Fim TB

Certificate of deposit
Chapter 01 Testbank Key
1. The exchange of goods and services is made more efficient by:

A. barters.
B. money.
C. governments.
D. some combination of government transfer and barter.
Ans: B
AACSB: Communication
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 1.02 Explain the functions of a modern financial system and categorise the main types of financial institutions,
including depository financial institutions, investment banks, contractual savings institutions, finance companies and unit trusts.
Section: Introduction
Topic: Introduction
2. The term ‘medium of exchange' for money refers to its use as:
A. coinage.
B. currency.
C. something that is widely accepted as payment for goods and services.
D. any standard of value that prices can be expressed in.
Ans: C
AACSB: Reflective thinking
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Topic: Introduction
3. 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.
Ans: C
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
Topic: Introduction
4. Money increases economic growth by assisting transfers from:
A. consumers to investors.
B. savers to borrowers.
C. businesses to consumers.
D. borrowers to investors.
Ans: B
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
Topic: Introduction
5. 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
Ans: C
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
Topic: Introduction
6. Buyers of financial claims lend their excess funds because they:

A. expect to borrow extra funds in the future.
B. want surplus funds in the future.
C. want to invest in the future.
D. want to increase their costs relative to their incomes.
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
Topic: Introduction
7. 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.
Ans: B
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
Topic: Introduction
8. A savings-surplus unit is an entity:

A. that needs to borrow funds from a surplus unit.
B. which has an income that exceeds its spending.
C. whose spending exceeds its income.
D. called a company.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Topic: Introduction
9. 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.
Ans: C
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
Topic: Introduction
10. 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
Ans: B
Bloom's: Evaluation
Difficulty: Medium
Est time: <1 minute
Section: 1.02 The financial system and financial institutions
Topic: The financial system and financial institutions
11. Which of the following is NOT associated with characteristics of shares?

A. Part ownership of a company
B. Capital gains
C. A fixed interest payment
D. Dividends
Ans: C
AACSB: Diverse and multicultural
Bloom's: Evaluation
Difficulty: Easy
Est time: <1 minute
Learning Objective: 1.03 Define the main classes of financial instruments that are issued into the financial system, that is, equity,
debt, hybrids and derivatives.
12. A financial institution that obtains most of its funds from deposits is a/an:
A. investment bank.
B. unit trust.
C. commercial bank.
D. general insurer.
Ans: C
Bloom's: Analysis
Difficulty: Easy
Est time: <1 minute
13. Institutions that specialise in off-balance-sheet advisory services are called:

A. depository financial institutions.
B. contractual institutions.
C. finance companies.
D. investment banks.
Ans: D
Bloom's: Comprehension
Difficulty: Easy
Est time: <1 minute
14. A financial intermediary that receives premium payments which are used to purchase assets
to cover future possible payments is a:
A. building society.
B. credit union.
C. savings bank.
D. life insurance office.
Ans: D
Bloom's: Evaluation
Difficulty: Easy
Est time: <1 minute
15. 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.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
16. 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.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
17. Financial institutions that are formed under a trust deed and attract funds by inviting the
public to buy units are:
A. finance companies
B. building societies.
C. unit trusts.
D. life insurance offices.
Ans: C
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
18. Which of the following is NOT a term associated with shares?

A. Residual
B. Ownership
C. Voting rights
D. Contractual claim
Ans: D
Difficulty: Easy
Est time: <1 minute
Section: 1.03 Financial instruments
Topic: Financial instruments
19. Which of the following is NOT a characteristic commonly associated with preference shares?
A. A specified, fixed return
B. No voting rights
C. Higher ranking than bond holders on claims on assets
D. No entitlement to take possession of assets if the borrower defaults on payment
Ans: C
Difficulty: Easy
Est time: <1 minute
20. Long-term debt financing instruments used by companies are called:

A. bills.
B. debentures.
C. shares.
D. equities.
Ans: B
Difficulty: Easy
Est time: <1 minute
21. When a borrower issues a debt instrument with collateral specified in its contract this debt
instrument is called:
A. unsecured.
B. secured.
C. defined.
D. negotiable.
Ans: B
Difficulty: Easy
Est time: <1 minute
22. Debt instruments that can be easily sold and transferred in the financial markets are called:
A. negotiable.
B. secured.
C. unsecured.
D. discounted.
Ans: A
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
23. Which of the following is NOT a feature of a debt instrument?

A. A contractual claim against the borrower
B. Periodic interest payments
C. Higher claim on assets of borrower than equity holders
D. Their prices do not fluctuate as much as shares
Ans: D
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
24. A fundamental difference between a futures contract and an options contract is that:
A. futures contracts are traded on organised exchanges, such as the ASX.
B. options contracts are mainly traded over-the-counter (OTC).
C. futures contracts are derivative instruments whereas options contracts are not.
D. both A and B are correct.
Ans: D
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
25. Which of the following is NOT a feature of forward contracts?

A. Forward contracts are not standardised.
B. Forward contracts do not trade on organised exchanges.
C. The contract price may be settled at the end of the contract.
D. Forward contracts are closed out by trading an opposite contract.
Ans: D
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
26. Which of the following is NOT a feature of option contracts?

A. The buyer does not have an obligation to proceed with the contract.
B. The writer of the contract receives a fee.
C. The price of the designated asset is determined at the beginning of the contract.
D. The right to buy is called a put option.
Ans: D
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
27. Which of the following is NOT a feature of swaps?

A. There is a contractual arrangement to exchange cash flows
B. Interest rate swaps exchange principal at the beginning and the end
C. A fixed rate obligation may be exchanged for a variable rate obligation
D. A swap can involve interest payments and currencies
Ans: B
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
28. The key reason for the existence of markets of financial assets is:
A. that holders of shares generally want to exchange them for bonds and other financial
instruments.
B. the high expenditure for many individuals and businesses.
C. that the lack of money in an economy makes trade in financial assets necessary.
D. the refusal of most modern governments to print money on demand.
Ans: A
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
Learning Objective: 1.04 Discuss the nature of the flow of funds between savers and borrowers, including primary markets,
secondary markets, direct finance and intermediated finance.
Section: 1.04 Financial markets
Topic: Financial markets
29. Financial markets:

A. facilitate the exchange of financial assets.
B. provide information about prices of financial assets.
C. provide a channel for funds to flow between the providers and users of funds.
D. all of the given choices.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
30. The most important function of a financial market is to:

A. provide information about shares.
B. provide a market for shares.
C. facilitate the flow of funds between lenders and borrowers.
D. provide employment for brokers and agents.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
31. Secondary financial markets
A. are where companies issue new debt and equity capital.
B. provide liquidity to primary markets financial markets.
C. transmit funds indirectly between lenders and borrowers.
D. usually provide investors with lower liquidity than primary markets.
Ans: B
Bloom's: Knowledge
Difficulty: Hard
Est time: <1 minute
32. A primary financial market is one that:

A. offers financial assets with the highest expected return.
B. offers the greatest number of financial assets.
C. involves the sale of financial assets for the first time.
D. offers financial assets with the highest historical return.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
33. A secondary financial market is one that:

A. offers financial assets with the highest expected return.
B. offers the greatest number of financial assets.
C. involves the sale of existing financial assets.
D. offers financial assets with the highest historical return.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
34. Purchasing shares on the Australian Securities Exchange is an example of:
A. a primary market transaction.
B. companies raising finance from another financial intermediary.
C. companies raising new finance.
D. a secondary market transaction.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
35. When a security is sold in the financial markets for the first time:
A. funds flow from the saver to the issuer.
B. funds flow from the borrower to the saver.
C. it represents a secondary transaction to the underwriter.
D. it is an asset for the borrower.
Ans: A
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
36. Which of the following is NOT an example of primary market transactions?

A. A company issue of shares to raise funds for an investment project
B. A government issue of bonds
C. A mortgage bond
D. A mortgage loan to buy a house
Ans: C
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
37. A ‘primary market' is a market:
A. only for equity issues by major or ‘primary' companies.
B. where borrowers sell new financial instruments to buyers.
C. where savers sell new financial claims to borrowers.
D. where government securities are bought and sold.
Ans: B
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
38. Buying bonds in the capital markets is an example of:

A. a secondary market transaction.
B. a primary market transaction.
C. companies raising new funds.
D. companies raising funds from a secondary source.
Ans: A
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
39. The market where existing securities are sold is the:

A. economic market.
B. primary market.
C. secondary market.
D. financial market.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
40. When a large company issues a financial instrument into the financial markets:
A. funds flow indirectly from saver to borrower.
B. the cost of funds is generally higher owing to the risk involved.
C. it buys a financial claim.
D. it sells a financial claim.
Ans: D
Difficulty: Easy
Est time: <1 minute
41. Secondary markets:

A. allow borrowers to raise long-term funds.
B. facilitate capital-raising in the primary market.
C. do not raise new funds but offer liquidity.
D. all of the given answers.
Ans: D
Difficulty: Medium
Est time: <1 minute
42. The flow of funds through financial markets increases the volume of savings and investment
by:
A. maintaining low interest rates.
B. storing large quantities of cash.
C. providing savers with a variety of ways to lend to borrowers.
D. offering lower interest rates than could be obtained directly from borrowers.
Ans: C
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
43. Which of the following statements is NOT a feature of financial markets?

A. Financial markets generally provide borrowers with lower cost funds than through a financial
intermediary.
B. Funds are channelled directly from savers to borrowers.
C. Contractual agreements are issued between savers and borrowers.
D. Financial markets generally deal only with the purchase and sale of government securities.
Ans: D
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
44. Which of the following is NOT true? A well-functioning financial market:

A. has a steadily increasing liquidity for most assets.
B. offers increased ease of restructuring portfolios of assets.
C. has a quick assimilation of information into asset prices.
D. has a selection of financial assets with similar timings of cash flow.
Ans: D
Difficulty: Hard
Est time: <1 minute
45. Financial markets:

A. act as intermediaries between borrowers and savers.
B. directly issue claims on savers to borrowers.
C. involve the buying and selling of existing financial securities only.
D. involve both primary and secondary transactions.
Ans: D
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
46. Direct financing allows a borrower to:

A. easily assess a lender's level of default risk.
B. match amounts and maturity of investments with borrowers.
C. lower search and transaction costs.
D. diversify their funding sources.
Ans: D
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
47. Which of the following is NOT a possible disadvantage of direct financing?

A. Matching amounts of funds to be borrowed with those to be lent
B. Assessment of the risk of the borrower
C. Cost of preparing legal contracts, taxation and accounting advice
D. Cost of the financial intermediary involved
Ans: D
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
48. An issue of debentures is an example of:

A. a secondary market transaction.
B. fundraising through financial intermediaries.
C. a direct form of funding.
D. an indirect form of funding.
Ans: C
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
49. An example of an indirect form of funding is a/an:

A. issue of debentures.
B. issue of unsecured notes.
C. term loan.
D. issue of shares.
Ans: C
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
50. Which of the following is NOT a major advantage of direct finance?

A. Direct finance reduces financial institution' fees.
B. Direct finance allows borrowers to diversify sources of funds.
C. Direct finance allows greater flexibility in funding types.
D. Direct finance reduces search and transactions costs.
Ans: D
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
51. 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.
Ans: A
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
52. The flow of funds between lenders and borrowers is channelled:

A. indirectly through financial markets.
B. directly through financial intermediaries.
C. indirectly through financial intermediaries.
D. mainly through government agencies.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
53. ‘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
Ans: B
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
54. The main role of financial intermediaries is to:

A. borrow funds from surplus units and lend them to borrowers.
B. provide advice to consumers on their finances.
C. provide funds for the government to cover budget deficits.
D. help ensure there are enough funds in circulation in a country.
Ans: A
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
55. 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.
Ans: C
Bloom's: Evaluation
Difficulty: Medium
Est time: <1 minute
56. Small savers prefer to use financial intermediaries rather than lending directly to borrowers
because:
A. financial intermediaries offer the savers a wide portfolio of financial instruments.
B. financial intermediaries offer much higher interest rates than can be obtained directly from
borrowers.
C. borrowers dislike dealing with savers.
D. savers have a claim with the ultimate borrower via the financial intermediary.
Ans: A
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
57. Financial intermediaries can engage in credit risk transformation because they:
A. obtain cost advantages owing to their size and business volumes transacted.
B. can quickly convert financial assets into cash, close to the current market price.
C. develop expertise in lending and diversifying loans.
D. can pool savers' short-term deposits and make long-term loans.
Ans: C
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
58. 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.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
59. ‘Liquidity’ in financial terms is:

A. a feature of money only.
B. the ease with which an asset can be sold at the published market price.
C. the best measure of risk of a financial asset.
D. to lower the rate of return for an asset.
Ans: B
Bloom's: Application
Difficulty: Easy
Est time: <1 minute
60. When an individual has immediate access to their funds from an account with a financial
intermediary, the intermediary is engaging in:
A. asset transformation.
B. liability management.
C. liquidity management.
D. credit transformation.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
61. 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.
Ans: D
Difficulty: Easy
Est time: <1 minute
62. According to the textbook, all of the following are financial intermediaries except a/an:
A. bank.
B. insurance company.
C. superannuation fund.
D. share broking firm.
Ans: D
Difficulty: Easy
Est time: <1 minute
63. An example of a financial intermediary is:

A. a stockbroker.
B. the Australian Securities Exchange.
C. the Australian Securities Commission.
D. an insurance company.
Ans: D
Difficulty: Easy
Est time: <1 minute
64. 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
Ans: C
Difficulty: Easy
Est time: <1 minute
Section: 1.05 Flow of funds, market relationships and stability
Topic: Flow of funds, market relationships and stability
65. Which of the following borrowers would pay the lowest interest rate on debts of equal
maturity?
A. The National Bank of Australia
B. Telstra
C. The City of Sydney
D. The Commonwealth Government
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
66. Generally, in the long term, a government:

A. is a net borrower of funds.
B. is a net supplier of funds.
C. borrows funds directly from households.
D. borrows funds directly from the financial market.
Ans: A
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
67. 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
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
68. Which of the following is NOT usually a short-term discount security?

A. Negotiable certificates of deposit
B. Commercial paper
C. Bank bills
D. Unsecured notes
Ans: D
Difficulty: Medium
Est time: <1 minute
69. Which of the following is NOT a feature of the money market?

A. It is a mainly wholesale market.
B. It deals with short-term financial claims.
C. It is important in financing the working-capital needs of businesses and governments.
D. It only operates as a market in which new security issues are created and marketed.
Ans: D
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
70. 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.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
71. A large company with a temporary surplus of funds is most likely to buy:
A. bank bills.
B. convertible notes.
C. debentures.
D. shares.
Ans: A
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
72. A company that issues promissory notes into the short-term debt markets is conducting a
transaction in the:
A. commercial paper market.
B. inter-bank market.
C. bills market.
D. official short-term money market.
Ans: A
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
73. A company with a high credit rating can issue _____ directly into the money markets.
A. CDs
B. Commercial paper
C. unsecured notes
D. debentures
Ans: C
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
74. The market that generally involves the buying and selling of discount securities is the:
A. securities market.
B. money market.
C. share market.
D. capital market.
Ans: B
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
75. A source of short-term liquidity funding for banks is the issue of:
A. bank bills.
B. debentures.
C. certificates of deposit.
D. commercial paper.
Ans: C
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
76. 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.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
77. When a company issues a long-term debt instrument with no security attached it is selling
_____ to investors.
A. shares
B. debentures
C. unsecured notes
D. term loans
Ans: C
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
78. From the viewpoint of a corporation, which source of long-term funding does not have to be
repaid?
A. Equity
B. Commercial paper
C. Corporate bonds
D. Bank bills
Ans: A
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
79. The term ‘liquidity’ refers to:

A. the length of time required to sell an asset.
B. the price discount received from buying an asset.
C. the price discount received from selling an asset.
D. access to cash and other sources of funds to meet day-to-day expenses.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
80. 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.
Ans: D
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
81. Compared with Treasury bonds, Treasury notes generally:

A. have a longer maturity.
B. pay interest annually.
C. are issued in the capital markets.
D. are discount securities.
Ans: D
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
82. If you purchase an Australian 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.
Ans: A
Bloom's: Knowledge
Difficulty: Hard
Est time: <1 minute
83. 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.
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
Learning Objective: 1.06 Analyse the flow of funds through the financial system and the economy, and briefly discuss the
importance of ‘stability’ in relation to the flow of funds.
84. All of the following are key financial services provided by the financial system except:
A. liquidity.
B. risk transfer.
C. profitability.
D. information.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
85. Which of the following would be most likely to use financial markets to borrow?
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
Ans: C
Difficulty: Easy
Est time: <1 minute
86. 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
Ans: C
Difficulty: Medium
Est time: <1 minute
87. The movement of funds between the four sectors of a domestic economy and the rest of the
world is called:
A. flow of funds.
B. sector analysis.
C. sectorial flows.
D. cross-sector flows.
Ans: A
Difficulty: Medium
Est time: <1 minute
88. As a broad generalisation, in the sectorial flow of funds households are typically:
A. a deficit sector.
B. a surplus sector.
C. fluctuates between a deficit sector and a neutral sector.
D. borrowers.
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
89. The flow of funds between the sectors of a nation-state:

A. varies from year to year.
B. depends on the business cycle.
C. depends on the levels of economic activity.
D. relates to all of the given answers.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
90. Assume that depositors want to be able to withdraw their money at almost any time and
assume that businesses like to borrow funds for two years or more. As a consequence, banks will
naturally _____ the matching principle. With the matching principle the amount of short-term
assets approximately should equal the amount of _____.
A. meet; short-term liabilities
B. meet; long-term assets
C. not meet; short-term liabilities
D. not meet; long-term assets
Ans: C
Difficulty: Medium
Est time: <1 minute
91. From the viewpoint of a corporation primary markets _____ and secondary markets _____.
A. transfer claims; transfer claims
B. transfer claims; raise funds
C. raise funds; raise funds
D. raise funds; transfer claims
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
92. A financial market would be judged as value-creating (or efficient) when:

A. it transfers funds from those with good investment ideas to those with poor investment ideas.
B. it transfers funds from those with poor investment ideas to those with good investment ideas.
C. it creates more opportunities for most investors to make money.
D. banks are liquid.
Ans: B
Difficulty: Medium
Est time: <1 minute
93. Which factor appeared to be fundamental to the Asian financial crisis?

A. Easy bank credit
B. Anti-inflationary monetary policy
C. Weak economic performance for most of the 1990s
D. Undervalued Asian currencies
Ans: A
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
Learning Objective: 1.08 Appreciate the effects, consequences and relevance of the Asian financial crisis.
Section: 1.01 Theory and facts in finance
Topic: Financial crises and the real economy
94. Securitisation occurs when:

A. an investor buys securities.
B. a company buys up assets of a certain type and sells claims against these assets.
C. a liquid asset is transformed into an illiquid asset.
D. a bank takes deposits and funds new loans.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
95. Direct finance has this characteristic:

A. asset transformation
B. contractual relationship between the ultimate supplier of funds and the user of funds
C. maturity transformation
D. liquidity transformation
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
96. Money market securities are _____, whilst capital market securities are _____.
A. both debt and equity; only debt
B. only debt; only equity
C. only equity; both debt and equity
D. only debt; both debt and equity
Ans: D
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
97. In terms of asset size the three largest financial institutions in declining order are:
A. commercial banks, Reserve Bank, general insurance offices.
B. commercial banks, superannuation funds, public unit trusts.
C. Reserve Bank, commercial banks, building societies.
D. commercial banks, life insurance offices, superannuation funds.
Ans: B
Difficulty: Medium
Est time: <1 minute
98. The matching principle involves funding short-term assets with long-term liabilities/owners
equity and funding long-term assets with short-term liabilities.
Ans: False
Feedback: Short-term assets are funded using short-term liabilities and long-term assets are
funded using long-term liabilities and owners equity.
Difficulty: Easy
Est time: <1 minute
99. Four main attributes of an asset are return, risk, volatility and time-pattern of cash flows.
Ans: False
Feedback: The attributes are return, risk, liquidity and time-pattern.
Difficulty: Easy
Est time: <1 minute
100. Deficit entities purchase financial instruments that offer the lowest interest rate.
Ans: False
Feedback: Deficit entities sell financial instruments.
Difficulty: Easy
Est time: <1 minute
101. Individuals may be categorised as risk averse, risk neutral or risk takers. Risk averse
individuals will accept a lower rate of return so as to reduce their risk exposure.
Ans: True
Feedback: An investor who prefers an investment with less risk to another with more risk,
provided they offer the same expected return, is risk averse.
Difficulty: Easy
Est time: <1 minute
102. A well-functioning financial system enables participants to readily change the composition
of their financial assets portfolio.
Ans: True
Feedback: With liquid markets and financial intermediaries, investors are able to change their
portfolios.
Difficulty: Easy
Est time: <1 minute
Topic: Introduction
103. Monetary policy relates to actions of a central bank to control the amount of money for
transactions in an economy.
Ans: False
Feedback: From the early days of banking it was recognised that there needed to be control over
the money supply. A country's central bank was usually assigned this task.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
104. The government organisation responsible for the conduct of monetary policy is the
prudential supervisor of a country's banks.
Ans: False
Feedback: Generally, the task of monetary policy is assigned to a central bank.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
105. The return or yield on an ordinary share is calculated using only the dividend paid to the
shareholder.
Ans: False
Feedback: The return or yield calculation also includes any capital gain/loss from holding the
asset.
Difficulty: Easy
Est time: <1 minute
106. In recent years, depository financial institutions have obtained a large proportion of their
funds from the financial markets directly.
Ans: False
Feedback: For the major financial intermediaries (the banks) the bulk of their funds are still
obtained from deposits.
Bloom's: Evaluation
Difficulty: Easy
Est time: <1 minute
107. A financial call/put option gives the holder the right and obligation to buy/sell the
underlying asset in the future.
Ans: False
Feedback: A call/put option gives the holder the right but not the obligation to buy/sell the
underlying asset in the future.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
108. Margin trading is the sale of a financial product that the seller does not own and who
intends to buy back at a lower price later.
Ans: False
Feedback: Short selling is the sale of a financial product that the seller does not own.
Difficulty: Medium
Est time: <1 minute
Topic: Introduction
109. Explain the advantages of financial intermediation.

