Investment Classification MCQs are the cornerstone topic for aspirants aiming to score high in General Awareness and Finance papers. In this guide, we cover the 17 most important questions based on the latest RBI Master Directions. This essential mock test is specifically designed for RBI Grade B Exam, SBI PO, IBPS PO, and Bank Promotion Exams to help you master the concepts quickly.
Practice Investment Classification MCQs (Live Mock Test)
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Investment Classification (17 MCQs Test)
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Which of the following statements regarding the primary categories of investment classification for banks are correct?
1.The entire investment portfolio must be classified into three primary categories: Held to Maturity (HTM), Available for Sale (AFS), and Fair Value through Profit and Loss (FVTPL).
2.Held for Trading (HFT) is a distinct fourth primary category separate from FVTPL.
3.Held for Trading (HFT) is a sub-category within the Fair Value through Profit and Loss (FVTPL) category.
4.Subsidiaries, joint ventures, and associates are included in the investment portfolio for these classification norms.
1.The entire investment portfolio must be classified into three primary categories: Held to Maturity (HTM), Available for Sale (AFS), and Fair Value through Profit and Loss (FVTPL).
2.Held for Trading (HFT) is a distinct fourth primary category separate from FVTPL.
3.Held for Trading (HFT) is a sub-category within the Fair Value through Profit and Loss (FVTPL) category.
4.Subsidiaries, joint ventures, and associates are included in the investment portfolio for these classification norms.
Explanation:
Correct: B
Banks must classify their investments into three primary categories: HTM, AFS, and FVTPL. ‘Held for Trading’ (HFT) is explicitly defined as a sub-category within FVTPL, not a separate primary category. Furthermore, investments in subsidiaries, joint ventures, and associates are excluded from this specific framework of Investment Classification MCQs.
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Which of the following statements regarding the classification of similar securities are correct?
1. Securities acquired in the same lot at the same time can be classified under different categories (e.g., HTM and AFS).
2.The classification depends on the objective with which the security was acquired.
3.The objective for acquisition must be clearly established and documented before or at the time of acquisition.
4.Once a security is classified as HTM, it cannot be used for any liquidity purposes.
1. Securities acquired in the same lot at the same time can be classified under different categories (e.g., HTM and AFS).
2.The classification depends on the objective with which the security was acquired.
3.The objective for acquisition must be clearly established and documented before or at the time of acquisition.
4.Once a security is classified as HTM, it cannot be used for any liquidity purposes.
Explanation:
Correct: B
Statements 1, 2, and 3 are correct. Banks may acquire a single lot of securities with mixed objectives. Therefore, even identical securities bought at the same time can be split between categories like HTM and AFS, provided this objective is documented at inception. Statement 4 is incorrect because, in the context of Investment Classification MCQs, HTM securities can be utilized for liquidity through repo transactions.
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In the context of the ‘Solely Payments of Principal and Interest’ (SPPI) assessment for investment classification, how is ‘Principal’ defined?
Explanation:
Correct: B
For the specific purpose of determining eligibility under the SPPI Test Criteria, ‘Principal’ is defined as the fair value of the security at initial recognition. This value may change over the life of the security due to repayments or amortization, but the initial reference point is fair value, which is a key concept in these Investment Classification MCQs.
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Consider the following statements regarding the eligibility of instruments for Held to Maturity (HTM) classification:
Assertion (A) – Instruments with contractual loss absorbency features, such as Basel III Additional Tier 1 bonds, are ineligible for HTM classification.
Reason (R) – These instruments do not meet the ‘Solely Payments of Principal and Interest’ (SPPI) criteria.
Assertion (A) – Instruments with contractual loss absorbency features, such as Basel III Additional Tier 1 bonds, are ineligible for HTM classification.
Reason (R) – These instruments do not meet the ‘Solely Payments of Principal and Interest’ (SPPI) criteria.
Explanation:
Correct: A
Instruments with contractual loss absorbency features (like AT1 bonds) are explicitly excluded from HTM. The reason is that these features violate the strict SPPI criteria required for amortised cost accounting, as the cash flows are not solely principal and interest but are subject to write-down triggers. This is a recurring theme in Investment Classification MCQs.
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A bank may not classify securities under Held to Maturity (HTM) if it intends to sell more than …… of the opening carrying value of the HTM portfolio to meet regulatory liquidity needs.
Explanation:
Correct: B
If a bank intends to sell securities to meet regulatory objectives and the value is “significant”—defined as more than five per cent of the opening carrying value of the HTM portfolio—those securities do not meet the criteria for HTM classification. This threshold is frequently asked in Investment Classification MCQs.
