Deck 1: The Financial System

Question 1

It is important to be able to resell financial claims in a secondary market because it allows:

A)DSUs to finance a project with successive issues of financial claims.
B)DSUs to implement projects with horizon shorter than the SSUs' investment horizon.
C)SSUs to purchase financial claims with maturities that are longer than their investment horizon.
D)SSUs to purchase financial claims with maturities that are shorter than their investment horizon.

Answer 1

C

Question 2

A surplus budget position means that an entity's:

A)income and expenditures are the same.
B)income for the period exceeds expenses.
C)expenditures for the period exceed revenues.
D)none of the above.

Answer 2

B

Question 3

The ASX is an example of:

A)an over-the-counter market exchange.
B)an electronic organised exchange.
C)a physical exchange.
D)all of the above.

Answer 3

B

Question 4

An over-the-counter market:

A)is a primary market.
B)is regulated by the RBA.
C)has no central location.
D)allows investors in financial claims to trade directly among themselves.

Question 5

Which of the following statements best describes the concept of "two faces of debt"?

A)Government debt requires higher taxation in the future to repay the principal and interests of the debt.
B)Intermediaries issue financial claims to SSUs and own financial claims issued by DSUs.
C)Every financial asset is someone else's liability/equity.
D)DSUs in one period can be SSUs in another one.

Question 6

An economy with a large flow of funds requires:

A)a tightly controlled central bank.
B)an efficient financial system.
C)a lot of gold reserves.
D)all of the above.

Question 7

A deficit spending unit is an economic unit:

A)who has negative income.
B)whose income is less than planned saving.
C)who can provide funds to the financial system.
D)whose planned expenditure in a period exceeds current income.

Question 8

A sale of an entire security issue to a small group of surplus spending units is:

A)a dealer arrangement.
B)a private placement.
C)an underwriting.
D)indirect finance.

Question 9

During 2017,Michael and Jenny Jones expect total income of $215,000 and are budgeting total expenditure of $195,000.For this budget period,the Jones family is most specifically a:

A)deficit spending unit.
B)a recipient of funds from the financial system.
C)surplus spending unit.
D)financial intermediary.

Question 10

Which of the following would most likely be involved in underwriting public securities?

A)A broker.
B)A dealer.
C)A regional commercial banker.
D)None of the above are involved in underwriting.

Question 11

Which one of the following statements is NOT true?

A)Prices in the corporate bond market tend to be more volatile than the market for shares.
B)Corporate bonds are more marketable than the securities that have higher daily trading volumes.
C)The market for corporate bonds is thin.
D)Life insurance companies and superannuation funds are the largest investors in corporate bonds.

Question 12

The functions of a financial system include:

A)facilitating the flow of funds.
B)providing means for the transfer and management of risks.
C)providing the mechanism for the settlement of transactions.
D)all of the above.

Question 13

Which of the following financial claims does NOT belong to the capital market?

A)Corporate bond.
B)Bank bill.
C)Shares.
D)Government bond.

Question 14

Which of the following are NOT financial claims?

A)commodities.
B)bonds.
C)shares.
D)loans.

Question 15

The major players in the direct financial markets are:

A)regional banks.
B)commercial banks.
C)investment banks.
D)both B and C.

Question 16

Corporate bonds:

A)provide funding for capital expenditure.
B)have a very active secondary market.
C)have a maturity less than one year.
D)are issued by governments.

Question 17

The functions of the financial system include:

A)providing ways of dealing with the incentive problems that arise in financial contracting.
B)generating and disseminating information that assists decision making.
C)facilitating the flow of funds.
D)all of the above.

Question 18

Which of the following is not a role of financial markets:

A)matching borrowers and lenders.
B)facilitation of business and trade.
C)to increase the poverty gap.
D)facilitation of savings by individuals to allow for future consumption.

Question 19

The financial system's primary concern is funnelling money from ________ to _________.

A)SSUs,DSUs.
B)DSUs,SSUs.
C)wealthy individuals,individuals.
D)the government,wealthy individuals.

