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Financial Markets (FINS5512)

Chapter 01 A modern financial system: An overview

1: The exchange of goods and services is made more efficient by:

A: barter B*: money C: governments D: some combination of government transfer and barter

2: A nation state that has only a barter system has high transaction costs because:

A: the difficulties of trade result in high legal costs because of the contracts required B*: traders must spend quite a bit of time looking for trading partners C: taxes under this system consume a large amount of output D: the difficulties of trade require high insurance premiums

3: The term ‘medium of exchange’ for money refers to its use as:

A: coinage B: currency C*: anything that is widely accepted as payment for goods and services D: any standard of value that prices can be expressed in

4: The role of money as a store of value refers to:

A: the value of money falling only when the money supply falls B: the value of money falling only when the money supply increases C*: the fact that money allows worth to be stored readily D: the fact that money never loses its value compared with other assets

5: Money increases economic growth by assisting transfers from:

A: consumers to investors B*: savers to borrowers C: businesses to consumers D: borrowers to investors

6: Financial markets have developed to facilitate the exchange of money between savers and borrowers. Which of the following is NOT a function of money?

A: a store of value B: a medium of exchange for settling economic transactions C*: a claim to future cash flows D: short-term protection against inflation

12: All of the following are associated with characteristics of shares EXCEPT:

A: part ownership of a company B: capital gains C*: a fixed interest payment D: dividends

13: A financial institution that obtains most of its funds from deposits is:

A: an investment bank B: a unit trust C*: a commercial bank D: a general insurer

Level: 2

Question 14: Institutions that specialise in off-balance sheet advisory services are called:

A: depository financial institutions B: contractual institutions C: finance companies D*: investment banks

Level: 2

Question 15: A _______ is a financial intermediary that receives premium payments that are used to purchase assets to cover future possible payments.

A: building society B: credit union C: savings bank D*: life insurance office

Level: 2

Question 16: Financial institutions, whose liabilities specify that, in return for the payment of periodic funds to the institution, the institution will make payments in the future, if and when a specified event occurs, are:

A: money market corporations B: unit trusts C*: contractual savings institutions

D: depository financial institutions

Level: 3

Question 17: Financial institutions that raise the majority of their funds by selling securities in the money markets are:

A: commercial banks B: building societies C*: finance companies D: life insurance offices

Level: 2

Question 18: All of the following are terms associated with shares EXCEPT:

A: residual B: ownership C: voting rights D*: contractual claim

Level: 2

Question 19: All of the following are characteristics commonly associated with preference shares EXCEPT:

A: a specified, fixed return B: no voting rights C*: higher ranking than bondholders on claims on assets D: no entitlement to take possession of assets if the borrower defaults on payment

Level: 2

Question 20: Long-term debt financing instruments used by companies are called:

A: bills B*: debentures C: shares D: equities

Level: 2

Question 21: All of the following are associated with features of debt instruments EXCEPT:

Question 26: The key reason for the existence of markets of financial assets is:

A*: that holders of shares occasionally want to exchange them for bonds and other financial instruments B: the high expenditure for many individuals and businesses C: that the lack of money in an economy makes trade in financial assets necessary D: the refusal of most modern governments to print money on demand

Level: 2

Question 27: Financial markets:

A: facilitate the exchanges of financial assets B: provide information about prices of financial assets C: provide a channel for funds to flow between the providers and users of funds D*: All of the above.

Level: 2

Question 28: The most important function of a financial market is:

A: to provide information about shares B: to provide a market for shares C*: to facilitate the flow of funds between lenders and borrowers D: to provide employment for brokers and agents

Level: 2

Question 29: Financial markets:

A: act as intermediaries by holding a collection of assets and issuing claims based on them to savers B*: issue claims on future cash flows of individual borrowers directly to lenders C: transmit funds indirectly between lenders and borrowers D: usually provide lenders with lower returns than other financial intermediaries

Level: 4

Question 30: A primary financial market is:

A: one that offers financial assets with the highest expected return B: one that offers the greatest number of financial assets C*: one that involves the sale of financial assets for the first time

D: one that offers financial assets with the highest historical return

Level: 2

Question 31: Purchasing unsecured notes on the Australian Stock Exchange is an example of:

A: a primary market transaction B*: a secondary market transaction C: companies raising new finance D: companies raising finance from another financial intermediary

