Viney Testbank With Answers

Chapter 01 A modern financial system: An overview 1: The exchange of goods and services is made more efficient by: A: barter
B*: money C: governments D: some combination of government transfer and barter 2: A nation state that has only a barter system has high transaction costs because: A: the difficulties of trade result in high legal costs because of the contracts required B*: traders must spend quite a bit of time looking for trading partners C: taxes under this system consume a large amount of output D: the difficulties of trade require high insurance premiums 3: The term medium of exchange for money refers to its use as: A: coinage B: currency C*: anything that is widely accepted as payment for goods and services D: any standard of value that prices can be expressed in 4: 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 5: Money increases economic growth by assisting transfers from: A: consumers to investors B*: savers to borrowers C: businesses to consumers D: borrowers to investors 6: 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
7: Buyers of financial claims lend their excess funds as 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 8: 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 9: A savings-surplus unit is one: A: that needs to borrow funds from a surplus unit B*: whose income exceeds its spending C: whose spending exceeds its income D: that generally is a company 10: 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 11: 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
12: All of the following are associated with characteristics of shares EXCEPT: A: part ownership of a company B: capital gains C*: a fixed interest payment D: dividends 13: A financial institution that obtains most of its funds from deposits is: A: an investment bank B: a unit trust C*: a commercial bank D: a general insurer Level: 2 Question 14: Institutions that specialise in off-balance sheet advisory services are called: A: depository financial institutions B: contractual institutions C: finance companies D*: investment banks Level: 2 Question 15: A _______ is a financial intermediary that receives premium payments that are used to purchase assets to cover future possible payments. A: building society B: credit union C: savings bank D*: life insurance office Level: 2 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 Level: 3 Question 17: 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 Level: 2 Question 18: All of the following are terms associated with shares EXCEPT: A: residual B: ownership C: voting rights D*: contractual claim Level: 2 Question 19: All of the following are characteristics commonly associated with preference shares EXCEPT: A: a specified, fixed return B: no voting rights C*: higher ranking than bondholders on claims on assets D: no entitlement to take possession of assets if the borrower defaults on payment Level: 2 Question 20: Long-term debt financing instruments used by companies are called: A: bills B*: debentures C: shares D: equities Level: 2 Question 21: All of the following are associated with features of debt instruments EXCEPT:
A: contractual claim against the borrower B: periodic interest payments C: higher claim on assets of borrower than equity holders D*: do not fluctuate in price like shares Level: 3 Question 22: The following are features of futures contracts EXCEPT: A: they involve an obligation to buy or sell a specified amount B*: the contract price is settled at the end of the contract C: trading of contracts occurs on an exchange D: trading an opposite contract usually closes out the contract Level: 3 Question 23: All of the following are features of forward contracts EXCEPT: A: they are not standardised B: they do not trade on organised exchanges C: the contract price may be settled at the end of the contract D*: they are closed out by trading an opposite contract Level: 3 Question 24: All of the following are features of option contracts EXCEPT when: A: the buyer does not have the 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 Level: 3 Question 25: All of the following are features of swaps EXCEPT when: 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 involves currencies as well Level: 3
Question 26: The key reason for the existence of markets of financial assets is: A*: that holders of shares occasionally 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 Level: 2 Question 27: Financial markets: A: facilitate the exchanges 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 above. Level: 2 Question 28: The most important function of a financial market is: A: to provide information about shares B: to provide a market for shares C*: to facilitate the flow of funds between lenders and borrowers D: to provide employment for brokers and agents Level: 2 Question 29: 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 Level: 4 Question 30: A primary financial market is: A: one that offers financial assets with the highest expected return B: one that offers the greatest number of financial assets C*: one that involves the sale of financial assets for the first time D: one that offers financial assets with the highest historical return
Level: 2 Question 31: Purchasing unsecured notes on the Australian Stock Exchange is an example of: A: a primary market transaction B*: a secondary market transaction C: companies raising new finance D: companies raising finance from another financial intermediary Level: 3 Question 32: When a security is sold in the financial markets for the first time, then: A: funds flow from the borrower to the saver B*: funds flow to the issuer from the saver C: it represents a secondary transaction to the underwriter D: it is an asset for the borrower Level: 3 Question 33: All of the following are examples of primary market transactions EXCEPT: 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 Level: 3 Question 34: A primary market is a market: A: for equity 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 Level: 3 Question 35: Buying bonds in the long-term debt market is an example of: A: a primary market transaction
B*: a secondary market transaction C: companies raising new funds D: companies raising funds from a secondary source Level: 2 Question 36: The market where existing securities are sold is: A: the primary market B*: the secondary market C: the economic market D: the financial market Level: 2 Question 37: When a large company issues a financial instrument in the financial markets: A: it buys a financial claim B*: it sells a financial claim C: funds flow indirectly from saver to borrower D: the cost of funds is generally higher due to the risk involved Level: 2 Question 38: 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: allow portfolio restructuring E*: All of the above. Level: 4 Question 39: The flow of funds through financial markets increases the volume of savings and investment by: A: maintaining low interest rates B*: providing savers with a variety of ways to lend to borrowers C: storing large quantities of cash D: offering lower interest rates than could be obtained directly from borrowers Level: 4
Question 40: All of the following are features of financial markets EXCEPT: A: they 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*: they generally deal only with the purchase and sale of government securities Level: 2 Question 41: A well-functioning financial market includes all of the following EXCEPT: A: a persistent increasing liquidity for most assets B: an increased ease of restructuring portfolios of assets C: quick assimilation of information into asset prices D*: a selection of financial assets with similar timings of cash flow to reduce risk Level: 4 Question 42: Financial markets: A: involve the buying and selling of existing financial securities only B*: involve both primary and secondary transactions C: act as intermediaries between borrowers and savers D: directly issue claims on savers to borrowers Level: 2 Question 43: Direct financing allows a borrower to: A: easily assess the level of default risk of a lender B: match amounts and maturity of investments with borrowers C: lower search and transaction costs D*: diversify their funding sources Level: 2 Question 44: All of the following may be disadvantages of direct financing EXCEPT: 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 Level: 2 Question 45: An issue of debentures is an example of: A: a secondary market transaction B: raising funding through financial intermediaries C*: a direct form of funding D: an indirect form of funding Level: 3 Question 46: An example of an indirect form of funding is: A: an issue of debentures B: an issue of unsecured notes C*: a term loan D: an issue of shares Level: 2 Question 47: 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 Level: 4 Question 48: The flow of funds between lenders and borrowers is: A: channelled indirectly through financial markets B: channelled directly through financial intermediaries C*: channelled indirectly through financial intermediaries D: channelled mainly through government agencies Level: 2 Question 49: 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 Level: 3 Question 50: The main role of financial intermediaries is to: A: provide advice to consumers on their finances B*: borrow funds from surplus units and lend them to borrowers C: provide funds for the government to cover budget deficits D: help ensure enough funds in circulation in a country Level: 2 Question 51: 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 Level: 3 Question 52: Small savers prefer to use financial intermediaries rather than lending directly to borrowers because: A: financial intermediaries offer much higher interest rates than can be obtained directly from borrowers B*: financial intermediaries offer a wide portfolio of financial instruments to the savers C: borrowers dislike dealing with savers D: savers have a claim with the borrower by way of the financial intermediary Level: 2 Question 53: Financial intermediaries can engage in credit risk transformation as: A: they obtain cost advantages due to their size and business volumes transacted B: they can quickly convert financial assets into cash, close to the current market price C*: they develop expertise in lending and diversify loans
D: they can pool the savers short-term deposits and make long-term loans Level: 4 Question 54: 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 Level: 2 Question 55: Liquidity 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 Level: 2 Question 56: When an individual has immediately access to their funds from an account with a financial intermediary, the intermediary is engaging in: A: liability management B*: liquidity management C: credit transformation D: asset transformation Level: 2 Question 57: 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 Level: 2 Question 58: According to the textbook, all of the following are financial
intermediaries EXCEPT: A: a bank B: an insurance company C: a superannuation fund D*: a share broking firm Level: 2 Question 59: An example of a financial intermediary is: A: a stockbroker B: the Australian Stock Exchange C: the Australian Securities Commission D*: an insurance company Level: 2 Question 60: 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 Level: 2 Question 61: Which of the following borrowers would pay the lowest interest rate on debt of equal maturity? A: the National Bank of Australia B: Telstra C: the City of Sydney D*: the Commonwealth Government Level: 2 Question 62: Generally, over the long term, a government: A*: is a net borrower of funds B: is a net supplier of funds C: borrows funds directly from the households
D: borrows funds directly from the financial market Level: 2 Question 63: 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 Level: 2 Question 64: Which of the following are not usually short-term discount securities? A: negotiable certificates of deposit B: commercial paper C: bank bills D*: unsecured notes Level: 3 Question 65: All of the following are features of the money market EXCEPT: 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 issues are created and marketed Level: 2 Question 66: 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 Level: 2 Question 67: A company with a temporary surplus of funds is most likely to buy:
A*: bank bills B: convertible notes C: debentures D: shares Level: 2 Question 68: A company that issues promissory notes into the short-term money market is said to be conducting a transaction in the: A*: commercial paper market B: inter-bank market C: bills market D: official short-term money market Level: 3 Question 69: The market that generally involves the buying and selling of discount securities is: A: securities market B*: money market C: share market D: capital market Level: 2 Question 70: A source of short-term liquidity funding for banks is the issue of: A: bank bills B*: certificates of deposit C: commercial paper D: debentures Level: 3 Question 71: 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
Level: 2 Question 72: For additional funding, a company decides to issue $15 million in debentures. The securities will be issued into the: A: retail markets B: secondary markets C: short-term money markets D*: capital markets Level: 3 Question 73: The major financial assets traded in the capital market are: A: bank bills and commercial paper B: Treasury notes and certificates of deposits C: bonds and convertible securities D*: shares and bonds 74: Compared with Treasury bonds, Treasury notes generally: A: have a longer maturity B: pay interest annually C*: are discount securities D: are issued in the capital markets 75: If you purchase a government bond, that bond is: A*: an asset to you but a liability for the Australian government B: an asset to you as well as an asset for the Australian government C: a liability to you but an asset for the Australian government D: a liability to you as well as a liability for the Australian government
76: When government borrowing reduces the amount of funds available for lending to businesses, this is called: A: credit rationing B*: crowding out C: capital rationing D: government quotas
77: All of the following are key financial services provided by the financial system EXCEPT: A: liquidity B: risk transfer C*: profitability D: information
78: Which of the following would be most likely to use financial markets? A: a household with a small amount saved B: a small business wanting to borrow to buy some machinery C*: a government authority wanting to borrow to finance highway construction D: a company with a poor credit rating
79: Generally, financial instruments are divided into three broad categories of equity, debt and derivatives. Which of the following are usually issued by a company to raise new funds? I. Unsecured notes II. Ordinary shares III. Debentures IV. Bills of exchange V. Futures contracts VI. Preference shares A: II, III, IV, V B: II, IV, V, VI C*: I, II, III, IV D: I, II, IV, V
80: The flow of funds between the four sectors of a domestic economy and the rest of the world is called: A: sector analysis B*: flow of funds C: sectorial flows D: cross-sector flows
Topic 2 Commercial banks 1. Deregulation of the banking sector throughout the late 1970s and the 1980s sought to: A. reduce the reliance of major Australian companies on international capital markets B. reduce the excess profits of banks C. reduce the discrimination against banks owing to direct controls on them only D. provide reduced control on the money supply
Difficulty: Medium Viney - Chapter 02 #1 learning goal: EMPTY learning objective: EMPTY level: EMPTY lo: EMPTY question type: EMPTY source: EMPTY type: EMPTY
2. The changes to the barriers to entry to the banking industry under deregulation in the early 1980s _______ the number of foreign banks. A. decreased B. increased C. did not alter D. dramatically decreased
Difficulty: Easy Viney - Chapter 02 #2 learning goal: EMPTY learning objective: EMPTY level: EMPTY lo: EMPTY question type: EMPTY source: EMPTY type: EMPTY
3. Which of the following statements concerning banks is INCORRECT? A. Currently in Australia, banks account for the largest share of assets of all financial institutions. B. Bank loans and commitments must be supported by a minimum specified amount of capital. C. At least 50% of the capital requirement must be in the form of Tier 1 capital. D. The Australian Reserve Bank monitors capital adequacy requirements for banks.
4. Unlike most other businesses, a bank's balance sheet is made up mainly of: A. real assets and financial liabilities B. real liabilities and financial liabilities C. real assets and real liabilities D. financial assets and liabilities
5. The level of banks' share of assets of all Australian financial institutions from the 1950s onwards first _______, then in the 1980s _______, and recently has _______ owing to banks forming consolidated corporate entities. A. increased; decreased; increased B. increased; decreased; remained stable C. decreased; increased; decreased D. decreased; increased; remained stable
Difficulty: Hard Viney - Chapter 02 #5 learning goal: EMPTY learning objective: EMPTY level: EMPTY lo: EMPTY question type: EMPTY source: EMPTY type: EMPTY
6. The market structure of the banking sector has changed since deregulation of the financial system during the 1980s. Which statement most closely reflects the current structure of the banking sector in Australia? A. Foreign banks dominate in number and share of total assets. B. Major Australian banks no longer hold the largest share of total assets. C. Total assets are fairly evenly distributed between the major, regional and foreign banks. D. Major banks maintain the highest percentage of branches and share of total assets.
7. Which of the following is a role of a bank? A. Attracting funds from the capital markets to facilitate borrowing by the household sector B. Facilitating the flow of funds from borrowers to lenders C. Facilitating the flow of funds from savers to borrowers D. Managing the level of interest rates
8. Banks have gradually moved to liability management in the management of their balance sheets. Which statement best describes liability management? A. The loan portfolio is tailored to match the available deposit base. B. The deposit base and other funding sources are managed in order to fund loan and other commitments. C. The ratio of debt to equity is managed to meet capital adequacy requirements. D. The liability to assets ratio is maintained within Reserve Bank standards.
9. Asset management for banks refers to: A. managing the assets of the banks; that is, their deposits B. managing the real assets, the bank buildings C. managing the loans portfolio D. protecting the deposits by using derivatives
10. For banks, liability management refers to: A. managing the liabilities of the banks; that is, the loans B. banks ensuring they have sufficient funds by managing their deposit base C. managing the real assets, the bank buildings D. protecting the loans and other commitments by using derivatives
11. When a bank raises funds in the international markets to fund new lending growth, it is involved in: A. asset management B. off-balance-sheet business C. liability management D. derivative management
12. The assets on the balance sheet of a bank are: A. the sources of funds B. the uses of funds C. the different types of deposits the bank offers D. equal to the liabilities of the banks
13. The liabilities on the balance sheet of a bank are: A. the sources of funds B. the uses of funds C. the different types of deposits the bank offers D. equal to the assets of the banks
14. All of the following balance sheet portfolio items are liabilities of a bank EXCEPT: A. term deposits B. bill acceptance facilities C. certificates of deposit D. overdrafts
15. All of the following balance sheet portfolio items are sources of funds for a bank EXCEPT: A. term deposits B. bill acceptance facilities C. certificates of deposit D. overdrafts
16. Which of the following is a bank liability? A. Consumer loans B. Lease finance C. Bills receivable D. Certificates of deposit
17. Which of the following statements about deposits is correct? A. Call accounts represent a fluctuating source of funds for banks. B. Term deposits are funds lodged with a bank for longer than two weeks. C. As current accounts are highly liquid, they form an unstable source of funds for a bank. D. A cheque account may pay interest.
18. Which of the following statements about banks' current accounts is INCORRECT? A. Current accounts today generally pay interest. B. They are a relatively stable source of bank funds. C. Deregulation had a major impact on current accounts. D. They form an increasingly important type of asset for banks.
19. Which of the following statements is NOT true of term deposits? A. They are less liquid than a current deposit. B. They usually offer a higher return than a current deposit. C. They are attractive to investors who expect interest rates to fall. D. They are generally negotiable instruments.
20. 20: As a depositor shifts funds from current deposits to term deposits in a bank, generally the depositor's: A. liquidity increases and credit risk increases B. liquidity decreases and interest income increases C. liquidity decreases and interest income decreases D. implicit interest increases and explicit interest decreases
21. If a bank required more short-term funding, it would issue: A. a certificate of deposit B. a debenture C. an unsecured note D. preference shares