Ans:
In carrying out the role of offering instruments with varying financial attributes (risk, return,
liquidity, timing of cash flows), intermediaries perform a range of functions that are important to
both savers and borrowers.
These are:
• asset transformation
• maturity transformation
• credit risk diversification and transformation
• liquidity transformation
• economies of scale.
Bloom's: Knowledge
Difficulty: Easy
Est time: 2-3 minutes
110. What is monetary policy and who is responsible for its implementation?
Ans: Monetary policy is the use of interest rates to control inflation, usually in a specified range,
and to promote economic growth. A central bank is usually responsible for carrying out
monetary policy.
Bloom's: Knowledge
Difficulty: Medium
Topic: Introduction
111. Explain what a debt security is. What are some common types of debt securities?
Ans: A debt security represents a contractual claim against the issuer of the instrument who has
borrowed the funds. The borrower agrees to abide by the terms of the contract such as meeting
covenants. A major part of the contract is the terms of payment to the lender. Corporations issue
debt securities such as debentures, term loans, commercial bills, promissory notes and unsecured
notes.
Bloom's: Synthesis
Difficulty: Medium
112. Identify and explain briefly the types of derivatives in a financial system.
Ans: There are four basic types of derivative contracts.
1. A futures contract is a contract to buy (or sell) a specified amount of a commodity or financial
instrument at a price determined today for delivery or payment at a future specified date.
2. A forward contract has features similar to a futures contract but is generally more flexible as it
is negotiated with a bank or investment bank.
3. An option gives the buyer the right but not the obligation to buy (or sell) a certain asset before
or at a specified date at a predetermined price.
4. A swap contract is an arrangement to exchange specified future cash flows. With an interest
rate swap, there is an exchange of future cash flows, such as one based on a floating interest rate
and the other on a fixed interest rate on a notional principal.
Bloom's: Synthesis
Difficulty: Hard
113. The capital markets provide the opportunity for large corporations to manage their long-
term cash flows. Discuss this statement using the example of a surplus entity and a deficit entity.
Ans: The debt part of capital markets consists of a range of instruments. Large creditworthy
companies seeking funds can issue long-term securities such as bonds or unsecured notes
directly into capital markets. Organisations such as superannuation funds or insurance companies
with funds to invest can buy these instruments for part of their portfolio.
Difficulty: Easy
Learning Objective: 1.05 Distinguish between various financial market structures, including wholesale markets and retail markets,
and money markets and capital markets.
114. The fundamental cause of a crisis is established in the boom period. Describe how a
financial crisis starts in the boom. You can illustrate this with either the Asian financial crisis or
the sub-prime mortgage crisis.
Ans: For example, the seeds for the sub-prime crisis were planted in the 1990s with government
promotion and pressure to extend home ownership to people who would not qualify for
traditional mortgages (not detailed in textbook). Financial institutions followed by creating and
promoting sub-prime mortgages. The creation of sub-prime mortgages helped engineer a housing
boom, particularly after the dot-com crisis had passed. Federal Reserve policy pushed interest
rates low for an extended period. Low interest rate policy had an outsized impact on long-dated
assets such as real estate construction. So the lethal combination of sub-prime mortgages and low
interest rates fuelled the boom, which inevitably led to the bust. Prices for homes rose at a high
rate until they became increasingly unaffordable. Once the perception of rising house prices
ended and indeed reversed, many homeowners found that they were underwater, that is the debt
owed was greater than the value of the house. This led to massive defaults, many of which were
opportunistic (debtor with ability to pay).
Difficulty: Hard
Learning Objective: 1.01 Understand the basic frameworks that underlie the facts that characterise financial institutions, financial
instruments and financial markets.
115. Explain why restrictions on capital movements are not consistent with globalisation.
Ans: Capital movements facilitate the purchase of assets in other countries, which helps to
integrate or globalise business. One final product can be assembled from subparts produced in
many disparate locations and countries. Capital movements allow for decision making to seek
out the best modes of production and markets into which products can be sold. With capital
restrictions production and trade will be more country-based, which foregoes the gains from
trade.
Difficulty: Hard
Est time: <1 minute
Learning Objective: 1.01 Understand the basic frameworks that underlie the facts that characterise financial institutions, financial
instruments and financial markets.
1. The changes to the regulations for the banking industry under deregulation in the mid-1980s
have resulted in _______ the growth of Australian banking sector.
A. decreasing
B. increasing
C. not altering
D. dramatically decreasing
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 2.01 Evaluate the functions and activities of commercial banks within the financial system.
Topic: Introduction
2. Which of the following statements concerning banks is NOT correct?

A. In Australia, banks currently 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 per cent of the capital requirement must be in the form of Tier 1 capital under
Basel II.
D. The Reserve Bank of Australia monitors capital adequacy requirements for banks.
Ans: D
Difficulty: Easy
Est time: <1 minute
Topic: Introduction
3. 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.
Ans: D
Difficulty: Easy
Est time: <1 minute
Topic: Introduction
4. The level of banks' share of assets of all Australian financial institutions since the
implementation of deregulation in the 1980s:
A. increased.
B. decreased.
C. remained stable.
D. cannot be determined.
Ans: A
Bloom's: Evaluation
Difficulty: Hard
Est time: <1 minute
Topic: Introduction
5. 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.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Topic: Introduction
6. The major roles of banks include:

A. channelling funds to finance productive investment.
B. accepting deposits and providing loans of different types including mortgage loans, personal
loans and commercial loans.
C. offering a form of liquidity services to depositors.
Ans: D
Bloom's: Evaluation
Difficulty: Easy
Est time: <1 minute
Section: 2.01 The main activities of commercial banking
Topic: The main activities of commercial banking
7. Which of the following features 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
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Topic: Introduction
8. There are four primary roles of a bank:

A. asset management, liability management, capital adequacy management and liquidity
management.
B. asset management, foreign exchange management, funds management and determining the
interest rates.
C. asset management, retirement and saving planning, stocks broking and controlling the
inflation.
D. both A and B are correct.
Ans: A
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
9a. As part of their liability management, banks sell which financial instrument?
A. Bank bill
B. Commercial paper
C. Certificate of deposit
D. Promissory note
Ans: C
9. Banks have gradually moved to liability management in the management of their balance
sheets since the period of deregulation introduced in 1980s. 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 central bank standards.
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
10. For banks, asset management 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 based on available deposit base.
D. protecting the deposits by using derivatives.
Ans: C
Bloom's: Evaluation
Difficulty: Easy
Est time: <1 minute
11. When a bank raises funds in the international financial markets to fund new lending growth,
it is involved in:
A. asset management.
B. off-balance-sheet business.
C. liability management.
D. derivative management.
Ans: C
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
12. The following statements are true for banks’ off-balance sheet transactions:
A. assets and liability are yet to be recorded in the balance sheet.
B. they represent an important source of banks’ income.
C. they are a significant part of a bank’s business (estimated to be about five to six times more
than balance sheet business)
Ans: D
Difficulty: Medium
Est time: <1 minute
13. Off-balance-sheet business for a bank refers to:

A. a bank's income.
B. a bank's contingent liabilities.
C. assets that will appear on the forthcoming balance sheet.
D. transactions recorded on the previous balance sheet.
Ans: B
Difficulty: Medium
Est time: <1 minute
14. Off-balance sheet transactions do NOT include:

A. direct credit substitute.
B. commitments.
C. extension of loans to existing customers
Ans: C
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
15. Which of the following statements about a bank's activities is NOT correct?
A. A bank's loans are its assets.
B. Off-balance-sheet business items are contingent liabilities.
C. Liability management is the management of a bank's loans.
D. All big four banks offer some form of fund management service.
Ans: C
Difficulty: Medium
Est time: <1 minute
16. The assets on a bank's balance sheet 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.
Ans: B
Difficulty: Medium
Est time: <1 minute
Learning Objective: 2.02 Identify the main sources of funds of commercial banks, including current deposits, demand deposits, term
deposits, negotiable certificates of deposit, bill acceptance liabilities, debt liabilities, foreign currency liabilities and loan capital.
Section: 2.02 Sources of funds
Topic: Sources of funds
17. The liabilities on a bank's balance sheet are:

A. the sources of funds.
B. the uses of funds.
C. the different types of loans the bank offers.
D. equal to the assets of the banks.
Ans: A
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
18. Each of the following balance sheet portfolio items are liabilities of a bank, except:
A. term deposits.
B. bill acceptance facilities.
D. overdrafts.
Ans: D
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
19. Each of the following balance sheet portfolio items are sources of funds for a bank, except:
A. term deposits.
B. bill acceptance facilities.
D. overdrafts.
Ans: D
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
20. Which of the following is a bank liability?

A. Consumer loans
B. Lease finance
C. Bills receivable
D. Certificates of deposit
Ans: D
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
21. 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 mostly negligible interest.
Ans: D
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
22. The following statements are true about a bank’s current accounts except
A. it is generally used for commercial purposes.
B. Current accounts today pay interest but it is generally insignificant.
C. There are no limit of transaction on current accounts
D. A Bank’s current account is similar with a country’s current account.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
23. 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.
Ans: D
Bloom's: Evaluation
Difficulty: Medium
Est time: <1 minute
24. 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.
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
25. 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.
Ans: A
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
26. 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
Ans: D
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
27. The negotiable certificate of deposits are issued by:

A. large banks.
B. large business corporations.
C. private equity firms
D. stock exchanges.
Ans: A
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
28. The term ‘negotiable' in relation to a security means:
A. its price can be bargained for when sold.
B. it can be sold and transferred easily in the secondary market.
C. its buyer can negotiate its price when buying.
D. it is reasonably illiquid and will drop in price when sold.
Ans: B
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
29. Which statement is NOT true for negotiable certificates of deposits?

A. They are a discount security issued by large banks into the money market.
B. They are a long-term financial instrument often traded at the stock exchange.
C. They can be bought and sold in the secondary market before the maturity.
D. The negotiable status of the security makes them highly liquid.
Ans: B
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
30. Which of the following statements 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 because 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.
Ans: C
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
31. The advantage/s of a certificate of deposit (CD) to a bank is/are:

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.
Ans: D
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
32. 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. a certificate of deposit does not pay interest until maturity.
C. a certificate of deposit is illiquid when compared with a term deposit.
D. a certificate of deposit is a high-credit-risk instrument when compared with a term deposit.
Ans: B
AACSB: Ethical
Difficulty: Medium
Est time: <1 minute
33. Which of the following statements about certificates of deposit (CDs) is NOT correct?
A. CDs are issued directly into the money markets.
B. CDs don't include interest until maturity.
C. CDs are called discount securities.
D. CDs are issued by large, creditworthy companies.
Ans: D
Bloom's: Evaluation
Difficulty: Medium
Est time: <1 minute
34. With regard to bank bills, the bill is sold at a discount:

A. because the bank needs to replace 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.
Ans: C
Bloom's: Evaluation
Difficulty: Hard
Est time: <1 minute
35. 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.
Ans: C
Bloom's: Evaluation
Difficulty: Hard
Est time: <1 minute
36. 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. Banks take primary responsibility to pay the face value of the funds to the holder at maturity.
Ans: D
Difficulty: Hard
Est time: <1 minute
37. Which of the following statements is NOT correct in relation to bill financing?
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.
Ans: C
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
38. For a bank, an advantage of bill financing is:

A. the bank earns income from accepting bills.
B. the bank doesn't necessarily have to use its own funds.
C. interest rates on bill funding can be adjusted rapidly.
Ans: D
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
39. Which of the following statements about bill acceptance facilities is NOT correct?
A. When a bank discounts a bill for the issuer, it buys it.
B. When a bank holds a bill, the bank will most likely sell it into the money market.
C. When a bank acts as an acceptor, it will pay the face value of the bill to the holder at maturity.
D. If interest rates change before a bank bill matures, the bank can change the interest rate on it.
Ans: D
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
40. 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.
Ans: C
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
41. Foreign currency liabilities have increased in importance as a source of funds for Australian
banks. Which of the following statements is NOT a major reason?
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. v
B. ii
C. i
D. All of the given answers.
Ans: A
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
42. 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.
Ans: D
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
43. The following balance sheet portfolio items are all assets of a bank, except:
A. overdrafts.
B. lease finance.
D. credit card draw-downs.
Ans: C
Difficulty: Medium
Est time: <1 minute
44. A short-term discount security issued by a drawer at a discount, with the promise to repay the
face value at maturity, is called:
A. a commercial paper.
B. a commercial bill.
C. a certificate of deposit.
Ans: D
Difficulty: Medium
Est time: <1 minute
45. Which of the following statements regarding the foreign currency liabilities of a bank is NOT
correct?
A. The large international markets are important sources of funds for commercial banks.
B. Australian banks occasionally issue debt securities into the international financial markets to
raise sums ranging from $20 million to $50 million.
C. Foreign currency liabilities issued into the euromarkets are typically denominated in US
dollars.
D. After deregulation of the banking industry, commercial banks were able to expand their
international funding sources.
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
46. All of the following financial securities are considered ‘uses of funds' by banks except:
A. commercial bills.
B. credit cards.
D. overdrafts.
Ans: C
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
Learning Objective: 2.03 Identify the main uses of funds by commercial banks, including personal and housing lending, commercial
lending, lending to government and other bank assets.
Section: 2.03 Uses of funds
Topic: Uses of funds
47. Which one of the following statements is/are true about the impact of deregulation on
housing lending in 1980s?
A. There had been increased home equity loans, which allowed households to borrow against
existing equity.
B. Household borrowing had been supported by increases in house prices.
C. The banking industry faced intense competition from lowering the lending standard in early
1990s.
D. All of the given answers describe the impact of deregulation on housing lending.
Ans: D
AACSB: Comprehension
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
48. 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.
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
49. The bank bill swap rate (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.
Ans: C
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
50. 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.
Ans: D
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
51. Which of the following statements about commercial lending is NOT correct?
A. The term loan is the main type of lending provided by banks to firms.
B. Typically, term loans are for maturities ranging from 5 to 15 years.
C. To extend commercial bill financing a bank may provide the firm with a rollover facility.
D. Banks can provide flexible funding called an overdraft to firms.
Ans: B
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
52. Which of the following statements about bank lending to government is NOT correct?
A. Securities issued by governments are usually regarded as low risk.
B. Banks invest in government securities because they are a source of liquidity.
C. Banks invest in T-notes because they provide short-term income streams.
D. Government securities enable a bank to manage the maturity structure of its balance sheet.
Ans: C
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
53. 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.
Ans: B
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
Learning Objective: 2.04 Outline the nature and importance of banks’ off-balance-sheet business, including direct credit substitutes,
trade- and performance-related items, commitments and market-rate-related contracts.
Section: 2.04 Off-balance-sheet business
Topic: Off-balance-sheet business
54. 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.
Ans: D
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
55. In recent times, there has been a substantial expansion in fee-related income for banks. What
is the principal reason for this?
A. Increased confidence in banks by individual investors
B. Increased off-sheet business (OBS) for banks
C. Reduced guidelines by Australian bank supervisor APRA
D. Increased deposits in banks
Ans: B
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
56. Which of the following statements is true for off-balance-sheet business for banks?
A. Off-balance-sheet business is a small part of a bank's income.
B. Off-balance-sheet business is recorded on a bank's statement of income and expense.
C. Off-balance-sheet business represents fee-based income.
D. Off-balance-sheet business records deposits that do not fit on the balance sheet.
Ans: C
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
57. Which of the following statements about market-rate-related items such as forward-rate
agreements (FRAs), foreign exchange contracts and interest rate swaps is NOT correct?
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' off-balance sheet business.
Ans: D
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
58. Which of the following categories 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
Ans: D
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
59. Which of the following categories 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
Ans: C
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
60. 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.
Ans: D
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
61. Which of the following statements about direct credit substitutes provided by a commercial
bank is NOT correct?
A. They are provided to support a client's financial obligations.
B. An example of a direct credit substitute is a bank guarantee.
C. The bank provides funding to a third party instead of the client providing the funding.
D. With a direct credit substitute a bank's client can raise funds directly from the financial
markets.
Ans: C
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
62. 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.
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
63. 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.
Ans: D
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
64. Which of the following is NOT a commitment by a bank?

A. Outright forward purchase agreement
B. Underwriting facilities
C. Credit card limit approvals unused by cardholder
D. Currency swap
Ans: D
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
65. 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
Ans: D
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
Learning Objective: 2.05 Consider the regulation and prudential supervision of banks.
Section: 2.05 Regulation and prudential supervision of commercial banks
Topic: Regulation and prudential supervision of commercial banks
66. The Australian institution 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.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
67. Which of the following institutions are supervised by APRA?
A. Building societies
B. Commercial banks
C. Credit unions
D. All of the given answers
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
68. Within the context of the Corporations Law in Australia, the supervision of financial market
integrity and consumer protection is done by:
A. Australian Prudential Regulation Authority (APRA).
B. Australian Securities and Investments Commission (ASIC).
C. Reserve Bank of Australia (RBA).
D. Australian Competition and Consumer Commission (ACCC).
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
69. 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.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Section: 2.06 A background to the capital adequacy standards
Topic: A background to the capital adequacy standards
70. 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.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 2.06 Understand the background and application of Basel III.
71. 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.
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
Section: 2.07 The Basel Accords: evolution from Basel I to Basel III
Topic: The Basel Accords: evolution from Basel II to Basel III
72. Which of the following does NOT apply to Tier 1 capital?

A. Tier 1 capital is described as ‘core capital'.
B. Tier 1 capital must constitute at least 50 per cent of a bank's capital base.
C. Paid-up ordinary shares can be included in Tier 1 capital.
D. Cumulative irredeemable APRA-approved preference shares can be included in Tier 1 capital.
Ans: D
Difficulty: Hard
Est time: <1 minute
73. Under Basel II prudential standards, an institution is required to maintain a risk-based capital
ratio of _____ of total-risk-weighted assets.
A. 2.00 per cent
B. 4.00 per cent
C. 8.00 per cent
D. 10.00 per cent
Ans: C
Difficulty: Easy
Est time: <1 minute
74. The Pillar 1 approach of Basel II capital adequacy incorporates the following 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.
Ans: C
Difficulty: Medium
Est time: <1 minute
75. Which of the following statements regarding capital adequacy requirements is NOT correct?
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 per cent of a bank's capital base.
D. Tier 2 capital is divided into upper and lower Tier 2 parts.
Ans: C
Difficulty: Medium
Est time: <1 minute
76. 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 per cent 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 per cent to the loan to determine the total capital requirement.
Ans: A
AACSB: Analysis
Difficulty: Hard
Est time: <1 minute
Learning Objective: 2.08 Understand the standardised approach to credit risk and compute the capital requirements for particular
transactions.
Section: Extended learning A
Topic: Extended learning A
76.. Which of the following about bank lending to government is incorrect?

A. Securities issued by governments are usually regarded as low risk
B. Banks invest in government securities because they are a source of liquidity
C. Banks invest in T-notes because they provide short-term income streams
D. Government securities enable a bank to manage the maturity structure of its balance sheet
77.. 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
77. 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 per cent.
B. 50 per cent.
C. 100 per cent.
D. 150 per cent.
Ans: D
AACSB: Analysis
Difficulty: Hard
Est time: <1 minute
transactions.
78.. In recent times, there had been a substantial expansion in fee-related income for banks. What
is the principal reason for this?
A. Increased confidence in banks by individual investors
B. Increased off-sheet business (OBS) for banks
C. Reduced guidelines by Australian bank supervisor APRA
D. Increased deposits in banks
79.. The term ‘negotiable' in relation to 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.
78. 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.
Ans: D
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
transactions.
79. 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
Ans: B
AACSB: Analysis
Difficulty: Hard
Est time: <1 minute
transactions.
80. 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 per cent.
A. $6 400
B. $16 000
C. $160 000
D. $240 000
Ans: B
AACSB: Analysis
Difficulty: Hard
Est time: <1 minute
transactions.
81. If a bank’s risk-weighted assets equal $50 000 000, the bank’s common equity requirement
in dollar value according to Basel III is:
A. $2 250 000
B. $5 000 000
C. $4 000 000
D. $1 000 000
Ans: A
AACSB: Analysis
Difficulty: Hard
Est time: <1 minute
transactions.
82. A bank’s common equity requirement for the capital conservation buffer under Basel III with
a risk-weighted asset of $50 000 000 is equal to:
A. $1 250 000
B. $1 000 000
C. $1 000 000
D. $1 000 000
Ans: A
AACSB: Analysis
Difficulty: Hard
Est time: <1 minute
transactions.
83. 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
Ans: A
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
84. Under Basel II capital accord, the approach to credit risk that requires a bank to assign risk
weights given by the prudential supervisor is called:
A. an advanced approach.
B. a foundation approach.
C. a standardised approach.
D. advanced-internal ratings.
Ans: C
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
85. 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.
Ans: D
Difficulty: Medium
Est time: <1 minute
86. The minimum total capital required under the Basel III guideline is:
A. 8 per cent of risk-weighted assets.
B. 9 per cent of risk-weighted assets.
C. 10 per cent of risk-weighted assets.
D. 50 per cent of risk-weighted assets.
Ans: A
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
87. Which of the following statements about recently adopted guidelines covering capital
requirements for market risk that banks are required to perform is NOT correct?
A. Banks use a risk measurement model based on a VaR approach.
B. Banks estimate the sensitivity of portfolio components to small changes in prices.
C. Banks must hold capital against risk of loss from changes in interest rates.
D. Banks hold a fixed allocation of funds between various balance sheet assets and off-balance-
sheet business.
Ans: D
Difficulty: Medium
Est time: <1 minute
Topic: Basel II capital accord
88. For a commercial bank operating 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.
Ans: A
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
89. For a commercial bank's normal day-to-day business, the capital adequacy guidelines for the
operational risk it is exposed to fall under:
A. Pillar 1.
B. Pillar 2.
C. Pillar 3.
D. Pillar 4.
Ans: A
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
90. For a commercial bank's market discipline, the capital adequacy guidelines for its disclosure
and transparency requirements fall under:
A. Pillar 1.
B. Pillar 2.
C. Pillar 3.
D. Pillar 4.
Ans: C
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
91. 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
Ans: D
Difficulty: Medium
Est time: <1 minute
92. Part of a bank's liquidity management is to hold a portfolio of:
A. term loans.
B. mortgages.
C. Commonwealth government securities.
D. credit card loans.
Ans: C
Difficulty: Medium
Est time: <1 minute
93. In relation to a bank, ‘liquidity management’ means:

A. the bank's ability to quickly convert deposits into loans.
B. the bank's ability to onsell its loans.
C. the bank's ability to have funds available when depositors' funds mature.
D. the bank's policies and practices in identifying and managing its loans portfolios.
Ans: A
Difficulty: Medium
Est time: <1 minute
Learning Objective: 2.07 Examine liquidity management and other supervisory controls applied by APRA in the context of Basel III.
Section: 2.08 Liquidity management and other supervisory controls
Topic: Liquidity management and other supervisory controls
94. Which statement best describes and defines a bank?