Level: 3

Question 32: When a security is sold in the financial markets for the first time, then:

A: funds flow from the borrower to the saver B*: funds flow to the issuer from the saver C: it represents a secondary transaction to the underwriter D: it is an asset for the borrower

Level: 3

Question 33: All of the following are examples of primary market transactions EXCEPT:

A: a company issue of shares to raise funds for an investment project B: a government issue of bonds C*: a mortgage bond D: a mortgage loan to buy a house

Level: 3

Question 34: A ‘primary market’ is a market:

A: for equity by major or ‘primary’ companies B*: where borrowers sell new financial instruments to buyers C: where savers sell new financial claims to borrowers D: where government securities are bought and sold

Level: 3

Question 35: Buying bonds in the long-term debt market is an example of:

Level: 4

Question 40: All of the following are features of financial markets EXCEPT:

A: they generally provide borrowers with lower-cost funds than through a financial intermediary B: funds are channelled directly from savers to borrowers C: contractual agreements are issued between savers and borrowers D*: they generally deal only with the purchase and sale of government securities

Level: 2

Question 41: A well-functioning financial market includes all of the following EXCEPT:

A: a persistent increasing liquidity for most assets B: an increased ease of restructuring portfolios of assets C: quick assimilation of information into asset prices D*: a selection of financial assets with similar timings of cash flow to reduce risk

Level: 4

Question 42: Financial markets:

A: involve the buying and selling of existing financial securities only B*: involve both primary and secondary transactions C: act as intermediaries between borrowers and savers D: directly issue claims on savers to borrowers

Level: 2

Question 43: Direct financing allows a borrower to:

A: easily assess the level of default risk of a lender B: match amounts and maturity of investments with borrowers C: lower search and transaction costs D*: diversify their funding sources

Level: 2

Question 44: All of the following may be disadvantages of direct financing EXCEPT:

A: matching amounts of funds to be borrowed with those to be lent

B: assessment of the risk of the borrower C: cost of preparing legal contracts, taxation and accounting advice D*: cost of the financial intermediary involved

Level: 2

Question 45: An issue of debentures is an example of:

A: a secondary market transaction B: raising funding through financial intermediaries C*: a direct form of funding D: an indirect form of funding

Level: 3

Question 46: An example of an indirect form of funding is:

A: an issue of debentures B: an issue of unsecured notes C*: a term loan D: an issue of shares

Level: 2

Question 47: Financial intermediaries:

A*: act as a third party by holding a portfolio of assets and issuing claims based on them to savers B: issue claims on future cash flows of individual borrowers directly to lenders C: transmit funds directly between lenders and borrowers D: usually provide lenders with lower returns than other financial institutions

Level: 4

Question 48: The flow of funds between lenders and borrowers is:

A: channelled indirectly through financial markets B: channelled directly through financial intermediaries C*: channelled indirectly through financial intermediaries D: channelled mainly through government agencies

Level: 2

Question 49: ‘Intermediaries, by managing the deposits they receive, are able to make

price C*: they develop expertise in lending and diversify loans D: they can pool the savers’ short-term deposits and make long-term loans

Level: 4

Question 54: When a financial intermediary collects together deposits and lends them out as loans to companies, it is engaging in:

A: liability management B: liquidity management C: credit transformation D*: asset transformation

Level: 2

Question 55: ‘Liquidity’ is:

A: a feature of money only B*: the ease with which an asset can be sold at the published market price C: the best measure of risk of a financial asset D: to lower the rate of return for an asset

Level: 2

Question 56: When an individual has immediately access to their funds from an account with a financial intermediary, the intermediary is engaging in:

A: liability management B*: liquidity management C: credit transformation D: asset transformation

Level: 2

Question 57: When a financial intermediary can repeatedly use standardised documents, it is engaging in:

A: liability management B: liquidity management C: credit transformation D*: economies of scale

Level: 2

Question 58: According to the textbook, all of the following are financial intermediaries EXCEPT:

A: a bank B: an insurance company C: a superannuation fund D*: a share broking firm

Level: 2

Question 59: An example of a financial intermediary is:

A: a stockbroker B: the Australian Stock Exchange C: the Australian Securities Commission D*: an insurance company

Level: 2

Question 60: The main participants in the financial system are individuals, corporations and governments. Individuals are generally ______ of funds and corporations are net ________ of funds.