Question 20

An important function of the financial system is:

A)to direct money to the best investment opportunities in the economy.
B)to allow the federal government to view all financial transactions.
C)to help state governments to coordinate state tax levies.
D)all of the above.

Question 21

Private placements are:

A)issues of securities to the public.
B)issues of securities directly onto the ASX.
C)issues of securities made only by the government.
D)issues of securities made by negotiation directly with purchasers.

Question 22

Which of the following is not a way in which secondary markets support primary markets?

A)Facilitating risk management.
B)Underwriting new issues of securities.
C)Providing liquidity for holders of issued securities.
D)Providing a price-discovery mechanism for primary markets when new issues are contemplated.

Question 23

Which of the following financial claims does NOT belong to the money market?

A)Bank bill.
B)Treasury note.
C)Corporate bond.
D)Commercial paper.

Question 24

Which of the following statements is NOT correct?

A)Owners of financial claims can sell them in the primary market.
B)Deficit spending units raise funds by issuing financial claims in the primary market.
C)Owners of financial claims can sell them in the secondary market before maturity date.
D)A financial claim has one issuer but possibly successive owners through the secondary market.

Question 25

Which of the following is NOT a comparative advantage of financial intermediaries over surplus spending units in providing funds to deficit spending units?

A)Economies of scale.
B)Lower transactions costs.
C)Better management of credit risk.
D)Higher searching costs for credit information.

Question 26

The ease with which a security can be sold and converted into cash is referred to as:

A)book value.
B)marketability.
C)convertibility.
D)none of the above.

Question 27

An organised security exchange:

A)is a primary market.
B)relies on dealers for trading.
C)has no central location.
D)is accessible by authorised traders only.

Question 28

Which of the following is NOT a characteristic of money market instruments?

A)Low default risk.
B)High marketability.
C)Small denomination.
D)Short term to maturity.

Question 29

The most common reason that corporate companies use the futures and options markets is to:

A)take risk.
B)hedge risk.
D)make deposits.
D)none of the above.

Question 30

Secondary financial markets are similar to:

A)new-car markets.
B)used-car markets.
C)direct auction markets.
D)all of the above.

Question 31

Which of the following transactions occurs in the primary market?

A)A managed fund sells some Optus shares it owns.
B)Mr Grey buys Commonwealth Bank shares listed on the ASX.
C)The Federal government sells Treasury bonds to finance road infrastructure.
D)Mrs Thompson sells government bonds to a dealer.

Question 32

The financial market where new securities are sold for the first time is:

A)an indirect market.
B)a secondary market.
C)a primary market.
D)none of the above.

Question 33

Credit risk diversification of a loan portfolio occurs when:

A)loans from similar borrowers are combined in a portfolio.
B)loans with similar payment patterns are combined in a single portfolio.
C)adding loans to the portfolio decreases the variability of the loan portfolio.
D)adding loans to the portfolio increases the variability of the loan portfolio.

Question 34

Denomination transformation refers to the ability of financial institutions to:

A)spread risk.
B)raise short-term funds to lend for longer periods.
C)raise many small amounts to lend larger amounts.
D)raise funds in one currency to lend in another currency.

Question 35

Most financial intermediaries issue _______financial claims and purchase ________financial claims.

A)direct; direct.
B)indirect; direct.
C)direct; indirect.
D)indirect; indirect.

Question 36

Which of the following statements is NOT correct?

A)Money markets are operated by dealers.
B)Money market securities have short-term maturities.
C)Money market transactions are seldom below $1 million.
D)Money markets securities are issued to finance long-term projects.

Question 37

Which market would a company participate in if it needs to adjust its liquidity position?

A)The money market.
B)The bond market.
C)The share market.
D)All of the above.

Question 38

A futures market is:

A)a dealer market in which securities that are not sold on one of the organised exchanges are traded.
B)an over-the-counter market in which people trade contracts for future delivery of securities,commodities or the value of securities sold in the spot market.
C)an organised market in which people trade contracts for future delivery of securities,commodities or the value of securities sold in the spot market.
D)a dealer market for contracts to buy (or sell)a particular type of security or commodity from (or to)the futures exchange during a predetermined future time period.

