The IIT Madras BS Financial Forensics (Financial Forensics) End Term paper sat on 21 Dec 2025, in the September 2025 term: 40 questions for 40 marks in 180 minutes. Every question is below with its answer. Take it as a timed mock test to be marked, or read it through first.
Which of the following is a characteristic of a stationary time series?
It exhibits a clear trend over time
It has a varying mean over time
Its autocorrelation function (ACF) decreases slowly over time
It has constant mean and variance over time
Correct answer
It has constant mean and variance over time
A firm has net working capital of ₹ 580, net fixed assets of ₹ 2,326, sales of ₹ 6,900, and current liabilities of ₹ 890. How many rupees worth of sales is generated from every ₹ 1 in total assets?
Correct answer: 1.82 (accepted within ±0.01)
What is the relationship between the IRR and the cost of capital?
The IRR must be lower than the cost of capital for the investment to be profitable.
The IRR must be higher than the cost of capital for the investment to be profitable.
The IRR and cost of capital are unrelated.
The IRR and cost of capital have an inverse relationship.
Correct answer
The IRR must be higher than the cost of capital for the investment to be profitable.
What is the Roll Forward rate for 0-29 DPD after 18 MOB?
Correct answer: 13.39 (accepted within ±0.5)
What is the Capture Rate of applications having score greater than 384?
50.11%
39.81%
36.45%
57.72%
Data Insufficient
Correct answer
Data Insufficient
What is the Capture Rate of Bads at top 5%?
100%
54.49%
76.05%
63.77%
Data Insufficient
Correct answer
54.49%
What is the Capture Rate of applications having score greater than 125?
100%
68.33%
0%
48.33%
Data Insufficient
Correct answer
100%
What is the Roll Back rate for 150+ DPD after 18 MOB?
Correct answer: 6.9 (accepted within ±0.5)
Secure Credit Union, one of the major lending banks, has hired you to build a credit underwriting model to help their automated lending decisions. Their definition of default is 60-89 DPD. There is historical loans data since January 1, 2021 till November 30, 2024. Which of the following is true?
Jan’21 – Nov’25 data should be used for model training
Jan’21 – Jul’25 data should be used for model training
Jan’21 – Mar’21 data should be ignored from model training
Sep’25 – Nov’25 data should be ignored from model training
None of these
Correct answer
Sep’25 – Nov’25 data should be ignored from model training
Which of the following is not used on approved applications?
Reject Inferencing
Rollrate analysis
Both Reject Inferencing and Rollrate analysis
Vintage analysis
None of these
Correct answer
Reject Inferencing
Which of the following is the last step in credit lifecycle?
Underwriting
Reject Inferencing
Collections
Propensity
Fraud check
Correct answer
Collections
Which of the following is the first step in credit lifecycle?
Underwriting
Reject Inferencing
Collections
Propensity
Fraud check
Correct answer
Propensity
What is the Roll Forward rate for 120-149 DPD after 18 MOB?
Correct answer: 49.75 (accepted within ±0.5)
The Bankruptcy Bank, one of the major lending banks, has hired you to build a credit underwriting model to help their automated lending decisions. Their definition of default is 60-89 DPD. There is historical loans data since January 1, 2021 till 31, July 2025. Which of the following is true – as of July 31, 2025?
Jan’21– Jul’25 is used for performance data
Apr’24 – Jul’25 is used for observation data
May’24 – Jun'25 is used for performance data
Jan’21 – Jan’25 is used for observation data
Jan’21 – Apr’25 is used for observation data
Correct answer
Jan’21 – Apr’25 is used for observation data
Stemming is faster than Lemmatization
True
False
Correct answer
True
Which of the following is not a text preprocessing technique?
Encoding
Stopword removal
Stemming
Lowercase conversion
None of these
Correct answer
Encoding
Given the sentence: "Customer sign-up rates have increased by 25% in the last quarter." Output: ['customer', 'sign', 'up', 'rates', 'increased', '25', 'last', 'quarter'] Which of the following text preprocessing techniques was NOT applied to the sentence?