A: borrowers; suppliers B: users; providers C*: suppliers; users D: demanders; providers

Level: 2

Question 61: Which of the following borrowers would pay the lowest interest rate on debt of equal maturity?

A: the National Bank of Australia B: Telstra C: the City of Sydney D*: the Commonwealth Government

Level: 2

Question 62: Generally, over the long term, a government:

A*: is a net borrower of funds

Question 67: A company with a temporary surplus of funds is most likely to buy:

A*: bank bills B: convertible notes C: debentures D: shares

Level: 2

Question 68: A company that issues promissory notes into the short-term money market is said to be conducting a transaction in the:

A*: commercial paper market B: inter-bank market C: bills market D: official short-term money market

Level: 3

Question 69: The market that generally involves the buying and selling of discount securities is:

A: securities market B*: money market C: share market D: capital market

Level: 2

Question 70: A source of short-term liquidity funding for banks is the issue of:

A: bank bills B*: certificates of deposit C: commercial paper D: debentures

Level: 3

Question 71: The market that includes individuals, companies and governments in the buying and selling of long-term debt and equity securities is the:

A: currency market B: debt market

C*: capital market D: financial market

Level: 2

Question 72: For additional funding, a company decides to issue $15 million in debentures. The securities will be issued into the:

A: retail markets B: secondary markets C: short-term money markets D*: capital markets

Level: 3

Question 73: The major financial assets traded in the capital market are:

A: bank bills and commercial paper B: Treasury notes and certificates of deposits C: bonds and convertible securities D*: shares and bonds

74: Compared with Treasury bonds, Treasury notes generally:

A: have a longer maturity B: pay interest annually C*: are discount securities D: are issued in the capital markets

75: If you purchase a government bond, that bond is:

A*: an asset to you but a liability for the Australian government B: an asset to you as well as an asset for the Australian government C: a liability to you but an asset for the Australian government D: a liability to you as well as a liability for the Australian government

76: When government borrowing reduces the amount of funds available for lending to businesses, this is called:

A: credit rationing B*: crowding out C: capital rationing D: government quotas

D: cross-sector flows

Topic 2 Commercial banks

1 .Deregulationofthebankingsectorthroughoutthelate 1970 sandthe 1980 ssought to: A.reducetherelianceofmajorAustraliancompaniesoninternationalcapitalmarkets B.reducetheexcessprofitsofbanks C. reducethediscriminationagainstbanksowingtodirectcontrolsonthem only D.providereducedcontrolonthemoneysupply

Di ff iculty:Medium Viney-Chapter 02 # 1 learninggoal:EMPTY learningobjective:EMPTY level:EMPTY lo:EMPTY questiontype:EMPTY source:EMPTY type:EMPTY

2 .Thechangestothebarrierstoentrytothebankingindustryunderderegulationin theearly 1980 s_______thenumberofforeignbanks. A.decreased B. increased C.didnotalter D.dramaticallydecreased

Di ff iculty:Easy Viney-Chapter 02 # 2 learninggoal:EMPTY learningobjective:EMPTY level:EMPTY lo:EMPTY questiontype:EMPTY source:EMPTY type:EMPTY

3 .WhichofthefollowingstatementsconcerningbanksisINCORRECT? A.CurrentlyinAustralia,banksaccountforthelargestshareofassetsofallfinancial institutions. B.Bankloansandcommitmentsmustbesupportedbyaminimum specifiedamount ofcapital. C.Atleast 50 % ofthecapitalrequirementmustbeintheform ofTier 1 capital. D. TheAustralianReserveBankmonitorscapitaladequacyrequirementsforbanks.

Di ff iculty:Easy Viney-Chapter 02 # 3 learninggoal:EMPTY learningobjective:EMPTY level:EMPTY lo:EMPTY questiontype:EMPTY source:EMPTY type:EMPTY

4 .Unlikemostotherbusinesses,abank'sbalancesheetismadeupmainlyof: A.realassetsandfinancialliabilities B.realliabilitiesandfinancialliabilities C.realassetsandrealliabilities D. financialassetsandliabilities

Di ff iculty:Easy Viney-Chapter 02 # 4 learninggoal:EMPTY learningobjective:EMPTY level:EMPTY lo:EMPTY questiontype:EMPTY source:EMPTY type:EMPTY