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PART I (1–20)
Basic Concepts of Risk Management
1. Net Interest Income is:
A. Interest earned on advances
B. Interest earned on investments
C. Total interest earned on advances and investment
D. Difference between interest earned and interest paid
Answer: D
Explanation: Net Interest Income (NII) is the difference between the revenue generated from interest-bearing assets (advances, investments) and the cost of paying interest on liabilities (deposits, borrowings). It is a key profitability measure for banks.
2. European option can be exercised:
A. On any day at the option of the buyer on or before expiry
B. Only on the expiry date
C. Both before and after expiry
D. None of the above
Answer: B
Explanation: A European option can only be exercised ON THE EXPIRY DATE, unlike an American option which can be exercised on any day up to and including the expiry date. The original statement was FALSE.
3. What is the beta factor for Corporate Finance under Standardized Approach for Operational Risk?
A. 15%
B. 18%
C. 12%
D. None of the above
Answer: B
Explanation: Under Basel II Standardized Approach for Operational Risk, beta factor for Corporate Finance is 18%. Key beta factors: Retail Banking 12%, Commercial Banking 15%, Trading & Sales 18%, Payment & Settlement 18%.
4. A bank suffers loss due to adverse market movement of a security held beyond the defeasance period. What type of risk has the bank suffered?
A. Market Risk
B. Operational Risk
C. Market Liquidation Risk
D. Credit Risk
Answer: A
Explanation: When a security held beyond the defeasance period suffers loss due to adverse market movement, it constitutes Market Risk — specifically price risk arising from changes in market prices of securities.
5. The Basel II Proposals (June 1999) contained mainly:
A. Settlement risk management, Supervisory review and Market discipline
B. Capital requirements, Supervisory review and Market discipline
C. Settlement risk management, hedge funds and Contingency plans
D. Capital requirements, hedge funds and Contingency plans
Answer: D (II, III and VI)
Explanation: Basel II is built on three pillars: Pillar 1 — Minimum Capital Requirements, Pillar 2 — Supervisory Review Process, and Pillar 3 — Market Discipline. These replaced the single capital ratio approach of Basel I.
6. Which of the following is NOT a type of Credit Risk?
A. Default risk
B. Credit spread risk
C. Intrinsic risk
D. Basis risk
Answer: D
Explanation: Basis Risk is a type of Market Risk (Interest Rate Risk), NOT Credit Risk. Types of Credit Risk include Default Risk, Credit Spread Risk, Counterparty Risk, and Concentration Risk.
7. 8% Government of India security is quoted at ₹120. The current yield on the security will be:
A. 12%
B. 9.6%
C. 6.7%
D. 8%
Answer: C
Explanation: Current Yield = (Coupon/Market Price) × 100 = (8/120) × 100 = 6.67% ≈ 6.7%. Current yield differs from coupon rate when bonds trade at premium or discount.
8. Risk of a portfolio with over-exposure in steel sector will be:
A. More than systematic risk
B. Equal to intrinsic risk
C. Less than intrinsic risk
D. None of these
Answer: A
Explanation: A portfolio over-exposed in a single sector carries concentration risk in addition to systematic risk, making total risk more than systematic risk alone. Diversification across sectors reduces unsystematic/intrinsic risk.
9. A company declares ₹2 dividend on equity share of face value ₹5, quoted at ₹80. The dividend yield will be:
A. 20%
B. 4%
C. 40%
D. 2.5%
Answer: D
Explanation: Dividend Yield = (Dividend per share / Market Price) × 100 = (2/80) × 100 = 2.5%. Dividend yield is calculated on market price, not face value.
10. The risk that arises due to worsening of credit quality is:
A. Intrinsic Risk
B. Credit Spread Risk
C. Portfolio risk
D. Counterparty risk
Answer: B
Explanation: Credit Spread Risk arises due to worsening of credit quality of the borrower/issuer, which widens the credit spread over risk-free rate. When ratings migrate downward (e.g., AA to A), credit spread widens and bond prices fall.
11. A debenture of face value ₹100 carries a coupon of 15%. If the current yield is 12.5%, what is the current market price?
A. ₹100
B. ₹120
C. ₹150
D. ₹125
Answer: B
Explanation: Current Market Price = (Coupon / Current Yield) = (15 / 0.125) = ₹120. When current yield (12.5%) is less than coupon rate (15%), the bond trades at a premium to face value.