Lowercasing
Removing punctuation
Tokenization
Lemmatization
None of these
Correct answer
Lemmatization
Which of the following is used to decide target variable definition?
Reject Inferencing
Rollrate analysis
Both Reject Inferencing and Rollrate analysis
Vintage analysis
None of these
Correct answer
Both Reject Inferencing and Rollrate analysis
In a credit risk scenario, if a model has high recall but low precision, it implies that:
The model correctly identifies a high percentage of non-risky customers but makes many mistakes in identifying risky customers.
The model correctly identifies a high percentage of risky customers but also incorrectly labels many non-risky customers as risky.
The model correctly identifies a high percentage of non-risky customers and makes few mistakes in identifying risky customers.
The model correctly identifies a high percentage of risky customers and makes few mistakes in identifying non-risky customers.
Correct answer
The model correctly identifies a high percentage of risky customers but also incorrectly labels many non-risky customers as risky.
If a model predicts the negative class for all observations in a binary classification problem with both positive and negative cases present with class balance 1:99 (positive : negative), which of the following statements is true?
Recall is 100%, but Precision is not necessarily 100%.
Precision is 100%, but Recall is not necessarily 100%.
Both Recall and Precision are 0%.
Neither Recall nor Precision are 100%.
None of these
Correct answer
Both Recall and Precision are 0%.
Which scenario is likely to occur if a credit risk model is optimized solely for high recall?
Most non-risky customers will be correctly identified.
Most risky customers will be correctly identified.
Many non-risky customers will be incorrectly labeled as risky.
Many risky customers will be incorrectly labeled as non-risky.
Correct answer
Many non-risky customers will be incorrectly labeled as risky.
Which of the following can be a consequence of not using reject inferencing in models dealing with credit applications?
Increased model transparency
Improved model accuracy
Higher risk of rejecting potentially good applicants
Simplified model validation
Correct answer
Higher risk of rejecting potentially good applicants
Which of the following correctly describes the impact of collecting cash from customers for services to be provided in the future?
Assets and stockholders' equity increase
Assets and revenues increase
Assets and income from operations increase
Correct answer
Assets and income from operations increase
On April 1, 2024, the premium on a one-year insurance policy was purchased for $2,700 cash with the insurance coverage beginning on that date. The books are adjusted only at year-end. Which of the following correctly describes the effect on the financial statements of the December 31, 2024 adjusting entry?
Insurance expense will increase by $675.
Prepaid insurance will decrease by $675.
Prepaid insurance will increase by $2,025.
Insurance expense will increase by $2,025.
Correct answer
Insurance expense will increase by $2,025.
Income taxes incurred but not yet paid at the end of the accounting period are examples of accrued expenses.
True
False
Correct answer
True
The retained earnings of Tink Company increased $227,500 last year and its assets increased $307,500. Tink declared a $51,500 cash dividend during the year. What was last year's net income?
Correct answer: 279000
Which of the following best explains the difference between local and global explainability in machine learning models?
Local explainability is faster but less accurate, while global explainability is slower but more comprehensive
Local explainability focuses on explaining individual predictions, while global explainability aims to understand the overall model behavior across all data
Local explainability can only be applied to neural networks, while global explainability works for all model types
Local explainability requires the entire dataset, while global explainability needs only a single instance
Correct answer
Local explainability focuses on explaining individual predictions, while global explainability aims to understand the overall model behavior across all data
In SHAP (SHapley Additive exPlanations) analysis, what is the base value?
The highest prediction value that the model can produce
The average model output across the entire training dataset (expected value)
The prediction for a specific instance before feature contributions are added
The weighted sum of all feature values in the training set
Correct answer
The average model output across the entire training dataset (expected value)
According to Shapley value theory, which of the following is a desirable property that SHAP explanations satisfy?
