Question 1

Which of the following categories of institutions is best described as providing investment management services?

Accepted Answer

A)  Retail banks.
B)  Wholesale banks.
C)  Investment banks.
D)  Insurance companies.
E)  Fund managers. E

Question 2

Bailouts of loss-making financial institutions pose incentive problems and moral hazards.

Accepted Answer

A) True 
 B)False  True

Question 3

Moral hazard problems arise in the financial system because people are fundamentally dishonest.

Accepted Answer

A) True 
 B)False  False

Question 4

Identify the correct statement about Australia's financial system.

Accepted Answer

A)  The main source of funds is household savings.
B)  Savings can be in the form of deposits and/or investments.
C)  Governments are a source of savings when they have budget surpluses.
D)  Firms are a source of savings when they retain earnings.
E)  All of these.

Question 5

The risk that the value of bonds falls because of an unexpected increase in interest rates is known as default risk.

Accepted Answer

A) True 
 B)False

Question 6

The risk associated with an unsecured loan is greater than the risk associated with an otherwise identical secured loan.

Accepted Answer

A) True 
 B)False

Question 7

The 'big four' (Westpac, Commonwealth bank, NAB and ANZ)are BEST described as:

Accepted Answer

A)  retail banks
B)  financial conglomerates
C)  wholesale banks
D)  investment banks
E)  superannuation schemes.

Question 8

The GFC is sometimes referred to as a 'crisis of confidence'.Explain the role of confidence leading up to and during the crisis.

Accepted Answer

The answer of The GFC is sometimes referred to as...

Question 9

The returns earned from supplying funds include interest, dividends and the potential for capital gains.

Accepted Answer

A) True 
 B)False

Question 10

Explain the two main forms of finance (debt and equity).

Accepted Answer

The answer of Explain the two main forms of finance...

Question 11

APRA enforces company and financial services laws to protect consumers, investors and creditors.

Accepted Answer

A) True 
 B)False

Question 12

Outline the differences between debt and equity as forms of finance.

Accepted Answer

The answer of Outline the differences between debt and equity...

Question 13

The money market trades discount securities.

Accepted Answer

A) True 
 B)False

Question 14

Our study of information asymmetry revealed:

Accepted Answer

A)  It is where one party to a potential contract has an information advantage over the other party.
B)  The markets assume professional traders are well informed.
C)  Retail investors must be supplied with relevant information to enable a well-informed decision.
D)  It can result in contracts that are not mutually beneficial at the expense of the less informed party.
E)  All of these.

Question 15

When lenders/investors become very confident, the risk-return function will:

Accepted Answer

A)  shift upwards
B)  shift downwards
C)  be relatively steep
D)  be relatively flat.
E)  None of these.

Question 16

Equity is considered riskier than debt because the returns to its suppliers are non-enforceable.

Accepted Answer

A) True 
 B)False

Question 17

The textbook's coverage of leverage explained its use will:

Accepted Answer

A)  increase the expected return on equity but not the risk of these returns
B)  reduce the risk but not the expected return on equity
C)  increase the return on equity as long as the return on assets is less than the cost of debt
D)  reduce the risk of bankruptcy.
E)  None of these.

Question 18

According to Merton (1995), financial systems perform three functions.These are the settlement function, the flow of funds function and the risk-transfer function.

Accepted Answer

A) True 
 B)False

Question 19

Briefly outline the main functions of the RBA.

Accepted Answer

The answer of Briefly outline the main functions of the...

Question 20

Financial institutions are supervised by the RBA.

Accepted Answer

A) True 
 B)False

Exam 1: Overview of the Financial System

Which of the following categories of institutions is best described as providing investment management services?

Bailouts of loss-making financial institutions pose incentive problems and moral hazards.

Moral hazard problems arise in the financial system because people are fundamentally dishonest.

Identify the correct statement about Australia's financial system.

The risk that the value of bonds falls because of an unexpected increase in interest rates is known as default risk.

The risk associated with an unsecured loan is greater than the risk associated with an otherwise identical secured loan.

The 'big four' (Westpac, Commonwealth bank, NAB and ANZ) are BEST described as:

The GFC is sometimes referred to as a 'crisis of confidence'.Explain the role of confidence leading up to and during the crisis.

The returns earned from supplying funds include interest, dividends and the potential for capital gains.

Explain the two main forms of finance (debt and equity).

APRA enforces company and financial services laws to protect consumers, investors and creditors.

Outline the differences between debt and equity as forms of finance.

The money market trades discount securities.

Our study of information asymmetry revealed:

When lenders/investors become very confident, the risk-return function will:

Equity is considered riskier than debt because the returns to its suppliers are non-enforceable.

The textbook's coverage of leverage explained its use will:

According to Merton (1995), financial systems perform three functions.These are the settlement function, the flow of funds function and the risk-transfer function.

Briefly outline the main functions of the RBA.

Financial institutions are supervised by the RBA.