12. An increase in Cash Reserve Ratio will cause the yield curve to:
A. Shift downward
B. Remain unchanged
C. Become steeper
D. Become flatter
Answer: D
Explanation: An increase in CRR tightens short-term liquidity, raising short-term interest rates more than long-term rates. This reduces the spread between long and short rates, making the yield curve flatter.
13. The model combining five financial ratios to produce an objective measure of borrower's financial health is:
A. Altman's Z-score
B. Credit Metrics
C. Credit Risk+
D. None of the above
Answer: A
Explanation: Altman's Z-score combines five financial ratios (Working Capital/Total Assets, Retained Earnings/Total Assets, EBIT/Total Assets, Market Value of Equity/Book Value of Debt, Sales/Total Assets) to predict bankruptcy probability.
14. A bank holds a security rated A+. The rating migrates to A. What risk has the bank faced?
A. Market risk
B. Operational risk
C. Market liquidation risk
D. Credit risk
Answer: D
Explanation: Rating migration (downgrade from A+ to A) constitutes Credit Risk — specifically Credit Spread Risk or Migration Risk. When rating deteriorates, credit spread widens and the bond's market value falls.
15. When interest rates go up, prices of fixed interest bonds:
A. Go up
B. Go down
C. Remain unchanged
D. None of these
Answer: B
Explanation: Bond prices and interest rates have an inverse relationship. When interest rates rise, existing bonds with lower coupon rates become less attractive, causing their market prices to fall.
16. VaR is not enough to assess market risk. Stress testing is desirable because:
A. It helps in calibrating VaR module
B. It helps as an additional risk measure
C. It helps in assessing risk due to abnormal movement of market parameters
D. VaR measure is not accurate enough
Answer: C
Explanation: Stress testing complements VaR by assessing portfolio behavior under extreme but plausible market scenarios (tail risk events). VaR is based on historical data and normal distributions but stress testing captures abnormal market movements.
17. Bond with BBB rating will carry lower interest rate than one with AA rating:
A. False
B. True
C. Difficult to say
Answer: A (False)
Explanation: BBB-rated bond carries HIGHER interest rate than AA-rated bond. Lower credit rating implies higher credit risk, requiring higher yield to compensate investors for greater default risk.
18. Fall in interest rate causes bond prices also to fall:
A. False
B. True
C. Difficult to say
Answer: A (False)
Explanation: Fall in interest rates causes bond prices to RISE. Bond prices and interest rates move in opposite directions. When rates fall, existing higher-coupon bonds become more valuable, pushing prices up.
19. A normal yield curve is sloping upward:
A. False
B. True
C. Difficult to say
Answer: B (True)
Explanation: A normal (upward sloping) yield curve reflects that long-term interest rates are higher than short-term rates. Investors demand higher yields for longer-term lending due to greater uncertainty and opportunity cost.
20. Stamp duty on transfer of dematerialized shares is lower:
A. False
B. True
C. Difficult to say
Answer: A (False)
Explanation: Transfer of demat shares attracts ZERO stamp duty — not merely lower. The elimination of stamp duty on demat transfers was a key incentive for dematerialization of securities.
PART II (21–50)
Bonds, Yield Curve & Interest Rate Risk
21. Large Government borrowing can cause yield curve to shift upward:
A. False
B. True
C. Difficult to say
Answer: B (True)
Explanation: Large Government borrowings increase demand for funds, raising interest rates across all maturities, shifting the entire yield curve upward.
22. Growth Funds assure growth in return:
A. False
B. True
C. Difficult to say
Answer: A (False)
Explanation: Growth Funds invest primarily in equity shares but do NOT assure or guarantee returns. Mutual fund returns are subject to market risk. SEBI prohibits guaranteed returns by mutual funds.
23. If short term interest rates remain higher than long term interest rates, the yield curve will be inverted:
A. False
B. True
C. Difficult to say
Answer: B (True)
Explanation: An inverted yield curve occurs when short-term rates exceed long-term rates. It is often a predictor of economic recession and reflects market expectation of falling interest rates in the future.
24. Credit rating agencies determine interest rates on debt securities:
A. False
B. True
C. Difficult to say
Answer: A (False)
Explanation: Credit rating agencies (CRISIL, ICRA, CARE) assess and assign credit ratings but do NOT determine or fix interest rates. Interest rates are determined by market forces of demand and supply.