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Consider the following statements regarding the classification of bonds with put options:
Assertion (A) – A bond with a put option can be classified under the Held to Maturity (HTM) category if the bank has the intention to hold it to maturity.
Reason (R) – The exercise of a put option prior to maturity is generally consistent with the objective of holding to maturity.
Assertion (A) – A bond with a put option can be classified under the Held to Maturity (HTM) category if the bank has the intention to hold it to maturity.
Reason (R) – The exercise of a put option prior to maturity is generally consistent with the objective of holding to maturity.
Explanation:
Correct: C
Assertion (A) is true: A bond with a put option can be classified under HTM if it meets the SPPI criteria and the bank intends to hold it to maturity. However, Reason (R) is false. According to RBI Investment Norms, exercising a put option prior to maturity is generally not consistent with the HTM objective and would be treated as a sale in these Investment Classification MCQs.
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Which of the following is a mandatory condition for classifying a security under the Available for Sale (AFS) category?
Explanation:
Correct: B
The defining characteristic of the Available for Sale (AFS) category is the “dual objective” business model. To qualify, a security must be acquired with an objective that is achieved by both collecting contractual cash flows and selling the securities, a distinction vital for solving Investment Classification MCQs.
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Which of the following statements regarding the classification of SLR securities are correct?
1. SLR securities acquired to manage everyday liquidity needs must generally be classified under AFS if they meet SPPI criteria.
2. SLR securities acquired for meeting LCR requirements must always be classified under AFS.
3. If a bank requires flexibility to routinely sell securities before maturity, they should be classified under AFS rather than HTM.
4. SLR status automatically mandates HTM classification.
1. SLR securities acquired to manage everyday liquidity needs must generally be classified under AFS if they meet SPPI criteria.
2. SLR securities acquired for meeting LCR requirements must always be classified under AFS.
3. If a bank requires flexibility to routinely sell securities before maturity, they should be classified under AFS rather than HTM.
4. SLR status automatically mandates HTM classification.
Explanation:
Correct: B
Statements 1 and 3 are correct. If the objective is to manage everyday liquidity or requires flexibility to routinely sell securities, the correct classification is AFS. Statement 2 is incorrect because securities held for LCR do not necessarily have to be AFS; they can be HTM if the bank intends to liquidate them only during stress scenarios, which is a nuance in Investment Classification MCQs.
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Which of the following instruments is explicitly REQUIRED to be classified under the Fair Value through Profit and Loss (FVTPL) category because it does not qualify for HTM or AFS?
Explanation:
Correct: B
The regulations provide a list of securities that fail HTM/AFS criteria and must be FVTPL. This includes investments in Mutual Funds, Alternative Investment Funds, REITs, and InvITs. Understanding the HTM vs AFS vs FVTPL distinction is crucial for acing these Investment Classification MCQs.
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Which of the following statements regarding the Held for Trading (HFT) sub-category are correct?
1. Instruments in HFT must be fair valued on a daily basis.
2. Instruments can be included in HFT even if there is a legal impediment against selling them.
3. Purposes for HFT include short-term resale, locking in arbitrage profits, and hedging related risks.
4. Any valuation change in HFT instruments must be recognized in the Profit and Loss Account.
1. Instruments in HFT must be fair valued on a daily basis.
2. Instruments can be included in HFT even if there is a legal impediment against selling them.
3. Purposes for HFT include short-term resale, locking in arbitrage profits, and hedging related risks.
4. Any valuation change in HFT instruments must be recognized in the Profit and Loss Account.
Explanation:
Correct: B
Statements 1, 3, and 4 are correct. HFT instruments require daily fair valuation and P&L recognition. Qualifying purposes include short-term resale and arbitrage. Statement 2 is incorrect because a bank shall only include instruments in HFT when there is no legal impediment against selling or fully hedging them, as noted in Investment Classification MCQs.
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Bonds where the payment is linked to the movement in an equity index rather than an interest rate benchmark can be classified as HTM or AFS.
Explanation:
Correct: B
This statement is false. Bonds where the payment is linked to the movement in a particular index such as an equity index (rather than an interest rate benchmark) do not meet the SPPI criteria. Therefore, in the context of Investment Classification MCQs, they must be classified under FVTPL.
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Which of the following instruments are mandatorily EXCLUDED from the Held for Trading (HFT) sub-category?
