Questions and Answers
Which of the following is a short-term financial goal? (Select all that apply)
What is the time frame for medium-term financial goals?
Which of the following is an example of a long-term financial goal? (Select all that apply)
Wealth accumulation includes managing increased expenses and saving for children’s education.
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What is a personal budget?
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What does the balance sheet report?
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What does the Cash Flow Statement analyze?
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On a balance sheet, the formula is: Assets = Liabilities + __________.
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What is the formula for calculating Compound Annual Growth Rate (CAGR)?
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Demand deposits can be withdrawn without previous notice to the bank.
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Which type of account does not carry interest payments?
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What is the primary purpose of a savings account?
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What does financial literacy mean?
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Why is financial literacy important?
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What is scarcity in economics?
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What defines microeconomics?
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What does GDP stand for?
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Income is ___ received by an individual, business, or nation over a specific period.
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Expenditure represents the outflows of resources from an economy and is the amount of money ___ on purchasing goods or services.
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Which of the following are considered types of income? (Select all that apply)
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True or False: Savings is the portion of income that is consumed.
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What are the four main factors of production?
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What is the common formula for calculating GDP using the expenditure approach?
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What is meant by financial planning?
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Which of the following is a reason for financial planning? (Select all that apply)
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What are life goals?
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What is a Non-Resident Ordinary Rupee (NRO) account?
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Interest earned on an NRO account is subject to Tax Deducted at Source (TDS).
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What does FCNR stand for?
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What is the tenure range for FCNR deposits?
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What is one of the main functions of the Reserve Bank of India (RBI)?
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The RBI was established on ____ in accordance with the provisions of the Reserve Bank of India Act, 1934.
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What is the minimum amount to be remitted through RTGS?
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What is the purpose of the Deposit Insurance and Credit Guarantee Corporation?
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What type of account does Pradhan Mantri Jan-Dhan Yojana (PMJDY) provide?
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What is a neo-bank?
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Credit cards charge interest on outstanding amounts only if payments are delayed.
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What does NEFT stand for?
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Mobile wallets are physical wallets used for cash transactions.
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What feature of IMPS distinguishes it from other payment methods?
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Match the following payment systems with their definitions:
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Study Notes
Financial Literacy and Its Importance
- Financial literacy encompasses essential skills for managing personal finances: earning, spending, investing, saving, budgeting, and borrowing.
- Protects individuals from fraudulent schemes by enhancing their ability to make informed financial decisions.
- An essential life skill, empowering individuals to finance education, make meaningful investments, and adopt value-oriented living.
- Helps differentiate between needs and wants, enabling effective financial planning and goal-setting.
Foundations of Finance
- Economics studies how societies allocate limited resources for goods and services production.
- Key concepts:
- Scarcity: Limited resources against unlimited human needs.
- Choice: Necessitated by scarcity, requiring allocation decisions.
- Efficiency: Optimal resource use to satisfy demands.
- Distribution: Allocation of goods and services among society members.
- Consumption: Use of goods and services.
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Branches of Economics:
- Microeconomics: Focus on individual agents and market interactions.
- Macroeconomics: Examines the economy as a whole, including inflation and economic growth.
Key Economic Terms
- Income: Money earned from labor, products, or investments. Varies contextually (e.g., personal vs. business).
- Expenditure: Amount spent to purchase goods/services; can be revenue (non-asset creating) or capital (asset creating).
- Savings: Income not spent; crucial for investment and economic growth.
Factors of Production
- Land: Natural resources critical for production (e.g., minerals, water).
- Labor: Human effort in production; includes physical and intellectual labor.
- Capital: Manufactured resources used in production (e.g., machinery, technology).
- Entrepreneurship: Combines the other factors to create products/services, driving economic growth.
Gross Domestic Product (GDP)
- GDP measures total value of all finished goods and services produced within a nation over a specific period.
- Calculated using:
- Expenditure Approach: GDP = C + G + I + NX (C = consumption, G = government spending, I = investments, NX = net exports).
- Income Approach: GDP = Total National Income + Sales Taxes + Depreciation + Net Foreign Factor Income.
Meaning and Scope of Economics
- Economics focuses on production, distribution, and consumption of goods/services, managing resource scarcity.