A. Banks engage in financial transactions.
B. Banks accept deposits and make loans.
C. Some of a bank's business is not shown on its balance sheet.
D. Banks compete in the global capital markets.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
95. Sally has an account that pays interest at a stated rate for a finite period of time. Most likely
this account is known as a:
A. negotiable certificate of deposit.
B. bank capital.
C. term deposit.
D. bill of exchange.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Topic: Sources of Funds
96. An amortised loan pays:

A. interest only.
B. principal only.
C. interest and principal so that the total paid each period is the same.
D. constant interest and decreasing principal.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Topic: Uses of Funds
97. The basic idea of capital is that it is:

A. equity value.
B. the long-term funds of a business.
C. a measuring device for banks.
D. an amount that cannot decrease through a firm's operations.
Ans: B
Difficulty: Medium
Est time: <1 minute
98. The notional value of off-balance sheet activities of banks in Australia _____. The largest
single activity concerns _____.
A. is about equal to the value of total bank assets; foreign exchange
B. exceeds the value of total bank assets; foreign exchange
C. is about equal to the value of total bank assets; interest rates
D. exceeds the value of total bank assets; interest rates
Ans: D
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
99. Value-at-risk models:

A. estimate possible losses on a bank's portfolio and show a bank how it can avoid the riskiest
markets.
B. are predicated on the assumption that the future will resemble an historical period.
C. compute the expected loss for the next two to five years.
D. stress test a portfolio for the most likely outcome in various markets.
Ans: B
Difficulty: Hard
Est time: <1 minute
100. The fundamental characteristics of high-quality assets described in the liquidity coverage
ratios meet the following criteria except:
A. assets should be liquid in markets during a time of stress.
B. assets are considered to be high-quality liquid assets if they can be easily and immediately
converted into cash at little or no loss of value.
C. assets are exposed to low credit and market risk.
D. it can be easily traded in the financial markets with a huge discount.
Ans: D
Difficulty: Hard
Est time: <1 minute
101. A bank's need for liquidity arises from the fact that its sources of funds are _____ and its
earning assets are typically _____. In assessing liquidity we should include _____.
A. short-term; long-term; bank capital
B. short-term; long-term; assets that trade in active secondary markets
C. long-term; short-term; assets that trade in active secondary markets
D. long-term; short-term; bank capital
Ans: B
Difficulty: Medium
Est time: <1 minute
102. To be listed on the ASX, firms must:

A. adhere to the Corporate Governance Principles and Recommendations.
B. disclose whether they adhere to the Corporate Governance Principles and Recommendations.
C. disclose whether they adhere to the Corporate Governance Principles and Recommendations
and if not, explain why not.
D. conduct their business in an ethical and responsible manner.
Ans: C
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
Learning Objective: 2.10 Discuss the importance of corporate governance and ethics in the context of Australian financial
institutions.
Section: Extended Learning C
Topic: Corporate governance and ethics
103. Commercial banks are the main type of financial institution in a financial system because
they hold the largest amounts of financial assets.
Ans: True
Feedback: 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.
Difficulty: Easy
Est time: <1 minute
Topic: Introduction
104. The greater the dominance of commercial banks in an economy, the less regulation
required.
Ans: False
Feedback: 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.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Topic: Introduction
105. Banks obtain funds from many areas. These sources of funds appear as liabilities on a
bank's balance sheet.
Ans: True
Feedback: Deposits are a major part of a bank's sources of funds and a bank needs to pay interest
expenses.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
106. Liability management is where banks actively manage their liabilities in order to meet
future loan demand.
Ans: True
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
107. Call deposits are funds lodged in a bank account for a specified short-term period.
Ans: False
Bloom's: Evaluation
Difficulty: Easy
Est time: <1 minute
108. 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.
Ans: False
Bloom's: Evaluation
Difficulty: Medium
Est time: <1 minute
109. There is an inverse relationship between bank exposure to level of credit risk and amount of
capital required under Basel II.
Ans: False
Feedback: As a bank’s exposure to counter-party risk is higher, there is a likely chance that the
borrowers will default on the payment of interest and principal; therefore, the prudential
supervisor may impose high level of capital requirement for this sort of bank exposure.
Difficulty: Hard
Est time: <1 minute
110. A capital buffer was introduced under Basel III to promote the conservation of capital above
minimum requirements that can be used to absorb losses during periods of financial and
economic stress.
Ans: True
Feedback: In line with the guideline based on Basel accord, APRA introduced a capital
conservation buffer, applicable at all times and equal to 2.5 per cent of risk-weighted assets
(unless determined otherwise by APRA). The role of the buffer was to ensure that capital
requirement takes into account the macro-financial environment.
Difficulty: Hard
Est time: <1 minute
111. One of the important attributes of certificates of deposit (CDs) for a bank is the ability to
adjust the yields on new issues.
Ans: True
Feedback: The yield on a CD cannot be adjusted until it reaches maturity and a new CD is
issued.
Bloom's: Evaluation
Difficulty: Easy
Est time: <1 minute
112. According to banks’ liability management principle, commercial banks now actively
manage their sources of funds (liabilities) in order to ensure they have sufficient funds available
to meet loan demand and other commitments.
Ans: True
Feedback: If loan demand is forecast to increase, banks enter the capital markets and borrow the
necessary funds required to meet their forecast loan demand.
Difficulty: Hard
Est time: <1 minute
113. For bills of exchange, a commercial bank serves as an acceptor to the bill. The acceptor, on
behalf of the issuer, will repay the face value of the bill to the holder at maturity, will repay the
face value of the bill to the holder at maturity.
Ans: True
Feedback: As an acceptor of the bill, the bank becomes the primary liability holder, and thus is
required to return the face value to the holder of the security at maturity.
Difficulty: Hard
Est time: <1 minute
114. One of the major advantages of an overdraft facility is that it allows a business to place its
operating account into debit up to an agreed amount to counter cash flow mismatch.
Ans: True
Feedback: Businesses typically need to pay out funds for expenses before they receive funds
back from their business operations. Since the arrangement of additional funds through a formal
process involves times and costs, an overdraft facility becomes an easy funding alternative.
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
115. 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.
Ans: False
Feedback: A normal bank acquires most of its funding from deposits.
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
116. A bank may seek to obtain funds by issuing unsecured notes with a collaterised floating
charge over its deposits.
Ans: False
Feedback: Unsecured notes do not have any security attached.
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
117. Foreign currency liabilities are debt instruments issued into another country but not
denominated in the currency of that country.
Ans: False
Feedback: Foreign currency liabilities are typically denominated in foreign currencies such as
US dollars, the yen and pound sterling.
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
Topic: Introduction
118. Briefly discuss the sources of funds for a commercial bank.

Ans: Sources of funds appear on a bank's balance sheet either as liabilities or shareholders' equity
funds. The main sources of funds are primarily the more liquid funds from current account
deposits (call deposits). Next 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.
Bloom's: Knowledge
Difficulty: Easy
119. Describe how a bill acceptance facility works.

Ans: 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. Alternatively, 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.
Consequently, the bank could provide both a bill acceptance facility and a bill discount facility.
Bloom's: Knowledge
Difficulty: Medium
120. Discuss the main features of housing finance.

Ans: 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.
Difficulty: Medium
121. Discuss the main features of a bank's commercial lending.

Ans: 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.
Difficulty: Easy
122. Within the context of off-balance-sheet business, explain direct credit substitutes, trade- and
performance-related items and any differences between these items.
Ans: 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.
Bloom's: Evaluation
Difficulty: Medium
123. In two or three sentences indicate what Basel is and why there are three versions.
Ans: The Bank for International Settlements promulgated capital standards for banks and this
became known as Basel I. The complex nature of modern banking led to the revised capital
standards of Basel II that could reflect more accurately risk Basel III was primarily adopted a
response to the GFC but it has been revised and enhanced since then. The main objective of
Basel III is to increase bank liquidity and decrease bank leverage in order to support financial
system stability. The focus of the three versions of Basel has remained on the capital adequacy of
financial institutions.
Difficulty: Hard
124. What is the LVR and how do banks use it in assessing risk?
Ans: LVR = loan-to-valuation ratio. For each residential mortgage the bank would calculate the
loan amount as a percentage of the value of the mortgaged property. One minus this ratio equals
equity as a percentage of the value. The higher the LVR, the more risky the loan is as there is
less equity or cushion and less incentive for the homeowner to make good on the loan. Thus, as
LVR increases, risk weighting in a step-wise manner increases. Mortgage insurance decreases
the risk weighting, especially at high levels of LVR.
Difficulty: Medium
transactions.
Section: Extended Learning
Topic: The standardised approach to credit risk
125. Discuss the major improvement in Basel III as compared with Basel II.
Ans: Basel II forms the foundation for Basel III, which strengthens the ‘three pillars’ of Basel II.
The most important changes to the three pillars are concerned with enhancing the capital
requirements (the first pillar of Basel II). Basel III introduces a new minimum Tier 1 capital
requirement of 6.00 per cent, up from 4.00 per cent. Within Tier 1, Basel III introduces a new
common equity Tier 1 requirement (CET1) that sets a minimum of 4.50 per cent as the
proportion of Tier 1 that must be common equity, the highest quality form of capital. In effect,
CET1 will be set at a minimum of 7.00 per cent because Basel III also introduces an additional
‘capital conservation buffer’ of 2.50 per cent, which must consist of common equity.
Difficulty: Medium
Est time: <1 minute
1. The major distinction between non-bank financial institutions (NBFIs) and commercial banks
are the following except:
A. differentiated by their source and use of funds.
B. differentiated by their off-balanced business activities and regulations.
C. under Banking Act-1959 (Common Wealth), commercial banks are authorized to operate as
banks.
D. Both NBFIs and commercial banks attract deposit from the public.
Ans: D
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
Learning Objective: 3.01 Describe the roles of investment banks, with an emphasis on the nature of their off-balance-sheet
business, in particular mergers and acquisitions.
Section: 3.01 Investment banks
Topic: Investment banks
2. Which of the following non-bank financial institutions are authorised depository institutions?
A. Savings and loans limited, credit unions and building societies
B. Investment banks, building societies and savings and loans limited
C. Investment banks, life office and finance companies
D. Commercial banks only
Ans: A
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Topic: Introduction
3. The financial institution that is a specialist provider of financial and advisory services to
companies is a/an:
A. credit union.
B. finance company.
C. building society.
D. investment bank.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
3.. Recent figures about superannuation assets in Australia show that the largest
amounts of assets are in the ____:
A. corporate superannuation funds

B. industry corporation funds
C. retail superannuation funds
D. self-managed superannuation funds
Ans: D
4. Major functions of investment banks include the following except:

A. advising and providing underwriting arrangement for clients by issuing financial securities.
B. serving as dealers or market makers in capital markets.
C. providing advice on risk management and hedging.
D. attracting deposits and providing investment loans.
Ans: D
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
5. 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 to retail clients.
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
6. 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.
Ans: C
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
7. Unlike depository institutions such as commercial banks, building societies and credit unions,
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 only from large corporations.
D. are not required to comply with minimum capital adequacy requirements.
Ans: D
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
8. A company may hire a/an ________ to advise on and underwrite its new share issue.
A. loans officer
B. investment banker
C. share analyst
D. treasury officer
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
9. A major source of income for investment banks is from:

A. issuing bank bills.
B. off-balance-sheet business activities.
C. issuing secondary securities.
D. issuing certificates of deposit.
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
10. Money market corporations (merchant and investment banks) have significantly increased
their off-balance-sheet business on account of 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.
Ans: C
Difficulty: Medium
Est time: <1 minute
11. Most corporations will seek advice from a/an ______ on possible mergers and acquisitions.
A. investment broker
B. commercial banker
C. accounting firm
D. investment banker
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
12. 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 firm's financial statements.
D. placement of securities to institutional investors.
Ans: C
AACSB: Ethical
Difficulty: Medium
Est time: <1 minute
13. Which of the following statements correctly describes about an underwriting?

A. it is a service whereby investment banks agree to buy new securities issued by a client
company those are not fully subscribed or sold.
B. investment bank gives advice to a company about a merger.
C. an investment banker as an underwriter ensures funds are raised for their clients from an
equity or debt issue.
D. both A and C are correct.
Ans: D
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
14. When an investment bank guarantees a certain price for a company issuing new shares, it is
acting as a/an:
A. auctioneer.
B. broker.
C. dealer.
D. underwriter.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
15. 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.
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
15.. The detailed analysis of a firm's financial statements as part of a possible

takeover is called:
A. share analysis
B. technical analysis
C. due diligence
D. project management
Ans: C
16. 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
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
17. Venture capital is:

A. a form of funding provided for a new start-up business by a group of investors.
B. providing advice to companies on the raising of new capital.
C. short-term funding provided by banks.
D. placement of securities to institutional investors.
Ans: A
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
18. 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
Ans: A
Difficulty: Easy
Est time: <1 minute
19. 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
Ans: B
Difficulty: Medium
Est time: <1 minute
19.. If a car manufacturer were to purchase one of the companies listed below, which purchase would
be called a vertical takeover?
A. An electronic components supplier
B. A rival car manufacturer
C. A travel company
Ans: A
20. If an oil drilling company were to purchase one of the companies listed below, which
purchase would be called a vertical takeover?
A. An oil refinery company
B. A rival oil drilling company
C. A travel company
Ans: A
Difficulty: Medium
Est time: <1 minute
20.. Which of the following holds the smallest percentage of total assets of financial
institutions: finance companies, credit unions, managed funds and permanent
building societies?
B. Credit unions
C. Finance companies
D. Managed funds
Ans: A
21.
In recent year, investment banking deals have been dominated by ‘spin-off’. Spin-off is best
described as:
1. where a company breaks itself into new companies and the new companies become
separately listed public companies.
2. where a publicly owned company breaks itself into new private equity firms.
3. where a private equity firm transitions into a publicly owned company.
4. none of the given answers.
Ans: A
Difficulty: Medium
Est time: <1 minute
22. Which of the following statements are true for managed funds?
A. They provide direct access to wholesale investment markets for pooled savings of individuals
(not an intermediary).
B. They provide opportunities for small investors to invest in financial securities and diversify
the risk.
C. They provide professional expertise, administrative efficiency, economies of scale and a
better diversification platform.
Ans: D
Difficulty: Hard
Est time: <1 minute
Learning Objective: 3.02 Explain the structure, roles and operation of managed funds and identify factors that have influenced their
rapid growth.
Section: 3.02 Managed funds
Topic: Managed funds
22.. Which of the following statements about managed funds is incorrect?
A. The assets of large managed funds may be managed by several professional

managers
B. A mutual fund is required to use the services of a mutual fund custodian
C. Sources of funds for a managed fund may be in the form of monthly payments
D. For Australia, recent figures show that the statutory funds of life offices have the largest amounts of
assets under management
Ans: D
23. Reasons for mergers do NOT include:

A. finances.
B. economies of scale.
C. business diversification.
D. reduction of debt.
Ans: D
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
24. The financial institution that pools funds from 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.
Ans: D
Difficulty: Easy
Est time: <1 minute
rapid growth.
25. Which of the following statements about managed funds is NOT correct?
A. The assets of large managed funds may be managed by several professional managers.
B. A mutual fund is required to use the services of a mutual fund custodian.
C. Sources of funds for a managed fund may be in the form of monthly payments.
D. For Australia, recent figures show that the statutory funds of life offices have the largest
amounts of assets under management.
Ans: D
Difficulty: Medium
Est time: <1 minute
rapid growth.
26. A managed fund that is established under a trust deed and is managed by a responsible entity
is called a:
A. mutual fund.
B. trust fund.
C. trustee fund.
D. investment fund.
Ans: BThe uses of funds for credit unions are mainly:
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
rapid growth.
27. 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.
Ans: C
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
rapid growth.
28. An investor who wishes to save for their retirement in 20 years' time and who is less risk-
averse is likely to invest in a managed fund that invests in government securities and:
A. cash deposits.
B. some property.
C. debentures.
D. foreign equities.
Ans: D
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
rapid growth.
29. Benefits of investing in mutual funds do NOT include:

A. record keeping and administration.
B. professional management.
C. diversification.
D. increasing supply of credit to the economy.
Ans: D
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
rapid growth.
30. Managed fund managers:

A. invest funds according to their fund's trust deed.
B. generally reinvest income and any capital gains in the fund.
C. will usually maintain a diversified portfolio of assets within the asset classes.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
rapid growth.
31. A mutual investment fund that specialises in short-term debt instruments and is managed by a
financial intermediary is called a:
A. money market fund.
B. cash management trust.
C. certificate of deposit fund.
D. bank bill fund.
Ans: B
Difficulty: Easy
Est time: <1 minute
Learning Objective: 3.03 Discuss the purpose and operation of cash management trusts and public unit trusts.
Section: 3.03 Cash management trusts
Topic: Cash management trusts
32. The main feature of cash management trusts is:

A. they allow individuals to access the money markets.
B. they provide liquidity and access to funds.
C. that many are associated with stockbrokers and the electronic purchasing and selling of
securities by investors.
Ans: D
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
33. The largest proportion of funds held by cash management funds in Australia is in:
A. cash and deposits.
B. bills of exchange.
C. promissory notes and CDs.
D. bills of exchange and CDs.
Ans: A
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
34. Which of the following statements is NOT a feature of unit trusts?

A. Unit trusts 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.
Ans: C
Difficulty: Medium
Est time: <1 minute
Section: 3.04 Public unit trusts
Topic: Public unit trusts
35. 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.
Ans: C
Difficulty: Medium
Est time: <1 minute
36. One of the major disadvantages of investing in unlisted real estate trusts is that:
A. they are generally unable to meet the demand for a large number of simultaneous withdrawal
requests as they do not hold cash reserves to the extent of the withdrawal demand.
B. they are generally able to meet the demand for a large number of simultaneous withdrawal
requests as they hold cash reserves to the extent of the withdrawal demand.
C. they are generally able to meet the demand for a large number of simultaneous withdrawal
requests as the units are highly liquid.
Ans: A
Difficulty: Medium
Est time: <1 minute
37. Which of the following statements is NOT a feature of public unit trusts?
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.
Ans: D
Difficulty: Medium
Est time: <1 minute
38. An investor is considering different methods of investment, including a public unit trust.
Which of the following is NOT a function of a public unit trust?
A. Acting as a vehicle for the pooling of investor funds
B. Providing a level of investor protection though the appointment of a trustee
C. Allowing small investors access to larger investment opportunities
D. Locking in a trust unit price by listing on the Australian Securities Exchange
Ans: D
Difficulty: Medium
Est time: <1 minute
39. 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 likely be established?
A. A mortgage trust
B. A property trust
C. An equity trust
D. A cash management trust
Ans: B
Difficulty: Easy
Est time: <1 minute
40. The main advantage of a listed trust over an unlisted unit trust is that a listed trust:
A. has a trustee but an unlisted trust does not.
B. units can be sold at any time by the unit holder in the secondary market.
C. invests in equities, while an unlisted trust invests only in fixed interest.
D. invests in equities, while an unlisted trust invests in property.
Ans: B
Difficulty: Easy
Est time: <1 minute
41. In Australia, listed property trusts dominate over the proportion of unlisted property unit
trusts because:
A. the valuations of buildings are larger than share valuations.
B. mortgages on buildings are larger than companies' valuations.
C. listed shares can be more advantageous in terms of liquidity.
D. it reflects the liquid nature of properties.
Ans: C
Difficulty: Easy
Est time: <1 minute
42. 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
Ans: D
Difficulty: Easy
Est time: <1 minute
Learning Objective: 3.04 Describe the nature and roles of superannuation funds, including the primary sources of superannuation
funds and the different types of fund.
Section: 3.05 Superannuation funds
Topic: Superannuation funds
43. Essentially, superannuation funds 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.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
44. Recent records about superannuation assets in Australia show that the largest amounts of
assets are in:
A. corporate superannuation funds.
B. industry corporation funds.
C. retail superannuation funds.
D. self-managed superannuation funds.
Ans: D
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
45. Which of the following funds is supervised by the Australian Taxation Office?
A. Corporate superannuation funds
B. Industry corporation funds
C. Retail superannuation funds
D. Self-managed superannuation funds
Ans: D
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
46. Which of the following statements is true?

A. Since the 1990s, assets of superannuation funds outside life insurance offices have grown
much slower 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 Australia's superannuation industry throughout the 1990s.
D. Industry superannuation funds are regulated superannuation entities with more than ten
members that provide benefits for employees working in the same industry.
Ans: C
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
47. 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.
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
48. 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.
Ans: C
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
49. 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.
Ans: C
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
50. 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 plan's 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.
Ans: B
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
51. The superannuation fund that involves the amount of benefit paid out on retirement being
calculated by a formula based at the time when a person joined the fund is called:
A. a defined benefit fund.
B. an accumulation fund.
C. a defined termination fund.
D. a defined payout fund.
Ans: A
Difficulty: Medium
Est time: <1 minute
52. The superannuation fund where the amount of funds available at retirement consists of past
contributions plus earnings less taxes and expenses is called:
C. a defined termination fund.
D. a defined payout fund.
Ans: B
Difficulty: Medium
Est time: <1 minute
53. 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:
A. accumulation fund.
B. defined benefit fund.
C. fully funded fund.
D. private fund.
Ans: B
Difficulty: Medium
Est time: <1 minute
54. When an employee makes regular contributions equal to 9.5 per cent of their salary and their
employer also contributes the equivalent of 14 per cent of salary to a superannuation fund that is
an accumulation scheme:
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.
Ans: B
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
55. All of the following Acts or Bills are relevant to the operation of the Australian
superannuation industry except the:
A. Superannuation Industry (Supervision) Act 1993.
B. Income Tax Assessment Act 1936.
C. Superannuation (Agents and Brokers) Act 1984.
D. Superannuation Guarantee Amendment Bill 2011.
Ans: C
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
56. Which of the following is NOT an important result of the compulsory guarantee charge
implemented in July 1992?
A. The amount of superannuation funds in Australia has increased significantly.
B. The employer contribution SGC increased to 9 per cent 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.
Ans: C
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
57. The amount of financial assets held by insurance companies has _______ over the past 20
years.
A. decreased
B. remained stable
C. increased slowly
D. increased dramatically
Ans: D
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
Learning Objective: 3.05 Define life insurance offices and general insurance offices, and explain the main types of insurance policies
offered by each type of insurer.
Section: 3.06 Life insurance offices
Topic: Life insurance offices
58. Which of the following has regular, relatively predictable and long-term inflow of funds?
A. Life insurance office
B. General insurance
C. Income protection insurance
D. Trauma insurance
Ans: A
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
59. Recent figures show 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.
Ans: C
Bloom's: Knowledge
Difficulty: Hard
Est time: <1 minute
60. Under a co-insurance clause, a house with a replacement cost of $500 000 is covered for only
90 per cent of the losses. Which one of the following statements is true?
A. The insurance office will pay only $450 000 and the policy holder will be said to have self-
insured for the remaining 10 per cent of the damage.
B. The insurance office will pay only $400 000 and the policy holder will be said to have self-
insured for the remaining $100 000 of the damage.
C. The insurance office will pay only $50 000 and the policy holder will be said to have self-
insured for the remaining $450 000 of the damage.
D. The insurance company will pay only $100 000.
Ans: A
Bloom's: Problem solving
Difficulty: Hard
Est time: <1 minute
61. In Australia, the prudential supervisor of life insurance offices is:

A. ASIC.
B. APRA.
C. the Reserve Bank of Australia.
D. PSLI.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
62. Which of the following statements with regard 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.
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
63. Which of the following statements about life insurance companies is false?
A. As inflows of funds are relatively predictable, they have a very stable level of liabilities.
B. Life insurance companies have greatly increased their assets over the past decade.
C. Life insurance companies sell contracts that offer financial cover against premature death.
D. Life insurance companies have large amounts of short-term liquid securities.
Ans: D
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
64. 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. do not match any of these answers.
Ans: A
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
65. In Australia there has been a substantial expansion of assets in the life insurance industry.
Which of the following factors 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
Ans: B
Difficulty: Medium
Est time: <1 minute
66. 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
Ans: D
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
67. 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
Ans: D
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
68. General insurance companies hold:

A. a smaller number of short-term assets than life insurance companies.
B. a greater number of short-term assets than life insurance companies.
C. approximately the same number of short-term assets as life insurance companies.
D. only long-term assets.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Section: 3.07 General insurance offices
Topic: General insurance offices
69. General insurance companies hold more liquid assets than life insurance companies 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. there are more items covered under a general insurance policy so there are more payouts to
the insured.
Ans: B
Difficulty: Easy
Est time: <1 minute
70. A major difference between a whole-of-life insurance policy and a term-life policy is:
A. a whole-of-life policy is long-term, whereas a term policy is only for a 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 part.
D. term policies only pay bonuses at the end of the term, unlike the whole–of-life policy, which
pays them out immediately as they are accumulated.
Ans: C
Difficulty: Medium
Est time: <1 minute
71. Which of the following does NOT apply to a whole-of-life insurance policy?
A. It includes an investment component
B. It is a long-term insurance policy
C. It may pay a bonus if surplus investment returns are generated
D. Premiums reduce over time owing to accumulated bonuses
Ans: D
Difficulty: Medium
Est time: <1 minute
72. In a/an _____ insurance policy, there is no savings component.

