Deck 1: Financial Markets

Question 1

Which of the following is NOT true of a financial market dealer?

A) Quotes two- way prices.
B) Acts as a market maker.
C) Trades only on behalf of others, never on their own account.
D) Can be an individual or company.

Answer 1

C

Question 2

In an arbitrage transaction, the average proportion of the transaction price that involves risk is:

A) 50%.
B) 0%.
C) 100%.
D) 80%.

Answer 2

B

Question 3

Which of the following is an example of an exchange- traded market?

A) Interest rate swaps.
B) Bank loans.
C) Stock exchange.
D) Foreign exchange.

Answer 3

C

Question 4

It is important that a secondary market be liquid so that:

A) loans are guaranteed.
B) large transactions will not have an impact on the price.
C) expensive dealers are not required.
D) all of the above.

Question 5

Which of the following best describes a financial sector transaction?

A) A firm supplying goods to a client on terms of 90 days.
B) A consumer buying a car and paying cash.
C) A farmer producing wheat and selling it to a bread maker.
D) A bank lending a sum to a customer.

Question 6

Which of the following does NOT use an over- the- counter market?

A) Shares.
B) Houses.
C) Foreign exchange.
D) Swaps.

Question 7

The 'secondary market' is where:

A) second- hand goods like cars and antiques are exchanged.
B) banks provide 'top- up' loans to customers with a first loan.
C) investors exchange their financial securities with other investors.
D) none of the above.

Question 8

The sector holding the largest share of debt securities on issue in Australia is:

A) financial corporations.
B) foreigners.
C) private non- financial sector.
D) government.

Question 9

On the same day, Julia sells a 2001 model Commodore for $19,000 and buys another one in the same condition for $16,000. This is an example of:

A) intermediation.
B) short- selling.
C) arbitrage.
D) speculation.

Question 10

Which of the following is the tool by which financial markets allocate funds across alternative uses?

A) Bank fees.
B) Interest rates.
C) Commodity prices.
D) Automatic teller machines.

Question 11

Liquidity is affected by an asset market's:

A) depth, breadth and resilience.
B) depth and breadth only.
C) breadth and resilience only.
D) depth only.

Question 12

Market liquidity is mostly a function of:

A) an asset's intrinsic value.
B) government stamp duty.
C) whether derivatives are available.
D) the volume of turnover of an asset.

Question 13

A 'surplus economic unit' is one that:

A) saves more than the national average.
B) saves less than the national average.
C) saves less than it invests.
D) saves more than it invests.

Question 14

Which of the following institutions is NOT responsible for the prudential regulation of banks' and depositors' protection?

A) RBA.
B) APRA.
C) ACCC.
D) ASIC.

Question 15

The role of financial markets is to:

A) produce goods and services.
B) conduct fiscal policy.
C) transfer funds from lenders to borrowers.
D) record statistics for official use.

Question 16

The allocative role of financial markets involves:

A) addressing the needs of the poor and disadvantaged.
B) selecting appropriate salary levels for financial employees.
C) distributing currency through banks' branch networks.
D) efficiently distributing scarce funds between competing uses.

Question 17

Which of the instruments below is an exchange- traded one?

A) Bank deposit.
B) Commercial bills.
C) Listed shares.
D) Swaps.

Question 18

Which of the following is NOT a benefit from financial intermediation?

A) Spreading of risk.
B) Saving on bank fees.
C) Economies of scale.
D) Improved liquidity.

Question 19

An example of 'direct financing' is:

A) Woolworths making a share issue through the stock exchange.
B) Chad buying a surfboard using his credit card.
C) Qantas buying aviation fuel using a bank overdraft.
D) Telstra taking out a corporate loan from a bank.

Question 20

The transfer of funds between ultimate lenders and ultimate users via deposit- taking institutions is known as:

A) direct financing.
B) dissaving.
C) intermediation.
D) hedging.

Question 21

The difference between the selling and buying prices quoted by market makers is:

A) the liquidity margin.
B) the yield.
C) the spread.
D) the tax benefit.

Question 22

'Short- selling' is accomplished whenever an overseas participant is involved in a transaction.

Question 23

The difference between dealers and brokers is that:

A) interest earnings of brokers are not taxed.
B) dealers quote to buy or sell, while brokers only sell.
C) brokers locate buyers for sellers and vice versa.
D) both A and C.

Question 24

When investors purchase Commonwealth Bank shares in a public offering, it is an example of the market.

A) derivatives
B) primary
C) secondary
D) bond

Question 25

Liquidity in the share market is doubly important because ordinary shares have no maturity date and can only be converted to cash through selling to other investors.

