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Top 30 Financial Services MCQs – With Answers Explained

June 8, 2023 Lekshmi S S Financial Modeling, Knowledge

Handled by the finance industry, financial services are a set of services that cover a wide range of services including banks, stock brokerages, insurance companies, credit card companies, accountancy, mutual funds, investment funds, etc. These services ensure individual asset growth as well as the nation’s economic growth. Today we will enumerate some important financial services MCQs that will help you have more clarity on finance, taxes, and financial services for examination and interview purposes.

What are Financial Services?

Financial services are various economic services offered by the finance industry. These services together contribute to a broad range of service sector firms. The sector of the economy that provides financial services to companies, corporations, and people is known as the financial services sector. They provide financial management which includes credit card companies, insurance companies, accountancy companies, investment funds, stock brokerages, etc.

Types of Financial Services

Let’s Briefly Discuss the Different Types of Financial Services in India:

Banking:

Among all the financial services of India, the banking industry can be considered the backbone of the industry. India has several banks in the private sector, public sector, regional rural, urban/ rural cooperative, and foreign banks. The most common financial services provided in this sector are individual banking, business banking, and loans. Individual banking can include checking accounts, savings accounts, debit/ credit cards, etc., business banking includes checking accounts and savings accounts for businesses, merchant services, treasury services, etc., and loans can be business loans, personal loans, working-capital loans, automobile loans, home loans, education loans, etc. The Reserve Bank of India monitors and maintains the banking sector’s liquidity, capitalization, and financial health.

Professional Advisory:

Professional financial advisory service providers have an important role in India, as they provide businesses and individuals with a wide range of services. These services include Merger & Acquisition (M & A) advisory, risk consulting, investment due diligence, valuation, real estate consulting, and taxation consulting. These financial advisories can be from small consulting companies to giant multinational companies.

Wealth Management:

Here the financial service offered is all about managing and investing clients’ wealth based on their financial goals, period and risk profile, across various financial instruments. These can be using the wealth in debt, mutual funds, equity, insurance, structured products, derivatives, commodities, real estate, etc. This financial service ensures the clients not only save a certain amount of money but are also able to get a return on any investment they make.

Mutual Funds:

Mutual funds are investments made by several people or investors who contribute the same amounts in equities, bonds, or money, towards a common objective. These are also provided by a professional financial service provider who offers services across funds that are made of different asset classes, equity-linked assets, and primary debt. Due to mutual funds having generally low risks, stable returns, tax benefits, and properties of diversification, these are most popular in India as shown by double-digit growth in assets in the last five years.

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Insurance:

Insurance is a contract or a policy signed by an individual to an insurance company, to pay the company on a set time basis in exchange for financial reimbursement or protection against an event resulting in loss or sudden high expense. The insurance can be general insurance or life insurance. General insurance covers expenses of the home, medical, automotive, fire, travel, etc. while life insurance covers pension plans, unit-linked, money-back, term-life, etc. Payouts for these products will vary with different qualitative and quantitative factors such as periods, customer risk assessment, premiums, etc. In India, the Insurance Regulatory and Development Authority of India (IRDAI) is responsible for regulating the insurance market.

Stock Market:

In India, for users of the National Stock Exchange and Bombay Stock Exchange, the stock market sector provides a wide range of equity-linked investment solutions. The returns of the customers are based on the capital appreciation that is payments made by companies or businesses to their investors as well as growth in the equity solution’s value and/or dividends.

Treasury/ Debt Instruments:

Services coming under this sector include investments into government and private organization debts/ bonds. The borrower of the bonds offers a fixed amount of interest and the principal repayment to the investor to be made at the end of the investment period. Capital-gain bonds, non-convertible bonds, listed bonds, Gol saving bonds, tax-free bonds, etc. come under the type instruments included in the treasury/ debt sector.

Tax/ Audit Consulting:

This sector offers a wide range of financial services in the tax and auditing domain and the services are usually differentiated based on individuals and business clients. Tax for individuals includes calculating tax liability, filing tax returns, and tax-savings advisory, among others. Tax for business clients similarly includes calculating tax liability, GST registrations, transfer pricing analysis and structuring, tax compliance advisory, etc. As for the auditing sector, the financial services offered include statutory audits, service tax audits, internal audits, risk audits, process/ transaction audits, tax audits, stock audits, etc. From a qualitative and quantitative point of view, these services are important for the smooth operation of companies/ businesses. It is also important in mitigating risks.

Capital Restructuring:

These financial services are mainly offered and used by businesses and it includes restructuring capital, i.e. debt and equity, to increase profitability and to counter events such as volatile markets, bankruptcies, hostile takeovers, and liquidity shortages. The financial solutions in this sector can be rapid M&A, capital raising, complex deals, lender negotiations, structured transactions, etc.

