NEB Class 11 · Past paper
The complete NEB Class 11 2069 exam paper for Business Finance, all 14 questions with solved model answers.
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Define finance. Describe in brief the scope of finance.
Finance is the branch of study concerned with the management of money and other assets. It deals with how individuals, businesses, and governments raise funds (financing), allocate them among competing uses (investment), and manage the resulting cash flows and risks over time. In a business context, finance is the art and science of acquiring capital at the lowest possible cost and employing it in the most profitable manner so as to maximize the wealth of the owners.
Scope of finance can be explained under the following broad areas:
Thus the scope of finance covers the entire process of raising, investing, and managing money to achieve the overall objective of wealth maximization.
What do you understand by Primary Market? Explain any four points that differentiate it with secondary market.
Primary market is that part of the capital market in which securities (shares, debentures, bonds) are issued and sold to investors for the first time. Companies, financial institutions, and the government raise fresh, long-term capital d...
State the meaning of Financial Institution. Explain the role of financial institutions in financial market.
A financial institution is an organization that acts as an intermediary between savers (surplus units) and borrowers (deficit units) in the financial system. It collects funds from those who have surplus money in the form of deposits, premiums, or contributions, and channels them to those who need funds in the form of loans and investments. Examples include commercial banks, development banks, finance companies, microfinance institutions, insurance companies, and mutual funds.
Role of financial institutions in the financial market:
By performing these functions, financial institutions bridge the gap between savers and users of funds, improve the allocation of capital, and keep the financial market active and stable.
What do you understand by 'Central Bank'? Write its functions in brief.
A central bank is the apex monetary institution of a country that regulates, supervises, and controls the entire banking and monetary system. It is owned and controlled by the government and works to maintain monetary and financial stability in the national interest rather than for profit. In Nepal, the Nepal Rastra Bank (NRB) is the central bank.
Functions of a central bank (in brief):
Thus the central bank acts as the leader, regulator, and guardian of the country's money, credit, and banking system.
Write in brief about the features of financial asset.
A financial asset is an intangible asset whose value comes from a contractual claim on the future cash flows or ownership of an entity, rather than from any physical substance. Shares, bonds, debentures, treasury bills, and bank deposits...
Following information are provided: Authorised Shares 10,000 Shares, Issued Common Shares 5,000 Shares, Par Value Rs. 100 Per Share, Share Premium Rs. 3,00,000, Retained Earning Rs. 2,00,000, Treasury stock 1,000 Shares, Rs. 100 each. Required: (a) Number of outstanding shares. (b) Book value per share.
Given: $$ \begin{aligned} \text{Issued common shares} &= 5{,}000 \ \quad \text{Par value} &= \text{Rs. }100 \ \text{Share premium} &= \text{Rs. }3{,}00{,}000 \ \quad \text{Retained earning} &= \text{Rs. }2{,}00{,}000 \ \text{Treasury...
The real risk-free rate is 3%. Inflation is expected to be 5% in first year, 6% in the second year, and 8% in the third year. Assume that the maturity risk premium is zero. Required: (a) Interest rate on 2-year Treasury Securities. (b) Interest rate on 3-year Treasury Securities. (c) Inflation rate expected in year 4 if average interest rate on 4-year Treasury Securities is 10%.
Given: Real risk-free rate $r^{*} = 3%$; expected inflation $I_1 = 5%$, $I_2 = 6%$, $I_3 = 8%$; maturity risk premium $MRP = 0$.
For a Treasury security there is no default or liquidity premium, so the nominal interest rate is:
$$ \begin{aligned} r_N &= r^{} + IP_N + MRP \ &= r^{} + IP_N \end{aligned} $$
where $IP_N$ is the average expected inflation over the $N$ years.
(a) Interest rate on 2-year Treasury securities
$$ \begin{aligned} IP_2 &= \frac{I_1 + I_2}{2} \ &= \frac{5 + 6}{2} \ &= 5.5% \ r_2 &= 3% + 5.5% \ &= \textbf{8.5%} \end{aligned} $$
(b) Interest rate on 3-year Treasury securities
$$ \begin{aligned} IP_3 &= \frac{I_1 + I_2 + I_3}{3} \ &= \frac{5 + 6 + 8}{3} \ &= \frac{19}{3} \ &= 6.33% \ r_3 &= 3% + 6.33% \ &= \textbf{9.33%} \end{aligned} $$
(c) Expected inflation in year 4
Given the 4-year rate $r_4 = 10%$, the average inflation over 4 years is:
$$ \begin{aligned} IP_4 &= r_4 - r^{*} \ &= 10% - 3% \ &= 7% \ IP_4 &= \frac{I_1 + I_2 + I_3 + I_4}{4} \ &\Rightarrow 7 = \frac{5 + 6 + 8 + I_4}{4} \ 28 &= 19 + I_4 \ &\Rightarrow I_4 = \textbf{9%} \end{aligned} $$
Answer: (a) 8.5%, (b) 9.33%, (c) expected inflation in year 4 = 9%.
Rs. 5,00,000 is required for the purchase of a car for five years. The loan bears an annual interest of 12% and calls for a five equal annual installment payment at the end of each year. Required: (a) annual amount of installment. (b) Portion of payment made at the end of fourth year showing interest and principal.
