Dear Readers,
Mahendras has started special quizzes for IBPS & SBI Exam so that you can practice more and more to crack the examination. This IBPS & SBI Exam special quiz series will mold your preparations in the right direction and the regular practice of these quizzes will be really very helpful in scoring good marks in the Examination. Here we are providing you the important question of reasoning ability for the IBPS & SBI Exam.
Read the following passage carefully and answer the questions that follow.
A loan is often misunderstood to be an avenue to borrow funds only for people who do not have enough money to buy things. However, wealthy people often use loans to achieve their financial goals. There are two types of people who take loans. The first are those who display either extreme affinity or extreme dislike towards taking a loan. The other kind is those taking a more balanced approach, who borrow funds, but prepay the loan as early as they can. This brings us to the next question — when to prepay the loan and when not to, such that you maximise your wealth-making capacity? There are several borrowers, who prefer to part-prepay or fully prepay the loan as soon as possible, because the thought of being in debt is not very comforting. While prepaying is a personal decision, it may not always make financial sense to prepay the loan. So when should you prepay your loan and when not? You should always look at the opportunity cost of your money before taking this decision. Let’s say you have taken a loan at 9 per cent interest. If you receive a windfall or a bulk amount, which can be used either to prepay a part or your entire loan, or invest this amount, you must first check the post-tax interest you can earn on any investment instrument at that point in time, which best suits your time horizon and risk appetite. If the returns you get from the investment will be below the interest rate you pay on your loan, then it is better to part prepay the loan, in order to save on the interest cost. On the other hand, if you can find an instrument which gives you post-tax returns of more than 9 per cent, then you should go ahead and invest the amount you have received, and not prepay the loan. Say you have the risk appetite to invest in equity, and you wish to invest in equity mutual funds, which give you long term returns of 13 per cent per annum. Then you will earn 13 per cent per annum instead of saving 9 per cent per annum on the loan. This is the opportunity cost of money. If you choose to prepay the loan to save the 9 per cent interest, you will be losing your potential earning of 13 per cent. So you can build your wealth by investing any windfalls or surplus in higher earning instruments at the same time fulfill your financial goals by taking a loan. Another factor to be considered is the tax benefit enjoyed by certain types of loans. If you take a loan which satisfies conditions laid down by the Income Tax Act, you can claim a deduction on your income. This in turn reduces tax outflow and helps you build your wealth. Home loans and education loans are two such loans. In the case of a home loan on a self occupied property, you can claim up to Rs 1 lakh on principal repayment during a year, under Sec JC of the Income Tax Act. In addition to this, you can claim interest paid up to Rs (1)5 lakh in a year under Sec 24B. You can claim unlimited amount on interest if it is a second home loan for your second house. In the case of an education loan, the entire interest paid can be claimed as a deduction under Sec JE of the Income Tax Act, if you take a loan from a recognized financial institution for a full time graduate or post-graduate course for yourself, your spouse or your children. Notwithstanding the benefits of taking a loan and dealing with it wisely, you must always remember not to bite off more than you can chew. This means you should never over-borrow or stretch your finances. This can be checked by calculating a simple ratio - the debt to income ratio. This ratio explains the total outgoings in a month in the form of EMIs as a proportion to the total monthly income from reliable sources. This ratio should ideally be less than 35-40 per cent. So, do your maths before you think of taking a loan. Taking a loan can be a useful tool to build your wealth, provided you do not stretch your finances. Know how to decide on prepayments and also have a contingency fund in place to service EMIs in case of unforeseen events resulting in temporary loss in income.
1 The decision of one’s prepaying of loan should not depend on -
01. One’s financial goals
02. One’s expected income in the future and risk taking capacity
03. Opportunity cost of the money one has
04. Interest to be paid and the loan amount
05. Not mentioned in the passage
2 Which of the following questions has/have been raised by the author in the passage?
01. How can one use the amount one has to maximize one’s wealth making capacity instead of prepaying loans?
02. How can one skip paying the loan amount without getting penalized for the same?
03. How is the amount collected by the government through income tax used for infrastructure development?
04. How can one part-prepay or fully prepay the loan amount without any financial burden?
05. All of the above
3 What is meant by the phrase ‘Don’t bite off more than you can chew’ in the context of the passage?
01. The amount paid as EMIs can exceed up to 50 percent of one’s total income.
02. People should make investments only when there is assured return ,else, the investment decision should be suspended
03. The amount lent by any person should not exceed his monthly income.
04. The amount to be paid as monthly installment shouldn't be more than forty percent of the person’s total income.
05. Both 2 and 4
4 In which of the following types of loans, tax benefits can be availed under Income tax act?
A. Education loans
B. Personal loans
C. Gold loan
D. Home loan
01. Only B
02. Only A and C
03. Only B and C
04. Only C and D
05. Only A and D
5 With reference to the passage, what is the general perception of taking loans?
01. A loan is a way to outsource services one wants to avail, in order to lead a comfortable life
02. A loan is a way to acquire fund with a promise to return with interest by the people who do not possess enough money to buy things
03. A loan is the amount one borrows and invests in illegal activities
04. A loan is the amount one borrows and the same is exempted in income tax evaluation
05. Not mentioned in the passage
6 Which of the following can be claimed in case of, second home loan for your second house ?
01. Interest paid up to Rs 1.5 lakh in a year
02. Unlimited amount of interest
03. Rs 1 lakh on principal repayment
04. Interest paid up to 35-40 per cent of the loan amount
05. Nothing can be claimed
7 Choose the word which is most nearly the OPPOSITE in meaning as the word given in bold as used in the passage.
Reliable
01. Respectable
02. Authentic
03. Strong
04. Doubtful
05. Other
8 Choose the word which is most nearly the OPPOSITE in meaning as the word given in bold as used in the passage.
Often
01. Frequently
02. Never
03. Much
04. Consistently
05. Knowingly
9 Choose the word most SIMILAR in meaning to the word given in bold, as used in the passage.
Affinity
01. Inclination
02. Closeness
03. Coordination
04. Bewilderment
05. Antipathy
10 Choose the word most SIMILAR in meaning to the word given in bold, as used in the passage.
Unforeseen
01. Primary
02. Temporary
03. Intentional
04. Fruitful
05. Unexpected
Answers:-
Q.1 (5)
Q.2 (1)
Q.3 (4)
Q.4 (5)
Q.5 (2)
Q.6 (2)
Q.7 (4)
Q.8 (2)
Q.9 (1)
Q.10 (5)
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