Portfolio Management:

Portfolio management is done by portfolio managers whose role is to analyze and optimize investments for their customers and clients across a broad range of assets including insurance, debt, equity, real estate, etc. These financial services are highly customized and specialized to help the customer reach their financial goals. These services can be discretionary, i.e. investment with no client intervention and done only through fund manager discretion, or non-discretionary, where clients are involved in decision making, and these are majorly targeted at HNIs.

Financial Services MCQs

Financial Services MCQs 1 – Which among the following includes every activity that is involved in changing savings into investment?

Financial services
Financial system
Saving system
Economic system

Ans. A. Financial services – These are services provided by financial companies whose main goal is to ensure smooth financial transactions of an individual or a company and their investors using allotted resources within a set period, thus changing the client savings to investments.

Financial Services MCQs 2 – The most common services provided to foreign investors.

Financial services
Factoring services
Custodial services
None of the above

Ans. C. Custodial services – This is a part of the services provided in the global market. Financial institutions like banks provide custodial services to their customers for safeguarding their financial assets to be used for foreign securities, cross-boundary transactions, foreign market investments, etc.

Financial Services MCQs 3 – Which among the following financial investment is considered to be highly risky and have a growth-oriented venture with the goal of earning a high percentage of return?

Merchant banking
Leasing
Venture capital
None of the above

Ans. C. Venture capital – This is a form of private equity provided by investors to entrepreneurs for start-ups or companies with high growth potential. In this case, it can be risky because if the overall percentage of successful start-ups is less than 20%, then there is a risk of not getting back the investment for the investor and the risk of not being able to pay back the investment by the entrepreneur.

Financial Services MCQs -4 – What is VCF?

Value capture financing
Venture capital funds
Variant call format
Virtual contact file

Ans. B. Venture Capital Funds – These are funds that are invested in a new start-up business or an already existing small company with high growth potential.

Financial Services MCQs 5 – Who promotes VCFs of the specialized financial institution?

RBI
State government
Central government
None of these

Ans. C. Central government is responsible for promoting VCFs of specialized financial institutions.

Financial Services MCQ 6 -Other than financial institutions, which among the following can promote offshore VCFs?

Private banks
Foreign banks
State banks
None of the above

Ans. B. Foreign banks can also take up the responsibility of promoting offshore VCFs.

Financial Services MCQs 7 – Which among the following has high risk as an outstanding feature?

Venture capital
Mutual funds
Debenture finance
Government bonds

Ans. A. Venture capital – since the risk of the start-up business not taking off well, and not being able to pay back, venture capital is a highly risky investment.

Financial Services MCQs 8 – What among the following is required for developing a new product in its initial stages?

Start-up capital
Seed capital
Second round financing
None of the above

Ans. B. Seed capital – It is the initial amount of money given by investors to entrepreneurs to start a new business.

Financial Services MCQ 9 – Which of the following is not included in financial service providers?

Crepitating agencies
Insurance companies
Sole proprietorship
Commercial banks

Ans. C. Sole proprietorship – It is a business or company run by an individual such that there is no distinction between the owner/ founder and the business organization legally. This is also known as sole trader ship as they most often do not have any business partners and mostly work alone.

Financial Services MCQ 10 -Identify the functions of financial services.

Allocation of funds
Specialized services
Mobilization of savings
None of the above
All of the above

Ans. E. All of the above-mentioned are functions of financial services.

Financial Services MCQ 11 – Select one among the following that is not a fee-based financial service.

Lease financing
Profit management
Corporate counselling
Issue management

Ans. A. Lease management – It is the process of managing the customer’s lease portfolio by tracking, analyzing, and optimizing real estate and equipment leases to lower overall company costs and achieve compliance. It is otherwise known as lease administration.

12. Which one of the below acts as an intermediary to link up the sources of ideas and sources of funds?

Leasing
Venture capital
Merchant banking
None of the above

Ans. B. Venture capital – They act as the intermediary to link up sources of funds and ideas.

13. Which fund invests in highly liquid securities such as commercial paper?

Equity funds
Income fund
Money market mutual fund
Balanced fund

Ans. C. Money market mutual fund – This type of fund is much less risky when compared to other mutual funds. Simply known as money market funds, this mutual fund usually invests in high-quality debt securities for a short period. The investment can be in the form of cash or other cash-equivalent securities. This is mostly used to increase income and depending on the type of portfolio, it can be tax-free or taxable income.

14. What is the process of selling the trade debts of a customer to a financial instrument?

Factoring
Secularization
Bill discounting
Materialization

Ans. A. Factoring – This is a type of financing in which the company/ a business would sell its accounts receivable or invoices at a discount to a third party to meet any short-term liquidity requirements and other immediate cash needs.

15. What are the additional finances provided by VCFs to overcome the fledging stage?

First round financing
Second round financing
Seed capital
None of the above

Ans. B. Second round financing – Also known as Series B financing, is where the funding for a business/ company through investment such as venture capital, private equity funds, etc. occurs. This stage starts when the business has met certain financial goals and is now past its start-up stage.