22. Which of the following is generally a highly liquid instrument? A. A bank bill B. A certificate of deposit C. Neither a bank bill nor a certificate of deposit D. Both bank bills and certificates of deposit are liquid instruments
23. The term 'negotiable' for a security means: A. its price can be bargained for when sold B. it can be sold easily C. its buyer can negotiate its price when buying D. it is reasonably illiquid and will drop in price when sold
24. Which of the following regarding certificates of deposit (CDs) is correct? A. CDs pay daily interest instead of monthly as for ordinary deposits. B. CDs generally pay higher interest, as they are not liquid. C. The rate of interest on a CD can be adjusted quickly. D. CDs with a face value of more than $100 000 are non-negotiable.
25. The advantage of a CD to a bank is: A. its rate of interest may be adjusted quickly B. it can be sold quickly in the money market for cash C. it is a negotiable instrument D. All of the given answers.
26. A major difference between a bank's term deposit and a certificate of deposit is a: A. term deposit represents an asset for a bank, while a certificate of deposit is a liability B. certificate of deposit does not pay interest until maturity C. certificate of deposit is illiquid when compared with a term deposit D. certificate of deposit is a high-credit-risk instrument when compared with a term deposit
27. With regard to bank bills, the bill is sold at a discount: A. because the bank needs to find a buyer B. to encourage buyers C. because the difference between the initial price and the final sale price is the return to the holder D. because the bank pays the face value of the funds to the borrower at maturity
28. 28: With regard to bank bills, the expression 'the issuer sells the bill at the best discount' means the issuer: A. is providing the funding B. is acting as mediator between the borrower and the bank C. is selling the bill into the market at the lowest yield D. pays the lowest face value of the funds to the holder at maturity
29. With regard to bank bills, the actual role of the acceptor is to: A. provide the initial funding B. act as mediator between the borrower and bank C. issue the bank bill D. pay the face value of the funds to the holder at maturity
30. Which of the following in relation to bill financing is INCORRECT? A. The drawer is the party seeking the funds. B. If a bank accepts the bill this enhances its credit quality. C. An issuer will seek to sell the bill in the market at the highest yield. D. Bills are sold at a discount to face value.
31. For a bank, the advantage of bill financing is: A. it earns income from accepting bills B. it doesn't necessarily have to use its own funds C. interest rates on bill funding can be adjusted rapidly D. All of the given answers.
32. Commercial banks take part in the money markets as: A. lenders of funds only B. borrowers of funds only C. both lenders and borrowers of funds D. underwriters only
33. Foreign currency liabilities have increased in importance as a source of funds for Australian banks. Major reasons for this include: I. Deregulation of the foreign exchange market II. Diversification of funding sources III. Demand from multinational corporate clients IV. Internationalisation of global financial markets V. Avoidance of the non-callable deposit prudential requirement VI. Expansion of banks' asset-base denominated in foreign currencies A. I, II, III, IV, VI B. II, III, IV, V, VI C. I, III, IV, V, VI D. All of the given answers.
34. Alternatives to the usual source of long-term bank funds that have the characteristics of both debt and equity are called: A. secured debentures B. transferable certificates of deposit C. promissory notes D. subordinated notes
35. All of the following balance sheet portfolio items are assets of a bank EXCEPT: A. overdrafts B. lease finance C. certificates of deposit D. credit card draw-downs
36. Short-term discount securities issued by a drawer at a discount, with the promise to repay the face value at maturity, are called: A. commercial paper B. commercial bills C. certificates of deposit D. All of the given answers.
37. All of the following financial securities are 'uses of funds' by the banks EXCEPT: A. commercial bills B. credit cards C. certificates of deposit D. overdrafts
38. If you take out a mortgage from a bank, the mortgage is a/an: A. liability to the bank and an asset to you B. liability to you and an asset to the bank C. liability to both you and the bank D. asset to both you and the bank
39. BBSW refers to: A. the reference rate for medium-term funding B. a rate calculated each day from the offer rate of the last daily sale in the bank bill market C. the average mid-point of the bid and offer rates in the bank bill market D. the bank bill security rate
40. Banks invest in government securities because: A. they offer high yield owing to their risk B. they offer a low yield owing to their illiquidity C. all government bonds offer protection against inflation risk D. they can be used as security against banks' borrowing
41. Off-balance-sheet business for a bank refers to: A. deposits and loans longer than one year B. transactions that are currently only a contingent liability C. call deposits that may be withdrawn on demand D. consumer loans that are in default
42. All of the following are off-balance-sheet transactions of a bank EXCEPT: A. documentary letters of credit B. performance guarantees C. underwriting facilities D. bills receivable
43. By the end of 2000, there had been a substantial expansion in fee-related income for banks. What is the principal reason for this expansion? A. Increased confidence in banks by individual investors B. Increased off-sheet business (OBS) for banks C. Reduced guidelines by APRA D. Increased deposits in banks
44. Which of the following is true for off-balance-sheet business for banks? A. It is a small part of a bank's income. B. It is recorded on a bank's statement of income and expense. C. It represents fee-based income. D. It records deposits that do not fit on the balance sheet.
45. Which of the following statements about market-related items for a bank is FALSE? A. They are generally called off-balance-sheet items. B. They are liabilities that may require an outflow of funds for a bank. C. They are included in the BIS capital-adequacy guidelines. D. They form a small part of banks' OBS business.
46. The off-balance-sheet business of banks is listed below. Which category represents the most significant proportion of total off-balance-sheet business of the banks? A. Direct credit substitutes B. Trade and performance-related items C. Commitments D. Market-rate-related transactions
47. Most of the market-rate-related off-balance-sheet business of banks is listed below. Which category represents the most significant proportion of total market-rate-related off-balance-sheet business of the banks? A. Currency swap agreements B. Foreign exchange contracts C. Interest rate swaps D. Interest rate futures
48. An example of an 'off-sheet business' transaction that banks are generally involved in is: A. providing a 'standby letter of credit' B. providing a note issuance facility C. providing a short-term, self-liquidating trade contingency D. All of the given answers.
49. Off-balance-sheet business is usually divided into four major categories: A. Direct credit substitutes; trade and performance-related items; commitments; and trade guarantees B. Direct credit substitutes; trade and performance-related items; commitments; and market-related transactions C. Direct credit substitutes; trade and performance-related items; commitments; and underwriting facilities D. Direct credit substitutes; 'standby letters of credit'; commitments; and market-related transactions
50. 50: A 'commitment' by a bank is: A. a form of swap B. a promise by a large depositor to provide extra funds to the bank C. the unused balance on a bank credit card D. an undertaking to advance funds or to acquire an asset in the future
51. 51: Consider the following five statements: Banks issue liquid financial liabilities that make up a large proportion of their activities Banks' share of assets of all financial institutions has increased after deregulation Banks' involvement in market-rate-related contracts forms a small part of their off-balance-sheet business If a bank discounts a bank bill drawn by a client into the marketplace, then it sells the loan to another party To improve the quality of their assets, the major banks may purchase more Commonwealth securities How many of these statements are true and how many are false? A. 2 statements are true and 3 are false B. 3 statements are true and 2 are false C. 4 statements are true and 1 is false D. 1 statement is true and 4 are false
52. Which of the following is NOT an argument for some form of government regulation of the banking system? A. The money-creation role of banks. B. A major source of funds to the banks comes from households who need their savings protected. C. The excess return on assets that banks have been making in recent years. D. Maintaining confidence in the financial system.
53. Which of the following is NOT associated with the purpose of regulating financial institutions? A. Providing stability of the money supply. B. Directing flow of funds to priority areas. C. Maintaining the soundness and stability of the financial system. D. Lowering the cost of funds.
54. APRA is responsible for the regulatory supervision of financial institutions, such as banks and credit unions. APRA stands for: A. Australian Practice and Regulatory Association B. Australian Prudential Regulation Authority C. Australian Prudential Rule Authority D. Australian Practice and Regulatory Authority
55. Which of the following institutions are supervised by APRA? A. Building societies B. Commercial banks C. Credit unions D. All of the given answers.
56. The requirement and observation of standards designed to ensure the stability and soundness of a financial system is called: A. fiscal policy B. monetary policy C. prudential supervision D. the Basel accord
57. 57: The Basel capital adequacy requirements apply to: A. all financial institutions B. banks, investment banks and merchant banks only C. all financial institutions supervised by ASIC D. all banks registered with APRA and some other financial institutions
58. Some of the elements in assessing capital adequacy requirements for banks under the Basel II capital accord are: A. credit risk, liquidity risk and interest rate risk B. credit risk, market risk and type of capital held C. default risk, interest rate risk and market risk D. default risk, liquidity risk and type of capital held
59. According to the textbook, the Basel II approach to capital adequacy involves ____ main elements. A. three B. four C. five D. six
60. Which of the following does NOT apply to Tier 1 capital? A. It is described as 'core capital'. B. It must constitute at least 50% of a bank's capital base. C. Paid-up ordinary shares can be included in it. D. Cumulative irredeemable APRA-approved preference shares can be included in it.
61. Which of the following statements about regulatory capital is FALSE? A. Tier 1 capital includes paid-up ordinary shares, retained earnings, non-cumulative irredeemable preference shares and general reserves. B. Tier 2 capital includes general provision for doubtful debts, revaluation reserves of premises, mandatory convertible notes and approved perpetual subordinated debt. C. Tier 1 capital is core capital, including paid-up ordinary shares, non-cumulative irredeemable preference shares and general reserves. D. Tier 2 capital includes general reserves for doubtful debts, asset revaluation reserves of premises, other preference shares, mandatory convertible notes, cumulative redeemable preference shares and perpetual subordinated debt.
62. The Pillar 1 approach of Basel II capital adequacy incorporates three risk components: A. Credit risk, interest-rate risk and market risk B. Default risk, interest-rate risk and operational risk C. Credit risk, market risk and operational risk D. Default risk, foreign exchange risk and operational risk
63. Which of the following statements regarding capital adequacy requirements is INCORRECT? A. Existing credit-risk guidelines are extended to include market risk arising from a bank's trading activities. B. Regulators focus on credit risk, market risks, operational risk and type of capital held. C. Eligible Tier 1 capital must constitute at least 70% of a bank's capital base. D. Tier 2 capital is divided into upper and lower Tier 2 parts.
64. Under the capital adequacy requirement for banks, in order to fund a $100 000 loan for a multinational corporate client with a Standard & Poor's rating of AA, a bank will: A. assign a risk-weighting of 20% for the balance B. allocate Tier 1 and Tier 2 capital to the loan according to the riskiness of the company C. seek funding in the euromarkets to minimise the capital adequacy requirements D. apply a risk weighting of 50% to the loan to determine the total capital requirement
65. In the Basel II standardised approach to external rating grades, the asset counterparty weights for capital adequacy guidelines are: A. 10%, 20%, 50% and 100% B. 10%, 50%, 100% and 150% C. 20%, 50%, 100% and 150% D. 20%, 50%, 100% and 200%
66. The Basel II risk weighting factor for a bank loan to an Australian company with a Moody's Investors Service rating of C is: A. 20% B. 50% C. 100% D. 150%
67. Under Pillar 1 of the Basel II framework, the risk weight for a residential housing loan is determined by the: A. amount borrowed B. level of mortgage insurance C. house valuation D. All of the given answers.
68. A bank provides a loan of $1 million to a company that has an A rating. Calculate the dollar value of capital required under the capital adequacy requirements to support the facility. A. $16 000 B. $40 000 C. $80 000 D. $120 000
69. A bank provides documentary letters of credit for a company that has a credit rating of A+. The face value of contracts outstanding is $2 million. Calculate the dollar value of capital required under the capital adequacy requirements to support these facilities, given that the bank supervisor's credit conversion factor is 20%. A. $6 400 B. $16 000 C. $160 000 D. $240 000
70. A large commercial bank operating in the international markets will generally apply to the banks' supervisor to use the _____ to credit risk. A. advanced internal ratings-based approach B. foundation external ratings-based approach C. standardised approach D. standardised approach with external ratings
71. The risk that arises from chance of loss as a result of inadequate internal bank processes is called: A. default risk B. interest rate risk C. market risk D. operational risk
72. Which of the following statements about recently adopted guidelines covering capital requirements for market risk that banks are required to perform is FALSE? A. They use a risk measurement model based on a VaR approach. B. They estimate the sensitivity of portfolio components to small changes in prices. C. They must hold capital against risk of loss from changes in interest rates. D. They hold a fixed allocation of funds between various balance sheet assets and off-balance-sheet business.
73. For a commercial bank that operates in foreign exchange, interest rate and equity markets, the capital adequacy guidelines for the market risk it is exposed to fall under: A. Pillar 1 B. Pillar 2 C. Pillar 3 D. Pillar 4
74. Under _____ of Basel II, bank supervisors should review and evaluate banks' internal capital adequacy assessments. A. Pillar 4 B. Pillar 3 C. Pillar 1 D. Pillar 2
75. Part of a bank's liquidity management is for it to hold a portfolio of: A. term loans B. mortgages C. Commonwealth securities D. credit card loans
76. Generally, commercial banks are the main type of financial institution in a financial system because they hold the largest amounts of financial assets. TRUE Banks have long been the dominant type of financial institution, although in recent years managed funds have close to having the same amount of financial assets under management.
77. The greater the dominance of commercial banks in an economy, the less regulation required. FALSE Because of the dominance of banks and the correlation between their business and a country's economy, there are strong arguments for regulation to constrain a bank's business.
78. Banks obtain funds from many areas. These sources of funds appear as liabilities on a bank's balance sheet. TRUE Deposits are a major part of a bank's sources of funds and a bank needs to pay interest expense.
79. Liability management is where banks actively manage their liabilities in order to meet future loan demand. TRUE
80. Call deposits are funds lodged in a bank account for a specified short-term period. FALSE
81. A bank may either issue a negotiable certificate of deposit directly into the money markets or place it directly with another bank with surplus funds. FALSE
82. One of the important attributes of certificates of deposit for a bank is the ability to adjust the yields on new issues. TRUE
83. As the majority of banks' assets are short-term loans, they are active in the money markets in order to fund part of their lending. FALSE
84. A bank may seek to obtain funds by issuing unsecured notes with a collaterised floating charge over its deposits. FALSE
85. Foreign currency liabilities are debt instruments issued into another country but not denominated in the currency of that country. FALSE
86. Briefly discuss the sources of funds for a commercial bank. Sources of funds appear on a bank's balance sheet either as liabilities or shareholders' equity funds. The main sources of funds are first the more liquid funds from current account deposits, call deposits. Then there are term deposits, negotiable certificates of deposit where a bank may issue directly into the money market, bill acceptance liabilities, debt liabilities, foreign currency liabilities, and loan capital and shareholders' equity.
Viney - Chapter 02 #86 difficulty: EMPTY learning goal: EMPTY learning objective: EMPTY level: EMPTY lo: EMPTY question type: EMPTY source: EMPTY type: EMPTY
87. Describe how a bill acceptance facility works. If a company with a good credit record is looking to raise funds through the issue of a bill of exchange into the money markets, a bank may have the role of acceptor for the bill where the bank agrees to pay the face value of the bill to the holder at maturity and will have a separate arrangement to recover the funds from the issuer. The bank will earn fees for providing this service. Or the bank may provide the funds directly for the bill by agreeing to discount the bill and buy it from the issuer, and usually rediscount the bill subsequently. So the bank could provide a bill acceptance facility and a bill discount facility.
88. Discuss the main features of housing finance. This involves the lending of long-term funds to individuals so that they can buy residential property. As security for the loan the bank lender registers a mortgage over the property. In recent years commercial banks and specialist mortgage lenders have used securitisation to refinance their lending.
89. Discuss the main features of a bank's commercial lending. Commercial lending is when banks lend to the business sector and other financial institutions. This is considered essential if economic growth is to be achieved within a country. Commercial banks offer borrowers both short-term and long-term loans of various types such as overdraft facilities.
90. Within the context of off-balance-sheet business, explain direct credit substitutes and trade- and performance-related items and any differences between these items. Direct credit substitutes are where a bank supports a client's financial obligation such as providing a 'standby letter of credit' so that a company may raise funds directly in the market place. Trade- and performance-related items are when a bank offers guarantees to support a client's non-financial obligations. Both of these items are not recorded on a bank's balance sheet.
MenuItem 3: {Topic 3} Non-bank financial institutions
Question 1: The financial institution that is a specialist provider of financial and advisory services to companies is:
A: a credit union B: a finance company C: a building society D*: an investment bank
Level: 2
Question 2: Money market corporations:
A: obtain all their funding by issuing bank bills B*: are generally referred to as investment banks C: offer money market deposits to retail clients D: sell money market securities
Level: 2
Question 3: The task of the investment bank in a public issue of new shares is to:
A: offer interim financing to the firm B: invest the funds raised in the capital markets C*: provide advice in designing and pricing a share issue D: act as a trustee of the funds raised
Level: 3
Question 4: Investment banks:
A: are supervised by APRA, since they operate in the banking sector B: focus their activities in the bank bill sector and money market C: obtain their deposits from only large corporations D*: are not required to comply with minimum capital adequacy requirements, but commercial banks are
Level: 3
Question 5: A company may hire ________ to advise on and underwrite its new share issue.
A: a loans officer B*: an investment banker C: a share analyst D: a treasury officer
Level: 2
Question 6: The principal source of income for investment banks is:
A: issuing bank bills B*: off-balance sheet business C: issuing secondary securities D: issuing certificates of deposit
Level: 3