25. The shares of software companies carry high P/E ratio:
A. False
B. True
C. Difficult to say
Answer: B (True)
Explanation: Software/technology companies typically carry high P/E ratios because investors expect high future growth. High growth expectations justify higher valuations relative to current earnings.
26. Closed end mutual funds are trading at discount to NAV:
A. False
B. True
C. Difficult to say
Answer: B (True)
Explanation: Closed-end mutual funds typically trade at a discount to their NAV in secondary markets, as investors price in liquidity risk and uncertainty about future performance.
27. In a rising interest rate phase, Zero coupon bond will be traded at a premium:
A. False
B. True
C. Difficult to say
Answer: A (False)
Explanation: In a rising interest rate phase, ALL bond prices fall including Zero coupon bonds. Zero coupon bonds have the highest duration and are actually MORE sensitive to interest rate changes than coupon-paying bonds.
28. A sharp decline in short term interest rates will cause yield curve to be steeper:
A. False
B. True
C. Difficult to say
Answer: B (True)
Explanation: When short-term rates fall sharply while long-term rates remain relatively stable, the spread between long and short rates widens, making the yield curve steeper.
29. A fall in interest rates reduces the demand for bonds in the secondary market:
A. False
B. True
C. Difficult to say
Answer: A (False)
Explanation: A fall in interest rates INCREASES demand for bonds in the secondary market. Existing bonds with higher coupons become more attractive as new bonds offer lower yields, pushing bond prices higher.
30. Increase in Cash Reserve Ratio can cause the yield curve going temporarily inverted:
A. False
B. True
C. Difficult to say
Answer: B (True)
Explanation: A sharp increase in CRR drains liquidity from the banking system, causing short-term interest rates to spike. If short-term rates rise above long-term rates, the yield curve temporarily inverts.
31. Dematerialization of stocks has increased turnover on the stock market:
A. False
B. True
C. Difficult to say
Answer: B (True)
Explanation: Dematerialization eliminated physical share certificates, reducing settlement time dramatically. This increased market liquidity, ease of trading, and overall turnover on stock exchanges.
32. Tight money and credit policy will cause bond prices to fall:
A. False
B. True
C. Difficult to say
Answer: B (True)
Explanation: Tight monetary policy raises interest rates. Since bond prices and interest rates move inversely, rising interest rates cause bond prices to fall.
33. Increasing Government borrowing will raise interest rates:
A. False
B. True
C. Difficult to say
Answer: B (True)
Explanation: Increased Government borrowing increases the demand for loanable funds, creating upward pressure on interest rates — the "crowding out" effect.
34. Bond carrying AA rating will carry highest interest rate than one carrying BBB rating:
A. False
B. True
C. Difficult to say
Answer: A (False)
Explanation: AA-rated bond carries LOWER interest rate than BBB-rated bond. Higher credit rating implies lower credit risk, so investors accept lower yields.
35. Mutual fund redemption brings bearish influence on the stock market:
A. False
B. True
C. Difficult to say
Answer: B (True)
Explanation: When investors redeem mutual fund units, fund managers must sell underlying securities to meet redemption demands. Large-scale selling creates downward pressure on stock prices — bearish influence.
36. Decline in interest rates on long-dated Government bonds will cause yield curve to be steeper:
A. False
B. True
C. Difficult to say
Answer: A (False)
Explanation: A decline in long-term rates while short-term rates remain stable would make the yield curve FLATTER, not steeper. Steepening occurs when long-term rates rise or short-term rates fall relative to long-term rates.
37. Demat shares carry lower stamp duty on transfer than physical shares:
A. False
B. True
C. Difficult to say
Answer: A (False)
Explanation: Transfer of demat shares attracts ZERO stamp duty — not just lower. Physical share transfers attracted stamp duty, making demat transfers far more cost-effective.
38. Increase in interest rates will cause bond prices to fall:
A. False
B. True
C. Difficult to say
Answer: B (True)
Explanation: This is the fundamental inverse relationship between bond prices and interest rates. When market interest rates rise, the present value of future cash flows from existing bonds falls, causing bond prices to decline.
39. Growth fund is a mutual fund that invests primarily in equity shares:
A. False
B. True
C. Difficult to say
Answer: B (True)
Explanation: Growth funds invest primarily in equity shares of companies with high growth potential, aiming for long-term capital appreciation rather than regular income.