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Scope:
- Economics as a science: Evidence-based and systematic study of the economy.
- Economics as an art: Practical application for solving economic problems.
- Positive science: Descriptive and fact-based analysis.
- Normative science: Value-based judgments and recommendations.
Factors Influencing Investment Decisions
- Micro Environment: Immediate factors affecting company operations (e.g., customers, suppliers, competitors).
- Macro Environment: Broader external factors influencing businesses (e.g., demographics, technology, political and legal contexts).
Financial Planning: Meaning and Need
- Financial planning is managing resources systematically to achieve objectives.
- Importance of financial planning includes:
- Achieving specific financial goals (e.g., buying a home, retirement).
- Managing risks from unexpected life events.
- Facilitating informed decision-making.
- Reducing financial stress and building wealth.
Financial Goals
- Life Goals: Aspirations guiding one’s journey, reflecting personal values and desires.
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Financial Goals: Specific financial milestones to help achieve life goals, categorized by time frame:
- Short-Term Goals: 1 year or less (e.g., emergency fund, debt payment).
- Medium-Term Goals: 1-5 years (e.g., house down payment, education funding).
- Long-Term Goals: 5 years or more (e.g., retirement savings, legacy planning).
Financial Life Cycle
- Describes different life stages affecting financial goals, income, and responsibilities.
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Wealth Accumulation Stage:
- Formative Years: Young individuals learn budgeting and value of money.
- Young Adulthood: Focus on building credit and saving for short-term goals (e.g., education, home down payment).### Early Career to Late Retirement
- Early career focuses on increasing income, repaying debt, and starting long-term investments for retirement.
- Family formation phase involves managing rising expenses, saving for children's education, and evaluating life and disability insurance.
- Peak earning years emphasize maximizing retirement contributions, diversifying investments, and estate planning.
- Pre-retirement necessitates expense reduction, investment income generation, and exploring retirement living options.
- Early retirement adjustments include handling decreased income, managing healthcare costs, and potential downsizing.
- Late retirement requires managing healthcare and long-term care expenses and may involve reliance on Social Security and pensions.
Estate Planning
- Involves asset transfer to heirs, minimizing estate taxes, and engaging in charitable giving.
Personal Budget
- A personal budget summarizes and tracks income and expenses for a defined period, often a month.
- A budget does not have to be restrictive; it should be effective in managing finances.
Financial Statements
Income Statement
- Reflects a company's financial performance over a specified accounting period.
- Summarizes revenues, expenses, and net income (profit or loss).
Balance Sheet
- Reports a company’s assets, liabilities, and shareholder equity.
- Adheres to the formula: Assets = Liabilities + Shareholders' Equity.
Cash Flow Statement
- Shows the flow of cash during a period, categorized into operating, investing, and financing activities.
- Assesses liquidity and solvency, ensuring efficient cash management.
Time Value of Money
- Asserts that money today is worth more than the same amount in the future due to earning potential.
- Example: Rs. 100 invested at 6.5% p.a. grows to Rs. 106.50 in one year.
- Future values are calculated using compound rates, while present values use discount rates.
Compounding and Discounting
- Compound interest is calculated using the formula: A = P {1 + (R/100)}N where A = future amount, P = principal, R = interest rate, N = number of periods.
- Example of CI calculation: Rs. 10,000 at 10% for 2 years yields a future value of Rs. 12,100, CI = Rs. 2,100.
Rule of 72
- Determines how long an investment will take to double using the formula: 72/interest rate.
- Example: Investment of Rs. 100,000 at 8% takes 9 years to double.
CAGR (Compounded Annual Growth Rate)
- Formula: CAGR = (End Value/Beginning Value)^(1/n) - 1.
- Example: Rs. 100 growing to Rs. 120 in 2 years has a CAGR of 9.5%.
Banking in India
- Governed by the RBI, established under the Reserve Bank of India Act, 1934, and the Banking Regulation Act, 1949.
Definition of Banking
- Banking is defined as accepting deposits for lending or investment, with funds repayable on demand.
Functions of Banks
- Accept deposits, provide loans (retail and corporate), facilitate payments, and offer a range of utility services.
- Evolving functions now include wealth management and insurance advisory services.
Types of Bank Deposits
- Classified into demand deposits (withdrawn with notice) and time deposits (fixed maturity).
