 30 years old, is currently earning an annual emolument of Rs. 300000. He starts saving 10% of his salary at every year end in a recurring plan which yields a rate of interest equal to 6% p.a. His salary increases by 5% p.a. How much will he be able to accumulate at the age of 60?

  • (a)   Rs.4520530.
  • (b)   Rs.4965080.
  • (c)    Rs.3519820.
  • (d)   Rs. 4264650.

7.  Parva is an NRI who has been working in the Gulf for the past 10 years. He is aged 30. He has been saving Rs. 10 lakh per annum for the past 10 years and hopes to save the same amount for the next 10 years that he plans to live in the Gulf. The inflation-adjusted monthly income requirement for Pavan is Rs. 100000 in the year in which he returns to India. It is estimated that inflation would remain at an average of 3% during Pavan’s retired life of 30 years. Pavan’s life expectancy is placed at 70 years. If his investments earn a target return of 6%. What is the accumulated nest egg required for his retirement?

Assumption; compounding to be done on annuity certain basis, throughout the problem. Select closest answer.

  • (a)   Rs.233Lakh
  • (b)   Rs.146Lakh
  • (c)   Rs.116Lakh
  • (d)   Rs.240Lakh

8.  Diversification reduces the risk of an entire portfolio if

  • (a)   the asset classes chosen are more than 4
  • (b)   the assets are mainly consisting of Real Estate
  • (c)   the asset classes chosen have a low correlation
  • (d)   the assets mainly consists of Government securities

9.  Sources of income to be considered at the time of retirement are.

  • (a)      Portfolio Income
  • (b)      Passive income
  • (c)      Earned Income
  • (d)      All of the above

10. Living Standards in India will rise if

  • (a)   population and GDP equally grow
  • (b)   population grows faster than GDP
  • (c)    relationship between GDP growth and population has no effect
  • (d)   GDP grows faster than the population.

11. Harinder has heard that changes in inflation rate might have a significant impact on his real saving. Currently he would buy the car of his dreams for Rs. 3 Lakh. He wants to estimate the amount he may need to buy the car in 8 yrs time. The inflation rate for the period are expected to be 5% for first four year, 4 % for next four year value of the car is expected to fall by 10 % every time over a period of 4 yrs. If he buys the car in 8 yrs then what would be the same real amount that he would need to have saved.

  • a)    345539
  • b)     400000
  • c)     383932
  • d)     426591

12. Sundar is a 30 year-old self employed youth with a life expectancy of 75 years. He has been saving Rs. 30,000 per year providing a compounded return of 8% p.a. for last 5 years. Swamesh wants to retire after total 25 years of saving. His post retirement funds are expected to earn 6% pa returns and expenses after retirement are fixed at Rs. 3 lakh per year. He wants to know what rate of return should he get on his current accumulated fund as well as his future yearly saving of Rs. 30,000 pa till retirement. To fund his retirement needs and leaving Nil estate behind. (Assumption: All computations for interest spend and savings compound annually, assuming beginning of the period investment).

  • (a)   11.72%
  • (b)   11.69%
  • (c)   10.61%
  • (d)   13.20%



Posted in CFP, Practice Question | 73 Comments »

Important questions for Investment Planning – CFP

Posted by Prashant Shah on May 4, 2012

Compilation of questions for Investment Planning.


If a new issue was offered to the public at 15 times earnings but the market was pricing similar shares at 19 times, this would be _____________.

  • (a) Appalling proposition to the investor
  • (b) The investor cannot take a position
  • (c) An example of low gearing
  • (d) Bargain not to be missed
2 How do T-Bills pay interest to their investors?

  • (a) Coupon interest
  • (b) Possible price appreciation above their discounted price
  • (c) T-Bills pay no interest
  • (d) Difference between issue price and face value



Covered call writing is a strategy preferred by risk-averse investors. Consider an investor who writes a covered call on ABC share. Spot price is 38, Exercise price is 40 and 3-month call on ABC share is traded at 3.

What is the initial cash flow incurred at the time of investment?

  • (a) 38
  • (b) 35
  • (c) 41
  • (d) 37



The May futures contract on XYZ Ltd closed at Rs. 3,940 yesterday. It closes today at Rs. 3,898.60. The spot closes at Rs. 3,800. Raju has a short position of 3,000 in the May futures contract. He sells 2,000 units of May expiring put options on XYZ with a strike price of Rs. 3,900 for a premium of Rs. 110 per unit. What is his net obligation to/from the clearing corporation today?

  • A) Pay Rs. 3,44,200.
  • B) Receive Rs. 3,44,200.
  • C) Receive Rs. 6,40,000.
  • D) Pay Rs. 95,800.
5 Gilt funds invests in

  • (a)  Medium and long term government securities
  • (b)   Certificate of deposits
  • (c)   Commercial paper
  • (d)   Treasury bills


The inflation linked annuity of a retirement plan reviewed every quarter on the basis of average inflation prevailing during the immediately preceding quarter, started at Rs. 40000/- p.m. when the base inflation was 7% p.a. If the average inflation for the quarter, during the year were 3.5% p.a., 5% p.a., 7.3% p.a. & 9.8% p.a. respectively. Find the monthly annuity in the first quarter of succeeding year.

  • (a)   42549
  • (b)   42560
  • (c)    42328
  • (d)   43365

Common for IP and RPEB


Your client has been presented with an investment opportunity that will yield cash flow of rs 30000 per year in year 1 through 4, rs 35000 per year in 5 years through 9 and rs 40000 in years 10. This investment will cost the firm rs 150000 today, and the cost of capital is 10%.assume cash flows occur at the end of each year. What is the discounted payback period for this investment?

  • (a)   5.23 yrs
  • (b)   4.386 yrs
  • (c)   4.00 yrs
  • (d)   6.74 yrs














































 13415.2/17960.53=0.74. Hence payback period is 6.74 years.



Posted in Practice Questions | 79 Comments »