A. term
B. variable
C. whole
D. endowment
Ans: A
Difficulty: Easy
Est time: <1 minute
73. In relation to insurance for term-life policies with a stepped premium over time, the policy
holder pays premiums:
A. based on current market rates.
B. that increase gradually over time.
C. based on increases in inflation.
D. based on indexing the sum insured.
Ans: B
Difficulty: Medium
Est time: <1 minute
74. For motor vehicle insurance, a third party policy means:

A. the policy covers damage to the named vehicle plus any damage to any third party vehicle or
party.
B. the policy covers damage to both parties.
C. the policy covers damage or loss to a third party or property only.
D. the policy covers damage to the named vehicle plus any theft.
Ans: C
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
75. A fund that aims to achieve high investment returns by using exotic financial products is
called a:
A. a hedge fund.
B. project fund.
C. money market fund.
D. leverage fund.
Ans: A
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 3.06 Discuss hedge funds, including their structure, investors, investment strategies and risk.
Section: 3.08 Hedge funds
Topic: Hedge funds
76. A hedge fund that takes a long position in the Australian dollar is forecasting the Australian
dollar will:
A. depreciate in value.
B. appreciate in value.
C. remain the same in value.
D. depreciate in value in the long-term.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Topic: Hedge funds
77. A hedge fund that takes a short position in equity markets:

A. will sell forward shares.
B. will buy a derivative that they expect will increase in price.
C. will buy shares.
D. is expecting the markets to increase.
Ans: A
Difficulty: Easy
Est time: <1 minute
Topic: Hedge funds
78. 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.
Ans: B
Difficulty: Medium
Est time: <1 minute
Learning Objective: 3.07 Explain the principal functions of finance companies and general financiers, and the changes that have had
an impact on finance company business.
Section: 3.09 Finance companies and general financiers
Topic: Finance companies and general financiers
79. Which of the following statements is NOT a feature of finance companies?

A. Finance companies came into existence in response to regulations on interest rates.
B. Finance companies sell unsecured notes and use the funds to make loans to borrowers.
C. The majority of finance companies' funds are sourced from banks.
D. Today the banks own many large finance companies.
Ans: C
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
80. 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.
Ans: D
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
81. Finance companies use their funds to provide:

A. loans to individuals.
B. instalment credit to finance retail sales to retail stores.
C. lease financing.
Ans: D
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
82. 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
Ans: B
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
Learning Objective: 3.08 Outline the roles and relative importance of building societies and credit unions, and analyse the significant
changes that have occurred in these sectors.
Section: 3.10 Building societies
Topic: Building societies
83. Which of the following statement about building societies in Australia is NOT correct?
A. The main activities of building societies are to take in deposits and provide mortgage finance.
B. The largest building societies have tended to convert to regional banks in recent times.
C. Now currently the building society sector holds 2 per cent of the total assets of the Australian
financial system.
D. Building societies are authorised deposit-taking institutions and supervised by APRA.
Ans: C
Bloom's: Evaluation
Difficulty: Medium
Est time: <1 minute
84. 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.
Ans: D
Bloom's: Evaluation
Difficulty: Easy
Est time: <1 minute
85. In Australia permanent building societies are supervised by:

A. ASIC.
B. APRA.
C. the Reserve Bank of Australia.
D. ASX.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
86. 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
Ans: C
Difficulty: Easy
Est time: <1 minute
87. 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.
Ans: D
Difficulty: Easy
Est time: <1 minute
88. The uses of funds for credit unions are mainly:

A. company shares.
B. commercial paper.
C. debentures and unsecured notes.
D. mortgages.
Ans: D
Difficulty: Easy
Est time: <1 minute
89. Which of the following holds the smallest percentage of total assets of financial institutions?
B. Credit unions
C. Finance companies
D. Managed funds
Ans: A
Bloom's: Evaluation
Difficulty: Hard
Est time: <1 minute
90. Export Finance and Insurance Corporation's function is:

A. solely to lend directly to small- or medium-sized businesses involved in export trade.
B. solely to guarantee trade finance to small- or medium- sized businesses involved in export
trade.
C. to encourage export trade by providing trade insurance and financial services.
D. solely to provide insurance for Australian suppliers of goods and services against non-
payment.
Ans: C
Bloom's: Evaluation
Difficulty: Medium
Est time: <1 minute
Learning Objective: 3.09 Describe the unique role of export finance corporations.
Topic: Export Finance Corporations
91. The form of financing for large tourist resorts, property developments, heavy industry and
processing plant developments is called:
A. euro finance.
B. conglomerate finance.
C. project finance.
D. lease finance.
Ans: C
Bloom's: Evaluation
Difficulty: Easy
Est time: <1 minute
Learning Objective: 3.10 Understand project finance and structured finance, and the related roles of investment banks.
Section: Extended learning
Topic: Extended learning
92. 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.
Ans: A
Difficulty: Medium
Est time: <1 minute
Learning Objective: 3.10 Understand project finance and structured finance, and the related roles of investment banks.
Topic: Building societies
93. When an oil refining company takes over an oil exploration company, the result is a:
A. vertical takeover.
B. horizontal takeover.
C. conglomerate takeover.
D. hostile takeover.
Ans: A
Bloom's: Knowledge
Difficulty: Easy
Difficulty: Medium
Est time: <1 minute
94. If someone does not want to make any investment decisions then the best type of fund would
be:
C. a rollover fund.
D. a superannuation fund.
Ans: A
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
Topic: superannuation funds
95. Which insurance product is simply life insurance?

A. Whole-of-life
B. Term-life
C. Total and permanent disablement
D. Income protection
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Topic: Life Insurance offices
96. Which type of fund or trust employs a strategy that often uses high levels of leverage?
A. Hedge fund
B. Superannuation fund
C. Public unit trusts
D. Capital guaranteed funds
Ans: A
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
Topic: Hedge funds
97. Generally investment banks do not

A. place new issues of securities.
B. advise clients about restructuring.
C. advise clients about risk management.
D. accept deposits.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Topic: Investment Banks
98. In Australia the predominant type of public unit trust is _____. Public unit trusts are _____.
A. equity; listed and unlisted
B. equity; unlisted only
C. fixed income; listed and unlisted
D. property; listed and unlisted
Ans: D
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
99. Which type of fund is the least liquid for most investors?
A. Public unit trust
B. Superannuation fund
C. Cash management trust
D. Real estate investment trust
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
100. Unlike commercial banks, investment banks only accept deposits from large corporations.
Ans: False
Feedback: Investment banks are specialist providers of financial and advisory services to
corporations, high-net-worth individuals and governments.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
101. As investment banks have increased their underwriting activities in recent years, the number
of financial assets held by them has similarly increased.
Ans: False
Feedback: The number of financial assets held by them has decreased as they are focused on
advisory services.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
102. In the context of a merger, the process of due diligence involves valuing the target company
shares.
Ans: False
Feedback: Due diligence is detailed analysis of the financial and operational condition of the
target company.
Difficulty: Easy
Est time: <1 minute
103. In relation to Australian managed funds, cash management trusts currently have the largest
amount of funds under management.
Ans: False
Feedback: Superannuation trusts have the largest amount of funds under management.
Difficulty: Easy
Est time: <1 minute
104. A capital guaranteed fund guarantees that contributors will receive at least the value of the
contributions and future earnings of the fund.
Ans: False
Feedback: Only the capital is guaranteed.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
rapid growth.
105. A managed growth fund is designed to maximise the return from appreciation in the value
of assets in its portfolio.
Ans: True
Feedback: The proportion of equity is generally larger than for a balanced growth fund and the
equity part of the fund includes a greater range of risk securities than a balanced growth fund.
These offer the possibility of potentially higher returns.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
rapid growth.
106. On average, the value of a balanced growth fund is subject to less market fluctuation than
that of a capital growth fund.
Ans: True
Feedback: The proportion of equity is lower and so a balanced growth fund has generally lower
volatility.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
rapid growth.
107. Unlike commercial banks, investment banks do not have a depositor base from which to
acquire assets.
Ans: True
Feedback: Under the Banking Act 1952 (Cwlth) only commercial banks are authorised to act as
banks and attract deposits.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
108. Cash management trusts are restricted under their trust deed to hold only bank deposits and
cash.
Ans: False
Feedback: Cash management trusts are generally restricted to short-term money market
securities.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
109. An insurance company is not a depository financial institution.
Ans: True
Feedback: Insurance companies receive funds in the form of premiums.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
110. The clients of investment banks include major corporations, governments, private firms,
financial institutions and qualified professional investors.
Ans: True
Feedback: Investment banks maintain a pool of clients to facilitate funding arrangements. The
services are mainly fee-based arrangements.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
111. Investment banks are involved in dealers’ markets and provide bid and offer rates for major
currencies.
Ans: True
Feedback: The functions and roles of investments banks are diverse. They have expertise all
areas of finance including dealers’ markets. In dealers’ markets they maintain portfolios of
currencies as well other financial securities from which they offer quotations for buying and
selling price.
AACSB: Synthesis
Bloom's: Knowledge
Difficulty: Hard
112. Explain the role and operation of one of the largest types of managed funds, superannuation
funds.
Ans: Their sources of funds are individuals who set aside funds for their retirement so that they
can maintain their lifestyle once they retire from the workforce. The majority of members make
regular contributions over their working life. The superannuation funds invest these funds in a
range of assets from money market, government securities, property and domestic and
international equities.
Difficulty: Medium
113. Explain the operation of cash management trusts.

Ans: A cash management trust invests the majority of its funds in money market securities such
as bills and commercial paper. They provide a high degree of liquidity and often a higher rate of
return for the short-term funds of smaller investors as a consequence of indirect access to the
wholesale money markets.
Bloom's: Knowledge
Difficulty: Medium
114. Identify and discuss the types of public unit trusts according to their assets.
Ans: Public unit trusts may be grouped into property trusts, both listed and unlisted; equity trusts,
both listed and unlisted; mortgage trusts, and other trusts including fixed interest trusts. Two
major types of trusts according to assets under management are listed property trusts and listed
equity trusts.
Bloom's: Knowledge
Difficulty: Medium
115. What do hedge funds do? Discuss any concerns their operations may have for the financial
system.
Ans: Hedge funds use supposedly complicated investment strategies and invest in exotic
financial products to try to achieve higher returns. Some of the instruments they invest in are
commodities, private equity, foreign exchange, bonds and derivatives. They tend to leverage
their positions using derivative products and are vulnerable to pressure to liquidate assets quickly
if they sustain significant losses. They also operate largely outside the regulatory framework
established to protect the stability of the financial system.
Bloom's: Knowledge
Difficulty: Hard
Topic: Hedge funds
116. What are the principal assets of a finance company? How have these been affected in recent
years?
Ans: The main assets are loans to individuals, instalment credit to finance retail sales, lease
financing, loans to businesses including floor plan financing, factoring and accounts receivable
financing.
Difficulty: Medium
117. The distinction between listed and unlisted trusts is important. Discuss the importance and
significance of listed and unlisted unit trusts.
Ans: A unit trust fund, particularly a property trust, in the environment of falling property prices,
will have a major impact on value of the trust. This will cause an unexpected demand for
withdrawals of funds by unit holders who wanted to exit the trusts before they experienced
further write-downs. Unlisted unit trusts make it difficult for unit holders to withdraw their
funds, unlike listed property funds, where there are established secondary markets through which
unit holders can liquidate their positions.
Difficulty: Medium
rapid growth.
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. partnership.
C. special partnership.
D. corporation.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly
listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation
2. Listing on the stock exchange means:

A. taking a privately owned firm and creating a publicly owned corporation whose shares can be
traded on the stock exchange.
B. taking a privately owned firm and creating a publicly owned corporation whose shares cannot
be traded on the stock exchange until some designated time frame.
C. taking a publicly owned firm and creating a privately owned entity whose shares can no
longer be traded.
D. none of the given answers.
Ans: A
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
listed corporation.
3. A publicly listed corporation:

A. has its shares listed on a formal exchange and designated with an exchange code.
B. is a legal entity (as part of the corporations law of a nation-state).
C. has to comply with the rules of the exchange where it is listed.
D. is all of the given answers.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
listed corporation.
4. A corporation:
A. has a widely dispersed ownership amongst its shareholders.
B. has its objectives and policies decided by a board of directors.
C. has an executive management group responsible for day-to-day management of the
corporation.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
listed corporation.
5. The actual owners of a company is/are the:

A. board of directors.
B. executive management group.
C. shareholders.
D. creditors.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
listed corporation.
6. 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
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
listed corporation.
7. The _______ is/are responsible for the objectives and policies of the company, but not its day-
to-day affairs.
C. shareholders
D. creditors
Ans: A
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
listed corporation.
8. Which of the following forms of business organisation is characterised by limited liability?

A. Sole partnership
B. Partnership
C. General partnership
D. Corporation
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
listed corporation.
9. If a growing organisation wanted to set itself up so it had greater access to a wider range of
capital, it would become a:
B. partnership.
C. general partnership.
D. listed corporation.
Ans: D
Difficulty: Medium
Est time: <1 minute
listed corporation.
10. The owners of _______ face unlimited liability.

A. sole proprietorships only
B. sole proprietorships and partnerships only
C. corporations only
D. partnerships and corporations only
Ans: B
Difficulty: Medium
Est time: <1 minute
listed corporation.
11. The liability of shareholders in ‘public companies limited by guarantee' means:

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.
Ans: B
Difficulty: Medium
Est time: <1 minute
listed corporation.
12. Because of their _____ liability, corporate stockholders are more
B. unlimited; failure than success

Ans: B
Difficulty: Medium
Est time: <1 minute
listed corporation.
13. Which of the following statements about a corporation is NOT correct?

A. The executive management group of a corporation is responsible to its board of directors.
B. Under corporation law the board of directors of a corporation must report to its shareholders.
C. The directors of a corporation have a legal responsibility to make sure the corporation acts in
the shareholders' best interests.
D. The shareholders of a publicly listed small corporation have the right to participate in the day-
to-day management of the business.
Ans: D
Difficulty: Medium
Est time: <1 minute
listed corporation.
14. When a no-liability company defaults on its loans with its creditors, this means the:
A. creditors have a legal claim against the directors only.
B. creditors have a legal claim against the CEO only.
C. creditors have a legal claim against the chairman of the company.
D. shareholders do not have to meet any remaining payment on shares.
Ans: D
Difficulty: Easy
Est time: <1 minute
listed corporation.
15. When the owners of a company hire full-time executives to be responsible for the day-to-day
decisions, this _____ the _____ problem.
A. lessens, shareholder-lender
B. lessens, managers-shareholders
C. brings on, managers-shareholders
D. brings on, shareholder-lender
Ans: C
Difficulty: Medium
Est time: <1 minute
listed corporation.
16. 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.
Ans: D
Difficulty: Easy
Est time: <1 minute
listed corporation.
17. Which of the following statements regarding companies is NOT correct?

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 a potentially unlimited life.
D. The shareholders' liability is limited.
Ans: B
Difficulty: Easy
Est time: <1 minute
listed corporation.
18. When a corporation continues to operate regardless of changes in ownership, this is known
as:
A. the right of perpetual succession.
B. perpetual shares.
C. perpetual trading.
D. unlimited succession.
Ans: A
Difficulty: Easy
Est time: <1 minute
listed corporation.
19. Which of the following is NOT an advantage of the corporate form of organisation?
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.
Ans: B
Difficulty: Easy
Est time: <1 minute
listed corporation.
20. Which of the following is an advantage of the corporate form of organisation?

A. The managers that control day-to-day operations have a strong incentive to act in the best
interests of shareholders.
B. As agents of the shareholders, the managers want to follow a growth maximisation strategy.
C. The managers want to increase the number of staff so they can grow.
D. A wide pool of investors can supply large amounts of corporate funding to the corporation.
Ans: D
Difficulty: Easy
Est time: <1 minute
listed corporation.
21. Many companies use ______ to align the interests of shareholders with those of management.
A. bond options
B. share options
C. company cars
D. debentures
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
listed corporation.
22. Agency theory is concerned with:

A. a conflict between owners and managers.
B. the agents who act on behalf of the company.
C. the relationship between employees.
D. the conflict of interests between outside agents and the company.
Ans: A
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
listed corporation.
23. The conflict of interests between the goals of the firm's 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.
Ans: B
AACSB: Ethical
Difficulty: Easy
Est time: <1 minute
listed corporation.
24. The key aspect of the agency relationship for the corporate form of business is that:
A. the firm's owners will always act in the best interests of the managers.
B. the managers will always act in the best interests of the firm's 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.
Ans: D
AACSB: Ethical
Difficulty: Medium
Est time: <1 minute
listed corporation.
25. Which of the following would NOT relate to agency costs involving management's desire to
maximise its benefits?
A. Management goals to achieve sales growth.
B. Management goals to achieve market share.
C. Management remuneration packages.
D. Management reports to shareholders.
Ans: D
AACSB: Ethical
Difficulty: Medium
Est time: <1 minute
listed corporation.
26. 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.
Ans: D
AACSB: Ethical
Difficulty: Medium
Est time: <1 minute
listed corporation.
27. Agency problems would be less likely to exist in a:

B. partnership.
C. private company.
D. public company.
Ans: A
AACSB: Ethical
Difficulty: Medium
Est time: <1 minute
listed corporation.
28. 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.
Ans: B
Difficulty: Medium
Est time: <1 minute
listed corporation.
29. A primary aim of corporate management should be to:

A. maximise the company's profit.
B. maximise the number of shareholders.
C. maximise the shareholders' wealth.
D. minimise the company's costs.
Ans: C
Difficulty: Medium
Est time: <1 minute
listed corporation.
30. The most appropriate goal for corporate management, according to finance theory, is to:
A. maximise the company's market share.
B. maximise the current profits of the company.
C. maximise the company's share price.
D. minimise the company's liabilities.
Ans: C
Difficulty: Medium
Est time: <1 minute
listed corporation.
31. 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
Ans: C
Difficulty: Easy
Est time: <1 minute
listed corporation.
Topic: The share market and the corporation
32. Which of the following is NOT a feature of a share?

