Deck 1: A Modern Financial System: An Overview

Question 1

Which of the following is NOT a characteristic commonly associated with preference shares?

A) A specified, fixed return
B) No voting rights
C) Higher ranking than bond holders on claims on assets
D) No entitlement to take possession of assets if the borrower defaults on payment

Answer 1

C

Question 2

A financial institution that obtains most of its funds from deposits is a/an:

A) investment bank.
B) unit trust.
C) commercial bank.
D) general insurer.

Answer 2

C

Question 3

A financial intermediary that receives premium payments which are used to purchase assets to cover future possible payments is a:

A) building society.
B) credit union.
C) savings bank.
D) life insurance office.

Answer 3

D

Question 4

Both real and financial assets have four principal attributes that are significant factors in the investment decision process.These are:
I)liquidity
II)capital gain
III)risk
IV)return or yield
V)time pattern of future cash flows
VI)price and cash flow volatility

A) I, II, III, IV
B) I, III, IV, V
C) I, III, IV, VI
D) II, III, IV, V

Question 5

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.

Question 6

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

A) depository financial institutions.
B) contractual institutions.
C) finance companies.
D) investment banks.

Question 7

Short selling is:

A) the sale of a financial product at a discount to its current market value.
B) the sale of a financial product in small quantities.
C) the sale of a financial product that the seller does not own.
D) the sale of a financial product where the seller agrees to buy it back at a predetermined price.

Question 8

Financial institutions that are formed under a trust deed and attract funds by inviting the public to buy units are:

A) finance companies
B) building societies.
C) unit trusts.
D) life insurance offices.

Question 9

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.

Question 10

Money increases economic growth by assisting transfers from:

A) consumers to investors.
B) savers to borrowers.
C) businesses to consumers.
D) borrowers to investors.

Question 11

Which of the following is NOT associated with characteristics of shares?

A) Part ownership of a company
B) Capital gains
C) A fixed interest payment
D) Dividends

Question 12

A savings-surplus unit is an entity:

A) that needs to borrow funds from a surplus unit.
B) which has an income that exceeds its spending.
C) whose spending exceeds its income.
D) called a company.

Question 13

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

A) barters.
B) money.
C) governments.
D) some combination of government transfer and barter.

Question 14

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

Question 15

Sellers of financial claims promise to pay back borrowed funds:

A) by borrowing extra funds in the future.
B) based on their expectation of having surplus funds in the future.
C) by selling other assets.
D) by reducing their costs relative to their incomes.

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.

Question 17

The process of facilitating the flow of funds between borrowers and lenders performed by the financial system:

A) is hindered by the problem of 'double coincidence of wants'.
B) greatly reduces the probability of inflation.
C) increases the rate of economic growth of a country.
D) occurs only through financial intermediaries.

Question 18

Buyers of financial claims lend their excess funds because they:

A) expect to borrow extra funds in the future.
B) want surplus funds in the future.
C) want to invest in the future.
D) want to increase their costs relative to their incomes.

Question 19

The term 'medium of exchange' for money refers to its use as:

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

Question 20

Which of the following is NOT a term associated with shares?

A) Residual
B) Ownership
C) Voting rights
D) Contractual claim

Question 21

A primary financial market is one that:

A) offers financial assets with the highest expected return.
B) offers the greatest number of financial assets.
C) involves the sale of financial assets for the first time.
D) offers financial assets with the highest historical return.

Question 22

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

A) that holders of shares generally 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.

Question 23

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.

Question 24

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

A) bills.
B) debentures.
C) shares.
D) equities.

Question 25

Buying bonds in the capital markets is an example of:

A) a secondary market transaction.
B) a primary market transaction.
C) companies raising new funds.
D) companies raising funds from a secondary source.

Question 26

When a security is sold in the financial markets for the first time:

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

Question 27

A secondary financial market is one that:

A) offers financial assets with the highest expected return.
B) offers the greatest number of financial assets.
C) involves the sale of existing financial assets.
D) offers financial assets with the highest historical return.

Question 28

Which of the following is NOT a feature of futures contracts?

