Wednesday, February 3, 2010

Part 11A: It is time to take stock (answers)

1) If you estimate that your current monthly expenses (for your family of four) are in the region of Rs.20,000 per month, what is the corpus you would need today, in order to be able to retire?  It’s a very open-ended question so let’s put in some more conditions.  Use the method already explained in Part 1, and make a similar assumption for taxes. Assume that your corpus will yield 8% p.a. pre-tax. Since you still don’t own a house, you need to add Rs.25 lakhs to your final answer. I am looking for one number, in Rupees.

Ans: Rs.97 lakhs.

A corpus of Rs.30 lakhs yields Rs.20,000 p.m. as interest at 8% p.a.  Doubling this gives Rs.60 lakhs.  Adding 20% for taxes gives Rs.72 lakhs.  Adding Rs.25 lakhs for the house gives Rs.97 lakhs.

2) Which of the following are assets in the sense that we have defined it? (a) Yacht  (b) Motorbike (c) Cash (d) Equity Shares (e) Units in a Money Market Mutual Fund (f) RBI Bonds (g) Kisan Vikas Patra (h) 30% discount voucher of Shoppers’ Stop

Ans: The following are the assets as per our definition:

(c) Cash
(d) Equity Shares
(e) Units in a Money Market Mutual Fund
(f) RBI Bonds
(g) Kisan Vikas Patra

3) When interest rates go up, the NAV of your long-term GSec Fund (a) goes up (b) goes down (c) stays flat (d) fluctuates (e) can’t say

Ans: (b) – When the interest rate moves up, the NAV of a long-term GSec Fund goes down.

4) You invest Rs. One Lakh in your savings bank account. (A) What would it amount to at 3.5% per annum in 10 years? (B) What would be the Net Present Value of that amount today if you discount it at the expected inflation rate which is 7%? (2 points)

Ans: (a) Rs.1,41,060    (b) Rs.71,708

5) Your credit card company charges you 3.1% interest per month, compounded monthly.  You have a credit card balance of Rs.50,000.  How many months (rounded off to the nearest month) will it take to repay the whole balance assuming you repay 5% of the monthly outstanding every month? Assume the balance is repaid the moment the outstanding balance drops below Rs.100.

Ans: 300 months. That’s right - 25 years!      

6) You take a personal loan of Rs.50,000 to repay the credit card balance.  The loan is at 15% per annum (@ 1.25% p.m.), interest calculated monthly on the outstanding balances.  You repay 5% of the outstanding balance every month. How long will it take you, in months (rounded off to the nearest month) to repay the entire loan? Assume the loan is repaid the moment the outstanding balance drops below Rs.100.

Ans: 160 months

7) Arrange the following in ascending order of liquidity (least liquid first, most liquid last). Land, Cash, Car, Equity stocks, US Dollar bills, Five-year Bank FD opened three years back, your Wedding Ring made of gold. Keep sentiments out of the picture.

Ans: Land, car, [wedding ring, five-year FD/equity stock (both are about equally liquid)], US Dollar bills, Cash

8) Arrange the following loans (assuming you are the one who is doing the borrowing) in order of most desirable to least desirable, in terms of interest rates (a) house loan (b) personal loan from a bank (c) credit card debt (d) overdraft against security of shares from a bank

Ans: House loan, overdraft against security of shares, personal loan, credit card debt

9) (A) How many companies is the BSE Sensex composed of? (B) What proportion of the Sensex is represented by the top 5 shares by market capitalization? Answers within +/- 2% will be taken as correct. (2 points)

Ans: a) 30   b) about one-third, as on Feb 26, 2010.  See attached link for the details:

10) Index Funds are usually (a) actively managed (b) passively managed (c) not managed

Ans: b) Passively managed

11) You are about to retire in five years’ time.  Conventional financial wisdom indicates that you should currently have most of your money invested in (a) 100% Equity (b) 100% Debt (c) Predominantly Equity (d) Predominantly Debt.  Assume Equity and Debt are the only two investment options available.

( d) Predominantly Debt

12) 916 Gold refers to how many carats?

Ans: 22 carats.  916/1000 = 22/24.  24 carats is pure gold.

13) If you want to retire, the following things are important to do: (1) Keep rigorous spending targets (2) Keep aside the balance by Paying Yourself First (3) Invest the balance to earn steady returns (4) Invest for the long term and allowing the money to compound (5) Have a judicious mix of less risky and more risky investments depending on life-stage and other factors (6) All the above

Ans: (6) All the above

14) You invest Rs. One Lakh in a five-year deposit with a finance company that promises to double your money every six months.  At the end of five years, how much money are you likely to get back?  Hint: Not everything in the world was achieved with Math.

Ans: Zero. You will not get any money back.  At those interest rates, did you really think you would? 

15) A Systematic Investment Plan is good because (a) it inculcates discipline in investing (b) of Dollar cost averaging (c) It takes away the hassle of thinking and analysis, while retaining good investment wisdom (d) of all the above

Ans: (d) All of the above

16) Diversified Equity Funds diversify by (a) investing in a broad range of Equities (b) investing in a mix of Equity, Corporate Debentures and Government Securities (c) buying and selling often (d) investing in only companies that sell a diverse range of products (e) investing in varied geographies (f) all the above

Ans: (a) Diversified Equity Funds diversify by investing in a broad range of Equities

17) Money Market Funds invest predominantly in securities with maturities exceeding one year – Yes/No

Ans: No.  Money Market Funds invest in very short maturity securities, ranging from one day to a few months at most.

18) Fidelity believes ‘more’ (remember ‘more’ is only a matter of degree) in which of the following: (you can indicate one or more choices)  (a) top-down stock picking (b)  bottom-up stock picking (c) quick short-term returns (d) investing for the longer term

Ans: (b) and (d). Fidelity believes in “bottom-up stock picking” and “investing for the long term”

19) Peter Lynch managed which Fidelity Fund?  Name one book that he has written?

Ans: Magellan Fund.  He has written three books (with co-author John Rothchild) – One Up on Wall Street, Beating the Street, and Learn to Earn.

20) Who is known as the Sage of Omaha?

Ans: Warren Buffett  (The last two were easy for those who know how to google!)

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