Given: Loan (present value) $PV = \text{Rs. }5{,}00{,}000$, interest rate $i = 12% = 0.12$, number of years $n = 5$, equal payments at year end (ordinary annuity). (a) Annual installment $$ \begin{aligned} PV &= A \times PVIFA{(i,n)} \...
Find the sum of the present values and future values of following net cash flows. Assumed required rate of return is 8%. Year: 1, 2, 3, 4, 5; NCF (Rs.): 500, 400, 400, 400, 100.
Given: Required rate of return $k = 8% = 0.08$. Net cash flows (Rs.): Year 1 = 500, Year 2 = 400, Year 3 = 400, Year 4 = 400, Year 5 = 100.
Sum of present values (discount each cash flow to time 0):
$$ \begin{aligned} PV &= \sum_{t=1}^{5} \frac{NCF_t}{(1.08)^t} \ PV &= \frac{500}{1.08} + \frac{400}{1.08^2} + \frac{400}{1.08^3} + \frac{400}{1.08^4} + \frac{100}{1.08^5}\ &= 462.96 + 342.94 + 317.53 + 294.01 + 68.06\ &= \textbf{Rs. }1{,}485.50 \end{aligned} $$
Sum of future values (compound each cash flow to the end of year 5):
$$ \begin{aligned} FV &= \sum_{t=1}^{5} NCF_t \times (1.08)^{5-t} \ FV &= 500(1.08)^{4} + 400(1.08)^{3} + 400(1.08)^{2} + 400(1.08)^{1} + 100(1.08)^{0}\ &= 680.24 + 503.88 + 466.56 + 432.00 + 100.00\ &= \textbf{Rs. }2{,}182.69 \end{aligned} $$
Answer: Sum of present values = Rs. 1,485.50 and sum of future values = Rs. 2,182.69.
What is insurance? Mention the features of insurance contract.
Insurance is a contract (policy) in which one party, the insurer, agrees to compensate another party, the insured, for a specified loss, damage, or liability in exchange for a fixed payment called the premium. It is a device for transferring and sharing the financial risk of an uncertain event from an individual to a large pool of people facing similar risks. In legal terms, insurance is an agreement whereby the insurer undertakes to indemnify the insured, or to pay a fixed sum on the happening of a specified event, against the payment of a premium.
Features of an insurance contract:
Thus insurance provides financial protection and peace of mind by converting an uncertain large loss into a certain small cost (the premium).
Write the different functions of insurance.
The functions of insurance may be grouped into primary, secondary, and other (indirect) functions. Primary functions: - Providing certainty: insurance replaces the uncertainty of a large financial loss with the certainty of a small, fixe...
State the different types of life insurance.
Life insurance is a contract under which the insurer agrees to pay a fixed sum (the sum assured) to the insured or the nominee on the death of the insured or on the maturity of the policy, in return for a premium. Its main types are: - W...
Calculate the insurance premium for a 3 year term insurance policy in the amount of Rs. 500,000 issued to a person aged 46. Assume interest rate is 5% and consider standard mortality table as follows: Age 46 (beginning of designated year 90,75,554; number dying 52,090); Age 47 (90,06,705; 58,032); Age 48 (89,20,611; 60,116).
Given: Sum assured $S = \text{Rs. }5{,}00{,}000$, age at entry = 46, term = 3 years, interest rate $i = 5%$, so the discount factor $v = \dfrac{1}{1.05}$. Death claims are assumed to be paid at the end of the year of death. Number livin...
What is meant by fire insurance? Explain the procedure of affecting fire insurance policy.
Fire insurance is a contract of general (non-life) insurance under which the insurer agrees to indemnify the insured for the actual financial loss or damage caused to the insured property by fire (and allied perils such as lightning or explosion) during the policy period, in return for a premium. Being a contract of indemnity, the insured is compensated only up to the actual loss suffered or the sum insured, whichever is lower. The insured must have an insurable interest in the property and must observe utmost good faith.
Procedure of effecting (taking) a fire insurance policy:
If a fire loss occurs, the insured gives immediate notice and files a claim; the insurer investigates through a surveyor and settles the claim up to the actual loss, thereby restoring the insured's financial position.
Given: Real risk-free rate ; expected inflation , , ; maturity risk premium .
For a Treasury security there is no default or liquidity premium, so the nominal interest rate is:
where is the average expected inflation over the years.
(a) Interest rate on 2-year Treasury securities
(b) Interest rate on 3-year Treasury securities
(c) Expected inflation in year 4
Given the 4-year rate , the average inflation over 4 years is:
Answer: (a) 8.5%, (b) 9.33%, (c) expected inflation in year 4 = 9%.
Given: Loan (present value) , interest rate , number of years , equal payments at year end (ordinary annuity). (a) Annual installment $$ \begin{aligned} PV &= A \times PVIFA{(i,n)} \...
Given: Required rate of return . Net cash flows (Rs.): Year 1 = 500, Year 2 = 400, Year 3 = 400, Year 4 = 400, Year 5 = 100.
Sum of present values (discount each cash flow to time 0):
Sum of future values (compound each cash flow to the end of year 5):
Answer: Sum of present values = Rs. 1,485.50 and sum of future values = Rs. 2,182.69.
Given: Sum assured , age at entry = 46, term = 3 years, interest rate , so the discount factor . Death claims are assumed to be paid at the end of the year of death. Number livin...