A) Futures contracts involve an obligation to buy or sell a specified amount
B) Trading of contracts occurs on an exchange
C) The contract price is settled at the end of the contract
D) Trading an opposite contract usually closes out the contract

Question 29

The market where existing securities are sold is the:

A) economic market.
B) primary market.
C) secondary market.
D) financial market.

Question 30

Which of the following is NOT a feature of swaps?

A) There is a contractual arrangement to exchange cash flows
B) Interest rate swaps exchange principal at the beginning and the end
C) A fixed rate obligation may be exchanged for a variable rate obligation
D) A swap can involve interest payments and currencies

Question 31

Which of the following is NOT an example of primary market transactions?

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

Question 32

Financial markets:

A) facilitate the exchange 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 given choices.

Question 33

Which of the following is NOT a feature of option contracts?

A) The buyer does not have an obligation to proceed with the contract
B) The writer of the contract receives a fee
C) The price of the designated asset is determined at the beginning of the contract
D) The right to buy is called a put option

Question 34

Which of the following is NOT a feature of a debt instrument?

A) A contractual claim against the borrower
B) Periodic interest payments
C) Higher claim on assets of borrower than equity holders
D) Their prices do not fluctuate as much as shares

Question 35

The most important function of a financial market is to:

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

Question 36

A 'primary market' is a market:

A) only for equity issues 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.

Question 37

Which of the following is NOT a feature of forward contracts?

A) Forward contracts are not standardised
B) Forward contracts do not trade on organised exchanges
C) The contract price may be settled at the end of the contract
D) Forward contracts are closed out by trading an opposite contract

Question 38

Debt instruments that can be easily sold and transferred in the financial markets are called:

A) negotiable.
B) secured.
C) unsecured.
D) discounted.

Question 39

When a borrower issues a debt instrument with collateral specified in its contract this debt instrument is called:

A) unsecured.
B) secured.
C) defined.
D) negotiable.

Question 40

Purchasing shares on the Australian Securities Exchange is an example of:

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

Question 41

Financial intermediaries pool the funds of:

A) many small savers and make loans to a few large borrowers.
B) a few savers and make loans to many borrowers.
C) many small savers and make loans to many borrowers.
D) a few large savers and make loans to a few large borrowers.

Question 42

Direct financing allows a borrower to:

A) easily assess a lender's level of default risk.
B) match amounts and maturity of investments with borrowers.
C) lower search and transaction costs.
D) diversify their funding sources.

Question 43

Small savers prefer to use financial intermediaries rather than lending directly to borrowers because:

A) financial intermediaries offer the savers a wide portfolio of financial instruments.
B) financial intermediaries offer much higher interest rates than can be obtained directly from borrowers.
C) borrowers dislike dealing with savers.
D) savers have a claim with the ultimate borrower via the financial intermediary.

Question 44

Secondary markets:

A) allow borrowers to raise long-term funds.
B) facilitate capital-raising in the primary market.
C) do not raise new funds but offer liquidity.
D) all of the given answers.

Question 45

An issue of debentures is an example of:

A) a secondary market transaction.
B) fundraising through financial intermediaries.
C) a direct form of funding.
D) an indirect form of funding.

Question 46

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.

Question 47

When a large company issues a financial instrument into the financial markets:

A) funds flow indirectly from saver to borrower.
B) the cost of funds is generally higher owing to the risk involved.
C) it buys a financial claim.
D) it sells a financial claim.

Question 48

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.

Question 49

Which of the following statements is NOT a feature of financial markets?

A) Financial markets 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) Financial markets generally deal only with the purchase and sale of government securities.

Question 50

Which of the following is NOT a major advantage of direct finance?

A) Direct finance reduces financial institution' fees.
B) Direct finance allows borrowers to diversify sources of funds.
C) Direct finance allows greater flexibility in funding types.
D) Direct finance reduces search and transactions costs.

Question 51

Which of the following is NOT true-a well-functioning financial market:

A) has a steadily increasing liquidity for most assets.
B) offers increased ease of restructuring portfolios of assets.
C) has a quick assimilation of information into asset prices.
D) has a selection of financial assets with similar timings of cash flow.