40. Stamp duty on transfer of dematerialized shares is lowest:
A. False
B. True
C. Difficult to say
Answer: A (False)
Explanation: Stamp duty on demat share transfers is NIL (zero), not merely the "lowest." The Finance Act 2019 clarified: demat transfers = 0% stamp duty.
41. Large Government borrowing in the market can make the yield curve shift upward:
A. False
B. True
C. Difficult to say
Answer: B (True)
Explanation: Large government borrowings increase supply of government securities and demand for funds, pushing up interest rates across all maturities, shifting the entire yield curve upward.
42. Bond with A rating will carry higher interest rate than one carrying BBB rating:
A. False
B. True
C. Difficult to say
Answer: A (False)
Explanation: A-rated bond carries LOWER interest rate than BBB-rated bond. A is higher credit quality than BBB. Credit hierarchy: AAA > AA > A > BBB > BB > B > CCC.
43. When the interest rates fall, the market price of a fixed rate bond:
A. Falls
B. Rises
C. Does not change
Answer: B
Explanation: When interest rates fall, market price of a fixed rate bond RISES. Existing bonds with higher fixed coupons become more attractive compared to new bonds issued at lower rates.
44. A transaction where financial securities are issued against the cash flow generated from a pool of assets is called:
A. Securitization
B. Credit Default Swaps
C. Credit Linked Notes
D. Total Return Swaps
Answer: A
Explanation: Securitization is the process of pooling financial assets (mortgages, auto loans, credit card receivables) and issuing securities backed by cash flows from that pool. It transfers risk from the originator to capital market investors.
45. Growth Fund is a mutual fund that:
A. Assures growth in income
B. Invests in fixed income securities
C. Gives fixed return
D. Invests primarily in equities
Answer: D
Explanation: Growth Fund invests primarily in equity shares of companies with strong growth potential, aiming for long-term capital appreciation. Growth funds do NOT assure income or fixed returns as they are subject to market risk.
46. Operational Risk arises from:
A. Inadequate or failed internal processes
B. People and systems
C. External Events
D. All of the above
Answer: D
Explanation: As per Basel II/III definition, Operational Risk arises from inadequate or failed internal processes, people, systems OR from external events. This includes fraud, system failures, natural disasters, legal risk, etc.
47. Which of the following is true about RBI monetary tools?
A. RBI Uses MSS as money contraction tool
B. RBI Uses Repo for Money Supply Tool
C. Reverse Repo is a money contraction tool
D. All statements are true
Answer: D
Explanation: All statements are TRUE: MSS absorbs excess liquidity (contraction); Repo injects liquidity (money supply); Reverse Repo absorbs liquidity (contraction tool).
48. A decline in Cash Reserve Ratio will cause the yield curve to:
A. Shift upward
B. Shift downward
C. Become flatter
D. Remain unchanged
Answer: B
Explanation: A decline in CRR releases liquidity into the banking system, reducing short-term interest rates. When short-term rates fall, the yield curve shifts downward.
49. Under Basel II Standardized Approach for Operational Risk, beta factors are assigned to:
A. Only high-risk business lines
B. All eight business lines
C. Only trading and sales
D. Only retail banking
Answer: B
Explanation: Beta factors are assigned to all eight business lines: Corporate Finance (18%), Trading & Sales (18%), Retail Banking (12%), Commercial Banking (15%), Payment & Settlement (18%), Agency Services (15%), Asset Management (12%), Retail Brokerage (12%).
50. 12% Government of India security is quoted at ₹120. If interest rates go down by 1%, the market price will be:
A. ₹120
B. ₹133.3
C. ₹109
D. ₹140
Answer: B
Explanation: Current yield = 12/120 = 10%. If interest rate goes down by 1%, new yield = 9%. New market price = Coupon/New Yield = 12/0.09 = ₹133.3.
PART III (51–70)
Basel Framework, VaR & Stress Testing
51. Which of the following is true about RBI instruments?
A. RBI discounts eligible bills of banks at Bank Rate
B. Rise in CRR leads to money contraction from the market
C. Reverse Repo Rate is for banks to park money with RBI
D. Banks raise money through CBLOs — All statements are true
Answer: E (All statements are true)
Explanation: All statements are TRUE: RBI rediscounts eligible bills at Bank Rate; Rise in CRR contracts money supply; Reverse Repo is the rate at which banks park surplus funds with RBI; Banks use CBLOs to raise funds.