A. Part ownership in the company
B. The right to vote in the control of the company
C. Readily transferable
D. The right to periodic payments
Ans: D
Difficulty: Easy
Est time: <1 minute
listed corporation.
33. Consider the following statements:

i. A corporation differs from other forms of business organisation only in that it tends to be
larger.
ii. The corporate form of business organisation is destined to fail because ‘managers', and not the
‘owners', run the business.
iii. The corporate entity ceases on the death or bankruptcy of the individual shareholders.
iv. 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.
v. 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
Ans: A
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
listed corporation.
34. Which of the following statements about share markets is NOT true?
A. They help carry out direct financing.
B. Most of the trading takes place in already-issued shares.
C. Share markets have aided in the increase in importance of corporations.
D. Every time a listed company's shares are bought or sold, the company receives funding.
Ans: D
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.02 Consider the origins and purpose of a stock exchange.
Section: 4.02 The stock exchange
Topic: The stock exchange
35. The role of stock exchanges such as the ASX include:

A. they are a platform for firms’ shares to be listed.
B. they monitor the behaviour of market participants and also ensure compliance with the
regulatory requirements of the nation-state supervisor.
C. listing on a stock exchange requires the corporation to comply with the rules of that exchange.
Ans: D
Difficulty: Medium
Est time: <1 minute
36. An equity market is best described as:

A. a place where shares of listed companies are traded.
B. a physical platform where buy and sell orders are made.
C. where the trading and issuing of equities, bonds and other classes of publicly listed companies
take place.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
37. The following statements about the primary market are true except:
A. it is where companies float shares to the general public in an initial public offering (IPO) to
raise capital.
B. it is a platform for existing shareholders to liquidate previously owned shares.
C. only equities are issued.
Ans: A
Difficulty: Medium
Est time: <1 minute
38. The total number of equity raisings on the ASX primary market over the past 20 years has:
A. increased.
B. decreased.
C. remained stable.
D. decreased significantly.
Ans: A
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.03 Understand the primary market role of a stock exchange through which corporations raise new funding.
Section: 4.03 The primary market role of a stock exchange
Topic: The primary market role of a stock exchange
39. The greatest number of issues of equity capital on the ASX over recent years has involved:
A. rights issues.
B. placements.
C. dividend reinvestment.
D. new floats.
Ans: D
Difficulty: Medium
Est time: <1 minute
40. The listing of new companies on an exchange such as the ASX and subsequently raising
funds is known as:
A. share buybacks.
B. initial public offerings.
C. share issues.
D. rights issues.
Ans: B
Difficulty: Easy
Est time: <1 minute
41. Which of the following security types is NOT usually listed on the ASX?
A. Ordinary shares
B. Treasury bonds
C. Debentures
D. Commercial paper
Ans: D
Difficulty: Medium
Est time: <1 minute
42. An issue of new shares to the public must have:

A. a prospectus attached.
B. an underwriter.
C. detailed documents called covenants.
D. a memorandum of understanding in place.
Ans: A
Difficulty: Medium
Est time: <1 minute
43. From a company's viewpoint, the existence of an active, liquid, well-organised secondary
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.
Ans: C
Difficulty: Medium
Est time: <1 minute
44. The following statements about the secondary market are true except:
A. there is a transfer of ownership and a settlement of value for that transfer.
B. the existence of a well-developed secondary market is of great significance to a corporation
that may be seeking to raise new equity finance in the future.
C. corporations normally seek to raise additional equity in order to expand the business through
the secondary market because there are thousands of buyers and sellers of new securities.
Ans: C
Difficulty: Medium
Est time: <1 minute
45. An initial public share offering represents the share market's _____ role.
A. interest rate
B. information
C. primary
D. secondary
Ans: C
Difficulty: Medium
Est time: <1 minute
46. The primary market role of a stock exchange is:
A. to trade the shares of the largest corporations.
B. to ensure the sale of new-issue securities.
C. to ensure deep trades in listed securities.
D. to ensure that information about listed companies is quickly reflected in share prices.
Ans: B
Difficulty: Medium
Est time: <1 minute
47. 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
Ans: C
Difficulty: Easy
Est time: <1 minute
48. The company process that gives the shareholders the chance to change their dividends into
additional company shares is called:
A. share placement.
B. dividend reinvestment scheme.
C. secondary public offering.
D. rights issue.
Ans: D
Difficulty: Easy
Est time: <1 minute
49. The distribution of extra shares on pro-rata basis by a company to all existing shareholders is
called a:
A. new float.
C. secondary float.
D. pro-rata rights issue.
Ans: D
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
50. The selling of new shares to a selected number of institutional investors is called a/an:
A. share release.
C. share float.
D. initial offering.
Ans: B
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
51. Compared with other forms of equity raisings, private placements for shares:
A. can be quicker but more expensive because of the short time frame 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 time frame involved.
Ans: C
Difficulty: Medium
Est time: <1 minute
52. 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 exchange's listing rules.
C. establish a deep and liquid secondary market in the shares.
D. purchase any unsold shares on issue.
Ans: D
Difficulty: Medium
Est time: <1 minute
53. If the depth and liquidity of a share market is high, it means:

A. corporations may raise funds at higher costs.
B. investors will experience higher risk exposures.
C. investors can passively manage their risk exposure.
D. corporations may raise funds at lower costs.
Ans: D
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
54. The document drawn up by a company stating the terms and conditions of a public share
issue is called a:
A. share directory.
B. memorandum.
C. share plan.
D. prospectus.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

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. include all of the given answers.
Ans: D
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.04 Discuss the secondary market role of a stock exchange through which existing securities are bought and
sold.
Section: 4.04 The secondary market role of a stock exchange
Topic: The secondary market role of a stock exchange
56. 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.
Ans: D
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
sold.
57. A well-developed secondary market is likely to:

A. aid in raising extra finance in the primary market.
B. help manage risk exposures of investors.
C. help with corporate agency problems.
Ans: D
Difficulty: Medium
Est time: <1 minute
sold.
58. In relation to a share market, the ratio of the value of turnover to market capitalisation is
called:
A. market depth.
B. market flow.
C. market transfer.
D. market liquidity.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
sold.
59. The following descriptions are true of a derivative instrument:

A. it is a risk management product that derives its value from an underlying commodity or
financial instrument.
B. it helps determine the price today for an underlying asset, but delivered into a specified future
point in time.
C. it helps individuals, firms and other entities to hedge possible risk exposure in their
investment portfolio.
Ans: D
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.05 Examine the managed product (exchange traded funds, contracts for difference, real estate investment
trusts and infrastructure funds) and derivative product (options, warrants and futures contracts) roles of a stock exchange.
Topic: The managed product and derivative product roles of a stock exchange
60. If a stock exchange provides a market for the trade of specific share market-related derivative
products, which of the following options is generally NOT correct?
A. The derivative products provide an investment tool to take advantage of future share price
movements.
B. The derivative products facilitate the management of risk within an existing share portfolio.
C. The derivative products provide protection against adverse movements in share prices.
D. The derivative products remove the share price volatility of stocks listed on the stock
exchange.
Ans: D
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
Section: 4.05 The managed product and derivative product roles of a stock exchange
61. Compared with 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.
Ans: A
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
62. To protect their portfolio of shares from a possible share price fall, an investor could buy a:
A. call option.
B. put option.
C. warrant on a matching share index.
D. matching share index future.
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
63. 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.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
64. In options markets, option premiums are paid by:

A. option writers to buyers.
B. option buyers to sellers.
C. both option buyers and sellers.
D. put option buyers only.
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
65. Which of the following is NOT correct?

A. A real estate investment trust may purchase industrial property.
B. An infrastructure fund may hold investments in power stations.
C. The units of a listed REIT purchases property are generally illiquid.
D. An investor may use a CFD to go long in a rising market.
Ans: C
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
66. An investor holding an investment portfolio 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.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
67. The writer of a put option expects the share price to:
A. decrease.
B. increase.
C. remain unchanged.
D. pay a dividend.
Ans: B
Difficulty: Medium
Est time: <1 minute
68. If an investor buys a put option on shares they own and then the price of the shares rises, the
investor:
A. must exercise the option.
B. must pay the difference between the contract start and close values.
C. has no obligation to exercise the option.
D. has to pay an additional premium to the option writer.
Ans: C
Difficulty: Easy
Est time: <1 minute
69. A futures contract is 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. contract that provides a specified commodity or instrument to be bought at a future date at a
price decided today.
C. right to buy a specified commodity or instrument at a price determined today.
D. right to buy a specified commodity or instrument at a price determined at the expiry date.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
70. Units sold in a managed investment scheme that follows the performance of a specified share
market index are called:
A. contracts for difference.
B. exchange traded funds.
C. option funds.
D. warrant funds.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
71. A contract for difference is:

A. the difference between a put and a call option on the same security.
B. the difference between an option and a warrant on the same security.
C. the difference between a physical stock market and the futures market.
D. an agreement to exchange the difference between a contract start and close values.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
72. A stock exchange may also list some debt issues of companies and governments. This
provision by a stock exchange is known as a/an:
A. subordinate debt market.
B. interest rate market.
C. primary debt market.
D. secondary bond market.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.06 Examine the interest rate market role of a stock exchange.
Section: 4.06 The interest rate market role of a stock exchange
Topic: The interest rate market role of a stock exchange
73. Which of the following statements, in regard to the provision of an interest rate market by a
stock exchange, is NOT correct?
A. It is beneficial to both borrowers and lenders because 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.
Ans: D
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
74. Which of the following debt securities is often quoted on the ASX?
A. Bank bills
B. Certificates of deposit
C. Floating rate notes
D. Commercial paper
Ans: C
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
75. 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.
Ans: D
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
76. The corporate bond that pays a variable rate of interest based on interest rate changes for a
reference rate is a/an:
A. adjustable note.
B. convertible note.
C. floating rate note.
D. straight corporate bond.
Ans: C
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
77. Which of the following is NOT used by the ASX to promote an efficient market?
A. Rapid release of new information
B. A clearing house
C. Stock trading systems
D. Transaction settlement systems
Ans: B
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.07 Explain the electronic trading (ASX Trade) and settlement (CHESS) platforms used for share-market
transactions by the Australian Securities Exchange (ASX).
Section: 4.07 The trading and settlement roles of a stock exchange
Topic: The trading and settlement roles of a stock exchange
78. Major determinants of an efficient stock market include:

A. the information is easily available to all the market participants.
B. the speed at which information is available to the market participant.
C. the speed at which this information is absorbed and reflected in a share price.
Ans: D
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
79. A security that pays a fixed dividend and usually converts to ordinary shares at a future date
is called a:
A. corporate bond.
B. floating rate note.
C. preference share.
D. debenture.
Ans: C
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
80. The Australian Stock Exchange now operates a system known as ASX Trade. Which of the
following statements is correct in relation to ASX Trade?
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.
Ans: B
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
81. The Clearing House Electronic Subregister System (CHESS) is operated by the ASX. Which
of the following statements regarding CHESS is NOT correct?
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.
Ans: C
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
82. The risk that arises from the failure of parties to complete and resolve a transaction is called:
A. Herstatt risk.
B. default risk.
C. settlement risk.
D. market risk.
Ans: C
Difficulty: Medium
Est time: <1 minute
83. The probability that a party to a buy/sell transaction will not complete it is called:
A. basis risk.
B. clearing risk.
C. settlement risk.
D. transaction risk.
Ans: C
Difficulty: Easy
Est time: <1 minute
84. The reason for the requirement by the ASX for companies to abide by the Corporations Act
2001 (Cwlth) is to:
A. ensure that there will be an active market in the company's shares.
B. maintain investor confidence in the company's creditworthiness.
C. ensure a minimum number of shareholders in the company.
D. ensure that information which may have a material effect on the share price is provided to the
market.
Ans: D
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.08 Recognise the importance of information flows to the efficiency and integrity of stock exchanges.
Section: 4.08 The information role of a stock exchange
Topic: The information role of a stock exchange
85. The rules that apply to listed companies about promptly advising a stock exchange of any
material changes relating to the corporation are called:
A. informational disclosure.
B. continuous disclosure.
C. transaction disclosure.
D. related parties disclosure.
Ans: B
AACSB: Ethical
Difficulty: Medium
Est time: <1 minute
86. 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, the Commonwealth government transferred responsibility in 1991 for the
administration of Corporations Law to:
A. the Australian Securities Exchange.
B. the Australian Securities and Investments Commission.
C. individual state government corporate governance authorities.
D. the Australian Consumer and Competition Commission.
Ans: B
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
Learning Objective: 4.09 Identify the principal regulators that affect the behaviour of participants in the Australian share market.
Section: 4.09 The regulatory role of a stock exchange
Topic: The regulatory role of a stock exchange
87. ASIC is the regulatory body responsible for the supervision of:
A. insurance companies only.
B. insurance and investment companies only.
C. initial public offerings only.
D. corporations law and markets.
Ans: D
AACSB: Ethical
Difficulty: Medium
Est time: <1 minute
88. The major supervisors of the Australian share market are:

A. RBA and ASX.
B. ASIC and ASX.
C. APRA and ASX.
D. EFIC and ASIC.
Ans: C
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
89. Which of the following statements is NOT correct?
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 ASX.
C. The main supervisor in the Australian market is the ASX.
D. If a listed company does not fully disclose information to the satisfaction of the ASX, trading
in its shares may be suspended.
Ans: C
Bloom's: Evaluation
Difficulty: Medium
Est time: <1 minute
90. To try to remove potential conflicts of interest with regard 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
Ans: C
AACSB: Ethical
Difficulty: Easy
Est time: <1 minute
91. Funding that is provided to higher risk companies seeking equity funding (but are unable to
access equity funding through a public issue in the share market) is generally called:
A. bank funding.
B. private placement funding.
C. preference share funding.
D. equity funding.
Ans: D
Difficulty: Medium
Est time: <1 minute
92. Corporate takeovers may help address
A. agency problems in the modern corporation.
B. a rights issue.
C. the right of perpetual succession.
D. the problem with continuous disclosure.
Ans: A
Difficulty: Medium
Est time: <1 minute
listed corporation.
93. Generally this is NOT a characteristic of ETFs:

A. listed on an exchange.
B. often seeks to match the performance of an index.
C. diversified portfolio.
D. strategies similar to a hedge fund.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
94. In Australia settlement occurs in _____ business days. Settlement occurs through _____.
A. five; ASX Trade and ASX Trade 24
B. five; CHESS
C. three; ASX Trade and ASX Trade 24
D. three; CHESS
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
95. Which of the following is a security that involves both debt and equity?
A. Rights
B. Convertible bond
C. Floating rate note
D. Corporate bond
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
96. ‘Limited liability of a corporation’ means the:

A. corporation has only limited liability for the torts committed by its employees.
B. corporation is not liable for share market losses of its shareholders.
C. shareholders are not personally liable for the corporation's debts.
D. corporation has limited liability for the torts committed by its shareholders.
Ans: C
Bloom's: Knowledge
Difficulty: Medium
Difficulty: Medium
Est time: <1 minute
listed corporation.
97. Listing of bonds does not create this advantage:

A. tax preference.
B. liquidity.
C. access to information.
D. easy purchase and sale.
Ans: A
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
98. Private equity funding:

A. is usually provided to lower-risk companies.
B. seeks to help the firm move towards an IPO.
C. is normally provided for 10–15 years.
D. is funded through contracts for difference.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
99. Shareholders of a public corporation have the right to participate in the profits and receive
annual dividends.
Ans: False
Feedback: Shareholders are entitled to a share in profits but are not automatically entitled to
dividend payments, unlike bond holders.
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
listed corporation.
100. The shareholders of a public corporation do not participate directly in the day-to-day
operation of a company but appoint the executive management group to do so at the
shareholders' general meeting.
Ans: False
Feedback: The executive management group is appointed by the board of directors.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
listed corporation.
101. For a limited liability company the liability is restricted to the debt holders of the company
and not the shareholders.
Ans: False
Feedback: Limited liability concerns the shareholders.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
listed corporation.
102. The corporate entity means that if a major shareholder is declared bankrupt it does not
necessarily impact on the firm's operations.
Ans: True
Feedback: This arises out of the concept of the right of perpetual succession where a corporation
continues to operate regardless of changes in ownership.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
listed corporation.
103. As a part owner of a public corporation, a shareholder has residual claims against the firm’s
profit in the form of dividend.
Ans: True
Feedback: The shareholders are residual claimholders, as such they receive their entitlement of
benefits after all other stakeholders are paid.
Bloom's: Knowledge
Difficulty: Hard
Est time: <1 minute
listed corporation.
104. Derivative securities are primitive financial securities that are used to raise much needed
funds.
Ans: False
Feedback: Derivative securities such as options, futures and swaps are risk management products
used by individual investors, fund managers, financial institutions and others to manage possible
risk exposure.
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
105. If a listed company violates the listing rules of the stock exchange, the company is likely to
be delisted.
Ans: True
Feedback: A stock exchange’s listing rules are additional to a company’s statutory obligations
under the corporations legislation of the nation-state in which the stock exchange is located. If
listed companies do not comply with the listing rule, they may be delisted.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
106. A growth maximisation strategy by management always results in wealth maximisation for
the shareholders.
Ans: False
Feedback: It is generally accepted in corporate finance that an organisation should be managed in
such a way as to maximise shareholder value.
Difficulty: Easy
Est time: <1 minute
listed corporation.
107. When a shareholder first sells their shares on a stock exchange this involves the secondary
role of the share market.
Ans: True
Feedback: The secondary market transactions in a stock exchange involve the buying and selling
of existing securities.
Difficulty: Easy
Est time: <1 minute
sold.
108. A common measure of market liquidity is the ratio of turnover to market capitalisation.
Ans: True
Feedback: It is a widely used measure of market liquidity.
Difficulty: Easy
Est time: <1 minute
sold.
109. An active and well-organised secondary market in existing shares benefits a company
because it receives an additional payment from the share market.
Ans: False
Feedback: A company does not receive any funds from secondary market transactions, only
primary.
Difficulty: Easy
Est time: <1 minute
sold.
110. The price of an equity-related derivative is directly related to the price of the corresponding
security on the stock exchange.
Ans: True
Feedback: As the underlying security price increases (decreases) so the derivative's price directly
increases (decreases).
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
111. Discuss briefly what part agency theory plays in the corporate governance of a company.
Ans: Since the shareholders are not directly involved in running the company, but the managers
are, there is the problem of separation of control. Since the managers of the company do not own
the company they will not necessarily have a strong incentive to act in the best interests of the
shareholders. Since they may be tempted to run the company for their own personal benefit, this
may lead to a conflict of interest known as the agency problem.
Bloom's: Knowledge
Difficulty: Medium
listed corporation.
112. Discuss briefly the different types of equity capital involved in a modern stock exchange
such as the ASX.
Ans: The different types of equity capital for a modern stock exchange are ordinary shares (the
most common type), preference shares, rights and derivative products such as options and
warrants. Ordinary shares have a residual claim on the company assets if the company goes into
liquidation. But ordinary shareholders are the ‘owners' of the company and may share in any
profits. Preference shareholders have a fixed payment.
Bloom's: Evaluation
Difficulty: Medium
113. Discuss the roles of the participants in a primary market issue of shares.
Ans: The participants in a primary market issue of shares are the advisers and underwriters
(usually brokers, investment banks and other specialists), the corporations, brokers and the stock
exchange.
Bloom's: Evaluation
Difficulty: Medium
114. Discuss what is meant by the derivative role of a share market.

Ans: Stock exchanges may provide a market for the trading of equity-related derivative products
such as options, warrants and futures, where a derivative is a financial security that derives its
price from an underlying commodity or financial instrument.
Bloom's: Knowledge
Difficulty: Medium
115. Discuss what is meant by the interest rate role of a stock exchange.
Ans: Not only may a stock exchange have a market for equities but it may also offer a market for
debt instruments such as straight corporate bonds, debentures, floating rate notes, convertible
notes and preference shares.
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
116. Explain why a good secondary market for the trading of a company’s shares is of interest to
the company.
Ans: The secondary market does not raise funds for a firm as only newly issued securities in the
primary market would do that. However, a good secondary market helps support the future
issuance of securities. Investors are more willing to buy new securities if they foresee that they
can easily sell. The secondary market also provides important information such as pricing.
Difficulty: Medium
Est time: <1 minute
sold.
117. How can an investor gain exposure to the real estate market without direct purchase of real
estate? Explain.
Ans: Real estate investment trusts (REIT) are listed on the stock exchange. A REIT is a trust
which holds properties. These are diversified up to a point as usually the REIT has a focus on a
type of real estate, such as shopping centres, hotels, housing units and so forth. They generate
capital gains and rental income. Note that the REIT investment is much more liquid than the
underlying assets held in the trust—modern finance at work.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
118. A contract for difference (CFD) is not always understood. Describe and discuss the major
features of the CFD.
Ans: A CFD is a contract listed on a stock exchange that is an agreement between two parties,
typically described as a ‘buyer’ and ‘seller’, to exchange the difference in the value of a CFD.
The difference in value is calculated by subtracting the value of the CFD contract at the start date
from the value of the contract at the close date. Typically, the seller will pay to the buyer the
difference between the current value of an asset and its value at contract time if the difference is
positive, and vice versa. The CFD may be based on a nominated security listed on a local or
international stock exchange, stock exchange indices, foreign currencies or commodities. For
example, a CFD may be based on BHP Billiton Limited shares listed on the ASX. The value of
the CFD is directly correlated with the value of the underlying BHP shares at the start and close
date specified in the CFD contract. A CFD provides a high level of leverage for an investor as
the buyer of a CFD only pays a deposit or initial margin; that is, the investor does not pay the full
value of the underlying shares. This means that an investor may be able to take a much larger
exposure to the market in that more of the underlying security can be bought or sold because full
payment is not required.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
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 firm's 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.
Ans: D
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
Learning Objective: 5.01 Understand issues related to the capital budgeting investment decision.
Section: 5.01 The investment decision: capital budgeting
Topic: The investment decision: capital budgeting
2. When a company decides to issue an unsecured note to pay for a new machine, it has made
a/an:
A. capital market decision.
B. money market decision.
C. financing decision.
D. investment decision.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
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.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Topic: Introduction
4. When a company decides to pay for an investment project using a short-term bank loan, this is
best described as a/an:
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
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.
Ans: B
Difficulty: Medium
Est time: <1 minute
6. Regarding project selection criteria based on IRR, a project will be considered when:
A. IRR is higher than cost of capital.
B. IRR is lower than cost of capital.
C. IRR is greater than cost of capital, but NPV is less than 0.
Ans: B
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
7. Problems associated with calculating an internal rate of return include:

A. negative cash flows during the project's lifetime.
B. choosing one project from two or more projects.
C. timing of cash flows.
Ans: D
AACSB: Analysis
Difficulty: Medium
Est time: <1 minute
8. When a company's project results in a return and profits which exceed the cost of its debt
financing:
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.
Ans: B
Difficulty: Medium
Est time: <1 minute
9. Financial risk refers to the:

A. risk of owning financial assets.
B. overall risk of a financial services firm.
C. risk faced by the shareholders when debt is used.
D. risk of not finding finance for a firm's investment.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 5.02 Identify issues relevant to a corporation’s funding choice between debt and equity.
Section: 5.02 The financing decision: equity, debt and risk
Topic: The financing decision: equity, debt and risk
10. 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
Ans: C
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
11. Which of the following statements about financial risk is NOT correct?
A. A rise in interest rates will adversely affect the cost of a corporation's variable debt.
B. If a corporation imports goods from overseas then an appreciation in the exchange rate will
adversely affect the company's profits.
C. If a company (A) has sold goods to another company (B) with payment due in 30 days but
company B has gone into liquidation then company A faces credit default.
D. If a company breaches its debt-to-equity ratio loan covenants the value of the company may
be adversely affected.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
A. The higher the debt-to-equity ratio, the higher the degree of financial risk.
B. Interest payments on debt must be paid when they fall due.
C. When a business fails equity holders rank ahead of providers of debt due to their higher
financial risk.
D. The higher the proportion of debt the higher the potential return on shareholders' funds.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
13. A company's business risk depends on:
A. its use of debt in financing the business.
B. the risk of the company's operations and assets.
C. how much debt a company has used.
D. the amount of shareholder equity in the company.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
14. 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 than 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. The company's capacity to service debt
A. i, iii, v, vi
B. ii, iii, v, vi
C. ii, iii, iv, v
D. iii, iv, v, vi
Ans: B
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
15. Restrictions placed on borrowers by lenders in the loan agreement are called loan:
A. covenants.
B. limits.
C. arrangements.
D. contracts.
Ans: A
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
16. An increase in a firm's 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.
Ans: B
Bloom's: Evaluation
Difficulty: Medium
Est time: <1 minute
17. The operating activities of companies in the banking and retail sectors are different.
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.
Ans: C
Bloom's: Evaluation
Difficulty: Medium
Est time: <1 minute
18. The claims of the equity holders on the assets of the firm have priority over those of:
A. the debt holders.
B. the preferred shareholders.
C. the unsecured debt holders.
D. no other holder.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
19. 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
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 5.03 Examine the listing and flotation or initial public offering (IPO) of a business on a stock exchange, including
equity-funding alternatives that are available to a newly listed corporation.
Section: 5.03 Initial public offering
Topic: Initial public offering
20. 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.
Ans: A
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
21. Which of the following statements is NOT a feature of ordinary shares?