1. Unlisted equities.
2. Instruments designated for securitisation warehousing.
3. Direct holdings of real estate.
4. Listed equities resulting from market-making activities.
1. Unlisted equities.
2. Instruments designated for securitisation warehousing.
3. Direct holdings of real estate.
4. Listed equities resulting from market-making activities.
Explanation:
Correct: B
The regulations provide a specific list of instruments that shall not be included in HFT. This includes unlisted equities, investments in subsidiaries/associates/JVs, securitisation warehousing instruments, and direct real estate holdings. Adhering to these Held for Trading Rules is essential for Investment Classification MCQs.
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Generally, equity investments in funds are excluded from HFT. Which of the following conditions allows an exception for a bank to include such an investment in HFT?
Explanation:
Correct: B
An exception exists if the bank meets at least one of two conditions: (a) it can “look through” to individual components with verified frequent information, or (b) it obtains daily price quotes and has access to the fund’s mandate/regulations. Without these transparency levels, the investment cannot be HFT in these Investment Classification MCQs.
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Which of the following statements regarding the “Presumptive List” for Held for Trading (HFT) classification are correct?
1. Instruments resulting from market-making activities are presumed to be HFT.
2. Listed equities are generally presumed to be HFT.
3. All repo-style transactions are automatically HFT without exception.
4. Repo-style transactions entered for liquidity management and valued at accrual are excluded from the HFT presumption.
1. Instruments resulting from market-making activities are presumed to be HFT.
2. Listed equities are generally presumed to be HFT.
3. All repo-style transactions are automatically HFT without exception.
4. Repo-style transactions entered for liquidity management and valued at accrual are excluded from the HFT presumption.
Explanation:
Correct: B
Statements 1, 2, and 4 are correct. Market-making instruments and listed equities are presumed HFT. However, statement 3 is incorrect because there is a specific exception: repo-style transactions entered for liquidity management and valued at accrual are not part of the HFT presumption in Investment Classification MCQs.
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If a bank believes an instrument on the presumptive HFT list should not be classified as HFT, it can simply document the reason internally and proceed with a different classification.
Explanation:
Correct: B
This statement is false. If a bank wishes to deviate from the presumptive list, it must submit a formal request to the Department of Regulation, RBI, and receive explicit approval. Internal documentation alone is insufficient, a critical procedural detail in Investment Classification MCQs.
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Consider the following statements regarding Supervisory Powers over investment classification:
Assertion (A) – The RBI may require a bank to reclassify an instrument out of Held for Trading (HFT) even if it is on the presumptive list.
Reason (R) – If the RBI believes the instrument customarily would not belong to HFT or the bank has not provided enough evidence of HFT intent, it can enforce reclassification.
Assertion (A) – The RBI may require a bank to reclassify an instrument out of Held for Trading (HFT) even if it is on the presumptive list.
Reason (R) – If the RBI believes the instrument customarily would not belong to HFT or the bank has not provided enough evidence of HFT intent, it can enforce reclassification.
Explanation:
Correct: A
The RBI retains supervisory power to override classifications. Even if an instrument is on the presumptive list, the RBI can require evidence of HFT intent. If the bank fails to provide this, it can mandate reclassification, a scenario often tested in Investment Classification MCQs.
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Instruments resulting from underwriting commitments must be included in Held for Trading (HFT) only if the commitments relate to securities that are …… by the bank on the settlement date.
Explanation:
Correct: A
The HFT inclusion rule for underwriting commitments applies only to commitments that relate to securities that are expected to be actually purchased by the bank on the settlement date. This specific condition is a fine print detail in Investment Classification MCQs.
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Quick Revision: Key Facts for Investment Classification MCQs
Classification Types: Banks must classify investments into HTM (Held to Maturity), AFS (Available for Sale), and FVTPL (Fair Value through Profit & Loss). HFT is a sub-category of FVTPL.
HFT Sales Limit: If a bank intends to sell more than 5% of the opening carrying value of the HTM portfolio, it cannot be classified as HTM.
HFT Exclusions: Unlisted equities and investments in subsidiaries/associates cannot be classified under Held for Trading (HFT).
Frequently Asked Questions
Why is Investment Classification MCQs critical for RBI Grade B?
It is a high-scoring area in the Finance & Management paper. Mastering Investment Classification MCQs ensures better performance in the objective papers of RBI Grade B.
Does this test cover the full syllabus?
Yes, these Investment Classification MCQs questions cover the most repeated concepts found in previous years’ papers of Bank Promotion Exams, RBI Grade B exams, SBI PO and IBPS PO.
What is the difference between HTM and AFS?
HTM is for securities held until maturity, while AFS covers securities held for both collecting cash flows and potential selling. These definitions are central to Investment Classification MCQs.