Deck 2: The Financial System and the Level of Interest Rates

Question 1

The downside to a private placement transaction is that it does not require the fees and expenses associated with an ASIC registration.

Answer 1

False

Question 2

The nominal rate of interest is the interest rate in the economy in the absence of inflation.

Answer 2

False

Question 3

The existence of an active secondary market for a security will help enhance the price for a security in the primary market.

Answer 3

True

Question 4

All securities listed on the ASX have been electronically traded since 2000 when floor trading was phased out.

Question 5

Equities are generally traded in the capital market.

Question 6

The Australian Securities and Investment Commission regulates public securities markets in Australia.

Question 7

The role of the financial system is to gather money from people and businesses that have funds to invest and to channel money to those that need it.

Question 8

The vast preponderance of securities sales on the Australian Securities Exchange are classified as secondary market transactions.

Question 9

The term money market reflects the idea that the instruments traded in the money market are highly marketable and easily converted into cash.

Question 10

Direct financial markets could be broadly labelled as wholesale markets for funding.

Question 11

A privately held company securing a loan from its regional commercial bank is an example of a direct market transaction.

Question 12

Without a financial market, purchasing a house would require a cash purchase.

Question 13

The method that most individuals use to fund their needs is through indirect financing.

Question 14

Brokers are market specialists who do not bear risk.

Question 15

Futures and options derive their value from some underlying asset.

Question 16

Businesses are the principal DSUs in the economy.

Question 17

A primary market is any financial market in which owners of outstanding securities can resell them to other investors.

Question 18

Governments are the principal SSUs in the economy.

Question 19

The financial system is nothing more than a collection of financial markets.

Question 20

The S&P/ASX 200 index is considered the pre-eminent benchmark in Australia.

Question 21

The major players in the direct financial markets are:

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

Question 22

The nominal rate of interest is indirectly related to real rates.

Question 23

The financial market where a new security is sold for the first time is:

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

Question 24

Real rates of interest are perfectly observable.

Question 25

________ is/are the principal SSUs in the economy.

A) Households
B) The federal government
C) State governments
D) Businesses

Question 26

Which types of individuals are able to participate in the direct financial market?

A) entrepreneurs
B) wealthy individuals
C) venture capitalists
D) all of the above.

Question 27

The elimination of small financial institutions is primarily a by-product of deregulating the financial markets.

Question 28

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

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

Question 29

Secondary financial markets are similar to:

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

Question 30

A surplus budget position means that an entity's:

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

Question 31

Direct financing occurs when:

A) an SSU borrows directly from a DSU.
B) a DSU borrows directly from a SSU.
C) an SSU borrows from the federal government.
D) a DSU borrows from the federal government.

Question 32

Wesfarmers needs to raise $720 million for an expansion and approaches an investment banker. If the issue is 480,000 bonds and it raises $840 million on a stand-by basis, what is the underwriter's per share compensation?

A) $120
B) $140
C) $240
D) $250

Question 33

Business finance companies obtain the majority of their funds by selling equity.

Question 34

What is the generally recognised minimum denominated transaction in the direct financial markets?

A) $10,000
B) $100,000
C) $1,000,000
D) $10,000,000

Question 35

It is impossible for the nominal rate of interest to be below the real rate of interest.

Question 36

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 37

Financial markets and financial institutions are both part of:

A) the Australian Reserve Bank.
B) the financial system.
C) the Australian Securities and Investments Commission.
D) none of the above.

Question 38

Savings by ________ is the origin of much of the money that funds large business loans in the economy.

A) consumers
B) the Australian government
C) small businesses
D) none of the above

Question 39

An economy with a large flow of funds requires:

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

Question 40

Elf Toy Products increased the amount of cash in its bank account this year. Elf is a:

A) DSU.
B) SSU.
C) neither a DSU nor a SSU.
D) both a DSU and a SSU.

Question 41

A highly liquid financial instrument with a maturity of 90 days would be traded in:

A) the money market.
B) the bond market.
C) the share market.
D) none of the above.

Question 42

Which law is administered by the Australian Securities and Investment Commission?

A) the Securities Act of 1933
B) Corporations Act of 2001
C) Stocks and Markets Act 1984
D) the Financial Services Modernisation Act of 1999

Question 43

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) all of the above.

Question 44

Money market instruments are generally issued by:

A) companies in dire need of cash to maintain their credit rating.
B) companies of the highest credit rating.
C) companies of the lower credit ratings.
D) all of the above.

Question 45

Which of the following grants the owner the right to purchase an asset at a pre-specified price for a pre-specified period of time?

A) a call option
B) a put option
C) a futures contract
D) all of the above

Question 46

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

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

Question 47

Which of the following is NOT a component of the financial system?

