Skip to content

NISM Certifications · NISM-Series-X-B: Investment Adviser (Level 2) · Comparison of Products Across Categories

Caselet: Mr. Kulkarni, in the 20% slab (ignore cess), is comparing two options, each offering a pre-tax return of 9% a year with interest fully taxable at slab rate. Option A is a taxable bond paying 9%. Option B is a product yielding a pre-tax 9% but with the tax-free equivalent needing computation. What tax-free yield would be equivalent to Option A's post-tax return?

The equivalent tax-free yield is 7.2%. The taxable bond's 9% return is reduced by 20% tax, leaving 9 x 0.80 = 7.2%, so any tax-free product must pay 7.2% to match it for Mr. Kulkarni.

  1. A7.2%Correct
  2. B1.8%
  3. C10.8%
  4. D8.0%

Explanation

Post-tax return of the taxable bond = 9% x (1 - 0.20) = 7.2%. A tax-free instrument must yield 7.2% to be equivalent. 1.8% is just the tax amount, and 10.8% wrongly grosses up at 9/(1-0.20)... actually 9/0.8 = 11.25, so 10.8% is simply 9 x 1.2 (wrong sign).

Did you get it right without looking?

One question tells you little. A timed set on Comparison of Products Across Categories shows your real accuracy, how long you take and where you lose marks.

Practise Comparison of Products Across CategoriesFree diagnostic mock

More Comparison of Products Across Categories questions