A. Ordinary shares are a major source of external equity financing for companies.
B. Ordinary shares entail voting rights at annual general meetings.
C. Ordinary shares have no fixed payment obligation.
D. Dividends of ordinary shares are always tax deductible.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
22. Generally, an initial public offering (IPO) is:
A. an offer to potential investors of ordinary shares to newly list a company on a stock exchange.
B. an offer to potential investors of preference shares to newly list a company on a stock
exchange.
C. an offer to potential investors of company debentures to newly list a company on a stock
exchange.
D. an offer to potential investors of unsecured notes to newly list a company on a stock
exchange.
Ans: A
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
23. Common shareholders are:

A. guaranteed a periodic distribution of dividends
B. guaranteed a distribution in the liquidation of the company.
C. guaranteed both a periodic distribution of dividends and a distribution in the liquidation of the
company.
D. not guaranteed a periodic distribution or a distribution in the liquidation of the company.
Ans: D
Difficulty: Medium
Est time: <1 minute
24. 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
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
25. Potential investors learn of the information concerning the company and its new issue
through a _____ sent by the broker.
A. registration statement
B. prospectus
C. letter of commitment
D. memorandum offering
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
26. As part of the listing process for an unlisted organisation, a document that provides detailed
information on the past and forecast performance for it is a:
A. flotation statement.
B. prospectus.
C. promotion report.
D. memorandum offering.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
27. When a company undertakes an initial public offering (IPO) it may:

A. issue and list debentures in the capital markets.
B. offer shares to a few public institutional investors.
C. issue and list shares in the primary share market.
D. directly list corporate bonds in the capital markets.
Ans: C
Difficulty: Medium
Est time: <1 minute
28. Compared with raising debt through a bank, the raising of equity through an initial public
offering (IPO) for a firm is generally:
A. cheaper.
B. preferred.
C. roughly the same.
D. much cheaper.
Ans: B
Difficulty: Medium
Est time: <1 minute
29. The distinction between an initial public offering (IPO) and seasoned equity offering is best
described by which of the following statements?
A. An IPO is an offer to investors of ordinary shares in a newly listed company on a stock
exchange.
B. A seasoned equity offering is an offer to both existing and new investors through right issue,
private placement and dividend re-investment scheme.
C. A seasoned equity offering is considered when an existing publicly traded company considers
raising additional capital by selling additional shares of its securities to the public.
Ans: D
Difficulty: Medium
Est time: <1 minute
30. 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.
Ans: D
Difficulty: Easy
Est time: <1 minute
31. Which of the following is NOT a role of an underwriter in a public offering of shares?
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
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
32. If, for an IPO, circumstances change and the issue becomes unattractive, 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.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
33. If, for an IPO, market prices have fallen, then underwriters with an out-clause that gives a
level of a specified price index that the index cannot fall below, then:
A. the underwriters have the right to charge the company more for raising the funds.
B. the underwriters need to only purchase a specified number of shares and not the total unsold.
C. the underwriters may be released from their obligations.
D. the underwriters may offer the shares at a lower price.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
34. Ordinary shares in limited liability companies are the major source of external equity funding
for Australian companies. Which of the following statements regarding the issuance of ordinary
shares by a newly listed limited liability company is NOT correct?
A. Shares may be issued on a fully paid or partly paid basis.
B. A holder of instalment receipts only has to pay the remaining amount when due or called.
C. Share price is determined with reference to a range of variable factors.
D. No liability company can issue shares only on a fully paid basis because of the risk.
Ans: D
Bloom's: Knowledge
Difficulty: Hard
Est time: <1 minute
35. Companies can raise equity capital through:

A. the money markets.
B. the inter-bank market.
C. internal sources of capital and the share market.
D. a major bank.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
36. A person who is authorised to vote on a shareholder's behalf is called:

A. an underwriter.
B. a proxy.
C. an authorised shareholder.
D. a substitute.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
37. Which of the following statements about a no liability company is NOT correct?
A. A no liability company will issue shares on a partly paid basis.
B. In Australia only mining companies can list as a no liability company.
C. A no liability company may also offer shareholders an option to sell shares back to the
company if the company exploration is not successful.
D. If a no liability gold-mining company discovers gold then for the product phase the company
may issue a further call on the partly paid shares.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
38. Financing for high-risk companies is often in the form of:

A. limited liability shares.
B. no-liability shares.
C. limited instalment receipts.
D. contributing shares.
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
39. Which of the following requirements does NOT apply to a company seeking a public listing
on the Australian Securities Exchange (ASX)?
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 ASX.
D. The company must have a structure and operation appropriate for a listed entity.
Ans: C
Bloom's: Evaluation
Difficulty: Hard
Est time: <1 minute
Learning Objective: 5.04 Consider important issues associated with listing a business on a stock exchange.
Section: 5.04 Listing a business on a stock exchange
Topic: Listing a business on a stock exchange
40. Most publicly listed companies raise funds by selling their securities in a:
A. public float.
C. stock exchange.
D. direct placement.
Ans: A
Difficulty: Medium
Est time: <1 minute
41. 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 company's cash requirements.
C. The projected earnings flow from the new investments.
D. The cost of alternative funding sources.
Ans: A
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
Learning Objective: 5.05 Explore equity-funding alternatives that are available to an established listed corporation, including right
issues, share purchase plans, placements, takeover issues, dividend reinvestment schemes, preference shares, convertible notes
and other quasi-equity securities.
Section: 5.05 Equity-funding alternatives for listed companies
Topic: Equity-funding alternatives for listed companies
42. Some of the main principles that form the basis of a stock exchange's listing rules are:
A. sufficient investor interest must be shown to warrant an entity's participation in the markets.
B. information must be produced according to the highest standards.
C. minimum standards of quality size, operations and disclosure must be satisfied.
D. security holders must be consulted on matters of significance except for agreements between
the entity and related parties.
Ans: D
Difficulty: Medium
Est time: <1 minute
43. A rights offering is the issue of:

A. proxies to the shareholders to use their voting rights at the annual general meeting.
B. options on shares to the general public.
C. an option to purchase shares directly to the shareholders.
D. special options to the management.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
44. A company may raise additional equity capital through:

A. a rights issue.
B. a placement.
C. a dividend reinvestment scheme.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
45. A right that can only be exercised by the shareholder and not sold is called a:
A. non-saleable right.
B. renounceable right.
C. non-renounceable right.
D. pro-rata right.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
46. Before making a rights issue, a company's management must consider several important
variables. Which of the following is NOT one of these variables?
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 firm's profits
Ans: D
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
47. 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.
Ans: A
Difficulty: Medium
Est time: <1 minute
48. 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. Can be renounceable or non-renounceable
D. Potential listing on a stock exchange
Ans: A
Difficulty: Medium
Est time: <1 minute
49. A pro-rata share rights offer means that the offer:

A. must be made to all the stakeholders of a company.
B. must be made to bond holders and shareholders who get their offer in before a cut-off date.
C. must be made to shareholders on the basis of the number of shares already held.
D. is made only to the shareholders with the largest number of shares on the share register at a
cut-off date.
Ans: C
Difficulty: Medium
Est time: <1 minute
50. A pro-rata share rights offer of 1:5 gives existing shareholders:

A. the right to purchase one new share for every five shares held.
B. the right to purchase five new shares for every one share held.
C. the right to purchase one share for every 1/5 shares held.
D. the right to purchase 10 shares for every five shares held.
Ans: C
AACSB: Analysis
Difficulty: Medium
Est time: <1 minute
51. For a share placement or private placement, the Australian authority 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 per cent.
C. a memorandum of information to be sent to all participating institutions.
D. a prospectus, which can be filed with them after the event.
Ans: C
Difficulty: Medium
Est time: <1 minute
52. For a share placement, the Australian authority ASIC or ASX listing rules require:
B. there must be no more than 20 participants.
C. the discount from market price must not be above 50 per cent.
D. that for a company that has had total placements of more than 15 per cent in the last 12
months, agreement for another must be sought from shareholders at the annual general meeting.
Ans: C
Difficulty: Medium
Est time: <1 minute
53. Share placements may, subject to compliance with certain regulations, be made to
institutional investors. Which of the following conditions is NOT a requirement of the Australian
authority ASIC for share placements?
A. The placement should consist of minimum subscriptions of $500 000 or be made up of not
more than 20 participants.
B. The discount from current market price should not be excessive.
C. Under no circumstances should placements be in excess of 10 per cent of the issued shares
permitted.
D. There is no need to register a prospectus, but a memorandum of information detailing the
company's activities should be sent to all participants.
Ans: C
Bloom's: Evaluation
Difficulty: Hard
Est time: <1 minute
54. 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.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
55. Compared with a pro-rata issue of shares, 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.
Ans: B
Difficulty: Medium
Est time: <1 minute
56. The main advantage of placements or private placement to raise additional equity funds
compared to a rights issue is:
A. the discount to current market price may be less.
B. it can be carried out much more quickly.
C. a selective placement can sell shares to friendly institutional investors.
D. it reduces the proportion of ownership by existing shareholders.
Ans: D
Difficulty: Medium
Est time: <1 minute
57. When a takeover company issues additional shares to fund the acquisition of the shares in a
target company this is called:
A. a seasoned share offering.
B. an equity-funded takeover.
C. an initial share takeover.
D. a rights offering.
Ans: B
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
58. Which of the following does NOT apply to a dividend reinvestment plan?
A. A dividend reinvestment plan forms additional equity financing for the company.
B. For a dividend reinvestment scheme the company typically bears the associated transaction
costs.
C. Companies have encouraged shareholders to use dividend reinvestment plans.
D. Shareholders have the chance of purchasing additional shares through a dividend
reinvestment plan.
Ans: C
Difficulty: Medium
Est time: <1 minute
59. Which of the following is NOT a feature of a dividend reinvestment scheme for a company?
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.
Ans: D
Difficulty: Medium
Est time: <1 minute
60. 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
Ans: B
Difficulty: Medium
Est time: <1 minute
61. 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.
Ans: C
Difficulty: Medium
Est time: <1 minute
62. _______ 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
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
63. 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
Ans: B
Difficulty: Medium
Est time: <1 minute
64. A company is likely to issue _____ if it has reached its optimal gearing level.
A. options
B. rights
C. ordinary shares
D. preference shares
Ans: D
Difficulty: Easy
Est time: <1 minute
65. Holders of _________ preference shares are entitled to dividend payments beyond the stated
dividend rate.
A. participating
B. cumulative
C. non-cumulative
D. secured
Ans: A
Difficulty: Medium
Est time: <1 minute
66. A preference share issue offers all of the following advantages to a company except:
A. a flexible dividend policy.
B. fixed interest borrowings that can count as equity.
C. extension of the equity base of the company.
D. an indefinite maturity.
Ans: D
Difficulty: Medium
Est time: <1 minute
67. Which of the following is NOT a feature of preference shares?

A. Convertible
B. Redeemable
C. Cumulative
D. An important source of company funding
Ans: D
Difficulty: Easy
Est time: <1 minute
68. Preference shares:

A. have their dividend fixed at the issue date.
B. rank behind ordinary shares in the payment of dividends.
C. rank behind ordinary shareholders in their claim on company assets in the event of
liquidation.
D. rank ahead of the company creditors.
Ans: A
Difficulty: Medium
Est time: <1 minute
69. 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
Ans: D
Difficulty: Medium
Est time: <1 minute
70. Convertible preference shares are normally converted into:

A. debentures.
B. bonds.
C. shares.
D. warrants.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
71. Compared with ordinary shares, preference shares usually:

A. rank ahead of a company's 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.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
72. A convertible note is a/an:

A. equity instrument that converts into debt at maturity.
B. equity instrument that converts into a specified number of shares at maturity.
C. debt instrument that the holder has the option to convert into an initially specified number of
shares.
D. warrant that the holder has the option to convert into an initially agreed-upon number of
shares.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
73. Which of the following statements is NOT a feature of convertible notes?

A. Convertible notes offer a lower interest rate than straight debt instruments.
B. Convertible notes are usually made available to ordinary shareholders.
C. Maturity of convertible notes is usually shorter than straight debt instruments.
D. Note holders can generally participate in new issues of equity.
Ans: C
Difficulty: Medium
Est time: <1 minute
74. Which of the following is NOT a feature of convertible notes?

A. Convertible notes are usually issued at a price close to the market price of the share.
B. The expectation of the note holder is that the share price will increase over the term of the
note.
C. Convertible notes offer a higher interest rate than straight debt instruments.
D. A convertible note may be made by direct placement to shareholders.
Ans: C
Difficulty: Medium
Est time: <1 minute
75. 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
Ans: C
Difficulty: Medium
Est time: <1 minute
76. The buyer of a convertible security accepts a lower rate of interest because of:
A. a lower default risk.
B. the possibility that the company may recall the security.
C. the accessibility of funds.
D. the possibility of becoming a shareholder in the future.
Ans: D
Difficulty: Medium
Est time: <1 minute
77. When a convertible security is issued, the issue price is usually _______ the current market
price of the company's share.
A. well below
B. close to
C. well above
D. not related to
Ans: B
Difficulty: Medium
Est time: <1 minute
78. Which of the following is NOT an advantage for a company that issues a convertible note?
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.
Ans: D
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
79. 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.
Ans: A
Bloom's: Evaluation
Difficulty: Medium
Est time: <1 minute
80. Which of the following statements is/are true for convertible notes and preferences?
A. A convertible note is a hybrid fixed-interest debt security that gives the holder an option to
convert to ordinary share at specified date.
B. A preference share is considered a hybrid security that pays a fixed divided payment and
offers the right to convert to ordinary shares at a future date.
C. Convertible notes and preference shares possess characteristics of both debt and equity.
Ans: D
Bloom's: Evaluation
Difficulty: Medium
Est time: <1 minute
81. Compared with 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.
Ans: A
Bloom's: Evaluation
Difficulty: Medium
Est time: <1 minute
82. 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.
Ans: B
Difficulty: Medium
Est time: <1 minute
83. When warrants are converted by a holder:

A. debt is decreased.
B. debt is decreased but equity also increases.
C. only the number of shares increases.
D. there is no impact on the company's capital structure.
Ans: C
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
84. Which of the following is NOT an advantage for a company that sells a company-issued
option with a rights issue?
A. It may add to the marketability of the associated rights issue.
B. It reduces the necessity for the company to increase dividend payments immediately.
C. If the holder of the option exercises the right to buy the shares offered then the company
raises additional equity funds.
D. There is no certainty that the future funds from the exercise of the option will eventuate.
Ans: D
Difficulty: Medium
Est time: <1 minute
85. Which of the following about equity warrants is NOT correct?
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.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
86. Which of the following statements about a company-issued option is NOT correct?
A. It is a security issued by a corporation that gives the holder the right, but not the obligation, to
buy ordinary shares in the company on a predetermined date and at a predetermined price.
B. If the holder of the option exercises the right to buy the shares offered, the company is able to
raise additional equity funds.
C. It is a security issued by a corporation that gives the holder the right, but with the obligation,
to buy ordinary shares in the company on a predetermined date and at a predetermined price.
D. It is considered a quasi-equity issue.
Ans: D
Difficulty: Medium
Est time: <1 minute
87. 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
Ans: A
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
88. Which of the following statements about a pro-rata rights issue is NOT correct?
A. A proportional offer to buy securities is based on an investor’s current shareholding.
B. A 1:3 offer grants the existing shareholders the right to purchase a new share for every three
shares.
C. The offer is made on the basis of a fixed ratio of new shares to the number of shares already
held.
D. It has no expiration date for the exercise.
Ans: D
Bloom's: Evaluation
Difficulty: Easy
Est time: <1 minute
89. Which one of the following conditions for an equity warrant that is generally attached to a
bond issue is NOT correct?
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.
Ans: B
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute

A. If the warrant is non-detachable it can only be sold with the associated bond.
B. Equity warrants add to the marketability of a corporate bond issue.
C. Equity warrants give an investor the right to convert the warrant into shares at a specified
price.
D. A warrant holder receives a dividend, unlike a rights holder.
Ans: D
Difficulty: Medium
Est time: <1 minute
91. Which of the following statements about company-issued equity warrants is NOT correct?
A. The terms of a warrant may allow the warrant to be detachable from the bond issue.
B. A company-issued equity warrant generally attaches to a bond issue.
C. Because company-issued equity warrants are attached to a bond they have no value.
D. Warrants may lower the costs of borrowing associated with the issue of the underlying
corporate bond.
Ans: C
Difficulty: Medium
Est time: <1 minute
92. Which of the following is NOT a similarity between a right and a warrant?
A. They both provide the right, without the obligation, to purchase a specified number of shares
at a predetermined price.
B. A right and a warrant both result in the company raising additional equity capital.
C. A right and a warrant can both be detached from the debt issue and traded separately.
D. A right and a warrant both have similar maturities.
Ans: D
Difficulty: Medium
Est time: <1 minute
on the ASX?
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 ASX on an annual basis.
Ans: C
Difficulty: Hard
Est time: <1 minute
Learning Objective: 5.06 Explain the listing requirements of the Australian Securities Exchange.
94. 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.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
95. The placement of ordinary shares has this advantage:

A. money can be raised in a short time.
B. ownership of existing shareholders becomes more concentrated.
C. the price will be at a discount.
D. shares will be sold to a large number of investors.
Ans: A
Difficulty: Medium
Est time: <1 minute
96. Financial risk is higher when the debt-to-equity ratio is _____. Payment to creditors is _____,
and payment to shareholders is _____.
A. lower; obligatory; not obligatory
B. lower; not obligatory; obligatory
C. higher; obligatory; not obligatory
D. higher; not obligatory; obligatory
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Difficulty: Easy
Est time: <1 minute
97. For listing on the ASX a firm must meet a number of criteria. Among them are:
A. continuous disclosure, either profits test or assets test.
B. continuous disclosure, profits test, assets test.
C. domiciled in Australia, continuous disclosure, either profits test or assets test.
D. domiciled in either Australia or New Zealand, continuous disclosure, profits test, assets test.
Ans: A
Difficulty: Easy
Difficulty: Hard
Est time: <1 minute
Topic: Australian Securities Exchange (ASX) listing rule requirements
98. For capital budgeting projects:

A. NPV can be misleading or wrong when the cash flows are non-conventional.
B. IRR can be misleading or wrong when the cash flows change signs more than once.
C. NPV can be a problem when there are mutually exclusive projects.
D. IRR should be used since IRR is often regarded as being easier to understand than NPV.
Ans: B
Difficulty: Medium
Est time: <1 minute
99. Which statement best relates NPV and IRR?

A. NPV is in terms of present value and IRR is in terms of percentages.
B. NPV discounts cash flows by using the internal rate of return for discounting.
C. IRR is the NPV divided by the initial investment.
D. IRR is the discount rate that makes NPV equal zero.
Ans: D
Difficulty: Medium
Est time: <1 minute
100. A firm is considering a project with an initial investment of $25 000 and cash flows in the
following three years (1–3) of $10 000, $12 000, $14 000. This sort of project would be
discounted at a 14 per cent rate. Should the project be funded?
A. Yes because the NPV is $11 000.
B. Yes because the NPV is $2455.
C. Yes because the NPV is $2701.
D. Yes because the NPV is $3264.
Ans: B
AACSB: Analysis
Bloom's: Valuation
Difficulty: Medium
Est time: <1 minute

A. have a preferred position as compared to other claimants such as ordinary shareholders and
creditors.
B. may be cumulative, which requires the payment of dividends in the current year and unpaid
dividends from prior years before ordinary shareholders can receive a dividend in the current
year.
C. usually pay dividends that increase in line with dividends paid to ordinary shareholders.
D. include those equity securities that can be converted into debt.
Ans: B
Difficulty: Medium
Est time: <1 minute
102. The _____ in an initial public offering probably has the biggest risk because of _____.
A. promoter; the obligation to buy up the unsold shares
B. adviser; the legal exposure for having miss-guessed the market
C. underwriter; the obligation to buy up the unsold shares
D. adviser; mistakes made in preparing the prospectus
Ans: C
Bloom's: Knowledge
Difficulty: Easy
103. The investment decision for a corporation involves the types of securities it is going to issue
or invest in.
Ans: False
Feedback: The investment decision is the capital budgeting decision that determines the strategic
activities of the firm and what assets it needs to acquire so it can carry out its business.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
104. If the calculated IRR on an investment proposal is greater than the required rate of return,
the company should proceed with the project.
Ans: True
Feedback: The IRR provides an actual rate of return that can be measured against a company's
required rate of return.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
105. Financial risk refers to risks arising from the different types of debt securities issued by a
company.
Ans: False
Feedback: Financial risk attaches to both equity and debt issued by a company.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
106. The main objective of a business corporation is the maximisation of shareholder value.
Ans: True
Feedback: The overriding objective is the maximisation of the market value of a company’s
shares, that is, any improvement in share price helps achieved this objective.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
be delisted.
Ans: True
the listed companies do not comply with the listing rule, they may be delisted.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
108. A company's debt-to-equity ratio is determined in practice with reference to four main
criteria and not by finance theory.
Ans: True
Feedback: Four main criteria are norms in the industry, history of the gearing ratio, limits
imposed by lenders and management decisions.
Difficulty: Easy
Est time: <1 minute
109. In consultation with a company, the promoter (an investment bank) will seek flotation of the
company shares.
Ans: False
Feedback: The promoter is the company seeking to issue new shares.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
110. Limited liability shares are generally sold to investors on a fully paid basis.
Ans: True
Feedback: Ordinary shares issued on a limited liability basis are the principal form of funding.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
111. A pro-rata offer of rights to existing shareholders must be accompanied by a prospectus.

Ans: True
Feedback: Generally, regulations require a prospectus to be attached.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
112. A placement occurs where a company offers additional shares to select institutional
investors.
Ans: True
Feedback: Corporations Law places limits on the issue of shares through a placement in order to
protect existing shareholders.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
113. What is capital budgeting? Explain its importance for a company.
Ans: Capital budgeting is the process of evaluating and selecting long-term investments
consistent with the firms' goal of owner-wealth maximisation. A company needs to determine
what assets it needs to invest in so it may carry out its planned business operations. Two
important quantitative measures it may use are net present value and internal rate of return.
Bloom's: Knowledge
Difficulty: Medium
114. Discuss relevant issues for a company that needs to decide on how to finance its investment
decisions.
Ans: The financing decision relates to the question of how a business investment is to be funded.
There is the choice of debt or equity and what kind of risk this exposes the firm to. These
generally entail business risk and financial risk.
Bloom's: Knowledge
Difficulty: Medium
115. Discuss the attractions of a private placement for a company.