A) money market.
B) leasing market.
C) bond market.
D) share market.

Question 48

The ease with which a security can be sold and converted into cash is called:

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

Question 49

If you just purchased a share of BHP through an Australia Securities Exchange-based transaction, you participated in:

A) a primary market transaction.
B) a secondary market transaction.
C) a futures market transaction.
D) a tertiary market transaction.

Question 50

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.

Question 51

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

A) a regional commercial banker
B) a broker
C) a dealer
D) none of the above would ever be involved in underwriting.

Question 52

The key difference between liquidity and marketability is that:

A) the securities are easier to trade
B) the securities can be converted into cash.
C) the securities preserve their value.
D) the securities have lower funding costs.

Question 53

If a company needs to adjust its liquidity position, then it would participate in:

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

Question 54

If you have an asset that you will be selling during the next two weeks, then you might be able to hedge the proceeds from the asset sale by:

A) purchasing a call option on the asset.
B) purchasing a put option on the asset.
C) purchasing more of the asset.
D) none of the above.

Question 55

If your company primarily borrows from commercial banks, then it primarily accesses the capital markets through:

A) direct financing.
B) indirect financing.
C) a legal loophole that allows all commercial banks the ability to underwrite securities.
D) none of the above.

Question 56

The S&P/200 Index represents what percentage of the market capitalisation of the Australian market?

A) 50%
B) 65%
C) 75%
D) 95%

Question 57

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

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

Question 58

The presence of a financial market increases the marketability of a financial security by:

A) essentially insuring the price of the security.
B) reducing the transaction costs for selling the security.
C) guaranteeing the accuracy of information produced by the issuer of the security.
D) none of the above.

Question 59

Which of the following share exchange organisational forms has no physical location?

A) a futures exchange
B) an over-the-counter market
C) an auction market.
D) none of the above.

Question 60

One of the main services offered by investment banks to companies is:

A) helping companies sell new debt or equity issues in the security markets.
B) making loans to companies.
C) taking deposits from companies.
D) all of the above.

Question 61

A line of credit to a business is like _______ to an individual.

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

Question 62

Which of the following would not make up a major proportion of a superannuation fund investment portfolio?

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

Question 63

Which of the following are the primary investment vehicles for the funds in which life insurance companies must invest?

A) cash
B) money market securities
C) capital market securities
D) foreign investments

Question 64

The general level of interest rates tends to follow:

A) deflation.
B) the business cycle.
C) the default cycle.
D) all of the above.

Question 65

A hedge fund is an example of:

A) a commercial bank.
B) a superannuation fund.
C) an investment fund.
D) a pension fund.

Question 66

General insurance companies sell:

A) protection against loss of income in the event of the death of the insured.
B) protection against loss of property from fire, theft, accidents, and other predictable causes.
C) protection against a loss of pension revenue for retirees.
D) all of the above.

Question 67

The price of borrowing money is called:

A) inflation.
B) return.
C) interest.
D) all of the above.

Question 68

If inflation is anticipated to be 5 per cent during the next year, while the real rate of interest for a one-year loan is 5 per cent, then what should the nominal rate of interest be for a risk-free one-year loan?

A) 5 per cent
B) 10 per cent
C) 25 per cent
D) none of the above

Question 69

The real rate of return can be justified, at a basic level, by:

A) compensation for inflation.
B) compensation for deferring consumption.
C) compensation for the level of international borrowing.
D) all of the above.

Question 70

In Australia, the real rate of interest is generally about:

A) 1 per cent.
B) 3 per cent.
C) 5 per cent.
D) 7 per cent.

Question 71

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

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

Question 72

If the supply of loanable funds decreases relative to the demand for those funds, then we would expect:

A) interest rates to remain unchanged.
B) interest rates to increase.
C) interest rates to decrease.
D) the price of money to remain unchanged.

Question 73

Which of the following is NOT true regarding finance companies?

A) they obtain the majority of their funds by selling short-term debt.
B) their funds are used to make a variety of long term loans and leases.
C) typically willing to make loans to companies with higher levels of default risk.
D) none of the above.

Question 74

If you are a borrower, which would you prefer to occur during the life of your loan?

A) a level of inflation that is higher than that anticipated at the outset of the loan
B) a level of inflation that is lower than that anticipated at the outset of the loan
C) a level of inflation that is exactly as anticipated at the outset of the loan
D) no inflation at all

Question 75

The nominal rate of interest is:

A) the inflation-adjusted return rate.
B) the inflation adjusted cost rate.
C) a commodity cross-indexed return rate.
D) the unadjusted return rate.

Question 76

During an economic expansion, we would expect:

A) interest rates to increase.
B) interest rates to decrease.
C) interest rates to remain the same.
D) the price of money to decrease.