Financial Management I

According to the Realized Yield approach, the past returns on a security are taken as a
proxy for the estimation of return required in the future by the investors. Hence,
statement I is true. The assumptions behind this approach are that (a) the actual returns
have been in line with the expected returns. And (b) the investors will continue to have
the same expectations from the security. Hence, statement II is not true. The result of
this approach is taken as a starting point for the estimation of the required rate of
return. Hence, statement III is true.
So, option d is the correct answer

The features of certificate of deposit issued by bank :
It is a document of title to a time deposit
It is issued at a discounts to face value
It is freely transferable by endorsement and delivery
It attracts stamp duty and there is no grace period, as in the case of bill financing

For the calculation of the present value interest factor of an annuity (PVIFA), it is
assumed that the cash flow will occur at the end of the period under consideration.
PVIFA is also reciprocal to the capital recovery factor. Hence, the option (e) is the
answer.

The interest rate usually specified on an annual basis in a loan agreement or security is
known as the nominal rate of interest. If compounding is done more than once a year, the
actual rate of interest paid (or received) is called effective interest rate. Effective interest
rate would be higher than the nominal interest rate.
The effective rate of interest increases with increase in the frequency of compounding.
For example, the effective rate of interest under quarterly compounding will be more
than the effective rate of interest under semi-annual compounding. Hence option (b) is
correct

According to the Realized Yield approach, the past returns on a security are taken as a
proxy for the estimation of return required in the future by the investors. Hence,
statement I is true. The assumptions behind this approach are that (a) the actual returns
have been in line with the expected returns. And (b) the investors will continue to have
the same expectations from the security. Hence, statement II is not true. The result of
this approach is taken as a starting point for the estimation of the required rate of
return. Hence, statement III is true.
So, option d is the correct answer.

The weights based on the book values are historical in nature and hence these do not
reflect the cost of capital owing to the changes in the business and financial risk of the
company. The reasons mentioned in the other options do not correctly reflect the
advantages of choosing the weights based on the book values in comparison to the
market values.

The options (a) and (b) represent the acts of hedgers who are interested to minimize their
risk in a volatile market. The option (c) represents the act of the speculators who wants
to make profits from the price movements in a volatile market through speculation. The
option (d) represents the act of the arbitrageurs who take the opportunity of improper
pricing in different markets and imparts a better efficiency in the system but not hedging
hence option (e) is not true.