Ans: There are a number of advantages—a placement can be arranged more quickly than a rights
issue; it may also involve less of a discount to current market value than a rights issue and so be
less expensive. A placement may also be made directly with institutions without the need to
lodge a prospectus but rather a less comprehensive and less costly memorandum of information.
Difficulty: Medium
116. What is an equity-funded takeover?

Ans: In the case of a merger or acquisition, a company may decide to issue additional shares to
fund a full-equity takeover rather than using other sources of funding such as debt. A company
(A) may offer these shares on a pro-rata basis to existing shareholders in the takeover target,
company (B). The target shareholders may be offered two shares in company A for every five
shares they hold in company B. The pro-rata basis of the offer will be based on the value of
company A shares compared to that of company B.
Bloom's: Synthesis
Difficulty: Hard
117. Common shareholders are often referred as ‘residual claim holders’. Briefly discuss the
salient features of this statement.
Ans: Ordinary shares or common stock represent a residual ownership claim on the assets of the
firm; that is, they provide a return to the shareholders only after the firm has met its obligations
to all other providers of funds, and after all operating expenses have been paid. In other words, as
residual claimants, they only receive the dividend payment after payments to all other
stakeholders in the firm have been made. Therefore the common shareholders are last in the
priority lists for possible payment to be received.
Bloom's: Synthesis
Difficulty: Hard
118. Lenders for real estate purchases usually require a security interest in the property, which
serves as collateral for the loan. How would the availability of suitable collateral impact a firm’s
debt-to-equity ratio? Explain.
Ans: When there is collateral a lender may be more willing to lend. The debt of the firm can
therefore be higher. Firms in high tech or service industries are less likely to have suitable
collateral. Accordingly, these firms typically have lower debt-to-equity ratios than those firms
with collateral, such as tangible assets like land or machinery.
Difficulty: Hard
119. How does a firm’s debt-to-assets ratio relate to its debt-to-equity ratio? Assume equity is
positive.
Ans: They are both positively related. A change in debt will alter the D/E ratio more than it alters
the D/A ratio, but in the same direction. For instance, if D=50 and E=150, then the D/A ratio is
50/200 = .25 and D/E is 50/150 = .33. Now if we borrow an additional 50, the D/A ratio
increases to 100/250 = .40 and the D/E ratio increases to 100/150 = .67.
AACSB: Analysis
Bloom's: Valuation
Difficulty: Hard
Difficulty: Medium
1. Fund managers often adopt either passive investment strategies, active management strategies
or the combination of both. In the context of investment environment, 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.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 6.01 Consider the role of an investor in the share market, appreciate the wide range of investment choices that
are available and understand risks associated with investments in shares of listed corporations.
Section: 6.01 Share-market investment
Topic: Share-market investment
2. Typically, a large stock exchange such as New York Stock Exchange (NYSE) and Australian
Securities Exchange (ASX) has ________ listed on it.
A. preference shares
B. shares
C. exchange-traded funds
D. all of the given answers
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
3. Compared with fixed interest securities, shares may 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.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
4. It is commonly accepted view that a portfolio is generally considered well diversified if it

includes about:
A. 0-5 stocks.
B. 5-10 stocks.
C. 10-15 stocks.
D. 10-25 stocks.
Ans: D
Difficulty: Medium
Est time: <1 minute
5. According to portfolio diversification principle, an investment portfolio that is well-diversified

contains:
A. a large range of term deposits.
B. a large number of properties.
C. a large number of future contracts.
D. a large range of shares, fixed-income securities and properties.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
6. A diversification is considered most effective if it includes a pair of assets that have:

A. a highest correlation.
B. a lowest correlation.
C. no correlation.
D. correlation is not important for effective diversification.
Ans: B
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
7. Which statement/s are true for the formation of a diversified portfolio?

A. The positive performance of some investments offsets the negative performance of others.
B. There should be an imperfect correlation between pair of assets, or a correlation coefficient
less than 1.
C. There should be a wide range of assets class such as shares, cash and properties.
Ans: D
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
8. Systematic risk refers to:

A. risks that have an impact on all technology shares.
B. risks that have an impact on all energy shares.
C. risks that have an impact on all financial shares.
D. risks that have an impact on the majority of shares in the market.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
9. Which of the following is an example of systematic risk exposures for a company?

A. Resignation of chief executive
B. Change in future performance forecasts
C. Rumour of financial difficulty in the company
D. Introduction of new company legislation
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
10. Which of the following is an example of an unsystematic risk exposure for a company?
A. A change in interest rates
B. A change in foreign exchange rates
C. Political instability in a country
D. Change in future performance forecast for a company
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
11. When investors buy and sell shares based on receiving new information on shares with the
objective to outperform the market, this is known as:
A. active investment.
B. a diversified strategy.
C. a market replication strategy.
D. passive investment.
Ans: A
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
12. 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.
Ans: D
Difficulty: Medium
Est time: <1 minute
13. The correlation of pairs of securities within a portfolio is called:
A. co-association.
B. correspondence.
C. covariance.
D. variance.
Ans: C
Difficulty: Medium
Est time: <1 minute
14. The correlation coefficient between two shares:

A. can take on positive values.
B. can take on negative values.
C. can take value from negative 1 to positive one.
D. includes all of the given answers.
Ans: D
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
15. For a portfolio of stocks, the diversification benefit of the portfolio risk is 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 individual stocks.
Ans: C
Difficulty: Medium
Est time: <1 minute
16. When an investor alters the mix of their portfolio allocation to reflect market changes or their
circumstances, this is called _____ asset allocation.
A. market timing
B. passive
C. non-fixed
D. tactical
Ans: D
Difficulty: Medium
Est time: <1 minute
17. For an investor, the mix of shares that satisfies their known cash-flow requirements, risk
tolerance and future life cycle positions is called:
A. tactical asset allocation.
B. strategic asset allocation.
C. systematic asset allocation.
D. diversified asset allocation.
Ans: B
Difficulty: Easy
Est time: <1 minute
18. Stockbrokers act as _____ for an exchange.

A. agents
B. dealers
C. negotiators
D. intermediaries
Ans: A
Difficulty: Medium
Est time: <1 minute
Learning Objective: 6.02 Detail the process for buying and selling shares.
Section: 6.02 Buying and selling shares
Topic: Buying and selling shares
19. 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.
Ans: D
Difficulty: Easy
Est time: <1 minute
20. Which of the following does NOT apply to full-advisory stockbrokers?

A. Full-advisory stockbrokers provide investment advice on listed securities.
B. Full-advisory stockbrokers monitor investors' financial plans.
C. Full-advisory stockbrokers accept buy and sell orders from clients.
D. Full-advisory stockbrokers' fees are competitive with discount brokers.
Ans: D
Difficulty: Easy
Est time: <1 minute
21. There are many forms of investing. When an investor purchases unit in a unit trust, this is
considered as ________ investing.
A. absolute
B. direct
C. indirect
D. value
Ans: C
Difficulty: Medium
Est time: <1 minute
22. When an investor puts an order to buy shares through their stock broker via their internet
share account, this is called:
A. indirect investment.
B. direct investment.
C. index investment.
D. passive investment.
Ans: B
Difficulty: Medium
Est time: <1 minute
23. Which of the following statements regarding dividends is NOT correct?

A. Dividends are usually received twice yearly from a company.
B. The payments of dividends are at the company board of directors' discretion.
C. An investor is generally required to pay taxation on the final dividend payment.
D. The taxation of dividends varies from country to country.
Ans: C
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
Learning Objective: 6.03 Understand the importance of taxation in the investment decision process.
Section: 6.03 Taxation
Topic: Taxation
24. There are two forms of tax system, a conventional and an imputation system. Dividend
imputation is best described as:
A. removing the double taxation of dividends.
B. helping to improve shareholders’ returns through the imputation system.
C. encouraging investment and growth in the share market.
Ans: C
Bloom's: Knowledge
Difficulty: Medium
Section: Est time: <1 minute
Topic: Est time: <1 minute

A. In Australia taxation of individuals is based on a progressive tax system.
B. The dividend imputation system effectively removes the double taxation of dividends in
Australia.
C. In relation to dividend imputation, a shareholder whose marginal tax is lower than the
company tax rate will pay their marginal tax on the dividend received.
D. In Australia dividends on which the company has already paid company tax are called franked
dividends.
Ans: C
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
Topic: Taxation
26. The capital structure of a company is one of the important indicators of performance. Which
of the following statements regarding capital structure is NOT correct?
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.
Ans: D
Difficulty: Medium
Est time: <1 minute
Learning Objective: 6.04 Identify and describe various indicators of financial performance.
Section: 6.04 Financial performance indicators
Topic: Financial performance indicators
27. When using indicators for a company's performance:

A. ratios for a company should be compared with others in the same industry.
B. a single ratio should not be used to judge the company's overall performance.
C. the dates of the financial statements being compared should be the same.
Ans: D
Difficulty: Medium
Est time: <1 minute
28. Compared with a company's current ratio, the shareholders' interest ratio gives information
about a company's:
A. interest expense.
B. level of liquidity.
C. long-term viability.
D. future earnings.
Ans: C
Difficulty: Medium
Est time: <1 minute
29. Which of the following are current assets of companies?

A. Accounts payable
B. Bank overdraft facility
C. Commercial paper
D. Inventories
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
30. Which of the following are current liabilities of a company?

A. Accounts receivable
B. Inventories
C. Bank overdraft facility
D. Cash
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
31. The major objectives of financial ratios are to:

A. evaluate the current state of the firm’s operations.
B. show the relative strengths and weaknesses of a company as compared to other firms in the
industry and leading firms in the industry.
C. help to show whether the firm’s position has been improving or deteriorating.
Ans: D
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
32. The greater the proportion of debt financing compared with 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.
Ans: C
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
33. A company with a _____ ratio of equity to debt is _________ dependent on external
financing.
A. lower; less
B. lower; not
C. higher; less
D. higher; more
Ans: C
Difficulty: Medium
Est time: <1 minute
34. The indicator ratio that should be used to assess a company's ability to meet its short-term
obligations is its:
A. liquidity.
B. debt.
C. profitability.
D. capital structure.
Ans: A
AACSB: Analysis
Bloom's: Analysis
Difficulty: Easy
Est time: <1 minute
35. 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.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
35a. Which ratio is a measure of liquidity that excludes inventories?
A. Current
B. Liquid
C. Debt to gross cash flow
D. Interest cover
Ans: B
36. 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.
Ans: B
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
37. If a company has a current ratio of 2, which of the following measures will increase the
current ratio?
A. Buying more inventory on short-term credit
B. Buying more inventory with cash
C. A customer paying an overdue account
D. Paying off a short-term bank advance with long-term debt
Ans: D
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
38. If a company has a current ratio of 0.9, in order to improve its current ratio it might:
A. increase its current assets by decreasing its inventory.
B. use more long-term debt to decrease current liabilities.
C. decrease its large amounts of accounts receivable.
D. decrease its large amount of accounts to pay to increase its current liabilities.
Ans: B
AACSB: Analysis
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute
39. If a company has a liquid ratio of 0.9, in order to improve its liquid ratio it might:
A. increase its current assets by increasing its inventory.
B. use more short-term debt to decrease current liabilities.
C. increase its large amounts of accounts receivable to improve its cash position.
D. increase its large amount of accounts to pay to decrease its current liabilities.
Ans: C
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
40. 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
Ans: A
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
41. Which financial ratio provides information essential for assessing the long-run operation of
the company?
A. Debt
B. Liquidity
C. Profitability
D. Share price
Ans: A
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
42. The financial 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.
Ans: C
Difficulty: Medium
Est time: <1 minute
43. The financial ratio that measures operating profit after tax to shareholders funds is:
A. EBIT to long-term funds.
B. Return on equity.
C. EBIT to total funds.
D. interest cover.
Ans: B
Difficulty: Medium
Est time: <1 minute
44. Compared with a company's 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.
Ans: C
Difficulty: Medium
Est time: <1 minute
45. Which of the following groups of financial 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
Ans: D
AACSB: Analysis
Difficulty: Medium
Est time: <1 minute
46. Which financial ratio links long-term funds provided by the company's owners and those of
the creditors?
A. Debt
B. Debt to equity
C. Times interest cover
D. Earnings to price
Ans: B
Difficulty: Medium
Est time: <1 minute
47. Which financial ratio is used to measure a company's ability to meet its short-term financing?
A. Debt
B. Liquidity
C. Debt to equity
D. Profitability
Ans: B
Difficulty: Medium
Est time: <1 minute
48. Which financial ratio measures a company's ability to service its interest commitments?
A. Debt
B. Equity to debt
C. Profitability
D. Interest cover
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
49. 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. liquidity
C. earnings per share
D. EBIT to long-term funds
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
50. The _______ is an indicator of investors' evaluation of a company's future earnings potential.
A. debt to equity ratio
B. price/earnings ratio
C. interest cover ratio
D. return on shareholders' funds
Ans: B
AACSB: Analysis
Difficulty: Easy
Est time: <1 minute
51. 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 liquidity ratio.

A. 0.85
B. 0.96
C. 1.51
D. 1.32
Ans: B
𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 − 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖 (𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 𝑜𝑜𝑜𝑜 ℎ𝑎𝑎𝑎𝑎𝑎𝑎)
Ex: 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 =
𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 − 𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏 𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜
Current assets = cash + security + AR + inventory

Current liabilities = AP + Accrued expenses payable + Taxes payable
Bank overdraft = 0
52. Which of the following statements regarding the debt servicing capacity of a company is
NOT correct?
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 company's capacity to service debt.
D. The lower the interest cover ratio, the greater the company's ability to cover interest
commitments.
Ans: D
Difficulty: Medium
Est time: <1 minute
53. If a share currently sells for $20 and has annual earnings per share of 2.0, the price/earnings
ratio is:
A. 0.4
B. 10.0
C. 4.0
D. 160
Ans: B
Ex:
54. The _______ ratio is an indicator of the share market's evaluation of a company.
A. debt/equity
B. price/earnings
C. debt to gross cash flow
D. shareholders' interest
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
55. Systematic risk is also referred to as:

A. economic risk.
B. diversifiable risk.
C. market risk.
D. financial risk.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
56. The risk that affects the whole market is called:

A. total risk.
B. systematic risk.
C. diversifiable risk.
D. financial risk.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
57. According to 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 the management of the company
D. Gearing and the impact of interest rate changes
Ans: A
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
58. Increased competition, increased costs of labour and lawsuits are all examples of:
A. unsystematic risk.
B. systematic risk.
C. total risk.
D. economic risk.
Ans: A
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
59. Which of the following is NOT an example of unsystematic risk for a company?
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.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
60. Estimating systematic risk involves comparing the price history of a particular share relative
to movements on the overall market index.
A. an average
B. the median weighted
C. the most volatile
D. the least volatile
Ans: A
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
61. 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.
Ans: A
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
62. Which of the following about beta coefficient is NOT correct?
A. A stock of beta 1.25 indicates the share price will perform 25 per cent better than the overall
market when prices are rising.
B. A stock of beta 1.25 indicates the share price will perform 25 per cent worse than the overall
market when prices are falling.
C. A stock with a beta of 1.25 will move more than a stock with a beta of 1.25.
D. A stock with a beta of 0.50 will rise at only half the rate at which the overall market index
will rise.
Ans: C
AACSB: Analysis
Difficulty: Medium
Est time: <1 minute
63. What should be the price of a share with a constant dividend of $2.50, if the growth rate is
zero and the required rate of return is 8 per cent per annum?
A. $22.86
B. $28.00
C. $31.25
D. $33.75
Ans: C
ex:
64. 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 per cent, and the required rate of return is 11 per cent?
A. $25.00
B. $26.00
C. $30.28
D. $43.75
Ans: B
Ex:
65. The majority of companies pay dividends twice a year to their:

A. bond holders.
B. secured bond holders.
C. shareholders.
D. board of directors.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 6.05 Apply quantitative methods to the pricing of shares.
Section: 6.05 Pricing of shares
Topic: Pricing of shares
66. 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.
Ans: B
Difficulty: Medium
Est time: <1 minute
67. After a company has made an announcement about a forthcoming dividend, then at a
specified date when the share begins to trade ex-dividend:
A. the buyer of the share will now receive the due dividend.
B. the share price will adjust upwards by the amount of the forthcoming dividend.
C. the seller of the share will receive the next dividend payment.
D. the ex-dividend share price will be unaffected by the forthcoming dividend.
Ans: C
Difficulty: Medium
Est time: <1 minute
68. When a share is trading for a period with a cash dividend entitlement, then the share is said to
trade:
A. bonus dividend.
B. pro dividend.
C. cum-dividend.
D. ex-dividend.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
69. If a dividend is declared on 1 November, has a cum-dividend date of 19 November and a

record date of 26 November, which of the following shareholders will NOT receive the
dividend?
A. A buyer of the share on 31 October
B. A buyer of the share on 11 November
C. A buyer of the share on 26 November
D. A buyer of the share on 29 November
Ans: D
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
70. On the day that a share 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.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
71. The decision to pay cash dividends to shareholders is made by the:

A. company management.
B. shareholders at the annual meeting.
C. board of directors.
D. bond holders.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
72. 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
Ans: C
Ex: Share price cum-dividend $5.44
Dividend paid 35%
Theoretical ex-dividend price $5.44 - 35% = $5.09
73. A rights issue differs from a bonus issue of shares in that:

A. after a bonus issue there is a 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.
Ans: C
Difficulty: Medium
Est time: <1 minute
74. Which of the following statement about bonus shares is NOT correct?
A. Bonus shares are generally issued at no cost to the shareholders.
B. If a company offers a 1 for 4 bonus issue this means for every one share a shareholder owns
they get four extra shares.
C. When shares go ex-bonus there should be a downward adjustment in the share price.
D. If a company declares a bonus share issue this can be viewed by the market as a positive
signal about the company's future profitability.
Ans: B
Difficulty: Medium
Est time: <1 minute
75. When shares are purchased cum-rights it means the purchaser of the share:
A. cannot usually sell the right separately.
B. may take part in the rights offer.
C. cannot take part in the rights offer.
D. can take up the offer of the right without having to pay extra for the subscription price.
Ans: B
Difficulty: Medium
Est time: <1 minute
76. A company recently announced renounceable offers that give eligible shareholders the right
to purchase the shares of the company at an issue price of $10.00 per share for every five shares
they hold. If the cum-right shares are priced at $12.00, the value of right is given as:
A. $1.667
B. $2.00
C. $1.00
D. $2.50
Ans: A
Ex:
77. If a company offers a one-for-five bonus issue and the current share price cum-bonus is
$7.50, the theoretical value of each share ex-bonus is:
A. $7.50
B. $6.25
C. $6.00
D. $5.00
Ans: B
EX: If a bonus 1:5 issue is made:
Cum-bonus price $7.50
Market value of 5 cum-bonus shares $7.50*5
Theoretical value of 6 ex-bonus shares $7.50*5
Theoretical value of each share ex-bonus $(7.50*5)/6 = $6.25
78. 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.
Ans: C
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
79. A company whose shares are currently trading at $3.60 proposes to have a 25 per cent 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
Ans: B
ex: 4 for 1 split:
Pre-split share price $3.60
Theoretical ex-split share price $3.60 / 4 = 0.9
80. 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 investor's portfolio and hence their total
value.
Ans: C
Difficulty: Medium
Est time: <1 minute
81. 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
Ans: B
Ex:
82. 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
Ans: C
Ex: market price cum-rights $3.00, with 1:10 rights issue priced at $2.80:
Cum-rights share price $3.00
Market value of 10 cum-rights shares 30.00
New funds from 1:10 issue 2.80
Market value of 11 ex-rights shares 30.00 + 2.80
Theoretical ex-rights share price (30.00 + 2.80) / 11
83. 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
Ans: D
Difficulty: Hard
Est time: <1 minute
84. 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
Ans: C
Difficulty: Easy
Est time: <1 minute
85. 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 investor's portfolio.
Ans: B
Difficulty: Medium
Est time: <1 minute
86. When a share price of a company has increased hugely compared to the prices of most other
shares on the exchange and its liquidity has decreased, the directors may decide to:
A. split the number of shares on issue.
B. have a bonus issue.
C. declare an increased dividend.
D. lower the dividend.
Ans: A
Difficulty: Medium
Est time: <1 minute
87. 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.
Ans: A
Difficulty: Medium
Est time: <1 minute
Learning Objective: 6.06 Analyse the functions and importance of share-market indices and interpret published share-market
information.
Section: 6.06 Stock-market indices and published share information
Topic: Stock-market indices and published share information
88. According to the text, a tradable benchmark:
A. is a broad market index that represents 90 per cent of the share market capitalisation.
B. may be a performance benchmark index but with a narrower focus upon which some
derivative contracts are priced.
C. is a broad market index that represents 99 per cent of the share market capitalisation.
D. is an index that measures changes in share prices plus reinvestment of dividends.
Ans: B
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
information.
89. BH Mining declared a 70 per cent partly franked dividend of $0.70 per share.
The company pays a corporate tax rate of 30 per cent. If a shareholder holds 100 shares of BH
Mining and the shareholder’s marginal tax rate is 37 per cent, the tax payable by the shareholder
is:
A. $7.00
B. $37.00
C. $30.00
D. $0.37
Ans: A
90. Consider the following five statements:

i. The expected return of a portfolio of shares is the weighted average of the expected returns for
each share.
ii. All other things being equal, a cum-dividend share price should fall by the amount of a
dividend that is paid.
iii. One of the effects of dividend imputation is the removal of ‘double taxation' of company
profits that are distributed as dividends.
iv. 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.
v. In a one-for-nine bonus issue, if the cum-bonus price was $10, then the theoretical ex-bonus
price would be $9.
How many of the above statements are true and how many are false?
A. 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
Ans: C
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
Topic: Taxation
91. Consider the following five statements:

i. The expected return of a portfolio of shares is the weighted average of the expected returns for
each share.
ii. All other things being equal, a cum-dividend share price should fall be the amount of a
dividend that is paid.
iii. One of the effects of dividend imputation is the removal of ‘double taxation' of company
profits that are distributed as dividends.
iv. 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.
v. In a one-for-nine bonus issue, if the cum-bonus price was $10, then the theoretical ex-bonus
price would be $9.
Which of the following is correct?
A. i, ii, iii are true and iv and v are false
B. i, and iii are true and ii, iv and v are false
C. i, ii, iii and iv are true and v is false
D. i and ii are true and iii, iv and v are false
Ans: C
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
Topic: Taxation
92. Australian personal income taxation exhibits:

A. increasing marginal tax rates as income increases and the double taxation of dividends.
B. increasing marginal tax rates as income increases and the elimination of double taxation of
dividends.
C. a constant marginal tax rate as income increases and the double taxation of dividends.
D. a constant marginal tax rate as income increases and the elimination of double taxation of
dividends.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Topic: Taxation
93. Company shares are priced at $13.45. The company announces a share split of 3 for 2. The
new share price should be:
A. $5.38.
B. $6.72.
C. $8.97.
D. $20.18.
Ans: C
ex: 3 for 2 splits:
Pre-split share price $13.45
Theoretical ex-split share price $13.45/3*2 = $8.97
94. A firm has recently paid dividend per share of $1.20. The dividend is expected to grow at the
rate of 5 per cent per annum. If the minimum rate of return required by an investor for that share
is 10 per cent, the real value of the stock is:
A. $25.20.
B. $30.25.
C. $12.50.
D. cannot be determined from the given information.
Ans: A
Ex:
95. An analyst estimates that the Seraphim Company will be able to increase its dividends at a
2.5 per cent rate indefinitely. The current annual dividend is $3, and the required rate of return is
12 per cent. What is the value of a share using the dividend growth model?
A. $25.60
B. $31.58
C. $31.83
D. $32.37
Ans: D
Ex:
96. A diversified portfolio:

A. reduces unsystematic risk.
B. has very little risk.
C. reduces systematic risk.
D. should result in higher returns.
Ans: A
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
97. Which of the following is NOT an example of a systematic risk?