52. Which of the following is NOT true?
A. Call Money Market Rates are fixed
B. LIBOR rates in a currency are as per demand and supply
C. As LIBOR is in London, MIBOR is in Mumbai
D. IRDA is a regulatory authority in Insurance sector
Answer: A
Explanation: Call Money Market rates are NOT fixed. They are determined by market forces of demand and supply of overnight funds among banks. Note: LIBOR was discontinued June 30, 2023 and replaced by SOFR for USD.
53. A fall in long term interest rates on Government securities will make the yield curve become:
A. Flatter
B. Steeper
C. Shift downward
Answer: A
Explanation: When long-term rates fall while short-term rates remain unchanged, the spread between long and short rates narrows, making the yield curve FLATTER.
54. 1-day VaR of a portfolio is ₹500,000 with 95% confidence level. In 125 working days, how many times may the loss exceed ₹500,000?
A. 4 days
B. 5 days
C. 6 days
D. 7 days
Answer: C
Explanation: At 95% confidence level, losses exceed VaR in 5% of cases. 5% of 125 days = 6.25 ≈ 6 days. The portfolio is expected to suffer losses exceeding ₹500,000 approximately 6 times in 125 working days.
55. A fall in interest rates will make prices of Government Securities:
A. Go down
B. Go up
C. Remain unchanged
D. None of these
Answer: B
Explanation: When interest rates fall, prices of Government Securities GO UP. This inverse relationship is a cornerstone of fixed income investing.
56. Systemic risk is the risk of:
A. Failure of a bank not adhering to regulations
B. Failure of two banks simultaneously due to bankruptcy of one bank
C. Where a group of banks fail due to contagion effect
D. Failure of entire banking system
Answer: D
Explanation: Systemic risk is the risk of COLLAPSE OF THE ENTIRE FINANCIAL SYSTEM. It involves interconnected failures that cascade through the financial system. Basel III reforms specifically addressed systemic risk through SIFI (Systemically Important Financial Institutions) framework.
57. If the yield on long-dated Government securities falls, the yield curve will become:
A. Steeper
B. Flatter
C. Shift downward
Answer: B
Explanation: If long-term yields fall while short-term rates remain unchanged, the gap between long and short rates narrows, making the yield curve FLATTER.
58. 11% Government of India security is quoted at ₹110. If interest rates go down by 1%, the market price will be:
A. ₹110
B. ₹109
C. ₹122.2
D. ₹130
Answer: C
Explanation: Current yield = 11/110 = 10%. If rates fall by 1%, new yield = 9%. New market price = Coupon/New Yield = 11/0.09 = ₹122.2.
59. Balanced fund is a mutual fund that:
A. Assures income
B. Invests in debt and equity
C. Assures growth
D. Gives fixed return
Answer: B
Explanation: A Balanced Fund (Hybrid Fund) invests in both debt instruments AND equity shares in a predetermined ratio, aiming to provide both income and growth while balancing risk and return.
60. Back testing is done to:
A. Test a model
B. Compare model results and actual performance
C. Record performance
D. None of the above
Answer: B
Explanation: Back testing involves comparing model predictions (like VaR estimates) against actual historical performance to validate the model's accuracy. It is mandatory under Basel II/III to validate internal models.
61. Under Basel II, Capital requirement under the accord is:
A. The maximum Capital required to be maintained
B. The minimum Capital required to be maintained
C. The capital as specified by the regulatory authority required to be maintained
D. None of the above
Answer: C
Explanation: Under Basel II, the capital requirement represents the MINIMUM regulatory capital that banks must maintain as specified by the regulatory authority (RBI in India). Banks may choose to hold more but must maintain at least the regulatory minimum.
62. Fall in interest rates causes the prices of Government Securities to go up:
A. False
B. True
C. Difficult to say
Answer: B (True)
Explanation: This is the fundamental inverse relationship between bond prices and interest rates. When rates fall, government securities with higher coupons become more attractive, pushing their market prices upward.
63. Steeper yield curve means long term interest rates are much lower than short term interest rates:
A. False
B. True
C. Difficult to say
Answer: A (False)
Explanation: A steeper yield curve means long-term interest rates are MUCH HIGHER than short-term rates — not lower. An inverted yield curve has short rates higher than long rates.
64. Mutual fund mobilization has bearish influence on the stock market:
A. False
B. True
C. Difficult to say
Answer: A (False)
Explanation: Mutual fund mobilization (collecting investor money) has a BULLISH influence on the stock market. As fund managers invest the collected money into stocks, it creates buying demand that pushes stock prices higher.
