Question 1

If interest is compounded quarterly, the "Effective Annual Rate" (EAR) will be:

Equal to the Nominal Rate.Higher than the Nominal Rate.Lower than the Nominal Rate.Half of the Nominal Rate.

View Explanation

When compounding occurs more frequently than once a year (e.g., quarterly), interest is earned on interest more often, making the Effective Annual Rate (EAR) higher than the stated Nominal Rate.

Question 2

According to the "Rule of 72", if the interest rate is 8% p.a., an investment will double in approximately:

10 years5 years9 years8 years

View Explanation

Rule of 72 formula: Years to Double ˜ 72 / Interest Rate. Here, 72 / 8 = 9 years.

Question 3

A "Perpetuity" is an annuity that:

Has uneven cash flows.Pays interest at the beginning of the period.Ends after 10 years.Continues forever (infinite life).

View Explanation

Perpetuity is a stream of constant cash flows that continues indefinitely. PV of Perpetuity = Annual Cash Flow / Discount Rate.

Question 4

An "Annuity Due" differs from an "Ordinary Annuity" in that payments are made:

Only once.Irregularly.At the beginning of each period.At the end of each period.

View Explanation

In an Ordinary Annuity, cash flows occur at the end of the period (e.g., bond interest). In Annuity Due, cash flows occur at the beginning (e.g., rent, insurance premium).

Question 5

A Sinking Fund factor is used to calculate:

The present value of a perpetuity.The future value of a single amount.The compound interest.The amount of annuity required to accumulate a specific future sum.

View Explanation

If you need ?10 Lakhs after 5 years to repay a bond, the Sinking Fund factor helps you calculate how much you need to save annually to reach that target.

Question 6

For a given nominal interest rate and time period, the Future Value will be highest if compounding is done:

Semi-annually.Daily.Annually.Quarterly.

View Explanation

More frequent compounding results in interest being earned on interest sooner, leading to a higher final amount. Daily > Quarterly > Annual.

Question 7

As the discount rate (interest rate) increases, the Present Value of a future sum will:

Decrease.Remain same.Become negative.Increase.

View Explanation

There is an inverse relationship. A higher discount rate means money loses value faster over time, so the current worth of a future sum is lower.

Question 8

Calculate the Effective Annual Rate (EAR) if the nominal rate is 12% compounded monthly.

12.36%13%12%12.68%

View Explanation

Formula: EAR = (1 + r/n)^n - 1. Here r=0.12, n=12. EAR = (1 + 0.01)^12 - 1 = 1.1268 - 1 = 0.1268 or 12.68%.

Question 9

Which formula represents the Present Value (PV) of a single future sum?

PV = FV * (1+r)^nPV = FV * n * rPV = FV / rPV = FV / (1+r)^n

View Explanation

To find the present value, we divide the future value by the compounding factor (1+r)^n.

Question 10

Using the "Rule of 69", if the interest rate is 10%, the doubling period is approximately:

6.9 years6.9 years + 0.3510 years7.25 years

View Explanation

Rule of 69 Formula: Doubling Period = 0.35 + (69 / Interest Rate). Here, 0.35 + (69/10) = 0.35 + 6.9 = 7.25 years. This is more accurate for continuous compounding.

Question 11

Which factor would you use to calculate the monthly EMI for a Housing Loan?

Present Value Interest Factor of a Lump Sum (PVIF).Future Value Interest Factor of a Lump Sum (FVIF).Future Value Interest Factor of an Annuity (FVIFA).Present Value Interest Factor of an Annuity (PVIFA).

View Explanation

A loan is a lump sum received today (PV), which is repaid in installments (Annuity). To equate the loan amount to the stream of EMIs, we use PVIFA.

Question 12

In a loan amortization schedule with constant EMI, as time passes:

The interest component increases, and principal component decreases.The EMI amount increases.Both components remain constant.The interest component decreases, and principal component increases.

View Explanation

In the early years, the outstanding principal is high, so interest is high. As principal is repaid, interest drops, allowing a larger portion of the fixed EMI to go towards principal repayment.

Question 13

To calculate the accumulated value of a systematic investment plan (SIP) at the end of the tenure, you would use the formula for:

Perpetuity.Future Value of a Single Amount.Future Value of an Annuity.Present Value of an Annuity.

View Explanation

SIP involves a series of equal payments at regular intervals. We want to know the total value at the end (Future), so FV of Annuity is used.

Question 14

The exact Fisher Equation relating Nominal Rate (r), Real Rate (R), and Inflation (i) is:

r = R + i(1 + r) = (1 + R) * (1 + i)R = r - ir = R * i

View Explanation

While r = R + i is a common approximation, the precise relationship accounts for the cross-product of real rate and inflation: r = R + i + (R*i). Thus, (1+r) is the product of (1+R) and (1+i).

Question 15

A "Deferred Annuity" is one where:

Payments continue forever.Payments start immediately.The first payment is delayed for a certain number of periods.Payments are made at the beginning of each period.

View Explanation

Example: A pension plan where you invest now, but the annuity payments (pension) start only after you retire (say, after 10 years).

Question 16

The Present Value of a perpetuity that grows at a constant rate 'g' is calculated as:

Cash Flow * Growth RateCash Flow / (Discount Rate + Growth Rate)Cash Flow / (Discount Rate - Growth Rate)Cash Flow / Discount Rate

View Explanation

Formula: PV = CF1 / (k - g). This is used when cash flows grow forever at a constant rate (e.g., valuation of a stock with constant dividend growth).

JAIIB Quiz

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