- Current Accounts allow frequent transactions but typically earn no interest.
- Savings Accounts are popular for individuals to save money and earn interest.
- Fixed Deposits have higher interest rates with penalties for early withdrawal.
- Recurring Deposits require monthly contributions for a specified term.
NRI Bank Accounts
NRE (Non-Resident External) Accounts
- Rupee-denominated accounts for income earned outside India, allowing easy fund transfers abroad.
NRO (Non-Resident Ordinary) Accounts
- Used for managing income earned in India, subject to TDS on interest.
FCNR (Foreign Currency Non-Resident) Accounts
- Fixed deposits in foreign currencies to avoid exchange rate risk, offered for tenures of 1 to 5 years.
Role of RBI as Banking Regulator
- Established on April 1, 1935, responsible for monetary stability, managing currency, and implementing monetary policy.
- Functions include controlling money supply, regulating banks, managing currency issuance, and advising the government.### Intervention by the RBI
- The Reserve Bank of India (RBI) intervenes in the foreign exchange market to manage fluctuations in exchange rates.
- Acts as a clearinghouse for bank transactions, facilitating smooth financial operations.
- Promotes the growth and development of India’s financial system.
- Focuses on financial inclusion by expanding services to under-served populations.
Deposit Insurance in India
- Deposit Insurance and Credit Guarantee Corporation (DICGC) was established in 1961 to protect depositor interests.
- Under DICGC, depositors can claim up to ₹5 lakh per account if their bank is unable to repay deposits due to bankruptcy.
- The scheme came into effect on January 1, 1962.
Pradhan Mantri Jan-Dhan Yojana (PMJDY)
- PMJDY aims to ensure access to essential financial services for all citizens.
- Allows for the opening of a Basic Savings Bank Deposit (BSBD) account without the need for a minimum balance.
- Key benefits include interest on deposits, a RuPay debit card, insurance coverage, and an overdraft facility of up to ₹10,000.
- PMJDY accounts qualify for various government schemes like Direct Benefit Transfer and insurance plans.
Traditional vs. Neo-Banks
- Traditional banks operate through a physical presence, while neo-banks function exclusively online or via mobile apps.
- Neo-banks leverage technology and AI to offer personalized services, targeting retail and small businesses often overlooked by traditional institutions.
- Venture capital is increasingly invested in neo-banks due to their innovative approaches and growth potential.
Debit and Credit Cards
- Debit cards are linked to current or savings accounts, deducting available funds directly upon use.
- Credit cards provide a borrowing limit, requiring timely repayments to avoid interest on outstanding balances.
Digital Payment Systems in India
- The RBI regulates payment and settlement systems, ensuring smooth transaction processes.
- The Board for Regulation and Supervision of Payment and Settlement Systems (BPSS) oversees these efforts.
- As per the Payment and Settlement Systems Act, transactions include various forms such as paper clearing, electronic transfers, card payments, and e-money.
National Electronic Funds Transfer (NEFT)
- NEFT, introduced in November 2005, enables electronic funds transfer managed by RBI.
- NEFT operates 24/7 since 2020; previously, it was available during specific hours.
- Transaction fees vary between ₹2.5 and ₹25, based on the amount transferred.
Real Time Gross Settlement (RTGS)
- RTGS processes transactions in real time, with individual settlements for each transaction.
- Since December 2020, RTGS is available 24/7, requiring a minimum transfer of ₹2,00,000 with no upper limit.
Immediate Payment Service (IMPS)
- IMPS allows instant transfers between banks via mobile devices, available 24/7, including holidays.
- The maximum transaction limit per IMPS transfer is ₹5 lakh.
Mobile Banking
- Mobile banking allows users to perform financial transactions remotely on smartphones or tablets.
- Services include account access, transactions, investments, and customer support.
Mobile Wallets
- Mobile wallets serve as digital versions of physical wallets, storing payment information and loyalty cards.
- Types include open wallets, closed wallets, and semi-closed wallets, each with varying functionalities and usage rules.
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Description
This quiz covers the fundamentals of financial literacy, including earning, spending, investing, saving, and budgeting skills. Test your knowledge on personal financial management and the importance of making informed financial decisions. Learn how to safeguard your financial future through effective planning and investment awareness.