65. Convertible debentures carry an element of equity shares:
A. False
B. True
C. Difficult to say
Answer: B (True)
Explanation: Convertible debentures give the holder the right to convert debt into equity shares after a specified period. They carry an embedded equity option, making them hybrid instruments with characteristics of both debt and equity.
66. Credit Rating agencies fix interest rates on bonds or debentures issued by companies:
A. False
B. True
C. Difficult to say
Answer: A (False)
Explanation: Credit Rating agencies (CRISIL, ICRA, CARE, Brickwork) only ASSESS and ASSIGN credit ratings. They do not fix interest rates. Interest rates are determined by market forces, influenced by the credit rating assigned.
67. Mutual Funds invest only in equity shares:
A. False
B. True
C. Difficult to say
Answer: A (False)
Explanation: Mutual Funds invest in a wide variety of instruments including equity shares, debt securities, money market instruments, gold, international securities, and hybrid combinations depending on their investment objective.
68. Favorable monsoon brightens the prospects for stock market:
A. False
B. True
C. Difficult to say
Answer: B (True)
Explanation: A favorable monsoon boosts agricultural output, rural income, and consumption demand, positively impacting FMCG, fertilizers, and rural banking sectors. The multiplier effect brightens overall stock market prospects.
69. Large Government borrowings cause debt securities prices to rise:
A. False
B. True
C. Difficult to say
Answer: A (False)
Explanation: Large Government borrowings INCREASE supply of government securities, which tends to DEPRESS prices and raise yields. Greater supply without proportionate demand causes prices to fall.
70. Falling interest rates have benefited investors in debt securities mutual funds:
A. False
B. True
C. Difficult to say
Answer: B (True)
Explanation: When interest rates fall, prices of debt securities RISE. Debt mutual funds holding these securities see their NAVs increase. Investors benefit from both coupon income and capital appreciation when rates decline.
PART IV (71–85)
Mutual Funds, Markets & IRB Approach
71. Large government borrowing would cause interest rates to go down:
A. False
B. True
C. Difficult to say
Answer: A (False)
Explanation: Large government borrowing RAISES interest rates by increasing demand for loanable funds ("crowding out" effect).
72. Falling interest rates cause NAVs of debt mutual funds to go down:
A. False
B. True
C. Difficult to say
Answer: A (False)
Explanation: Falling interest rates cause NAVs of debt mutual funds to GO UP. When rates fall, bond prices rise. Rising bond prices increase the fund's NAV, benefiting unit holders.
73. Bond with BBB rating will carry lower interest rates than one with A rating:
A. False
B. True
C. Difficult to say
Answer: A (False)
Explanation: BBB-rated bond carries HIGHER interest rate than A-rated bond. A is a higher credit rating than BBB. Higher risk bonds must offer higher yields to attract investors.
74. Money market mutual funds do not invest in equity shares:
A. False
B. True
C. Difficult to say
Answer: B (True)
Explanation: Money Market Mutual Funds (Liquid Funds) invest ONLY in short-term money market instruments (T-Bills, CPs, CDs, repos) with maturity up to 91 days. They do NOT invest in equity shares.
75. SEBI gives credit rating to securities issued in the capital market:
A. False
B. True
C. Difficult to say
Answer: A (False)
Explanation: SEBI is the regulator for capital markets. Credit ratings are assigned by SEBI-registered Credit Rating Agencies (CRAs) like CRISIL, ICRA, CARE, Brickwork — not by SEBI itself.
76. Mutual funds can offer guaranteed returns:
A. False
B. True
C. Difficult to say
Answer: A (False)
Explanation: As per SEBI regulations, mutual funds cannot offer or advertise guaranteed returns. All mutual fund investments are subject to market risk.
77. Large government borrowings will cause interest rates to go up:
A. False
B. True
C. Difficult to say
Answer: B (True)
Explanation: Large government borrowings increase demand for funds, raising interest rates across the economy — the "crowding out" effect.
78. A mutual fund scheme with entry load will have its sale price higher than its NAV:
A. False
B. True
C. Difficult to say
Answer: B (True)
Explanation: Sale Price = NAV + Entry Load. If entry load is 1% and NAV is ₹16, sale price = ₹16.16. Note: SEBI abolished entry loads for mutual funds from August 2009.