Question 39

If a company needs to finance a new corporate headquarters building,then it would most likely seek the funds in the:

A)money market.
B)capital market.
C)futures market.
D)foreign exchange market.

Question 40

Highly liquid financial instruments with a maturities of 90 days would be traded in:

A)the bond market.
B)the share market.
C)the money market.
D)all of the above.

Question 41

____________ risk is the risk that a government decides to change the terms of a financial contract by which it borrowed funds.

A)credit.
B)political.
C)liquidity.
D)operational.

Question 42

Which of the following statements is NOT correct? Australian commercial banks:

A)are highly regulated.
B)take deposits and make loans.
C)have various sources of funds.
D)have fewer assets than superannuation funds.

Question 43

Which of the following activities is NOT performed by money-market corporations?

A)Underwriting securities.
B)Offering insurance services.
C)Marketing new issues of securities.
D)Advising on mergers and acquisitions.

Question 44

Which of the following conduct daily transactions between the Australian domestic markets and the international markets?

A)Large financial institutions.
B)Institutional investors.
C)Business firms.
D)All of the above.

Question 45

Which of the following is NOT a comparative advantage of financial intermediaries over surplus spending funds in providing funds to deficit spending units?

A)Ability to increase credit risk.
B)Ability to reduce transaction costs.
C)Ability to achieve economies of scale.
D)Ability to find confidential information.

Question 46

Superannuation funds tend to invest in:

A)government securities exclusively.
B)predominantly long-term securities.
C)money market securities exclusively.
D)predominantly lower-yielding securities.

Question 47

If a small business opts not to borrow from a commercial bank,then what is probably its next best alternative?

A)A finance company.
B)An investment fund.
C)An insurance company.
D)A superannuation fund.

Question 48

A superannuation fund would not include ______________ as a major proportion of their investment portfolio.

A)commercial papers.
B)long-term corporate bonds.
C)shares.
D)none of the above.

Question 49

_____________ risk is the risk that a company will not generate sufficient cash inflows to meet required cash outflows.

A)liquidity.
B)credit.
D)operational.
D)political.

Question 50

Which international institution sets capital adequacy guidelines for banks that have been adopted by Australian regulatory authorities?

A)The World Bank.
B)The International Monetary Fund (IMF).
C)The Bank for International Settlements (BIS).
D)The United Nations Organisation for Economic Cooperation and Development (OECD).

Question 51

In an efficient capital market:

A)prices of securities adjust as new information becomes available to the market.
B)security prices fully reflect the knowledge and expectations of all investors at a particular point in time.
C)investors and financial managers have no reason to believe the securities are not priced at or near their true value.
D)All of the above are true.

Question 52

Which one of the following statements is NOT true?

A)Operational efficiency focuses on bringing buyers and sellers together at the lowest possible cost.
B)If market prices reflect all relevant information about securities at a particular point in time,the market is operationally efficient.
C)The overall efficiency of a capital market depends on its operational efficiency and its informational efficiency.
D)All of the above are true.

Question 53

Which international institution aims to reduce poverty and improve living conditions and quality of life in the Asia-Pacific region?

A)The World Bank.
B)The Asian Development Bank (ADB).
C)The International Monetary Fund (IMF).
D)The Bank for International Settlements (BIS).

Question 54

Which international institution facilitates the expansion and balanced growth of international trade?

A)The World Bank.
B)The Asian Development Bank (ADB).
C)The International Monetary Fund (IMF).
D)The Bank for International Settlements (BIS).

Question 55

Which of the following financial institutions accepts deposits as liabilities?

A)Credit unions.
B)Managed funds.
C)Finance companies.
D)Superannuation funds.

Question 56

Which of the following is an important international financial market for Australian firms?

A)The eurocurrency market.
B)The short-term US market.
C)The long-term Eurobond market.
D)All of the above.

Question 57

With strong-form market efficiency:

A)it would not be possible to earn abnormally high returns by trading on private information.
B)investors who have access to inside or private information will be able to earn abnormal returns.
C)the price of a security in the market reflects all public information only.
D)None of the above.