Question 7: Money market corporations (merchant and investment banks) have significantly increased their off-balance sheet business due to competition. All of the following are off-balance sheet activities of investment banks EXCEPT:
A: mergers and acquisitions B: managing project finance undertakings C*: trading in the short-term money market D: strategic risk management advice
Level: 3
Question 8: Most corporations will seek advice from ______ for possible mergers and acquisitions.
A: an investment broker B: a commercial banker C: an accounting firm D*: an investment banker
Level: 2
Question 9: The process of due diligence involves:
A: underwriting of new equity issues by a company B: providing advice to companies on the raising of new equity C*: detailed analysis of a firms financial statements D: placement of securities to institutional investors
Level: 3
Question 10: Underwriting is:
A: when a broker places new share issues with selected financial institutions B: when an investment bank gives advice to a company about a merger C*: when a broker guarantees prices on a security issue for a company D: when an investment bank finds funding for a company
Level: 3
Question 11: When an investment bank guarantees a certain price for a company issuing new shares, it is acting as:
A: an auctioneer B: a broker C: a dealer D*: an underwriter
Level: 2
Question 12: When an investment bank helps a company sell large parcels of shares directly to institutional investors, this is called:
A: due diligence B*: private placement C: securitisation D: underwriting
Level: 3
Question 13: The ________ is the company in a merger transaction that tries to merge with or acquire another company.
A: target company B*: takeover company C: conglomerate company D: hostile company
Level: 2
Question 14: The ________ is the company in a merger transaction that is being pursued as a takeover possibility.
A*: target company B: takeover company C: conglomerate company D: hostile company
Level: 2
Question 15: If a car manufacturer were to purchase one of the companies listed below, which purchase would be called a horizontal takeover?
A: a steel mill B*: a rival car manufacturer C: a tyre manufacturer D: a finance company
Level: 2
Question 16: A conglomerate takeover occurs when:
A*: companies from different business areas merge B: both parties are similar in size C: the merged entity is expected to have large additional value D: the management team of the target company are combined with those of the takeover company.
Level: 3
Question 17: All of the following are reasons for mergers EXCEPT:
A: finances B: economies of scale C: business diversification D*: to have a dominating share of the market
Level: 2
Question 18: The amount of financial assets held by insurance companies has _______ over the last 20 years.
A: decreased B: remained stable C: increased slowly D*: increased dramatically
Level: 3
Question 19: As of 2005, the largest proportion of assets held by life insurance companies is:
A: Commonwealth securities B: loans and placements C*: equities and units in trusts D: land and buildings
Level: 4
Question 20: In Australia, the prudential supervisor of life insurance offices is:
A: ASIC B*: APRA
C: the Reserve Bank of Australia D: SIS
Level: 2
Question 21: Which of the following statements with regards to life insurance companies is true?
A: Life insurance companies are more likely to acquire short-term assets than long-term securities, for liquidity reasons. B*: Life insurance companies are more likely to acquire long-term assets because their liabilities are long-term in nature. C: life insurance companies tend to acquire short-term assets because they have relatively predictable inflows and outflows. D: The Reserve Bank of Australia regulates life insurance companies.
Level: 3
Question 22: All of the following statements about life insurance companies are true EXCEPT:
A: as inflows of funds are relatively predictable, they have a very stable level of liabilities B: they have greatly increased their assets over the last decade C: they sell contracts that offer financial cover against premature death D*: they have large amounts of short-term liquid securities.
Level: 2
Question 23: Life insurance companies:
A*: are significant investors in equities
B: invest mainly in debt, which is generally in the form of debentures C: are not important suppliers of equity funding D: None of the above.
Level: 3
Question 24: The change in the portfolio of financial assets for the life insurance companies since the 1980s has been mainly due to:
A*: change in government regulations B: strong financial markets C: change in policies of life insurance companies D: strong growth in the number of life insurance policies.
Level: 3
Question 25: By the end of 2005, there had been a substantial expansion of assets in the life insurance industry. What is one of the primary reasons for this?
A: increased confidence in life policies by individual investors B*: growth in superannuation funds C: decreased cost of regulation by the Australian Financial Institutions Commission D: rationalisation through mergers of small life insurance companies
Level: 3
Question 26: Life insurance companies attract a large proportion of their funds through regular premiums from policy holders. In regard to the matching principle, what types of assets would an insurance company hold the smallest proportions of?
A: equity investments B: debentures and notes
C: housing loan mortgages D*: money market securities
Level: 3
Question 27: A life insurance company that sells a large number of ________ will need a large portion of liquid assets to match the liabilities.
A: whole-of-life policies B: 20-year term policies C: annuities D*: one-year renewable term policies
Level: 3
Question 28: General insurance companies hold:
A: a smaller amount of short-term assets than life insurance companies do B*: a greater amount of short-term assets than life insurance companies do C: approximately the same amount of short-term assets as life insurance companies D: only long-term assets
Level: 2
Question 29: General insurance companies hold more liquid assets than life insurance companies do because:
A: they have a legal requirement to do so B*: events such as fires and earthquakes are difficult to predict C: more people try to get payouts from them by fraud D: as there are more items covered under a general insurance policy, there are more payouts to the insured
Level: 2
Question 30: A major difference between a whole-of-life insurance policy and a term-life policy is:
A: the whole-of-life policy is long-term, whereas a term policy is only for the term of one year B: a term policy has an investment component, specified only for the term C*: only a whole-of-life policy has an investment component D: term policies only pay bonuses at the end of the term, unlike the wholeof-life policy, which pays them out immediately as they are accumulated
Level: 3
Question 31: All of the following apply to a whole-of-life insurance policy EXCEPT:
A: includes an investment component B: is a long-term insurance policy C: may pay a bonus if surplus investment returns are generated D*: premiums reduce over time due to accumulated bonuses
Level: 3
Question 32: In a(n) _____ insurance policy, there is no savings component.
A*: term B: variable C: whole D: endowment
Level: 2
Question 33: For term-life policies with a stepped premium over time, the policy holder pays:
A: premiums based on current market rates B*: premiums that increase gradually over time C: premiums based on increases in inflation D: premiums based on indexing the sum insured
Level: 3
Question 34: A portfolio manager for a general insurance company who expects a downturn in the markets is likely to shift more of the companys portfolio into:
A: common stock B: long-term corporate bonds C: preference shares D*: short-term securities
Level: 2
Question 35: The function of a ________ is to provide income for employees of corporations or governments after they retire.
A: building society B: credit union C: general insurer D*: superannuation fund
Level: 2
Question 36: Essentially, superannuation assets provide:
A: indefinite income when employees stop working B: indefinite income as long as employees continue to work C: limited income if an employee is injured and unable to work D*: retirement income for employees
Level: 2
Question 37: Since the early 1990s, the largest growth in assets held by superannuation funds outside life offices has been in:
A: Commonwealth securities B: loans and placements C*: equities and units in trusts D: land and buildings
Level: 3
Question 38: Which of the following statements is true?
A: In the 1990s, assets of superannuation funds outside life insurance offices have grown much faster than life insurance office funds. B: Assets in defined benefit schemes have experienced greater growth than assets in accumulation schemes. C: The introduction of the Superannuation Guarantee Charge (SGC) policy in 1992 resulted in rapid growth in Australias superannuation industry throughout the 1990s. D*: Both A and C.
Level: 3
Question 39: Superannuation funds, because of the ______-term nature of their liabilities, prefer to hold _____-term assets.
A*: long, long B: long, short C: short, long D: short, short
Level: 2
Question 40: A private superannuation fund to which an individual makes recurring, predetermined payments for a given number of years into the plan is called a(an):
A: approved deposit scheme B*: superannuation savings plan C: standard superannuation scheme D: single premium scheme
Level: 3
Question 41: If an individual retires early but wants to retain their superannuation entitlements in a favourable taxation environment, they can hold their eligible superannuation funds in a:
A: single-premium scheme B: growing annuity scheme C*: rollover scheme D: termination scheme
Level: 2
Question 42: Superannuation funds that aim at delivering a longer-term income stream and capital appreciation by acquiring a diversified asset portfolio across a wider risk spectrum are classified as:
A: managed growth funds B: capital guaranteed funds C*: balanced growth funds D: capital stable funds
Level: 3
Question 43: A defined benefit plan:
A: is always fully funded, with no shortfall requirement B: may have a shortfall, but the Commonwealth government will make good the shortfall C*: may have a shortfall, but the employer will make good the shortfall D: is where the employee bears the risk if the performance of the investment is bad
Level: 3
Question 44: An investor who wishes to save for their retirement in 20 years time and who has a high propensity for risk is likely to invest in:
A: a fund that invests in government securities and cash deposits B: a fund that invests in government securities and some property C: a fund that invests in government securities and debentures D*: a fund that invests in government securities and foreign equities
Level: 3
Question 45: In an accumulation superannuation fund:
A: the employee is promised an allocated benefit based on earnings and years of service
B*: superannuation income varies depending on how well the plans investments have performed C: if the funds in the plan exceed the promised amount, the excess remains with the issuing firm or institution D: all of the earnings taxes are paid by the employer
Level: 4
Question 46: The superannuation fund where the employer must make good a shortfall in the fund when the benefit is to be paid up is:
A: an accumulation fund B*: a defined benefit fund C: a fully funded fund D: a private fund.
Level: 3
Question 47: When an employee makes regular contributions equal to 7% of their salary and their employer also contributes the equivalent of 14% of salary to a superannuation fund that is an accumulation scheme, then:
A: the final payout benefit is stated when the member joins the fund B*: the final payout depends upon the investment performance of the fund C: payment is specified under the superannuation guarantee legislation D: the benefit is paid in the form of a life annuity.
Level: 3
Question 48: All of the following Acts are relevant to the operation of the Australian superannuation industry EXCEPT:
A: Superannuation Industry (Supervision) Act 1993 B: Income Tax Assessment Act 1936 C*: Superannuation (Agents and Brokers) Act 1984 D: None of the above.
Level: 4
Question 49: All of the following are important results of the compulsory guarantee charge implemented in July 1992 EXCEPT:
A: the amount of superannuation funds in Australia has increased significantly B: the employer contribution SGC increased to 9% from July 2002 C*: the vast majority of retirement savings are invested in superannuation funds D: the SGC represents a penalty taxation charge on employers.
Level: 3
Question 50: Finance companies generally:
A: issue shares and use the proceeds to buy bonds B*: raise funds in financial markets to lend to households and companies C: raise funds from banks to lend to households and companies D: issue bonds and use the proceeds to buy shares
Level: 2
Question 51: All of the following are features of finance companies EXCEPT:
A: they came into existence in response to regulations on interest rates B: they sell unsecured notes and use the funds to make loans to borrowers C*: the majority of their funds are sourced from banks D: today the banks own the major finance companies
Level: 2
Question 52: Since deregulation of the financial markets in the 1980s, finance companies have seen the largest growth in their assets in:
A: bills of exchange B: local government securities C: placements and deposits D*: loans to businesses
Level: 3
Question 53: Which of the following liability types represents a main source of funding for finance companies?
A: fixed-term deposits B*: debentures and unsecured notes C: bills of exchange D: borrowings from non-residents (overseas)
Level: 3
Question 54: By the end of the 1990s, there had been a substantial contraction in the building society sector. What is the principal reason for this contraction in building societies?
A: loss of confidence in building societies by individual investors B*: conversion of building societies to banks C: increased cost of regulation by the Australian Prudential Regulation Authority (APRA) D: rationalisation through the merger of small building societies
Level: 3
Question 55: In the 1980s, building societies expanded their lending operations to:
A: foreign-currency loans for members B: commercial paper C*: increased lending to high-risk business borrowers D: underwriting facilities
Level: 3
Question 56: Under deregulation, building societies lost market share to other financial institutions. Their response included:
A: mergers with other building societies B: expenditure on technology C: expanding their range of products D*: All of the above.
Level: 2
Question 57: Permanent building societies are supervised by: A: ASIC B*: APRA C: the Reserve Bank of Australia D: ASX
Level: 2
Question 58: A ________ is a financial intermediary that deals mainly in the flow of funds between members. Membership is generally derived from some common bond.
A: savings bank B: superannuation fund C*: credit union D: merchant bank
Level: 2
Question 59: A credit union differs from most other financial institutions because:
A: it accepts deposits mainly from members B: its assets are mainly loans to members C: there are stringent requirements to hold prime liquid assets D*: All of the above.
Level: 3
Question 60: An important source of funds for credit unions is:
A: cheque accounts B*: loan interest C: interest from government securities D: financial support from the organisations that employ its members
Level: 2
Question 61: The uses of funds for credit unions are mainly:
A: company shares B: commercial paper C: debentures and unsecured notes D*: mortgages
Level: 2
Question 62: Credit unions, while representing a very small proportion of total financial assets, have strong numerical representation throughout Australia. They derive this numerical strength:
A*: from a common bond of association of society members B: through the wide dispersion of societies throughout the country C: because of the full range of financial services provided D: due to a guarantee of deposits provided by the government
Level: 2
Question 63: Currently, out of finance companies, credit unions, managed funds and permanent building societies, which one holds the smallest percentage of total assets of financial institutions?
A*: building societies B: credit unions C: finance companies D: managed funds
Level: 3
Question 64: The financial institution that pools funds for individuals and then invests them in both the money and capital markets is a:
A: savings bank B: credit union C: investment bank D*: managed fund
Level: 2
Question 65: Funds under management by managed funds in 2005 represented almost _____ of the total assets of financial institutions.
A: 20 per cent B*: 40 per cent C: 50 per cent D: 60 per cent
Level: 3
Question 66: All of the following are features of unit trusts EXCEPT:
A: they are companies that accept funds from investors and make investments that yield returns in the form of income and/or capital gains B: the market determines the value of a listed unit trust C*: unlisted unit trusts are generally highly liquid as they can accept money from investors at any time D: the number of listed property trusts is far larger than the number of listed equity trusts.
Level: 3
Question 67: A mutual investment fund that specialises in short-term debt instruments and is usually managed by a financial intermediary is called:
A: a money market fund B*: a cash management trust C: a certificate of deposit fund D: a bank bill fund
Level: 2
Question 68: The main features of cash management trusts are:
A: they allow individuals to access the money markets B: they provide liquidity and access to funds C: many are associated with stockbrokers, and the electronic purchasing and selling of securities by investors D*: All of the above.
Level: 2
Question 69: The average maturity of deposits and money market securities held in a cash management account is approximately:
A: 10 days B: 20 days C*: 40 days D: 90 days
Level: 2
Question 70: Since the early 1990s, public unit trusts have seen the largest growth in assets in:
A: cash and deposits B: long-term government securities C*: equities and units in trusts D: land and buildings
Level: 3
Question 71: The majority of securities owned by unlisted public unit trusts are:
A: real physical assets B: money market securities C*: capital market securities D: fixed interest trusts
Level: 3
Question 72: All of the following are features of public unit trusts EXCEPT:
A: the four main classes of trusts are property, equity, mortgage and fixed interest trusts B: there was enormous growth in public unit trusts during the 1990s C: the majority of mortgages held by a mortgage trust are first mortgages D*: property trusts are generally unlisted as they need notice to sell their physical assets
Level: 2
Question 73: An investor is considering different methods of investment, including a public unit trust. All of the following are functions of a public unit trust EXCEPT:
A: acts as a vehicle for the pooling of investor funds B: provides a level of investor protection though the appointment of a trustee C: allows small investors access to larger investment opportunities D*: locks in a trust unit price by listing on the Australian Stock Exchange
Level: 3
Question 74: A developer is promoting a large new suburban shopping centre and
decides to establish a publicly listed unit trust to attract investors. Which type of unit trust would be established?
A: a mortgage trust B*: a property trust C: an equity trust D: a cash management trust
Level: 2
Question 75: The main advantage of a listed trust over an unlisted unit trust is:
A: a listed trust has a trustee but an unlisted trust does not have a trustee B*: a listed trust can be sold at any time by the unit holder in the marketplace C: a listed trust invests in equities, while an unlisted trust invests only in fixed interest D: a listed trust invests in equities, while an unlisted trust invests in property
Level: 2
Question 76: Export Finance and Insurance Corporations:
A: only function is to lend directly to small- or medium-sized businesses involved in export trade B: only function is to guarantee trade finance to small- or-medium sized businesses involved in export trade C*: function is to encourage export trade by providing trade insurance and financial services D: only function is to provide insurance for Australian suppliers of goods and services against non-payment
Level: 3
Question 77: All of the following are services provided by financial institutions EXCEPT:
A: to pay interest on depositors funds B: to provide loans to customers C: to invest customers savings in the capital markets D*: to buy the businesses of customers
Level: 2
Question 78: _________ is the form of financing for large tourist resorts, property developments, heavy industry and processing plant developments.
A: Euro finance B: Conglomerate finance C*: Project finance D: Lease finance
Level: 2
Question 79: The main difference between project finance and other forms of lending is:
A*: lenders base their participation on expected future cash flows and assets of the project B: lenders take a major equity stake in the project C: the project company, which is set up as a separate legal entity, relies heavily on venture capitalists for equity funding D: the lenders have a claim on the assets of the project as well as the sponsors
Level: 3
Question 80: All of the following features for project finance in Australia are generally correct EXCEPT:
A: guarantees provided by sponsors to lenders usually do not cover all the risks involved in the project B: a project company is usually established as a separate legal entity C: lenders rely mainly on the expected future cash flows and the assets of the project D*: finance is usually established on a non-recourse basis
MenuItem 4: {Topic 4} The share market and the corporation
Question 1: A business organisation that is a separate legal entity, can buy property in its own name, and can enter into contracts with other entities is:
A: a sole proprietorship B: a partnership C: a special partnership D*: a corporation
Level: 2
Question 2: The actual owners of a company are the _______.
A: board of directors B: executive management group C*: shareholders D: creditors
Level: 2
Question 3: The _______ is(are) responsible for conducting the day-to-day financial and operational affairs of the company.
A: board of directors B*: executive management group C: shareholders D: creditors
Level: 2
Question 4: The _______ is(are) responsible for the objectives and policies of the company, but not the day-to-day affairs.
A*: board of directors B: executive management group C: shareholders D: creditors
Level: 2
Question 5: Which of the following forms of business organisation is characterised by limited liability?
A: sole partnership B: partnership C: general partnership D*: corporation
Level: 3
Question 6: If a growing organisation wanted to set itself up so it had greater access to a wider range of capital, then it would become a:
A: sole proprietorship B: partnership C: general partnership D*: listed corporation
Level: 2
Question 7: The owners of _______ face unlimited liability.
A: sole proprietorships only B*: sole proprietorships and partnerships only C: corporations only D: partnerships and corporations only
Level: 2
Question 8: The liability of shareholders in limited liability companies signifies that:
A: creditors of a company can call upon the shareholders in the case of company default to contribute an amount based only on the current market price of the shares B*: shareholders are only liable for any amount that is unpaid on the shares of a company C: in the event of company default, the creditors have no claim on the shareholders for any contribution D: shareholders do not have a right to participate directly in the day-to-day management of a company
Level: 3
Question 9: Because of their _____ liability, corporate stockholders are more interested in chances of _____.
A: limited, failure than success B*: limited, success than failure C: unlimited, success than failure D: unlimited, failure than success
Level: 3
Question 10: When a no-liability company defaults on its loans with its creditors, this means:
A: the creditors have a legal claim against the directors only B: the creditors have a legal claim against the CEO only C: the creditors have a legal claim against the chairman of the company D*: the shareholders do not have to meet any remaining payment on shares
Level: 2
Question 11: When the owners of a company hire full-time executives responsible for the day-to-day decisions, this _____ the _____ problem(s)
A: lessens, shareholder-lender B: lessens, managers-shareholders C*: brings on, managers-shareholders D: brings on, shareholder-lender
Level: 3
Question 12: All of the following are advantages of a corporation EXCEPT:
A: freely transferable ownership B: limited liability C: access to capital markets D*: low management costs
Level: 2
Question 13: All of the following are correct statements regarding companies EXCEPT:
A: a company is a discrete legal entity B*: since shares represent ownership in a company, ownership cannot be readily
transferred to new owners C: a company has potentially unlimited life D: the shareholders liability is limited
Level: 2
Question 14: All of the following are advantages of the corporate form of organisation EXCEPT:
A: the corporate form is particularly suited to large-scale business operations B*: there is a separation of ownership (shareholders) and management control C: the corporate form allows for continuity of business activities D: large amounts of funding can be raised on relatively favourable terms
Level: 2
Question 15: Many companies use ______ to align the interests of shareholders with those of management.
A: bond options B*: share options C: company cars D: debentures
Level: 2
Question 16: Agency theory is concerned with:
A*: a conflict between owners and managers B: the agents who act on behalf on the company C: the relationship between employees D: the conflict of interests between outside agents and the company
Level: 3
Question 17: The conflict of interests between the goals of the firms owners and those of its managers is:
A: the antagonism theory B*: the agency problem C: reduced when the company is large D: serious only when sales volumes decline dramatically
Level: 2
Question 18: The key aspect of the agency relationship for the corporate form of business is that:
A: the firms owners will always act in the best interests of the managers B: the managers will always act in the best interests of the firms owners C: with their management contracts, the managers have the incentive to act in the best interests of the shareholders D*: the managers have different incentives from the shareholders
Level: 3
Question 19: Agency costs involving managements desire to maximise their benefits include all of the following EXCEPT:
A: management goals to achieve sales growth B: management goals to achieve market share C: management remuneration packages D*: management reports to the shareholders
Level: 3
Question 20: Agency problems are reduced by:
A: monitoring management behaviour B: the shareholders ability to sell their shares C: the threat of takeover by another firm D*: All of the above.
Level: 3
Question 21: Agency problems would be less likely to exist in:
A*: a sole proprietorship B: a partnership C: a private company D: a public company
Level: 3
Question 22: The members of the board of directors of a corporation are elected by the:
A: executive management group B*: shareholders C: creditors D: debt holders
Level: 3
Question 23: A primary aim of corporate management should be to:
A: maximise the companys profit B: maximise the number of shareholders C*: maximise the shareholders wealth D: minimise the companys costs
Level: 3
Question 24: The most appropriate goal for corporate management, according to finance theory, is:
A: to maximise the companys market share B: to maximise the current profits of the company C*: to maximise the companys share price D: to minimise the companys liabilities
Level: 3
Question 25: A _______ represents a financial claim to the cash flow of a business after all other claims have been deducted.
A: bond B: debenture C*: share D: preference share
Level: 2
Question 26: All of the following are features of a share EXCEPT:
A: part ownership in the company B: right to vote in the control of the company C: readily transferable
D*: a right to periodic payments
Level: 2
Question 27: All of the following are true of share markets EXCEPT:
A: they help carry out direct financing B: most of the trading takes place in already-issued shares C: the dollar volume of trading in the bond markets is greater than the dollar volume of trading in share markets D*: every time a companys shares are bought or sold, the company receives a payment
Level: 2
Question 28: The total number of equity raisings on the Australian Stock Exchange (ASX) primary market over the past twenty years has:
A*: increased B: decreased C: remained stable D: decreased significantly
Level: 2
Question 29: The greatest number of issues of equity capital on the Australian Stock Exchange (ASX) over the last three years has involved:
A: rights issues B: placements C: dividend reinvestment D*: new floats
Level: 3
Question 30: The smallest number of issues of equity capital on the ASX over the last three years has been for:
A: rights issues B: placements C: dividend reinvestment D*: options and calls
Level: 3
Question 31: The listing of new companies on the Australian Stock Exchange is known as:
A: share buybacks B*: initial public offerings C: share issues D: rights issues
Level: 2
Question 32: All of the following security types are usually listed on the Australian Stock Exchange EXCEPT:
A: ordinary shares B: Treasury bonds C: debentures D*: commercial paper
Level: 3
Question 33: From a companys viewpoint, the existence of an active, liquid, well-organised market in existing shares:
A: facilitates the raising of further capital in the secondary market B: maintains the share price above the initial issue price C*: encourages successful primary market issues D: is of little or no consequence
Level: 3
Question 34: An initial public share offering represents the share markets _____ role.
A: interest rate B: information C*: primary D: secondary
Level: 2
Question 35: Secondary markets:
A: can provide liquidity but do not raise new funds B: make capital raising in the primary market more attractive C: help borrowers raise long-term funds D*: All of the above.
Level: 3
Question 36: A characteristic of secondary markets for shares is that:
A: only highly risky shares are traded
B: only low-risk shares are traded C: they are where companies borrow funds for the second time D*: companies do not get funds from the secondary market in shares
Level: 3
Question 37: Which of the following securities would you expect to buy on the primary market?
A: a bond that has no maturity left B: a bond with a very long maturity date C*: a newly issued share D: a previously issued share
Level: 2
Question 38: A well-developed secondary market is likely to:
A: aid in raising extra finance B: help manage risk exposures of investors C: help with corporate agency problems D*: All of the above.
Level: 3
Question 39: The selling of new shares to a selected number of institutional investors is called:
A: a share release B*: a share placement C: a share float D: an initial offering
Level: 2
Question 40: Compared to other forms of equity raisings, share placements:
A: can be quicker but more expensive because of the short timeframe involved B: can be quicker if a prospectus is available for distribution C*: can be quicker and often cheaper D: involve stricter regulatory requirements for meeting the shorter timeframe involved
Level: 3
Question 41: The basic role of a company underwriter about to list a new share issue on a stock exchange is to:
A: provide advice on the timing of the share issue B: ensure the company complies with the stock exchanges listing rules C: establish a deep and liquid secondary market in the shares D*: purchase any unsold shares on issue
Level: 3
Question 42: The document drawn up by a company stating the terms and conditions of a public share issue is called:
A: a share directory B: a memorandum C: a share plan D*: a prospectus
Level: 2
Question 43: If a stock exchange provides a market for the trade of specific share market-related derivative products, which of the following statements is generally NOT correct? The derivative products _______:
A: provide an investment tool to take advantage of future share price movements B: facilitate the management of risk within an existing share portfolio C: provide protection against adverse movements in share prices D*: remove the share price volatility of stocks listed on the stock exchange
Level: 3
Question 44: The distribution of extra shares to all existing share holders is called:
A: a new float B: a private placement C: a secondary float D*: a rights issue
Level: 2
Question 45: Compared to an exchange-traded derivative product, over-the-counter derivative products:
A*: are discussed and agreed upon by the parties involved B: are standardised C: have margin calls D: are traded between banks, not on the exchange
Level: 2
Question 46: Compared to an over-the-counter derivative product, exchange-traded derivative products:
A: are standardised B: involve margin calls C: are not negotiated between the buyer and seller of the contract D*: All of the above.
Level: 2
Question 47: To protect their portfolio of shares from a possible share price fall, an investor could:
A: buy a call option B*: buy a put option C: buy a warrant on a matching share index D: buy a matching share index future
Level: 3
Question 48: The strategy of lowering risk exposure by holding a number of investments in a portfolio is called:
A: augmentation B*: diversification C: expansion D: optimisation
Level: 2
Question 49: Option premiums are paid by:
A: option writers to buyers B*: option buyers to sellers
C: both option buyers and sellers D: only put option buyers
Level: 3
Question 50: An investor who purchases a put option is expecting:
A: share prices to go up in the short term B*: share prices to fall in the short term C: interest rates to go up D: interest rates to go down
Level: 2
Question 51: An American call option should have a higher premium than the comparable European call option because:
A: it is more volatile in price B: it is less volatile in price C*: it gives more flexibility to the holder D: a call would not be exercised unless the exercise price exceeded the share price
Level: 3
Question 52: The writer of a put option expects the share price to:
A: decrease B*: increase C: remain unchanged D: pay a dividend
Level: 3
Question 53: A futures contract can be:
A: a contract that provides a specified commodity or instrument to be bought at a future date at a price determined at the expiry date B*: a contract that provides a specified commodity or instrument to be bought at a future date at a price decided today C: a right to buy a specified commodity or instrument at a price determined today D: a right to buy a specified commodity or instrument at a price determined at the expiry date
Level: 2
Question 54: A stock exchange may also list some debt issues of companies and governments. This provision by a stock exchange is known as:
A: a subordinate debt market B*: an interest rate market C: a primary debt market D: a secondary bond market
Level: 2
Question 55: All of the following statements are true in regard to the provision of an interest rate market by a stock exchange EXCEPT:
A: it is beneficial to both borrowers and lenders as it can add liquidity B: it can provide ease of access to information about debt securities C: it can reduce investors transaction costs D*: its main function is to serve as a primary market for debt issues
Level: 2
Question 56: Which of the following debt securities is often quoted on the Australian Stock Exchange (ASX)?
A: bank bills B: certificates of deposit C*: floating rate notes D: commercial paper
Level: 3
Question 57: Examples of debt instruments listed on a stock exchange do not include:
A: corporate bonds B: floating rate notes C: convertible notes D*: promissory notes
Level: 3
Question 58: The corporate bond that pays a variable rate of interest based on interest rate changes for a reference rate is:
A: an adjustable note B: a convertible note C*: a floating rate note D: a straight corporate bond
Level: 3
Question 59: All of the following are used by the Australian stock exchange (ASX) to promote an efficient market EXCEPT:
A: rapid release of new information B*: a clearing house C: stock trading systems D: transaction settlement systems
Level: 2
Question 60: A security that pays a fixed dividend and usually converts to ordinary shares at a future date is called:
A: a corporate bond B: a floating rate note C*: a preference share D: a debenture
Level: 2
Question 61: The Australian Stock Exchange now operates a system known as CLICK XT. Which of the following statements is correct in relation to CLICK XT?
A: It allows individual investors direct access to execute buy/sell orders on the ASX. B*: At opening of trade, overlapping bids and offers are shared between existing orders. C: Share trading is also conducted on the floor of the ASX using chalkies. D: It facilitates the efficient processing and settlement of market transactions through multiple platforms.
Level: 3
Question 62: The Clearing House Electronic Subregister System (CHESS) is operated by the Australian Stock Exchange. All of the following statements regarding CHESS
are correct EXCEPT:
A: the system allows settlement of transactions within three working days B: a shareholder must conduct a CHESS transaction with a sponsor C*: shareholders can still hold traditional share certificates D: the clearing house issues holding statements to uncertified shareholders
Level: 2
Question 63: The risk that arises from failure of parties to complete and resolve a transaction is called:
A: Herstatt risk B: default risk C*: settlement risk D: market risk
Level: 3
Question 64: _____ is the probability that a party to a buy/sell transaction will not complete it.
A: Basis risk B: Clearing risk C*: Settlement risk D: Transaction risk
Level: 2
Question 65: The reason for the requirement by the Australian Stock Exchange (ASX) for companies to abide by the Corporations Act 2001 (Cwlth) is:
A: to ensure that there will be an active market in the companys shares B: to maintain investor confidence in the companys creditworthiness C: to ensure a minimum number of shareholders in the company D*: to ensure that information that may have a material effect on the share price is provided to the market
Level: 3
Question 66: Having regard to a number of high-profile situations where improper practices resulted in share market volatility, losses to individual shareholders, and possible breaches of existing legislation, in 1991 the Commonwealth government transferred responsibility for the administration of Corporations Law to:
A: The Australian Stock Exchange B*: The Australian Securities and Investments Commission C: Individual State Government corporate governance authorities D: The Australian Consumer and Competition Commission
Level: 3
Question 67: ASIC is the regulatory body responsible for:
A: the supervision of insurance companies only B: the supervision of insurance and investment companies only C: the supervision of initial public offerings only D*: the supervision of corporations law and markets
Level: 2
Question 68: All of the following statements are true EXCEPT:
A: the Corporations Act 2001 compels continuous disclosure requirements on a listed
company B: all corporations, except mining companies, must submit half-yearly and annual audited reports to the Australian Stock Exchange (ASX) C*: the main supervisor in the Australian market is the ASX itself D: if a listed company does not fully disclose information to the satisfaction of the ASX, trading in its shares may be suspended
Level: 3
Question 69: To try to remove potential conflicts of interest with regards to the ASX monitoring listed companies, ____ has also assumed the role of supervising the ASX.
A: APRA B: the Australian Reserve Bank (RBA) C*: ASIC D: the Stock Brokers Association
Level: 2
Question 70: Consider the following statements: A corporation differs from other forms of business organisation only in that it tends to be larger. The corporate form of business organisation is destined to failure because managers, and not the owners, run the business. The corporate entity ceases on the death or bankruptcy of the individual shareholders. The stock exchange is important to the corporation only because it provides the institutional framework through which new shares may be sold to the public. Maximisation of shareholder utility is presumed when managers maximise possible profit.
How many of these statements are true and how many are false?
A*: 1 statement is true and 4 are false B: 2 statements are true and 3 are false C: 3 statements are true and 2 are false D: 4 statements are true and 1 is false
Level: 3
MenuItem 5: {Topic 5} Corporations issuing equity in the share market
Question 1: An investment decision differs from a financing decision in that:
A: investment decisions relate to assets that the firm has invested in, while financing decisions relate to the firms financial assets B: an investment decision first determines what assets the firm will invest in, while a financing decision considers if the existing investments should be refinanced C: a financing decision first determines what financial assets the firm will invest in, while an investment decision considers how the funds will be invested D*: an investment decision first determines what assets the firm will invest in, while a financing decision considers how the investments under consideration are to be funded
Level: 3
Question 2: When a company decides to issue an unsecured note to pay for a new machine, it has made:
A: a capital market decision B: a money market decision C*: a financing decision D: an investment decision
Level: 2
Question 3: The finance required by a company to fund its day-to-day operations is called:
A: daily financing B: operational financing
C: operational capital D*: working capital
Level: 2
Question 4: When a company decides to pay for an investment project using a short-term bank loan, this is best described as:
A: a capital market decision B: a money market decision C*: a financing decision D: an investment decision
Level: 2
Question 5: Which of the following statements is correct for an investment proposal with a positive NPV?
A: The discount rate exceeds the required rate of return. B*: The IRR is greater than the required rate of return. C: Accepting the investment proposal has an uncertain effect on shareholders. D: The present value of the cash flow equals the cost of the investment.
Level: 3
Question 6: Problems associated with calculating an internal rate of return include:
A: negative cash flows during the projects lifetime B: choosing one project from two or more projects C: timing of cash flows D*: All of the above.
Level: 2
Question 7: When a companys project results in a return and profits that exceed the cost of its debt borrowing then:
A: both the debt holders and shareholders can share in the profits B*: only the shareholders may share in the profits C: the interest payments to the debt holders may increase D: its cost of capital increases
Level: 3
Question 8: Financial risk refers to:
A: the risk of owning financial assets B: the overall risk of a financial services firm C*: the risk faced by the shareholders when debt is used D: the risk of not finding finance for a firms investment
Level: 2
Question 9: Increasing the financial leverage of a company will _______ shareholders expected returns and ______ their risk.
A: increase; not affect B: increase; decrease C*: increase; increase D: decrease; increase
Level: 3
Question 10: A companys business risk depends on:
A: its use of debt in financing the business B*: the risk of the companys operations and assets C: how much debt a company has used D: the amount of shareholder equity in the company
Level: 2
Question 11: Which of the following criteria would be determinants of the appropriate ratio of debt to equity if a company should not take on more debt that can be serviced under conservative economic forecasts? I. Maximisation of shareholder wealth II. Industry norms III. History of the ratio for the firm IV. The stage of the current economic cycle V. Limit imposed by lenders VI. Companys capacity to service debt
A: I, III, V, VI B*: II, III, V, VI C: II, III, IV, V D: III, IV, V, VI
Level: 4
Question 12: Restrictions placed on borrowers by lenders in the loan agreement are called:
A: loan limits B*: loan covenants C: loan arrangements D: loan contracts
Level: 2
Question 13: An increase in a firms level of debt will:
A: reduce the business risk of the firm B*: increase the variability in earnings per share C: lower the expected return on shareholders funds D: increase the return to the debt holders
Level: 3
Question 14: Compared with retail sector companies, banks have a:
A: high equity-to-debt ratio B: low gearing ratio C*: high debt-to-equity ratio D: conservative gearing ratio
Level: 3
Question 15: Which of the following statements best describes the role or function of the promoter of a flotation?
A: The manager of the sub-underwriting panel or group. B: The broker responsible for the initial sale of shares to investors. C*: The party seeking the flotation of the company. D: The agency responsible for marketing the issue to the public.
Level: 2
Question 16: Potential investors learn of the information concerning the company and
its new issue by being sent a _____ by the broker.
A: registration statement B*: prospectus C: letter of commitment D: memorandum offering
Level: 2
Question 17: When a company undertakes an initial public offering (IPO):
A: it may issue and list debentures in the capital markets B: it may offer shares to a few public institutional investors C*: it may issue and list shares in the primary share market D: it may directly list corporate bonds in the capital markets
Level: 3
Question 18: Compared to raising debt through a bank, the raising of equity through an initial public offering (IPO) is generally:
A: cheaper B*: dearer C: roughly the same D: much cheaper
Level: 3
Question 19: If, for an initial public offering (IPO), circumstances change and the issue becomes unattractive, then the underwriters:
A: charge the company more for raising the funds
B: charge the company less for the IPO C*: may purchase unsubscribed shares D: offer the shares at a lower price
Level: 2
Question 20: Ordinary shares in limited liability companies are the major source of external equity funding for Australian companies. All of the following statements regarding the issuance of ordinary shares by a newly listed limited liability company are correct EXCEPT:
A: the public company is incorporated with an authorised share capital B*: shares may only be issued on a fully paid basis C: share price is determined with reference to a range of variable factors D: usually, not all shares authorised in the Memorandum of Association are issued
Level: 4
Question 21: All of the following requirements apply to a company seeking a public listing on the Australian Stock Exchange EXCEPT:
A: the entity must adhere to minimum standards of quality B: the entity must adhere to minimum standards of disclosure C*: the company must issue a prospectus that is to be lodged with the Australian Stock Exchange D: the company must have a structure and operation appropriate for a listed entity
Level: 4
Question 22: Most companies raise funds by selling their securities in:
A*: a public float
B: a private placement C: a stock exchange D: a direct placement
Level: 2
Question 23: A financial institution involved in underwriting the sale of new securities by buying them from the issuing firms and then reselling them to the public in the primary capital market is an:
A: investment agent B: investment broker C: investment dealer D*: investment banker
Level: 2
Question 24: All of the following are roles of an underwriter in a public offering of shares EXCEPT:
A: to provide pricing of the issue B: to provide advice on the structure of the issue C*: to invest the funds raised in the offering D: to provide guidance on the timing of the issue
Level: 3
Question 25: A company may seek to raise further funds by issuing additional ordinary shares. The terms and conditions of the new share issue are determined by the board of directors, in consultation with its financial advisers and others, and having regard to the preferences of existing shareholders and the needs of the company. Which of the following is LEAST likely to be a determinant of the price
that is eventually struck?
A*: the discount to current market price that can be offered to shareholders B: the companys cash requirements C: the projected earnings flow from the new investments D: the cost of alternative funding sources.
Level: 3
Question 26: Companies can raise equity capital through:
A: the money markets B: the inter-bank market C*: retained earnings and the share market D: a major bank
Level: 2
Question 27: Holders of equity capital:
A: receive interest payments B*: own the company C: have lent money to the company D: have a guaranteed right to income from the company
Level: 2
Question 28: Common shareholders are:
A: guaranteed a periodic distribution of dividends B: guaranteed a distribution in the wind-up of the company C: guaranteed both a periodic distribution of dividends and a distribution in the
wind-up of the company D*: not guaranteed a periodic distribution or a distribution in the wind-up of the company.
Level: 3
Question 29: The claims of the equity holders on the assets of the firm have priority over:
A: the debt holders B: the preferred shareholders C: the unsecured debt holders D*: no other holder
Level: 2
Question 30: Who are sometimes referred to as the residual owners of the corporation?
A: the secured creditors B: the unsecured creditors C*: the common shareholders D: the preferred shareholders
Level: 2
Question 31: What is the function of a proxy statement for a shareholder?
A*: It gives them the right of a vote for each share they own. B: It gives them the right to transfer their share to another party. C: It gives them the entitlement to new shares when issued. D: It gives them the right to sell their shares at a premium.
Level: 3
Question 32: All of the following are features of ordinary shares EXCEPT:
A: they are a major source of external equity financing for companies B: they entail voting rights at annual general meetings C: there is no fixed payment obligation D*: dividends are always tax deductible
Level: 2
Question 33: The maximum number of shares that can be issued is:
A: the issued capital B: the authorised capital C*: the outstanding capital D: the treasury capital
Level: 3
Question 34: Financing for high-risk companies often is in the form of:
A: limited liability shares B*: no-liability shares C: limited instalment receipts D: contributing shares
Level: 3
Question 35: The internal relationship between shareholders, the board of directors and the managers of a company is called:
A: agency theory B*: corporate governance C: commercial theory D: organisational governance
Level: 2
Question 36: A rights offering is:
A: the issue of proxies to the shareholders to use their voting rights at the annual general meeting B: the issue of options on shares to the general public C*: the issue of an option to purchase shares directly to the shareholders D: the issue of special options to the management
Level: 3
Question 37: A right that can only be exercised by the shareholder and not sold is called:
A: a non-saleable right B: a renounceable right C*: a non-renounceable right D: a pro-rata right
Level: 2
Question 38: Before making a rights issue, a companys management must consider several important variables. These include all of the following EXCEPT:
A: the ability of the company to service the increased equity on issue B: the costs of alternative funding sources
C: whether there will be a sufficient take-up rate of the issue D*: the effect on the firms profits
Level: 3
Question 39: The subscription price in a rights offering is generally:
A*: below the current share price B: equal to the current share price C: above the current share price D: not related to the share price
Level: 3
Question 40: Which of the following is generally not a characteristic of rights?
A*: no expiration date B: if exercised, results in the dilution of earnings for existing shareholders C: saleability D: potential listing on a stock exchange
Level: 3
Question 41: A pro-rata share rights offer means that:
A: the offer must be made to all the stakeholders of a company B: the offer must be made to bond holders and shareholders who get their offer in before a cut-off date C*: the offer must be made to shareholders on the basis of number of shares already held D: the offer is made only to the shareholders with the largest number of shares on the share register at a cut-off date
Level: 3
Question 42: When shares are purchased cum-rights it means:
A: the purchaser of the share cannot usually sell the right separately B*: the purchaser of the share may take part in the rights offer C: the purchaser of the share cannot take part in the rights offer D: the purchaser of the share can take up the offer of the right without having to pay extra for the subscription price
Level: 3
Question 43: For a share placement, ASIC requires:
A: that a placement must consist of subscriptions of not less than $1,000,000 B: that any discount from the current market price not be more than 10% C*: a memorandum of information to be sent to all participating institutions D: a prospectus, which can be filed with them after the event
Level: 3
Question 44: Share placements may, subject to compliance with certain regulations, be made to institutional investors. All of the following conditions are requirements of the Australian Securities and Investments Commission for share placements EXCEPT:
A: the placement consists of minimum subscriptions of $500 000, or is made up of not more than 20 participants B: the discount from current market price must not be excessive C*: under no circumstance are placements in excess of 10% of issued shares permitted D: there is no need to register a prospectus, but a memorandum of information
detailing the companys activities must be sent to all participants
Level: 4
Question 45: If a company raises equity funds by issuing shares to a selected number of institutional investors, this is known as:
A: a share appointment B*: a placement C: a share rights issue D: share transfer
Level: 2
Question 46: Compared to a pro-rata issue of shares, private placements usually:
A: take a longer time to organise B*: can be carried out much more quickly C: involve a far greater discount to the current market price D: involve no more than 50 participants
Level: 3
Question 47: All of the following apply to a dividend reinvestment plan EXCEPT:
A: it forms additional equity financing for the company B: the number of issues of equity rights issues in early 2000 was less than that of dividend reinvestment schemes C*: companies have steadily increased their use of dividend reinvestment plans throughout the 90s D: shareholders have the chance of purchasing additional shares through it
Level: 3
Question 48: _______ are promised a fixed periodic dividend, the payment of which must be paid before that of ordinary shares.
A: Common shareholders B*: Preferred shareholders C: Stakeholders D: Creditors
Level: 2
Question 49: Any unpaid dividends that must be paid before payment of dividends to ordinary shareholders are called _________ preference shares.
A: participating B*: cumulative C: non-cumulative D: secured
Level: 3
Question 50: A company is likely to issue _____ if it has reached its optimal gearing level.
A: options B: rights C: ordinary shares D*: preference shares
Level: 2
Question 51: Holders of _________ preference shares are entitled to dividend payments beyond the stated dividend rate.
A*: participating B: cumulative C: non-cumulative D: secured
Level: 3
Question 52: A preference share issue offers the following advantages to a company EXCEPT:
A: its flexible dividend policy B: fixed interest borrowings that can count as equity C: extension of the equity base of the company D*: its indefinite maturity
Level: 3
Question 53: Which of the following is NOT a feature of preferred shares?
A: convertible B: redeemable C: cumulative D*: an important source of company funding
Level: 2
Question 54: Preference shares have a number of features similar to debt that distinguish them from ordinary shares. Which of the following features may be incorporated in a preference share issue?
I. cumulative or non-cumulative II. convertible or non-convertible III. redeemable or non-redeemable IV. issued at different rankings V. participating or non-participating
A: I, II, III, IV B: I, II, IV, V C: II, III, IV, V D*: All of the above.
Level: 3
Question 55: Convertible preference shares are normally converted into:
A: debentures B: bonds C*: shares D: warrants
Level: 2
Question 56: Compared with ordinary shares, preference shares usually:
A: rank ahead of a companys creditors in the case of a wind-up B*: have dividends set at issue C: are viewed as debt financing D: pay their dividends after ordinary shares
Level: 2
Question 57: A convertible note
A: is an equity instrument that converts into debt at maturity B: is an equity instrument that converts into a specified number of shares at maturity C*: is a debt instrument that the holder has the option to convert into an initially specified number of shares D: is a warrant that the holder has the option to convert into an initially agreed-upon number of shares
Level: 2
Question 58: All of the following are features of convertible notes EXCEPT:
A: offers a lower interest rate than straight debt instruments B: usually made available to ordinary shareholders C*: maturity of the note is usually shorter than straight debt instruments D: note holders can generally participate in new issues of equity
Level: 3
Question 59: An advantage of a convertible security for a company is that it can generally be sold with interest rates _______ other non-convertible debt securities.
A: higher than B: equal to C*: lower than D: unrelated to
Level: 2
Question 60: The buyer of a convertible security accepts a lower rate of interest:
A: due to a lower default risk
B: because of the possibility that the company may recall the security C: due to the accessibility of funds D*: because of the possibility of becoming a shareholder in the future.
Level: 3
Question 61: When a convertible security is issued, the issue price is usually _______ the current market price of the companys share.
A: well below B*: close to C: well above D: not related to
Level: 3
Question 62: ALL BUT ONE of the following are advantages for a company that issues a convertible note. Pick the exception.
A: A lower interest rate can be offered, compared with straight debt. B: It offers a method of raising cheap funds for the time being. C: A longer maturity can often be offered. D*: There is an increase in financial leverage upon conversion.
Level: 3
Question 63: A company is advised to issue convertible notes. They are advised of the conditions applicable to the convertible note issue. Which of the following conditions is NOT correct?
A*: The holder of the note has the right to convert the note into preference shares. B: Notes are generally available on a pro-rata entitlement to shareholders.
C: Entitlements to convertible notes are generally not renounceable. D: Notes are usually issued at a price close to the current share price at the time of issue.
Level: 3
Question 64: Compared to straight debt, convertible notes may offer a company:
A*: lower borrowing costs B: higher borrowing costs C: a chance to issue more shares at maturity D: the opportunity to reduce debt
Level: 3
Question 65: When a company wants to increase the marketability of a rights issue, it may offer:
A: preference shares attached B*: options attached C: convertible notes attached D: dividends attached
Level: 3
Question 66: When warrants are converted by a holder:
A: debt is decreased B: debt is decreased but equity increases C*: only the number of shares increases D: there is no impact on the companys capital structure
Level: 3
Question 67: All of the following are true about equity warrants EXCEPT:
A: adding equity warrants to a bond issue increases its marketability B: warrants are similar to conversion features on some bonds C: warrants can be detached from the bond issue and sold separately D*: dividends for warrants are usually lower than for ordinary shares
Level: 2
Question 68: Which financial instrument gives the holder an option to purchase a specified number of shares at a predetermined price over a given period?
A*: an equity warrant B: a put option C: an ordinary preference share D: a debenture
Level: 2
Question 69: ALL BUT ONE of the following conditions for an equity warrant that is generally attached to a bond issue are correct. Pick the exception.
A: The holder has a conditional option to convert into ordinary shares of a company. B*: A warrant holder receives dividend payments over the life of the warrant. C: Warrants may be detachable and traded separately from the bond issue. D: The cost of borrowing through a bond issue may be lower with a warrant attached.
Level: 4
Question 70: ALL BUT ONE of the following are true of equity warrants. Pick the
exception.
A: often detachable B: add to the marketability of an issue C: may offer an investor an opportunity of buying stock at a discount D*: exercise period is usually shorter than three months
Level: 3
Question 71: ALL BUT ONE of the following are similarities between a right and a warrant. Pick the exception.
A: They both provide the right, without the obligation, to purchase a specified number of shares at a predetermined price. B: They both result in the company raising additional equity capital. C: They can both be detached from the debt issue and traded separately. D*: They both have similar maturities.
Level: 2
Question 72: ALL BUT ONE of the following are features of a dividend reinvestment scheme for a company. Pick the exception.
A: Shareholders can acquire company shares at little or no transaction cost. B: Shareholders can increase their return on the company share concerned. C: The company can obtain additional equity funding. D*: The shareholders can redeem shares for dividends.
Level: 3
Question 73: A dividend reinvestment plan generally _______ on the security.
A: decreases the return B*: increases the return C: has no effect on the return D: has an uncertain effect
Level: 3
Question 74: Dividend reinvestment schemes are a significant source of equity for many Australian companies. Which of the following advantages of dividend reinvestment schemes may, at times, also be regarded as a disadvantage?
A: The shareholder avoids transaction costs on the share issue. B: The share issue price is usually at a discount to the average market price. C*: Such schemes allow dividends to be paid while retaining cash for future growth. D: The company is able to pass on franking credit to its shareholders.
Level: 3
Question 75: All of the following requirements apply to a company seeking a public listing on the Australian Stock Exchange EXCEPT:
A: the entity must satisfy either the profit test or the net tangible assets test B: the company must have at least 500 holders of a parcel of main class securities valued at least $2000 C*: the company must lodge a prospectus with the Australian Stock Exchange on an annual basis D: the company must have a structure and operation appropriate for a listed entity
MenuItem 6: {Topic 6} Investors in the share market
Question 1: Passive investment means building a portfolio of shares based on the strategy of:
A: buy and hold B*: replicating a market index C: following solely the advice of share brokers D: investing in low-risk shares
Level: 2
Question 2: Investors buy listed shares:
A: to obtain fixed dividend payments B: to obtain fixed capital growth C: for the chance of capital growth only D*: for the chance of dividend payments and capital growth
Level: 2
Question 3: Compared with fixed interest securities, shares offer:
A: capital gain for lower risk B: capital gain for higher risk C: fixed dividends and capital gains for lower risk D*: periodic dividends and capital gains at higher risk