16. What is also known as the fledging stage?

First round financing
Second round financing
Start-up capital
None of the above

Ans. B. Second round financing – or the expansion stage when the company is showing great potential and requires more funds to keep up with the development and demands.

17. Which stage of financing includes buyouts, expansion, and financial development?

First round financing
Early-stage financing
Later-stage financing
None of the above

Ans. C. Later-stage financing – This is commonly funded by venture capitalists and focuses on established organizations or businesses that are showing high growth potential or already generating profit. Hence why this is much less risky for the investors and since the business is doing well, the investment can be converted to cash. These funds are mostly used to pay off any debts created in the earlier stages of business.

18. Who is the Father of Venture capital?

Jimmy Carter
Georges Doriot
Vaghul
Modigliani

Ans. B. Georges Doriot – a French-American educator who was the pioneer in the development of venture capital in the 1950s.

19. What type of finance is provided by venture capital at the implementation stage of a business/ project?

Mezzanine finance
Start-up
Seed finance
Both b. and c.

Ans. B. Start-up – Once the legal body of a start-up business is formed along with a good business plan, start-up financing is used. Even then, investing in a business at this point is still considered to be highly risky. This financing is also known as ‘Early stage financing’.

20. Which of the following is considered Mezzanine capital?

Replacement finance
Development financing
Expansion Finance
All of the above

Ans. B. Development financing – Mezzanine financing is a hybrid financing between debt and equity the investor’s right to convert the debt to an equity interest in the extreme case of defaulting of the company. Mezzanine capital/ loans can also cover the purchase cost or development project, hence considered to be development financing.

Financial Services MCQ 21 – In India, which company deals with the corpus of mutual funds?

Trustee Company
Asset management company
Sponsor Company
Mutual fund company

Ans. B. Asset Management Company – These firms collect and invest pooled funds from customers in different investments such as bonds, mutual funds, stocks, real estate, etc.

22. Which among the following is an inflation-free instrument?

Variable rate bond
Deep discount bond
Option bond
Index-linked gilt bond

Ans. D. Index-linked gilt bond – In this, the principal amount to be paid is related to a specific price index, most commonly the Consumer Price Index (CPI). These bonds are used to safeguard the income earned by bond investors against any inflation.

23. What are financial derivatives mainly used for?

Earning income
Speculative activities
Creating more risks
Hedging risks

Ans. D. Hedging risks – A hedge is a trade made to minimize the threat of unfavourable price movements in an asset or investment. Derivatives can therefore be effective against the underlying assets since the relationship between the both of them is more or less clearly defined.

24. In an option contract, what is known as the predetermined price at which an underlying asset has to be bought or sold?

Exercise price
Future price
Option price
Spot price

Ans. A. Exercise price – The price at which an asset can be sold or brought when trading a call or put option.

25. Which of the following methods considers the entire earnings stream of the venture investment?

First Chicago method
Conventional valuation method
Revenue multiplier method
None of the above

Ans. A. The First Chicago method – or the venture capital method is a hybrid business evaluation method used by investors and venture capitalists to calculate and derive the terminal values and discount values of future cash flow.

26. Select one among the following factors that are used to estimate the annual revenue of a new company. 30

Expense multiplier factor
Conventional multiplier factor
Revenue multiplier factor
None of the above

Ans. C. Revenue multiplier factor – this shows the value of a business or equity about the revenue generated.

27. Which among the following is a fee-based activity?

Stockbroking
Portfolio management services
Credit rating
Lease Finance

Ans. D. Lease Finance

Financial Services MCQs 28 – What is asset-based service otherwise known as? 67

Capital based
Interest-based
Fund based
Fee-based

Ans. C. Fund based.

Financial Services MCQs 29. What are non-fund-based activities otherwise known as?

Managing the capital issue
Fee-based
Interest-based
Fund based

Ans. B. fee-based

Financial Services MCQs 30. Which among the following includes all asset-based financial plans that are offered to customers to help acquire more durable consumer goods?

Consumer credit
Cash Credit
Hire purchase
Trade credit

Ans. A. Consumer credit – While any type of personal loan can be considered consumer credit, this term is more commonly used for the unsecured debt of less amount such as goods and services.

Frequently Asked Questions (FAQs) on Financial Services MCQs

Q1. Why is the financial services sector important?

They are important as they drive a nation’s economy by providing liquidity and a free flow of capital that helps the economy grow.

Q2. What are some of the financial service careers?

A financial service career includes investment banker, real estate agent, loan officer, etc.

Q3. What role do banks play in offering financial services?

Banks are responsible for acquiring the required funds and also ensuring that the company/ business is invested efficiently.

Conclusion on Financial Services MCQs

Thus, financial services help customers to invest their money with minimum loss. Overall it ensures the growth and development of the country’s economy by equally distributing funds to all major sectors for balanced growth. Here we’ve discussed some common multiple-choice questions with answers that will be helpful for students and anyone who wants to learn a bit more about financial services.