79. Security with A rating will carry higher interest rate than one with BB rating:
A. False
B. True
C. Difficult to say
Answer: A (False)
Explanation: A-rated security carries LOWER interest rate than BB-rated security. A-rated securities have better credit quality than BB (speculative grade). Lower risk = lower yield required.
80. A fall in the interest rates causes Government Securities to:
A. Remain stable
B. Fall
C. Rise
Answer: C
Explanation: A fall in interest rates causes Government Securities prices to RISE due to the inverse relationship between bond prices and interest rates.
81. Under Advanced IRB approach, who provides input for LGD?
A. Bank
B. Supervisor
C. Function provided by BCBS
D. None of the above
Answer: A
Explanation: Under Advanced IRB Approach, the BANK itself provides all inputs including PD, LGD, EAD, and M. Under Foundation IRB, only PD is bank-provided; LGD and EAD use supervisory estimates.
82. A debenture of ₹100 carrying 15% coupon rate is quoted at ₹135. The current yield will be:
A. 13.5%
B. 15%
C. 11.11%
D. 10%
Answer: C
Explanation: Current Yield = (Annual Coupon / Market Price) × 100 = (15/135) × 100 = 11.11%. When a bond trades at premium (₹135 > ₹100 face value), current yield (11.11%) is lower than coupon rate (15%).
83. Investment in Post Office time deposit is:
A. Zero risk investment
B. Low risk investment
C. Medium risk investment
D. High risk investment
Answer: A
Explanation: Post Office time deposits are ZERO RISK investments backed by the sovereign guarantee of the Government of India — the safest investment instruments in India with no credit risk.
84. If short term interest rates are temporarily higher than long term interest rates, the yield curve will be:
A. Sloping upward
B. Inverted
C. Zigzag
D. Horizontal
Answer: B
Explanation: An INVERTED yield curve occurs when short-term interest rates exceed long-term rates. This typically signals economic recession expectations and happens when central banks aggressively raise short-term rates to combat inflation.
85. Premature payment of a term loan results in interest rate risk of type:
A. Basis risk
B. Yield curve risk
C. Embedded option risk
D. Mismatch risk
Answer: C
Explanation: Premature payment of a term loan is an exercise of the embedded prepayment option by the borrower. This creates Embedded Option Risk for the bank, which had planned on receiving fixed cash flows for the entire loan tenure.
PART V (86–100)
Advanced Risk Topics & Latest Basel III Updates
86. A company with equity capital ₹50 crores (FV ₹10/share), net profit ₹25 crores, market price ₹50. The PE ratio will be:
A. 50
B. 5
C. 10
D. 20
Answer: C
Explanation: No. of shares = ₹50 crore / ₹10 = 5 crore shares. EPS = ₹25 crore / 5 crore = ₹5. PE Ratio = Market Price / EPS = ₹50 / ₹5 = 10.
87. Daily volatility of a stock is 1%. What is its 10-day volatility approximately?
A. 3%
B. 10%
C. 1%
D. 4%
Answer: A
Explanation: 10-day volatility = Daily volatility × √10 = 1% × 3.162 ≈ 3.16% ≈ 3%. This square root of time rule is fundamental to VaR calculations under the Basel framework.
88. If call money rates are temporarily higher than long term interest rates, the yield curve will be:
A. Sloping upwards
B. Zigzag
C. Inverted
D. Horizontal
Answer: C
Explanation: When call money (overnight) rates are temporarily higher than long-term rates, the yield curve becomes INVERTED. This typically happens when RBI tightens short-term liquidity aggressively through CRR hikes or OMO sales.
89. Under Basel III Capital Charge for Credit Risk (Standardised Approach) Directions 2026, effective from April 1, 2027, which banks are covered?
A. All banks including SFBs and RRBs
B. All Scheduled Commercial Banks excluding SFBs, Payments Banks and Local Area Banks
C. Only public sector banks
D. Only private sector banks
Answer: B
Explanation: RBI's Basel III Capital Charge for Credit Risk (SA) Directions 2026, effective April 1, 2027, apply to ALL Scheduled Commercial Banks EXCLUDING Small Finance Banks, Payments Banks and Local Area Banks. These replace the existing standardised approach framework.
90. Equity oriented mutual funds:
A. Assure income
B. Assure growth
C. Invest in debentures
D. Invest in shares
Answer: D
Explanation: Equity oriented mutual funds primarily INVEST IN SHARES (equity). As per SEBI, equity mutual funds must invest at least 65% of assets in equity and equity-related instruments. They do not assure income or growth.