Level: 2
Question 4: A diversified portfolio generally includes:
A: 0-5 stocks B: 5-10 stocks C: 10-15 stocks D*: 10-25 stocks
Level: 3
Question 5: Share ownership of listed companies on the Australian Stock Exchange has remained relatively constant across various sectors of the market over the past few years. Which of the following ownership groupings is the largest investor in Australian equities?
A: Financial institutions, including insurance companies and superannuation funds B: Households and unincorporated enterprises C: Government: Commonwealth, State and government trading enterprises D*: Overseas - the rest of the world
Level: 2
Question 6: The risk that particularly impacts on the share price of a particular company is called:
A: economic risk B: business risk C: systematic risk D*: unsystematic risk
Level: 2
Question 7: When investors buy and sell shares based on receiving new information on shares and markets, this is known as:
A*: active investment B: a diversified strategy C: a market replication strategy D: passive investment
Level: 2
Question 8: To track the S&P500, a fund manager can buy:
A: all the stocks in the S&P500 B: an S&P500 index fund C: a percentage of stocks that essentially tracks the index D*: All of the above.
Level: 3
Question 9: The correlation of pairs of securities within a portfolio is called:
A: co-association B: correspondence C*: covariance D: variance
Level: 3
Question 10: The correlation between two shares:
A: can take on positive values B: can take on negative values C: is related to the covariance of a share D*: All of the above.
Level: 2
Question 11: Portfolio risk is heavily based on:
A: a simple average of the variance of the stocks in the portfolio B: a weighted average of the variance of the stocks in the portfolio C*: a weighted average of the covariance of the stocks in the portfolio D: the standard deviation of the stocks
Level: 3
Question 12: When an investor alters the mix of their portfolio to reflect market changes, this is called _____ asset allocation
A: market timing B: passive C: non-fixed D*: tactical
Level: 3
Question 13: Stock brokers act as _____ for an exchange:
A*: agents B: dealers C: negotiators D: intermediaries
Level: 3
Question 14: Major differences between a discount stockbroker and a full-advisory
stockbroker lie in:
A: the level of fees B: the amount of advice given C: the quantity of share recommendations D*: All of the above.
Level: 2
Question 15: All of the following apply to full-advisory stock brokers EXCEPT:
A: they provide investment advice on listed securities B: they monitor investors financial plans C: they accept buy and sell orders from clients D*: their fees are competitive with discount brokers
Level: 2
Question 16: When an investor purchases units in a unit trust, this is known as ________ investing.
A: absolute B: direct C*: indirect D: value
Level: 2
Question 17: Calculate the tax payable by a shareholder on a fully franked dividend that is fully imputed, given the following data: Company profit: $3 250 000 Profit distribution: 100%
Company tax rate: 36% Shareholders tax rate: 43%
A: -$275 600 (tax credit) B: -$227 500 (tax credit) C*: $227 500 (tax payable) D: $275 600 (tax payable)
Level: 4
Question 18: The capital structure of a company is one of the important indicators of performance. All of the following regarding capital structure are correct EXCEPT:
A: debt to equity, or shareholders interest ratios, are both measures of capital structure B: capital structure ratios are an indicator of longer-term viability and stability C: a company with a higher equity ratio is less dependent on external funding D*: the capital ratios of companies, and industry groupings, are generally similar
Level: 3
Question 19: When using indicators for a companys performance, care should be taken that:
A: ratios for a company are compared with others in the same industry B: a single ratio is not used to judge the companys overall performance C: the dates of the financial statements being compared are the same D*: All of the above.
Level: 2
Question 20: Compared to a companys current ratio, the shareholders interest ratio
gives information about a companys:
A: interest expense B: level of liquidity C*: long-term viability D: future earnings
Level: 3
Question 21: The greater the proportion of debt financing compared to equity financing for a company, the:
A: lower the future earnings prospects for the company B: greater the ability of the company to meet its interest payments C*: greater the degree of financial risk for the company D: lower the expected earnings per share
Level: 3
Question 22: A company with a _____ ratio of equity to debt is _________ dependent on external financing.
A: lower; less B: lower; more C*: higher; less D: higher; more
Level: 2
Question 23: The _______ ratio measures the proportion of total assets provided by the companys owners.
A: total asset turnover B: equity turnover C*: shareholders interest D: debt
Level: 3
Question 24: The indicator ratio that should be used to assess a companys ability to meet its short-term obligations is:
A*: liquidity B: debt C: profitability D: capital structure
Level: 2
Question 25: Which ratio is a measure of liquidity that excludes inventories?
A: current B*: liquid C: debt to gross cash flow D: interest cover
Level: 3
Question 26: An example of a liquidity ratio for a company is:
A: a fixed asset turnover B*: current ratio C: earnings per share D: share price to net tangible assets
Level: 2
Question 27: A company has a higher current ratio than the industry average. This implies that the company:
A: has a higher P/E than other companies in the industry B*: is more likely to avoid insolvency in the short term than other companies in the industry C: may be more profitable than other companies in the industry D: operates with a much lower level of inventory than others in the industry
Level: 3
Question 28: If a company has a current ratio of 2, which of the following measures will increase the current ratio?
A: buying inventory on short-term credit B: buying inventory with cash C: a customer paying an overdue account D*: paying off a short-term bank advance with long-term debt
Level: 3
Question 29: If a company has a current ratio of 0.9, then to improve its liquidity ratio it might:
A: increase its current assets by increasing its inventory and so improve its current ratio B*: use more long-term debt to decrease current liabilities, and so increase the current ratio C: decrease its large amounts of account receivable to improve its cash position, and
so improve its current ratio D: decrease its large amount of accounts to pay to decrease its current liabilities, and so improve its current ratio
Level: 4
Question 30: The ________ ratio is an indicator of the longer-term viability and stability of a company.
A*: shareholders interest B: P/E C: EBIT/total funds D: liquidity
Level: 3
Question 31: Which financial ratio provides information essential for assessing the long-run operation of the company?
A*: debt B: liquidity C: profitability D: share price
Level: 2
Question 32: A ratio that indicates the number of years required for a company to repay its total debt is:
A: debt to equity B: debt to depreciation C*: debt to gross cash flow
D: debt to net cash flow
Level: 3
Question 33: Compared to a companys interest cover ratio, earnings before interest and tax measures its:
A: amount of earnings for dividend payments B: expected earnings C*: profitability D: return on equity
Level: 3
Question 34: Which of the following groups of ratios provide information on the short-run operation of the company?
A: capital structure and debt servicing B: capital structure and profitability C: debt servicing and profitability D*: liquidity and profitability
Level: 3
Question 35: Which ratio links long-term funds provided by the companys owners and those of the creditors?
A: debt B*: debt to equity C: times interest cover D: earnings to price
Level: 3
Question 36: Which ratio is used to measure a companys ability to meet its short-term financing?
A: debt B*: liquidity C: capital structure D: profitability
Level: 3
Question 37: Which financial ratio measures a companys ability to service its interest commitments?
A: debt B: equity to debt C: profitability D*: interest cover
Level: 2
Question 38: The higher the value of the _______ ratio, the better able the firm is to meet its short-term financial obligations.
A: debt to equity B*: liquid C: earnings per share D: EBIT to long-term funds
Level: 2
Question 39: The _______ is an indicator of investors evaluation of a companys future earnings potential.
A: debt to equity ratio B*: price/earnings ratio C: interest cover ratio D: return on shareholders funds
Level: 2
Question 40: The following is a simplified financial position statement for a company.
Assets $ Liabilities $ Cash 250 000 Accounts payable 1 480 000 Trading securities 350 000 Accrued expenses payable 420 000 Accounts receivable 1 360 000 Taxes payable 140 000 Inventory 2 470 000 Long-term debt 3 850 000 Property 3 350 000 Shareholders funds 2 340 000 Equipment 450 000
Calculate the liquid ratio.
A: 0.85 B*: 0.96 C: 1.51 D: 1.32
Level: 4
Question 41: All of the following statements regarding the debt servicing capacity of a company are correct, EXCEPT:
A: the debt to gross cash flow ratio is an indicator of debt servicing capacity B: the debt to gross cash flow ratio indicates years required for cash flows to repay total debt C: the interest cover ratio is an indicator of a companys capacity to service debt D*: The lower the interest cover ratio, the greater the ability to cover interest commitments
Level: 3
Question 42: If a share currently sells for $20 and has annual earnings per share of 8.0, the price/earnings ratio is:
A: 0.4 B*: 2.5 C: 4.0 D: None of the above.
Level: 2
Question 43: The _______ ratio is an indicator of the share markets evaluation of a company.
A: debt/equity B*: price/earnings C: debt to gross cash flow D: shareholders interest
Level: 2
Question 44: Systematic risk is also referred to as:
A: economic risk
B: diversifiable risk C*: market risk D: financial risk
Level: 2
Question 45: The risk that affects the whole market is called:
A: total risk B*: systematic risk C: diversifiable risk D: financial risk
Level: 2
Question 46: In modern portfolio theory, investment risk is divided into two components: systematic risk and unsystematic risk. Which of the following risks is an example of systematic risk?
A*: increase in the corporate tax rate B: productivity and cost of labour C: the effectiveness of management of the company D: gearing and the impact of interest rate changes
Level: 2
Question 47: Increased competition, increased costs of labour, lawsuits, and unfavourable exchange rates are all examples of:
A*: diversifiable risk B: systematic risk C: total risk
D: economic risk
Level: 2
Question 48: All of the following are examples of unsystematic risk EXCEPT:
A: the company announces a merger with a competitor B: the chief financial officer resigns C: the company loses competitiveness relative to other companies D*: changes occur in the level of company tax rates
Level: 3
Question 49: What should be the price of a share that constantly pays $2.50 annually in dividends, if the growth rate is zero and the required rate of return is 8% per annum?
A: $22.86 B: $28.00 C*: $31.25 D: $33.75
Level: 3
Question 50: What should be the price of a share if it paid $1.75 in dividends in the last financial year, its dividend growth rate is 4%, and the required rate of return is 11%? A: $25.00 B*: $26.00 C: $30.28 D: $43.75
Level: 3
Question 51: The higher the beta of a share, the:
A*: greater the systematic risk B: lower the systematic risk C: lower the expected return D: less responsive it is to changing share market movements
Level: 2
Question 52: In modern portfolio theory, an investor should not be concerned with unsystematic risk when calculating expected rates of return, because:
A: there is no way to measure unsystematic risk B*: unsystematic risks are assumed to be removed by diversification C: unsystematic risks are generally insignificant D: beta includes a portion to compensate for unsystematic risk
Level: 2
Question 53: The majority of companies pay dividends twice a year to their:
A: bondholders B: secured bond holders C*: shareholders D: board of directors
Level: 2
Question 54: When a share goes ex-rights, assuming everything else remains the same, its price should:
A: increase, as the company no longer has the right to make the shareholder convert B*: decrease, as the shareholder is losing an option C: remain the same, as the market knows about it in advance D: increase, as a successful rights issue will raise a large amount of cash
Level: 2
Question 55: If a dividend is declared on November 1, has a cum-dividend date of November 19, and a record date of November 26, which of the following shareholders will NOT receive the dividend?
A: a buyer of the share on October 31 B: a buyer of the share on November 11 C: a buyer of the share on November 26 D*: a buyer of the share on November 29
Level: 3
Question 56: What should happen to the price of a share on the day that it goes ex-dividend? The price should theoretically:
A: increase by the extent of the dividend B*: decrease by the extent of the dividend C: decrease by a small fraction of the dividend D: remain constant
Level: 2
Question 57: The decision to pay cash dividends to shareholders is made by the:
A: management B: shareholders at the annual meeting
C*: board of directors D: bondholders
Level: 2
Question 58: A company declares a dividend of 35 cents per share, which was payable on 14 September. Immediately prior to the declaration of the dividend, the share price was $4.79. At the close of trading on the stock exchange on 13 September, the share price was $5.44. What is the theoretical ex-dividend price of the share?
A: $4.44 B: $4.79 C*: $5.09 D: $5.79
Level: 3
Question 59: A rights issue differs from a bonus issue of shares in that:
A: after a bonus issue there is greater number of shares in existence, unlike rights B: shares that are cum-bonus are renounceable C*: the purpose of a bonus issue for a company is not to raise more funding D: only listed companies have rights issues
Level: 3
Question 60: If a company offers a onefor-five bonus issue and the current share price cum-bonus is $7.50, then the theoretical value of each share ex-bonus is:
A: $7.50 B*: $6.25 C: $6.00
D: $5.00
Level: 3
Question 61: A company whose share is selling for $24 announces a stock split of four-for-three. Which of the following statements is correct?
A: There will be four times as many shares on issue and they will sell for $96. B: There will be three times as many shares on issue, and they will sell for $8. C*: There will be one-third more shares on issue and they will sell for $18. D: There will be three-quarters more shares on issue and they will sell for $32.
Level: 3
Question 62: A company whose shares are currently trading at $3.60 proposes to have a 25% split; that is, four new shares for one existing share. At the commencement of the next business day, a dividend of 25 cents is paid on existing shares, followed immediately by the share split. What is the theoretical price of the new shares?
A: $0.72 B*: $0.90 C: $2.70 D: $3.35
Level: 4
Question 63: Share market participants can regard a bonus issue favourably because:
A: bonus issues represent a change in the total assets of a company B: bonus issues increase the equity/debt ratio of a company, and so reduce financial risk C*: they take it as a signal from the company of increased future profitability
D: bonus issues increase the number of shares in an investors portfolio and hence their total value
Level: 3
Question 64: An investor holds 100 shares of a company that is about to make a bonus issue of five shares for every two held. If the shares are currently trading for $2.50, what will be the value of the holding after the bonus issue?
A: $200 B*: $250 C: $400 D: $500
Level: 2
Question 65: The current market price of a stock is $3.00. The rights issue is one-for-ten, priced at $2.80. Calculate the theoretical ex-rights price.
A: $1.96 B: $2.85 C*: $2.98 D: $3.05
Level: 3
Question 66: Which of the following is an aim of a stock split?
A: to increase the number of shares on issue and so affect the capital structure B: to reduce the dividend payments C: to increase the share price D*: to try to improve the liquidity of shares
Level: 4
Question 67: There is ________ change in the capital structure of a company after a share split.
A: a measurable B: a small C*: no D: an adverse
Level: 2
Question 68: Share market participants can regard a rights issue favourably because:
A: a rights issue does not affect the capital structure of a company B*: a rights issue increases the equity/debt ratio, and so reduces financial risk C: they can participate in the rights issue without having to pay the subscription price D: rights issues increase the value of shares in an investors portfolio
Level: 3
Question 69: The S&P/ASX All Ordinaries share price index represents:
A*: Changes in aggregate share market values of the largest 500 companies B: Movements in the Australian share market relative to international markets C: The historical capitalisation of the 100 largest corporations D: Changes in share market value, including dividend reinvestment
Level: 3
Question 70: Consider the following five statements:
The expected return of a portfolio of shares is the weighted average of the expected returns for each share. The rest of the world is the largest single category of owners of Australian shares and of units in trusts in Australia. One of the effects of dividend imputation is the removal of double taxation of company profits that are distributed as dividends. For a shareholder with a marginal tax rate that is lower than the company tax rate, no tax will be payable on the fully franked dividend received, and the excess credit can be applied against other assessable income. The taxation of contributions and earnings of an employees compulsory superannuation fund may be offset by imputation credits received by the fund from its share investments.
How many of the above statements are true and how many are false?
A: 3 statements are true and 2 are false B: 2 statements are true and 3 are false C*: 4 statements are true and 1 is false D: 1 statement is true and 4 are false
MenuItem 7: {Topic 7} Forecasting share price movements
Question 1: If investors _______ a companys shares, the _______ supply is likely to lead to a _______ in the share price.
A: buy; increased; rise B: buy; decreased; fall C*: sell; increased; fall D: sell; decreased; rise
Level: 2
Question 2: The approach that seeks to identify factors that are likely to influence the growth rate and future profits of a company is called:
A: economic analysis B: factor analysis C*: fundamental analysis D: technical analysis
Level: 2
Question 3: When an investor makes their investment decision based on a companys accounting ratios, they are using:
A: economic analysis B: factor analysis C*: fundamental analysis D: technical analysis
Level: 2
Question 4: The investment approach that focuses on the underlying determinants of future profitability rather than on past price movements of a companys stock is:
A: credit analysis B*: fundamental analysis C: systems analysis D: technical analysis
Level: 2
Question 5: All of the following are problems associated with rapid, unsustainable economic growth EXCEPT:
A: GDP growth between 1 and 2% B: current account of the balance of payments worsens C*: pressure on wage growth falls D: inflationary pressures increase
Level: 2
Question 6: The portion of the overall economy defined by the nature of a companys operations is called:
A: economic component B: company component C*: industry sector D: country sector
Level: 2
Question 7: The net record of a countrys international earnings less its international payments is its:
A: capital account B*: current account C: Gross Domestic Product D: gross national income
Level: 3
Question 8: The more a country imports, and the worse the current account becomes, then:
A: the more the currency increases B: the lower interest rates fall C: the lower foreign debt becomes D*: the higher foreign debt becomes
Level: 3
Question 9: If a countrys current account deteriorates, then a government is likely to:
A: loosen monetary policy B: increase government expenditure C*: tighten interest rates D: lower taxes
Level: 3
Question 10: Foreign exchange risk is best described as:
A: the variability in the current account balance of the balance of payments B: the cost of one currency in terms of another C*: the risk that the price of one currency relative to another currency will change
D: the variability of domestic and international interest rates
Level: 2
Question 11: Writing-down the value of a capital asset, reported as an expense, is called:
A: down-grading B*: depreciation C: documentation D: reduction
Level: 1
Question 12: Investment analysts use a number of approaches in the analysis of fundamentals that may affect share prices. Which of the following statements in relation to the bottom-up approach to share price analysis is MOST correct? The bottom-up approach:
A: identifies the level of systematic risk within industry sectors B*: is applied to select, specific firms from within desired industry sectors C: indicates a well-diversified portfolio that eliminates unsystematic risk D: provides investment indicators based on forecast financial ratios
Level: 3