Question 52

The flow of funds through financial markets increases the volume of savings and investment by:

A) maintaining low interest rates.
B) storing large quantities of cash.
C) providing savers with a variety of ways to lend to borrowers.
D) offering lower interest rates than could be obtained directly from borrowers.

Question 53

Financial markets:

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

Question 54

Which of the following is NOT a possible disadvantage of direct financing?

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

Question 55

'Intermediaries,by managing the deposits they receive,are able to make long-term loans while satisfying savers' preferences for liquid claims.' This statement is referring to which important attribute of financial intermediation?

A) Asset transformation
B) Maturity transformation
C) Credit risk transformation
D) Denomination transformation

Question 56

'Liquidity' in financial terms 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.

Question 57

Financial intermediaries can engage in credit risk transformation because they:

A) obtain cost advantages owing to their size and business volumes transacted.
B) can quickly convert financial assets into cash, close to the current market price.
C) develop expertise in lending and diversifying loans.
D) can pool savers' short-term deposits and make long-term loans.

Question 58

An example of an indirect form of funding is a/an:

A) issue of debentures.
B) issue of unsecured notes.
C) term loan.
D) issue of shares.

Question 59

The flow of funds between lenders and borrowers is channelled:

A) indirectly through financial markets.
B) directly through financial intermediaries.
C) indirectly through financial intermediaries.
D) mainly through government agencies.

Question 60

The main role of financial intermediaries is to:

A) borrow funds from surplus units and lend them to borrowers.
B) provide advice to consumers on their finances.
C) provide funds for the government to cover budget deficits.
D) help ensure there are enough funds in circulation in a country.

Question 61

Which of the following borrowers would pay the lowest interest rate on debts of equal maturity?

A) The National Bank of Australia
B) Telstra
C) The City of Sydney
D) The Commonwealth Government

Question 62

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

A) retail markets.
B) secondary markets.
C) money markets.
D) capital markets.

Question 63

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

Question 64

The _______ is created by a financial connection between providers and users of short-term funds.

A) share market
B) capital market
C) money market
D) financial market

Question 65

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

A) bank bills.
B) debentures.
C) certificates of deposit.
D) commercial paper.

Question 66

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.

Question 67

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

A) bank bills.
B) convertible notes.
C) debentures.
D) shares.

Question 68

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.

Question 69

An example of a financial intermediary is:

A) a stockbroker.
B) the Australian Securities Exchange.
C) the Australian Securities Commission.
D) an insurance company.

Question 70

When a company issues a long-term debt instrument with no security attached it is selling _____ to investors.

A) shares
B) debentures
C) unsecured notes
D) term loans

Question 71

Generally,in the long term,a government:

A) is a net borrower of funds.
B) is a net supplier of funds.
C) borrows funds directly from households.
D) borrows funds directly from the financial market.

Question 72

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

A) asset transformation.
B) liability management.
C) liquidity management.
D) credit transformation.

Question 73

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

A) securities market.
B) money market.
C) share market.
D) capital market.

Question 74

A company that issues promissory notes into the short-term debt markets is conducting a transaction in the:

A) commercial paper market.
B) inter-bank market.
C) bills market.
D) official short-term money market.

Question 75

A company with a high credit rating can issue _____ directly into the money markets.

A) CDs
B) Commercial paper
C) unsecured notes
D) debentures

Question 76

Which of the following is NOT usually a short-term discount security?

A) Negotiable certificates of deposit
B) Commercial paper
C) Bank bills
D) Unsecured notes

Question 77

From the viewpoint of a corporation,which source of long-term funding does not have to be repaid?

A) Equity
B) Commercial paper
C) Corporate bonds
D) Bank bills

Question 78

According to the textbook,all of the following are financial intermediaries except a/an:

A) bank.
B) insurance company.
C) superannuation fund.
D) share broking firm.

Question 79

Which of the following is NOT a feature of the money market?

A) It is a mainly wholesale market
B) It deals with short-term financial claims
C) It is important in financing the working-capital needs of businesses and governments
D) It only operates as a market in which new security issues are created and marketed

Question 80

The market that involves the buying and selling of short-term securities is the:

A) securities market.
B) money market.
C) share market.
D) capital market.