Question 26

Swaps are an example of a financial instrument that is always exchange- traded and never traded over- the- counter.

Question 27

Around four in every ten Australian households owns shares.

Question 28

Properly used, the term 'investment' means:

A) buying a quality consumer item whose brand is respected.
B) depositing money in a bank account or similar vehicle.
C) the acquisition of physical plant and equipment to produce goods and services.
D) all of the above.

Question 29

Which of the following is INCORRECT?

A) A market maker is an entity which stands ready to buy or sell securities.
B) The secondary market is the issue of securities to a single private investor.
C) The primary market is where investors purchase securities from the issuer or its representative.
D) All of the above.

Question 30

What is meant by the term 'dissaving'?

A) Getting a poor rate of interest on your investment.
B) Consuming more than you earn.
C) Being a surplus economic unit.
D) Withdrawing money from your bank account.

Question 31

Which of the following protects depositors?

A) Disclosure requirements.
B) Prudential regulation.
C) None of the above.
D) Both A and B.

Question 32

An important objective of regulation is to maintain systemic stability.

Question 33

In designing regulatory frameworks, the costs of regulations are:

A) the costs created by customers' reactions to changes in relative prices.
B) costs of regulators.
C) compliance costs.
D) all of the above.

Question 34

The term 'short- selling' refers to:

A) disintermediation using the primary market.
B) dissaving by selling shares.
C) borrowing by promising to repay a security rather than a sum of money.
D) borrowing without a bank.

Question 35

Australian companies that have specifically set aside a proportion of their raising for individual investors include Woolworths, Qantas and Telstra.

Question 36

The study of financial markets and institutions:

A) looks at how households and businesses with surplus funds lend to others who need to borrow.
B) is an exact science.
C) is focused on the consumer.
D) is concerned with what goods business produces and in what quantities.

Question 37

Governments are typically the main parties to raise funds using private placements.

Question 38

Companies borrow from households by:

A) selling shares to them.
B) indirectly borrowing from banks.
C) none of the above.
D) A and B.

Question 39

A university student has a part- time job. She gets this week's pay and puts $100 into her bank account. Which type of asset is this?

A) Deposit.
B) Collectible.
C) Equity.
D) Cash.

Question 40

Which of the following markets exist in Australia?

A) Cash and debt market.
B) FOREX.
C) ASX and SFE.
D) All of the above.

Question 41

The ACCC retains its role in encouraging competitiveness, which means that it continues to be responsible for the sensitive issue of mergers and acquisitions in the banking industry.

Question 42

Financial markets are best studied by listing facts and figures.

Question 43

The major household asset is superannuation.

Question 44

Intermediaries offer the advantage of spreading risk across a number of counterparties.

Question 45

Retired people tend to dissave.

Question 46

A major difference between superannuation funds and traditional intermediaries is that units in a managed fund tend to be illiquid.

Question 47

A major advantage of direct financing is the ability to transform assets.

Question 48

When agents put their money with fund managers who invest it on their behalf, it is an example of indirect financing.

Question 49

If a household consumes more than its income, it is dissaving.

Question 50

Funds flow in the economy from deficit units to surplus units.

Question 51

The market in which holders of securities can on- sell them to other investors is known as the secondary market.

Question 52

According to the HILDA survey, the percentage of Australian households holding HECS is 13%.

Question 53

An example of a non- financial asset is life insurance.

Question 54

A useful way to distinguish between direct and indirect financing is the number of assets that are created in the process.

Question 55

The flow- of- funds matrix was affected by the GFC.

Question 56

Arbitrage is defined as a sale of securities between non- residents and residents.

Question 57

If a household with an income of $125 consumes $88 and invests $26, its financial surplus available for lending to the financial system equals $37.

Question 58

Fund managers primarily invest in equities, debt securities and property.

Question 59

The equation for the dealer's spread equals sell price minus buy price.

Question 60

Over- the- counter markets are characterised by open competitive bidding.

Question 61

Companies with strong financial fundamentals have been bypassing banks and borrowing by issuing debt securities of their own.

Question 62

The iron law of unintended consequences says that regulations will have effects beyond those intended.

Question 63

Typically, only large corporations with international credit ratings can use the over- the- counter market.

Question 64

What is 'market liquidity' and what factors affect it?

Question 65

In your own words, what is short- selling and how can it be accomplished?

Question 66

'Financial intermediaries add very little economic value, compared with direct financing.' Critically evaluate this statement.

Question 67

Consumer durables such as cars and TVs are classed as household 'assets'.

Question 68

Companies never borrow from households.

Question 69

Outline the difference between surplus and deficit economic units.

Question 70

Examples of financial intermediaries are banks, the stock exchange and building societies.