Question 13: Investment analysts use a number of approaches in the analysis of fundamentals that may affect share prices. Which of the following statements in relation to the top-down approach to share price analysis is MOST correct? The top-down approach:
A: identifies specific firms to include in an investment portfolio
B: provides a measure of the level of unsystematic risk in the market C: compares the performance of firms through financial ratio analysis D*: identifies future economic factors that may impact industry sector performance
Level: 3
Question 14: Some of the factors that are used by investment analysts using the top-down approach in the analysis of fundamentals that may affect share prices are:
A: exchange rates B: interest rates C: rate of growth in international economies D*: All of the above.
Level: 2
Question 15: An investor seeks to compare the financial characteristics of four companies which are investment possibilities. Based solely on the data provided in the following ratios, which company would provide the lower investment risk?
Ratio Company A Company B Company C Company D Current 1.80 1.55 1.85 1.10 Proprietorship 65.00% 45.75% 71.00% 31.50% EBIT/long-term funds 18.50% 14.60% 17.00% 15.50% Return on shareholders funds 14.50% 11.50% 14.50% 12.75% Debt/gross cash flow 4.91 (years) 2.80 (years) 2.91 (years) 3.85 (years) Interest cover 3.00 (times) 2.10 (times) 3.10 (times) 2.30 (times) P/E 19.50 (times) 7.70 (times) 5.21 (times) 12.10 (times) NTA/price 1.02 (times) 0.96 times) 1.00 (times) 0.99 (times)
A: company A B: company B
C*: company C D: company D
Level: 3
Question 16: All of the following are problems that may be associated with rapid, unsustainable growth in an economy, EXCEPT:
A: an upward pressure on wages B: an increase in inflationary pressures C*: an improvement in the current account of the balance of payments D: a rise in interest rates
Level: 3
Question 17: The greater the degree of systematic risk, the:
A: higher the expected share price B*: higher the expected rate of return C: lower the expected return on a share D: closer a shares beta will be to 1
Level: 3
Question 18: The lower the degree of unsystematic risk, the:
A: lower a shares beta coefficient B*: higher the diversification of a share portfolio C: higher a shares beta coefficient D: lower the diversification of a share portfolio
Level: 3
Question 19: An investor who buys a large number of shares of different companies will:
A: abolish systematic risk B*: minimise unsystematic risk C: minimise credit risk D: minimise price risk
Level: 2
Question 20: According to modern portfolio theory, the _______ the degree of systematic risk, the _______ should be the expected return.
A: less; greater B*: greater; greater C: less; less D: greater; less
Level: 2
Question 21: The investment approach that focuses more on past price movements of a companys stock than on the underlying determinants of future profitability is:
A: credit analysis B: fundamental analysis C: systems analysis D*: technical analysis
Level: 2
Question 22: When investors use past share price movements to make their
investment decisions, they are using:
A: economic analysis B: factor analysis C: fundamental analysis D*: technical analysis
Level: 2
Question 23: Compared to technical analysis, fundamental analysis considers:
A: the fundamentals of price movements only B: the fundamentals of companies only C: the factors that influence a company only D*: the factors that influence a company and the overall market
Level: 2
Question 24: Compared to fundamental analysis, technical analysis focuses on:
A: accounting ratios B: forecasting a companys future profitability C: forecasting a companys technical ratios D*: share price movements
Level: 2
Question 25: An important belief underlying the use of technical analysis techniques is that:
A: security prices react rapidly to new information B*: security prices react gradually to new information
C: there are sufficient investors in the market to provide enough liquidity to keep price changes relatively small D: all investors have immediate and relatively low-cost access to information
Level: 3
Question 26: Technical analysts basically believe that security prices:
A: react rapidly to new information, and share market prices are determined by the interaction of demand and supply B: react rapidly to new information, and security dealers provide liquidity C*: react gradually to new information, and market prices are determined by the interaction of supply and demand D: react gradually to new information, and security dealers provide liquidity
Level: 3
Question 27: An alternative approach to forecasting the behaviour of share prices is technical analysis. All of the following statements are correct in relation to the approach taken by technical analysts, EXCEPT:
A: as a price pattern emerges, it is assumed that the historic pattern will re-emerge in full B: the stock markets are, at times, dominated by mass psychology C*: historic price patterns are of little use in forecasting future price movements D: analysts typically adopt either a technical or a fundamental approach
Level: 2
Question 28: _______ is a mathematical technique used by technical analysts to clearly reveal all the trends in a price series.
A: Averaging B*: Moving average C: Price averaging D: Series averaging
Level: 2
Question 29: A graph of average price series constructed over time is called a:
A: chart B: average time series C*: moving average D: technical line
Level: 2
Question 30: In technical analysis, when the lower points of a rising price series are connected this is a:
A: downward trend line B: moving average C*: upward trend line D: weighted moving average
Level: 2
Question 31: Daily share-price data is given over a seven-day period for a company. Calculate the five-day moving average over the period.
14 June: $6.75 15 June: $6.80 16 June: $6.94
17 June: $6.58 18 June: $6.23 21 June: $5.95 22 June: $5.80
A: $6.23; $5.95; $5.80 B: $6.23; $6.50; $6.44 C*: $6.66; $6.50; $6.30 D: $6.66; $6.54; $6.44
Level: 5
Question 32: When the share price series breaks through the moving average line from below, a technical analyst would probably suggest it is a good time to:
A*: buy the share B: sell the share C: hold the share D: short the share
Level: 3
Question 33: An analyst constructs a moving average line in order to:
A: forecast future cash earnings of a company B: analyse support and resistance lines C*: smooth out erratic price movements D: work out the efficiency of the market
Level: 2
Question 34: When the share price series breaks through a flattening moving average
line from above, a technical analyst would probably suggest it is a good time to:
A: buy the share B*: sell the share C: hold the share D: short the share
Level: 3
Question 35: Once the actual price and moving average (MA) series are plotted on the same graph, buy and sell signals are generated. So:
A: buy when the actual price series cuts the MA from below, especially if the MA has been flat or in a gentle decline B*: sell when the MA series is rising strongly and the price series cuts or touches the MA from above, but then moves back above the MA after only a few observations C: sell when the MA flattens or declines after a steady rise, and the price series cuts the MA from above D: buy when the MA series is rising strongly and the price series cuts or touches the MA from above, but then moves back above the MA after only a few observations
Level: 4
Question 36: A support level is:
A: a level beyond which the market is unlikely to rise B*: a level below which the market is unlikely to fall C: an equilibrium price level supported by earnings and cash flows D: the complete cycle of a market wave
Level: 2
Question 37: What is the level above which it is difficult for the market to rise?
A: trend channel B*: resistance level C: support level D: None of the above.
Level: 2
Question 38: In technical analysis, a price level below which the market price is temporarily unlikely to fall is:
A: a trend channel B: a resistance line C*: a support line D: a trend line
Level: 2
Question 39: In technical analysis, a price level below which the market price is temporarily unlikely to rise is:
A: a trend channel B*: a resistance line C: a support line D: a trend line
Level: 2
Question 40: For technical analysts, the pattern formed by a series of price fluctuations characterised by increasing bottoms and horizontal tops is:
A: a symmetrical triangle B*: an ascending triangle C: a descending triangle D: a pole
Level: 3
Question 41: For technical analysts, the pattern formed by three successive rallies with the second rally being greater than the first or third is called a:
A: symmetrical triangle B*: head and shoulder pattern C: breakout D: triple top
Level: 3
Question 42: A support/resistance pattern, plotted by chartists in the stock markets, is the rectangle, which consists of sideways price fluctuations contained within horizontal support and resistance levels. All of the following statements are correct in relation to indicators given by support and resistance rectangles, EXCEPT:
A*: rectangles tend to be characterised by increasing volumes, except for a few days before the breakout when there are strong decreases in volumes of trade in the share(s) B: if the last bottom does not touch the support level (beginning the formation of an ascending triangle), and if prices then rise rapidly, on increasing volume, it is likely that there will be a topside breakout C: if the tops fail to reach resistance levels (beginning the formation of a descending triangle), then a downside breakout is likely D: when a break occurs from a rectangle, the extent of the breakout is likely to equal the height of the price rectangle.
Level: 4
Question 43: In relation to charting, an upward trend line connects the _______ points of a _______ price series, while a downward trend connects the _______ points of a _______ price series.
A: upper; rising; higher; falling B*: lower; rising; higher; falling C: upper; falling; lower; rising D: lower; falling; upper; rising
Level: 3
Question 44: The Elliot wave theory maintains that the bullish behaviour of the share market can be explained as:
A: a series of medium-term and long-term waves B: a series of long-term waves upward, and short-term waves downward C*: a series of three major waves upwards, followed by two major waves downwards D: None of the above.
Level: 3
Question 45: One of the theories on the determination of, and change in the value of, shares and other securities, is the random walk hypothesis. Which one of the following statements in relation to the random walk hypothesis is correct?
A: The trend of new information into the market may be consistently good or consistently bad over time. B: If the price of a share rose in one period, there is a higher probability that it will rise again in the next period. C*: Share price reflects the shares intrinsic value, based on the latest information set
relevant to current and future prospects. D: The history of previous price movements contains valuable information on likely future price movements.
Level: 4
Question 46: If a share price falls on four consecutive days of trading, then share prices:
A: cannot be following a random walk B*: can still be following a random walk C: are almost certain to decrease the next day D: are almost certain to increase the next day
Level: 3
Question 47: Which one of the following statements regarding an efficient capital market is correct?
A: All securities that investors would like are listed. B: All transactions are closed out and settled within two days. C*: Current prices reflect all current information. D: The lowest interest rates are offered.
Level: 2
Question 48: In an efficient market:
A: security prices are seldom far above or below their justified level B: share prices react quickly to new information C: investors will not make superior returns consistently D*: All of the above.
Level: 2
Question 49: The weak form of the efficient market hypothesis asserts that:
A: the change in future share prices cannot be predicted from past share prices B: share prices adjust rapidly to new information contained in past prices or past data C: technical analysts cannot be expected to outperform the market D*: All of the above.
Level: 3
Question 50: If the weak form of the efficient market hypothesis holds, then:
A: share prices follow a random walk B: share prices reflect all information contained in past prices C: technical analysis is useless D*: All of the above.
Level: 2
Question 51: Strategies based on technical analysis are most likely to be profitable in a market that is regarded as:
A: following a random walk B: semi-strong efficient C: not strong-form efficient D*: not weak-form efficient
Level: 3
Question 52: The weak form of the efficient market hypothesis denies:
A: the use of technical analysis, but supports fundamental analysis as valid B: the use of fundamental analysis, but supports technical analysis as valid C: the use of both technical analysis and fundamental analysis D*: the use of technical analysis, but is silent on the possibility of successful fundamental analysis
Level: 3
Question 53: At which of the levels of market efficiency does the efficient market hypothesis support the technical analysis approach to future share price determination?
A: weak-form efficiency B: semi-strong form efficiency C: strong-form efficiency D*: None of the above.
Level: 3
Question 54: The semi-strong form of the efficient market hypothesis states that:
A: future share prices are predictable B: all available information is reflected in the price of securities C*: security prices reflect all publicly available information D: None of the above.
Level: 2
Question 55: When investors cannot make superior profits on a continual basis based on past prices, public or private information, the market is said to be:
A: weak-form efficient
B: semi-strong form efficient C*: strong-form efficient D: fundamentally efficient
Level: 3
Question 56: The strong form of the efficient market hypothesis states that:
A: security prices reflect all publicly available information B: major market events can be predicted using publicly available information C*: insider information contains no special advantage D: future prices are predictable
Level: 2
Question 57: Which group of investors is able to earn consistent superior profits if the financial markets are strong-form efficient?
A: Only fundamental analysts will be able to profit. B: Only technical analysts will be able to profit. C: Only specialists, analysts and insiders in the company will be able to profit. D*: No one will be able to sustain superior profits.
Level: 2
Question 58: An investor finds that for a particular group of shares, large positive price changes are always followed by large negative price changes. This finding violates the:
A: strong form of the efficient market hypothesis B: semi-strong form of the efficient market hypothesis C*: weak form of the efficient market hypothesis
D: None of the above.
Level: 2
Question 59: If you believe that share prices reflect all information that can be derived from examining the market trading data, such as the history of past share prices, which form of efficient market hypothesis do you believe in?
A*: weak B: semi-strong C: strong D: informational
Level: 2
Question 60: If you believe that share prices reflect all relevant information, including publicly available information, which form of efficient market hypothesis do you believe in?
A: weak B*: semi-strong C: strong D: informational
Level: 3
Question 61: If you believe that share prices reflect all relevant information, including information that is available only to insiders, which form of efficient market hypothesis do you believe in?
A: weak B: semi-strong
C*: strong D: informational
Level: 2
Question 62: Proponents of the efficient market hypothesis assert that technical analysts:
A: should focus on resistance levels B: should focus on relative strength C: should focus on support levels D*: are wasting their time
Level: 2
Question 63: When new information becomes public in the market, evidence suggests that:
A: transaction costs will erase any benefit of trading on the new information B: insiders will be the only investors to gain C: it takes at least three trading days for share prices to adjust D*: share prices adjust rapidly to the new information
Level: 2
Question 64: It may be argued that share prices on the Australian Stock Exchange reflect all publicly available, relevant information regarding listed companies, and therefore superior profits cannot be made by an investor using publicly available information. Based on the above contention, which of the following statements best describes the informational efficiency of the Australian Stock Exchange?
A: Strong-form efficiency
B*: Semi-strong form efficiency C: Weak-form efficiency D: Random walk efficiency
Level: 3
Question 65: In relation to stock exchanges, the term circuit breaker refers to:
A*: interventions designed to restore orderly markets B: fines levied on inside traders C: fines levied on speculators D: the minimum amount of capital brokers must have before trading
Level: 3
Question 66: Program trading:
A: is the most likely reason there was a stock market crash in October 1987 B: occurs only in over-the-counter markets C*: refers to computer generated orders to buy or sell many shares at the same time D: has been abolished by order of the Australian Stock Exchange
Level: 2
Question 67: Research indicates that the correlation coefficient between successive days share price changes is:
A: quite close to +1 B*: quite close to zero C: quite close to 1 D: directly related to the shares beta
Level: 4
Question 68: If share prices appear to follow a random walk, then:
A: selecting shares for portfolios is irrelevant B: investment analysts are unimportant C*: successive share price changes are unpredictable D: it is impossible to know when to buy shares
Level: 2
Question 69: Research of actively managed portfolios, managed by professional portfolio managers:
A: indicates that one should not randomly select managed portfolios, managed by professional portfolio managers B: indicates that historical performance is not necessarily indicative of future performance C: indicates that professional management provides investors with superior market returns D*: both A and B
Level: 3
Question 70: Which one of the following is correct?
A: If the share market follows a random walk, price changes should be highly correlated. B: A random walk for share price changes is inconsistent with observed patterns in price changes. C*: If the share market is weak-form efficient, the share prices follow a random walk. D: All of the above.
Level: 3
Question 71: Consider the following five statements: Technical analysts rely on very sophisticated technical models of the macroeconomic environment. Since all chartists are confronted with identical share price data, they should identify very similar patterns and generate identical buy and sell signals from the data. A chartist will draw resistance levels at higher share price levels where an increase in supply halts price increases. Chartists will draw support lines at lower price levels where an increase in demand halts a price fall. The random walk hypothesis, as applied to share price movements, implies that the examination of past price movements yields no useful information on the course of future price movements.
How many of these statements are true and how many are false?
A: 4 statements are true and 1 is false B: 3 statements are true and 2 are false C*: 2 statements are true and 3 are false D: 1 statement is true and 4 are false
Chapter 9:
1. The ________ is the benchmark rate of interest charged on loans to a business borrower by a bank. A*: prime rate B: commercial paper rate C: Treasury rate D: overdraft rate
2. The _______ is the party that lends the funds in a commercial bill transaction. A: acceptor B*: discounter C: drawer D: endorser
3. The process of discounting a commercial bill means: A*: a buyer for the bill will provide the financing B: a seller for the bill will provide the financing C: the borrower has a specified time in which to repay the loan D: the acceptor agrees to pay the face value of the bill to the holder at maturity.
4. In relation to a commercial bill, the acceptance fee is: A: the discounters fee for taking on the risks associated with discounting the bill B: the fee for drawing up the bill C*: the fee for taking the liability for paying the holder at maturity D: the drawers fee for taking on the risks associated with drawing the bill.
5. When a party endorses a bank bill, it: A: repays the face value of the bill to the holder at maturity B*: creates a liability for payment of the bill C: provides the funds to the seller D: provides the funds to the discounter of the bill.
6. A company issues a 90-day bill with a face value of $100 000, yielding 7.65% per annum. What amount would the company raise on the issue? A: $84 130.46 B: $92 350.21
C: $98 123.39 D*: $98 148.62
7. A holder of a 180-day bill with 60 days left to maturity and a face value of $100 000 chooses to sell it into the market. If 60-day bills are currently yielding 6.8% per annum, what price will be obtained? A: $81 728.61 B: $89 945.79 C: $97 813.27 D*: $98 894.55
8. Promissory notes have a decided advantage over bills in that: A: they are liquid B*: an issuer of a promissory note does not incur a contingent liability C: a borrower without a strong name in the markets does not need bank endorsement D: sole liability to repay the face value at maturity belongs to the underwriting bank(s).