Question 58

With semi-strong form market efficiency:

A)the price of a security in the market reflects all public information only.
B)it would be possible to earn abnormally high returns by trading on public information.
C)investors who have access to inside or private information will be unable to earn abnormal returns.
D)None of the above.

Question 59

A ______________ to a business is like a credit card to an individual.

A)a bond.
B)a term loan.
C)line of credit.
D)none of the above.

Question 60

The process of converting financial securities with one set of characteristics into securities with another set of characteristics is called:

A)financial disintermediation.
B)financial intermediation.
C)financial bundling.
D)none of the above.

Question 61

If a senior manager can consistently earn excess profits by trading her company's stock,which form of efficiency is contradicted?

A)Weak form.
B)Semi-strong form.
C)Strong form.
D)No form of efficiency is contradicted.

Question 62

How are abnormal returns defined?

A)Positive return.
B)Returns in excess of the risk-free rate.
C)Returns in excess of the market return.
D)Returns in excess of the risk-adjusted expected return.

Question 63

Which one of the following statements is NOT true?

A)Strong-form market efficiency implies that investors who have access to private information will be able to earn abnormal returns.
B)Semi-strong form market efficiency implies that investors who have access to private information will be able to earn abnormal returns.
C)Weak-form market efficiency implies that investors who have access private information will be able to earn abnormal returns.
D)None of the above.

Question 64

If markets were semi-strong form efficient,which of the following situations would yield abnormal returns?

A)Obtaining insider information.
B)Analysing a company's earnings report.
C)Identifying a pattern in a company's stock price.
D)None of the above would yield abnormal returns.

Question 65

If an investor consistently makes excess profits by following the advice provided on the Financial Guru public website,which form of efficiency is contradicted?

A)Strong form.
B)Semi-strong form.
C)Weak form.
D)No form of efficiency is contradicted.

Question 66

A stock's price rises 8 percent two days before the announcement of a large long-term project takes place.Which form of efficiency is contradicted?

A)Strong form.
B)Weak form.
C)Semi-strong form.
D)No form of efficiency is contradicted.

Question 67

You purchased shares of a company in the automotive industry a year ago.Over the course of the past year,the economy began to slow down and the company faced declining sales.As a result,the stock price declined over your holding period.Which of the following is true?

A)This is a violation of weak form market efficiency.
B)This is a violation of strong form market efficiency.
C)This is not a violation of the efficient market hypothesis.
D)This is a violation of semi-strong form market efficiency.

Question 68

If markets were strong form efficient,which of the following situations would yield abnormal returns?

A)Obtaining insider information.
B)Analysing a company's earnings report.
C)Identifying a pattern in a company's stock price.
D)None of the above would yield abnormal returns.

Question 69

If security markets are efficient,then:

A)the net present value of all securities should be zero.
B)the net present value of all securities should be negative.
C)the net present value of all securities should be positive.
D)there are no implications on the net present value of securities.

Question 70

Technical analysis,which is defined as the analysis of historical trends of prices,is an important field in finance.Which form of efficiency is this field based on?

A)Strong form inefficiency.
B)Weak form inefficiency.
C)Semi-strong form inefficiency.
D)It has nothing to do with efficiency.

Question 71

The announcement of the sudden accidental death of the CEO and principal scientist of a public company is associated with a 10% decrease in the company's share price.Which form of market efficiency is contradicted?

A)Weak form.
B)Semi-strong form.
C)Strong form.
D)No form of efficiency is contradicted.

Question 72

What does operational efficiency refer to?

A)Prices that quickly reflect important information.
B)Sufficient securities to efficiently allocate risk.
C)Low transaction costs.
D)Both B and C are correct.

Question 73

If markets were weak form efficient,which of the following situations would NOT yield abnormal returns?

A)Obtaining insider information.
B)Analysing a company's earnings report.
C)Identifying a pattern in a company's stock price.
D)None of the above would yield abnormal returns.

Question 74

Which of the following are forms of market efficiency?

A)Weak form.
B)Strong form.
C)Semi-strong form.
D)All of the above.