SHAP values are always positive and represent feature importance rankings
SHAP values satisfy the efficiency property: the sum of all feature contributions equals the difference between the prediction and the base value
SHAP values require the same computational time as LIME for any model
SHAP values can only be calculated for linear models
Correct answer
SHAP values satisfy the efficiency property: the sum of all feature contributions equals the difference between the prediction and the base value
From the waterfall plot shown below, identify the model's base value and final prediction:
Figure 1: SHAP Waterfall Plot
Base: +2.23, Prediction: +1.445
Base: +1.445, Prediction: +2.23
Base: -2.36, Prediction: -0.24
Base: -0.24, Prediction: -2.36
Correct answer
Base: +1.445, Prediction: +2.23
Which of the following scenarios is best suited for using global explainability rather than local explainability?
Understanding why a specific loan application was rejected
Explaining a single medical diagnosis prediction
Analyzing which features drive model decisions across all customers in a business context
Debugging a model prediction that seems incorrect for one particular instance
Correct answer
Analyzing which features drive model decisions across all customers in a business context
A real estate developer offers an investment plan where buyers pay ₹15,00,000 upfront to own a property. The developer promises to pay ₹1,20,000 annually to the buyer for 20 years as rental income. However, some buyers propose an alternative: instead of a fixed rent, the annual rent should increase by 5% every year indefinitely. If the developer's cost of capital is 8%, what should be the rent in the first year of the new scheme so that it is financially equivalent to the original fixed-income plan?
Correct answer: 35345 (accepted within ±5)
ABC Corporation operates in a volatile industry and has an equity beta (levered beta) of 2.2. Currently, the company is financed with 70% equity and 30% debt. The management is considering increasing its leverage by shifting to a 50% equity and 50% debt structure to fund a new project. The corporate tax rate is 25%. What is the company’s unlevered beta?
Correct answer: 1.65 (accepted within ±0.05)
Two mutually exclusive projects have 3-year lives and a required rate of return of 10.5 percent. Project A costs ₹75,000 and has cash flows of ₹18,500, ₹42,900, and ₹28,600 for Years 1 to 3, respectively. Project B costs ₹72,000 and has cash flows of ₹22,000, ₹38,000, and ₹26,500 for Years 1 to 3, respectively. Using the NPV, which project, or projects, if either, should be accepted?
Reject both projects
Accept both projects
Accept Project A and reject Project B.
Accept Project B and reject Project A.
Correct answer
Reject both projects
Foremost Inc. has a net income of ₹ 29,600, a total asset turnover of 1.4, total assets of ₹ 3,18,600, and a debt-equity ratio of 0.35. What is the return on equity (expressed in percentage – just enter the numerical value)?
Correct answer: 12.5 (accepted within ±0.5)
XYZ bank is interested in lending loans to companies and earn interest income from it. But at the same time they also want to ensure that their loan is repaid on a timely basis. What of the following number is most relevant for the bank to look at before approving the loan?
Quick ratio
Dividend Yield
Share Price of the company
Cash flow to debt ratio
Correct answer
Cash flow to debt ratio
Stock A has an expected return of 12 percent and a variance of 0.0203. The market has an expected return of 11 percent and a variance of 0.0093. What is the beta of Stock A if the covariance of Stock A with the market is 0.0137?
Correct answer: 1.47 (accepted within ±0.01)
The return on equity ratio is closest to:
34%
14.2%
22%
9.2%
Correct answer
22%
Which of the following statements are True about Isolation Forest
Data points that are hard to separate from the population are most likely the anomalies
Data points that are easy to separate from the population are most likely the anomalies
More decisions are need to separate data points that are anomalous
Fewer decisions are need to separate data points that are anomalous
Correct answers
Data points that are easy to separate from the population are most likely the anomalies
Fewer decisions are need to separate data points that are anomalous
A fintech company has a ML system that identifies transaction frauds that occur in its system. The model currently has a recall of 80%. The fraud rate, as reported by the company in its system is 15 BPS. On a regular day there are close to above 1 million transactions that happens via the company’s payment system and for each fraudulent transaction the company losses INR 10 on an average. The annual savings (INR) brought in by the ML system is:
Correct answer