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Chapter 01 A modern financial system: An overview 1: The exchange of goods and services is made more efficient by: A: barter

MenuItem 3: {Topic 3} Non-bank financial institutions

A: a credit union B: a finance company C: a building society D*: an investment bank

Question 2: Money market corporations:

Question 4: Investment banks:

A: a loans officer B*: an investment banker C: a share analyst D: a treasury officer

Question 6: The principal source of income for investment banks is:

A: an investment broker B: a commercial banker C: an accounting firm D*: an investment banker

Question 9: The process of due diligence involves:

Question 10: Underwriting is:

A: an auctioneer B: a broker C: a dealer D*: an underwriter

A: due diligence B*: private placement C: securitisation D: underwriting

A: target company B*: takeover company C: conglomerate company D: hostile company

A*: target company B: takeover company C: conglomerate company D: hostile company

Question 16: A conglomerate takeover occurs when:

A: decreased B: remained stable C: increased slowly D*: increased dramatically

A: ASIC B*: APRA

C: the Reserve Bank of Australia D: SIS

Question 23: Life insurance companies:

A*: are significant investors in equities

A: equity investments B: debentures and notes

C: housing loan mortgages D*: money market securities

Question 28: General insurance companies hold:

Question 32: In a(n) _____ insurance policy, there is no savings component.

A*: term B: variable C: whole D: endowment

A: building society B: credit union C: general insurer D*: superannuation fund

Question 36: Essentially, superannuation assets provide:

Question 38: Which of the following statements is true?

A*: long, long B: long, short C: short, long D: short, short

Question 43: A defined benefit plan:

Question 45: In an accumulation superannuation fund:

Question 50: Finance companies generally:

A: savings bank B: superannuation fund C*: credit union D: merchant bank

Question 60: An important source of funds for credit unions is:

A*: building societies B: credit unions C: finance companies D: managed funds

A: savings bank B: credit union C: investment bank D*: managed fund

A: 20 per cent B*: 40 per cent C: 50 per cent D: 60 per cent

Question 68: The main features of cash management trusts are:

A: 10 days B: 20 days C*: 40 days D: 90 days

Question 76: Export Finance and Insurance Corporations:

A: Euro finance B: Conglomerate finance C*: Project finance D: Lease finance

MenuItem 4: {Topic 4} The share market and the corporation

A: a sole proprietorship B: a partnership C: a special partnership D*: a corporation

Question 2: The actual owners of a company are the _______.

A: board of directors B: executive management group C*: shareholders D: creditors

A: board of directors B*: executive management group C: shareholders D: creditors

A*: board of directors B: executive management group C: shareholders D: creditors

A: sole partnership B: partnership C: general partnership D*: corporation

A: sole proprietorship B: partnership C: general partnership D*: listed corporation

Question 7: The owners of _______ face unlimited liability.

Question 8: The liability of shareholders in limited liability companies signifies that:

Question 12: All of the following are advantages of a corporation EXCEPT:

A: bond options B*: share options C: company cars D: debentures

Question 16: Agency theory is concerned with:

Question 20: Agency problems are reduced by:

Question 21: Agency problems would be less likely to exist in:

A*: a sole proprietorship B: a partnership C: a private company D: a public company

A: executive management group B*: shareholders C: creditors D: debt holders

Question 23: A primary aim of corporate management should be to:

A: bond B: debenture C*: share D: preference share

Question 26: All of the following are features of a share EXCEPT:

D*: a right to periodic payments

A*: increased B: decreased C: remained stable D: decreased significantly

A: rights issues B: placements C: dividend reinvestment D*: new floats