91. A bank funds its assets from a pool of composite liabilities. Apart from credit and operational risks, it faces:
A. Basis risk
B. Mismatch risk
C. Market risk
D. Liquidity risk
Answer: A
Explanation: When a bank funds its assets using composite liabilities, it faces BASIS RISK — the risk that interest rates on assets and liabilities change by different amounts when market rates change. This is a component of Interest Rate Risk in Banking Book (IRRBB).
92. A rise in Government securities prices will make the yield curve:
A. Slope upward
B. Shift downward
C. Remain stable
D. Shift upward
Answer: B
Explanation: When Government securities prices rise, their yields fall. If prices rise across all maturities, yields across all maturities decline, causing the yield curve to SHIFT DOWNWARD.
93. Risk mitigation measures result in: (1) Reducing downside variability (2) Reducing upside potential. Which is true?
A. Both statements are correct
B. Both statements are not correct
C. Only statement 1 is correct
D. Only statement 2 is correct
Answer: A
Explanation: BOTH statements are correct. Risk mitigation measures (hedging, insurance, diversification) reduce downside risk but simultaneously limit upside potential. For example, hedging with futures eliminates both adverse and favorable price movements.
94. 9% Government of India security is quoted at ₹120. The current yield on the security will be:
A. 12%
B. 9%
C. 7.5%
D. 13.3%
Answer: C
Explanation: Current Yield = (Annual Coupon / Market Price) × 100 = (9/120) × 100 = 7.5%. The bond trades at premium (₹120 > ₹100) because coupon rate (9%) exceeds current market yield (7.5%).
95. Financial Risk is defined as:
A. Uncertainties resulting in adverse variation of profitability or outright losses
B. Uncertainties that result in outright losses only
C. Uncertainties in cash flow
D. Variations in net cash flows
Answer: A
Explanation: Financial Risk is comprehensively defined as uncertainties resulting in ADVERSE VARIATION OF PROFITABILITY OR OUTRIGHT LOSSES. It encompasses credit risk, market risk, operational risk, liquidity risk, and other risks affecting a bank's financial performance.
96. Strategic Risk is a type of:
A. Interest Rate Risk
B. Operational Risk
C. Liquidity Risk
D. None of the above
Answer: D
Explanation: Strategic Risk is NOT a sub-type of any of the above. It is a separate category of risk arising from adverse business decisions, improper implementation, or lack of responsiveness to industry changes. Under RBI/Basel framework, it is categorized under Pillar 2 risks.
97. Objective of liquidity management is to:
A. Ensure profitability
B. Ensure liquidity
C. Either of two
D. Both
Answer: D
Explanation: The objective of liquidity management is BOTH to ensure adequate liquidity (meeting obligations as they fall due) AND to ensure profitability (avoiding excess idle liquidity). The ALM framework seeks to balance both objectives optimally.
98. A mutual fund charges 1% entry load, no exit load. NAV is ₹16. Sale and repurchase price will be:
A. ₹16 and ₹15.80
B. ₹16.16 and ₹15.84
C. ₹15.84 and ₹16
D. ₹16.16 and ₹16
Answer: D
Explanation: Sale Price (with 1% entry load) = NAV × 1.01 = ₹16 × 1.01 = ₹16.16. Repurchase Price (no exit load) = NAV = ₹16. Note: SEBI abolished entry loads in August 2009.
99. Banks need liquidity to:
A. Meet deposit withdrawal
B. Fund loan demands
C. Both of them
D. None of them
Answer: C
Explanation: Banks need liquidity for BOTH: (1) To meet deposit withdrawal demands by depositors, and (2) To fund loan disbursement demands by borrowers. Liquidity Risk arises when banks cannot meet these obligations timely at reasonable cost.
100. A fall in interest rate of long dated Government securities with short term rates unchanged will make the yield curve:
A. Steeper
B. Slope downward
C. Shift downward
D. Flatter
Answer: D
Explanation: When long-term rates fall while short-term rates remain unchanged, the SPREAD between long and short rates NARROWS, making the yield curve FLATTER. A flatter yield curve reflects reducing premium for long-term lending.
Disclaimer: This article is for educational purposes only. Always refer to the official RBI website at www.rbi.org.in for the most current guidelines.