A. Rising interest rates
B. CEO scandal
C. Political instability
D. Economic recession
Ans: B
Difficulty: Easy
Difficulty: Easy
Est time: <1 minute
98. Which profitability measure takes interest and taxes into account?
A. EBIT
B. Operating profit
C. Interest cover
D. Return on equity
Ans: D
Difficulty: Easy
Est time: <1 minute
99. A company whose earnings are likely to grow _____ will likely have a _____ P/E ratio,
especially if the P/E ratio is based on _____ earnings.
A. fast; high; historical
B. fast; high; forecasted
C. fast; low; historical
D. slowly; high; historical
Ans: A
Difficulty: Medium
Est time: <1 minute
100. The typical sequence for dividends is:

A. announcement, cum-dividend, dividend payment, ex-dividend.
B. cum-dividend, ex-dividend, announcement, dividend payment.
C. announcement, cum-dividend, ex-dividend, dividend payment.
D. announcement, ex-dividend, cum-dividend, dividend payment.
Ans: C
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
101. One of the major objectives of continuous disclosure for listed companies under ASIC’s
guideline is to ensure that companies take practical steps to improve investors’ access to
companies’ information.
Ans: True
Feedback: Through timely disclosures, investors are better informed about the prospect of the
firms, hence informed investment decisions are possible.
Bloom's: Knowledge
Est time: <1 minute
Topic: Investors in the share market
102. Efficient price discovery means that share information is disclosed at the lowest possible
transactions cost.
Ans: False
Feedback: Efficiency here means how quickly the relevant information is incorporated into the
share price.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Topic: Introduction
103. A change in foreign exchange rates is a systematic risk that affects the bulk of shares listed
on a stock exchange.
Ans: True
Feedback: Systematic risk involves exposures that affect the majority of shares listed on a stock
exchange.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
104. The level of beta indicates how sensitive a share return is to changes in overall market
movement.
Ans: True
Feedback: It is true that some firms are more sensitive to changes in the market. The market has
a beta of one. A company with a beta of 1.5 would be considered riskier than average firms in
the market.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
105. If two assets are negatively correlated this means their prices move in opposite directions.
Ans: True
Feedback: Positive correlation means the two prices move together in the same direction.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
106. If investors alter the mix of shares in their portfolios as the share market suddenly falls they
are using a strategic asset allocation approach to investing.
Ans: False
Feedback: Strategic asset allocation means a distribution of assets based on an investor's
preference for physical and financial assets.
Difficulty: Medium
Est time: <1 minute
107. A company's ability to meet short-term financial obligations is an important financial

performance indicator for an investor.
Ans: True
Feedback: A company will have a mixture of debt and equity and the company must have
enough funds on hand to meet its debt payments and other commitments.
Difficulty: Easy
Est time: <1 minute
108. Historically, Australian banks have had low EPS ratios compared with the retail sector
because of the amount of lending they do.
Ans: False
Feedback: According to the text, Australian banks have had very high earnings per share ratios.
Difficulty: Medium
Est time: <1 minute
109. What are some factors that influence investors to buy listed rather than unlisted shares?
Ans: Some factors that encourage investors to buy shares quoted on an exchange are efficient
price discovery that includes share market listing rules such as continuous disclosure and other
investor protection rules, and depth and liquidity of share markets.
Difficulty: Hard
110. Explain the concept of a diversified portfolio.

Ans: Under investment theory, an investor who holds a diversified portfolio is able to minimise
the risk exposure from investing in a single share. A diversified portfolio would include a range
of investment categories including shares, fixed-interest securities and property so that
unsystematic risk is diversified away.
Difficulty: Hard
111. Explain how an index fund might benefit an investor.

Ans: If an investor wishes to build a portfolio based on tracking a share index they might
consider index funds. Index funds use a range of techniques to replicate or track the share
market, including full or partial replication of a specified share-market index. Full replication
occurs when a share manager purchases all the stocks included in an index. For indexes that
contain a large number of stocks such as the S&P 500 a manger may partly replicate the index.
Difficulty: Hard
112. Define and explain what a share split involves.

Ans: A share split is a proportional division of the number of shares issued by a company. A
share split may be motivated by a company's share price increasing significantly over time and
possibly being seen as too expensive for some investors. The directors may be motivated to split
the shares in, for example, a 20 per cent split that results in five new shares for one existing
share. However, there is no fundamental change in the asset value of the company.
Difficulty: Medium
113. What is a stock-market index? Discuss three main types.
Ans: A stock-market index is a measure of the price performance of the share market or some
section of it. Three main types are performance benchmark indices, tradeable benchmark indices
and market indicator indices. A performance benchmark index measures the performance and
risk of a broad market based on capitalisation and liquidity; a tradable benchmark index is a
narrower index and is the basis on which some derivative contracts are priced, and a market
indicator index measures the performance of the overall market such as the Dow Jones Industrial
Average (USA).
Difficulty: Medium
information.
114. Briefly discuss the share indices in the US and Australia.

Ans: A brief discussion would refer to methodology and coverage. All the major indices are
market-weighted with the exception of the Dow Jones, which is price-weighted. This is notable
as the DJIA is a widely quoted, media-favoured index. The S&P 500 is widely used as well,
especially by industry professionals. It is superior in its methodology and coverage compared to
the DJIA. The 500 largest listed companies are large companies with some of the largest mid-
caps included. In Australia, the All Ordinaries has the broadest coverage, but the S&P/ASX 200
might be a more appropriate benchmark for portfolios that are not willing to hold illiquid shares
as the All Ordinaries holds many small and very small companies.
Difficulty: Hard
information.
115. Briefly discuss the variety of P/E ratios.

Ans: P/E ratios vary because of the measurement of earnings. There are three major approaches.
First, the classic P/E ratio calculates earnings on the basis of the last four reported quarters.
While this seems straightforward, there may be several versions of earnings. Companies may
maintain several books, one for tax purposes and one for reporting. Furthermore, companies may
‘massage’ the data to exclude what they characterise as one-time costs. Second, the P/E may
reflect forecasted earnings (aka forward P/E) for the year ahead. Of course, these calculations
will vary from analyst to analyst. Some databases are built around a consensus earnings forecast,
which reduces the variation of forecasted P/Es. Thirdly, there is the relatively new P/E (CAPE).
Professor Shiller’s approach is to look at earnings levels over a decade, adjusting for changes in
the CPI index. The idea is to get a P/E that is more stable and covers all parts of the business
cycle. Whilst any P/E measure can be constructed for individual companies as well as the
market, the focus of the Shiller P/E is on the market.
Difficulty: Hard
information.
116. Fund managers often adopt either an active or a passive management approach to
investment strategies. Briefly describe and discuss major distinction between the two
approaches.
Ans: The major aim of fund managers is to out-perform the market benchmark, while the passive
fund manager tries to track the market or market index. Active fund managers often assume that
the assets can be either under-valued or over-valued, thus by identifying them correctly,
investors can take either long or short positions in those assets. To achieve this objective, active
funds managers frequently rebalance funding allocation for the portfolio, shifting funds from one
sector to other, from one asset class to another or from a safer to a more risky asset class.
However, active funds managers sometimes fail to beat particular market, with the underlying
investments not performing as expected. The passive fund managers, on other hand, assume that
market is fairly efficient. Any good or bad news coming to the market is instantaneously
absorbed or reflected into the share prices, thus requiring no additional analysis to identify over-
valued or under-valued securities.
Difficulty: Medium
When an investor purchases units in a unit trust, this is known as ________ investing. A. absolute B. direct C. indirect D. value
1. If shareholders become disenchanted with the performance of a company, they may take the
following action, with the subsequent impact on share prices:
A. they will buy more shares to control the company, thus the share price will increase.
B. they may decide to sell their shares, hence the increase in shares is likely to bring about a fall
in the share price.
C. they may decide to sell their shares, hence there will be an increased demand for the
company’s shares and an increase in the share price.
D. they will stay passive, thus no impact on share price.
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
Learning Objective: 7.01 Identify and interpret economic variables that impact on share price movements within the context of the
top-down approach to fundamental analysis.
Topic: Introduction
2. If investors _______ a company's 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
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Topic: Introduction
3. If a company's shares are expected to perform better than other companies in the same
industry, there will be _______ for the company shares and a ____ in the share price.
A. increased demand; rise
B. decreased demand; rise
C. increased supply; fall
D. decreased supply; fall
Ans: A
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Topic: Introduction
4. When considering a top-down approach to fundamental analysis, the impact of

macroeconomic factors on a stock’s price can have which of the following effects?
A. an increase in real GDP is followed by improvement in current and expected future profits for
companies, leading to higher stock price.
B. an increase in real GDP is followed by performance of industries and subsequent
improvement in current and expected future profits for companies, leading to higher stock prices.
C. an increase in real GDP, followed by a significant performance of cyclical industries such as
automobile and consumer discretionary, will lead to higher stock prices.
Ans: D
Bloom's: Reflection
Difficulty: Hard
Est time: <1 minute
Topic: Introduction
5. 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.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Topic: Introduction
6. When an investor makes their investment decision based on a company's accounting ratios,
they are using:
B. factor analysis.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Topic: Introduction
7. The investment approach that focuses on the underlying determinants of future profitability
rather than on past price movements of a company's stock is:
A. credit analysis.
B. fundamental analysis.
C. systems analysis.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Topic: Introduction
8. The investment approach that evaluates and interprets past share price movements is:
A. credit analysis.
B. technical analysis.
D. systematic analysis.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Section: 7.01 Fundamental analysis: the top-down approach
Topic: Fundamental analysis: the top-down approach
9. In relation to fundamental analysis, which of the following is NOT a problem associated with
rapid, unsustainable economic growth?
A. GDP growth between 1 and 2 per cent
B. Current account of the balance of payments worsens
C. Pressure on wage growth falls
D. Inflationary pressures increase
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
10. The portion of the overall economy defined by the nature of a company's operations is called
the:
A. economic component.
B. company component.
C. industry sector.
D. country sector.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
11. The net record of a country's international exports less its international imports is its:
A. capital account.
B. current account.
C. gross domestic product.
D. gross national income.
Ans: B
Difficulty: Medium
Est time: <1 minute
12. In relation to a country's economy, the more a country imports and the worse the current
account becomes, the:
A. more the currency increases.
B. lower interest rates fall.
C. lower foreign debt becomes.
D. higher foreign debt becomes.
Ans: D
Difficulty: Medium
Est time: <1 minute
13. In relation to a country's economy, if a country's current account deteriorates, the government
is likely to:
A. loosen monetary policy.
B. increase government expenditure.
C. tighten interest rates.
D. lower taxes.
Ans: C
Difficulty: Medium
Est time: <1 minute
14. Foreign exchange risk is best described as the:

A. variability in the current account balance of the balance of payments.
B. cost of one currency in terms of another.
C. risk that the value of one currency relative to another currency will change.
D. variability of domestic and international interest rates.
Ans: C
Difficulty: Medium
Est time: <1 minute
15. Writing down the value of a capital asset, reported as an expense, is called:
A. downgrading.
B. depreciation.
C. documentation.
D. reduction.
Ans: B
Difficulty: Easy
Est time: <1 minute
16. If there were an appreciation of the exchange rate of a local currency against the USD, then
_____ from _____ sales would be _____ than if the exchange rate had remained constant.
A. profits; increased exports; less
B. losses; increased exports; less
C. profits; increased exports; more
D. losses; decreased imports; more
Ans: C
Difficulty: Easy
Est time: <1 minute
17. 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.
Ans: B
Difficulty: Medium
Est time: <1 minute
18. 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 on industry sector performance.
Ans: D
Difficulty: Medium
Est time: <1 minute
19. Some of the factors that are used by analysts using the top-down approach in the analysis of
fundamentals affecting share prices are:
A. inflation rates.
B. interest rates.
C. rate of growth in domestic and international economies.
Ans: D
Difficulty: Medium
Est time: <1 minute
20. Firm-specific financial indicators used in fundamental analysis top-down approach are:
A. interest rates.
B. consumer confidence.
C. the firm’s profitability.
D. business cycle.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
21. Which of the following is NOT a problem that may be associated with rapid, unsustainable
growth in an economy?
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
Ans: C
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
22. An investor seeks to compare the financial characteristics of four companies that are
investment possibilities. Based solely on the data provided in the following ratios, which
company would provide the lowest 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' 14.50% 11.50% 14.50% 12.75%
funds
Debt/gross cash flow 4.91 (years) 2.80 (years) 2.91 (years) 3.85 (years)
Interest cover 3.00 (times) 2.10 3.10 2.30 (times)
(times) (times)
P/E 19.50 7.70 5.21 12.10
(times) (times) (times) (times)
NTA/price 1.02 (times) 0.96 times) 1.00 0.99 (times)
(times)
A. Company A
B. Company B
C. Company C
D. Company D
Ans: C
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
Learning Objective: 7.02 Evaluate and apply the principles of the bottom-up approach to fundamental analysis, in particular the
analysis of the financial and operational performance of a corporation.
Section: 7.02 Fundamental analysis: the bottom-up approach
Topic: Fundamental analysis: the bottom-up approach
23. 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 share's beta will be to 1.
Ans: B
Difficulty: Medium
Est time: <1 minute
24. The lower the degree of unsystematic risk, the:

A. higher the possibility of diversification of a share portfolio.
B. lower a share's beta coefficient.
C. higher a share's beta coefficient.
D. lower the diversification of a share portfolio.
Ans: A
Difficulty: Medium
Est time: <1 minute
25. An investor who buys a large number of shares from different companies and from many
different industries will:
A. abolish systematic risk.
B. effectively minimise unsystematic risk.
C. minimise credit risk.
D. minimise price risk.
Ans: B
Difficulty: Easy
Est time: <1 minute
26. According to modern portfolio theory, the _______ the degree of systematic risk, the
_______ should be the expected return.
A. smaller; greater.
B. greater; greater.
C. smaller; smaller.
D. greater; smaller.
Ans: B
Difficulty: Easy
Est time: <1 minute
27. The investment approach that focuses more on past price movements of a company's stock
than on the underlying determinants of future profitability is:
A. credit analysis.
B. fundamental analysis.
C. systems analysis.
Ans: D
Difficulty: Easy
Est time: <1 minute
Learning Objective: 7.03 Describe and apply technical analysis to forecasting movements in share prices.
Section: 7.03 Technical analysis
Topic: Technical analysis
28. When investors use past share price movements to make their investment decisions, they are
using:
B. factor analysis.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
29. Compared with technical analysis, fundamental analysis considers the:

A. fundamentals of price movements only.
B. fundamentals of companies only.
C. factors that influence a company only.
D. factors that influence a company and the overall market.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
30. Compared with fundamental analysis, technical analysis focuses on:

A. accounting ratios.
B. forecasting a company's future profitability.
C. forecasting a company's technical ratios.
D. share price movements.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
31. From a technical analysis approach, the ‘resistance level’ signifies all of the following
except:
A. a value above which it is difficult for the market to rise.
B. a value at which the market tries to suppress prices to keep the value below certain level.
C. a value at which supply, relative to demand, is sufficient to halt a further advance in prices.
D. a value at which there is an increasing demand, and sufficient volumes, to halt any further
downward price movement.
Ans: D
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
32. An important belief underlying the use of technical analysis 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.
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
33. 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.
Ans: C
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
34. Chartists generally use _______________to discern price patterns and establish trading
position.
A. technical analysis
B. sensitivity analysis of prices
C. fundamental analysis
D. correlation analysis
Ans: A
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
35. An alternative approach to forecasting the behaviour of share prices is technical analysis.
Which of the following statements in relation to the approach taken by technical analysts is NOT
correct?
A. As a price pattern emerges, it is assumed that the historical pattern will re-emerge in full.
B. The stock markets are, at times, dominated by mass psychology.
C. Historical price patterns are of little use in forecasting future price movements.
D. Analysts typically adopt either a ‘technical' or a ‘fundamental' approach.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
36. _______ 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
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
37. Which of the following is NOT true of moving average techniques?

A. Investors can use them to generate buy and sell signals.
B. A buy signal is indicated once the actual share price exceeds the long-term moving average
share price.
C. A sell signal is indicated once the current share price moves below the long-term moving
average share price.
D. At a particular point, once the short-term moving average crosses and moves below the long-
term moving average, a buy signal is created.
Ans: D
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
38. A graph of average price series constructed over time is called a:

A. chart.
B. average time series.
C. moving average.
D. technical line.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
39. 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.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
40. 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
Ans: C
AACSB: Analysis
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute
41. 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.
Ans: A
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
42. 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.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
43. 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.
Ans: B
Difficulty: Medium
Est time: <1 minute
44. 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.
Ans: B
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
45. In relation to technical analysis, 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.
Ans: B
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
46. In relation to technical analysis, what is the level above which the market finds it difficult to
rise?
A. Trend channel
B. Resistance level
C. Support level
D. None of the given answers are correct
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
47. In technical analysis, a price level below which the market price is temporarily unlikely to
fall is a:
A. trend channel.
B. resistance line.
C. support line.
D. trend line.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
48. For technical analysts, the pattern formed by a series of price fluctuations characterised by
rising bottoms and horizontal tops is a/an:
A. ascending triangle.
B. symmetrical triangle.
C. descending triangle.
D. pennant.
Ans: A
Difficulty: Medium
Est time: <1 minute
49. For technical analysts, the pattern formed by a series of price fluctuations composed with
each top and bottom smaller than its predecessor and with transaction volumes usually
diminishing is a/an:
A. ascending triangle.
B. symmetrical triangle.
C. descending triangle.
D. pole.
Ans: B
Difficulty: Medium
Est time: <1 minute
50. 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.
Ans: B
Difficulty: Medium
Est time: <1 minute
51. 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.
Which of the following statements in relation to indicators given by support and resistance
rectangles is NOT correct?
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, 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.
Ans: A
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
52. 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
Ans: B
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
53. 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 upwards, and short-term waves downwards.
C. a series of three major waves upwards, followed by two major waves downwards.
Ans: C
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
54. In relation to share trading, buy and sell orders automatically triggered by rules entered into a
computer program are called:
A. high frequency trading.
B. intraday trading.
C. program trading.
D. flash trading.
Ans: C
AACSB: Technology
Difficulty: Medium
Est time: <1 minute
Learning Objective: 7.04 Examine the role of electronic trading in influencing share price movements.
Section: 7.04 Electronic trading
Topic: Electronic trading
55. In relation to share trading, a dedicated system that operates within an exchange allowing
some institutional investors to place large buy or sell orders without having to disclose the whole
trade to the exchange are:
A. high frequency trading.
B. intraday trading.
C. program trading.
D. dark pools.
Ans: D
Difficulty: Medium
Est time: <1 minute
56. In relation to stock exchanges, the term ‘flash trading' refers to:
A. applications of high-speed supercomputers that can place thousands of orders in seconds and
then immediately cancel them.
B. some institutional investors being able to place large buy orders without having to disclose the
whole trade to the exchange.
C. pennants and flags patterns in very fast moving markets.
D. the trades of certain institutional investors that receive information from a stock exchange of
incoming orders before other traders.
Ans: D
Difficulty: Medium
Est time: <1 minute
57. 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 ASX.
Ans: C
AACSB: Technology
Difficulty: Easy
Est time: <1 minute
58. One of the theories on the determination of, and change in the value of, shares and other
securities is the random walk hypothesis. Which 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 share's 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.
Ans: C
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
Learning Objective: 7.05 Explain the theoretical concepts that form the basis of the random walk hypothesis, and consider the
implications of the efficient market hypothesis and the behavioural finance hypothesis when analysing and forecasting share price
movements.
Section: 7.05 The random walk, efficient market and behavioural finance hypotheses
Topic: The random walk, efficient market and behavioural finance hypotheses
59. If a share price falls on four consecutive days of trading, 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.
Ans: B
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
movements.
60. Which of the following statements regarding an efficient capital market is correct?
A. All securities that investors would like to invest in 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.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
movements.
61. 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 given answers are correct.
Ans: D
Difficulty: Medium
Est time: <1 minute
movements.
62. 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.
Ans: D
Difficulty: Medium
Est time: <1 minute
movements.
63. If the weak form of the efficient market hypothesis holds:

A. share prices follow a random walk.
B. share prices reflect all information contained in past prices.
C. technical analysis is useless.
Ans: D
Difficulty: Medium
Est time: <1 minute
movements.
64. Financial markets, in particular a stock market, can be characterised as ‘weak form
efficiency’ if:
A. successive changes in share prices are independent of one another.
B. investors cannot use historical share price series to make abnormal profit.
C. share prices are randomly formed, with no predictable pattern.
Ans: D
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
movements.
65. Based on the __________ form of the efficient market hypothesis, stock prices reflect all
publicly available information about the firm, excluding information only available to insiders.
A. strong
B. semi-strong
C. weak
D. all of the given answers
Ans: B
Difficulty: Hard
Est time: <1 minute
Learning Objective: 7.05 Explain the theoretical concepts that form the basis of the random walk
hypothesis, and consider the implications of the efficient market hypothesis and the behavioural
finance hypothesis when analysing and forecasting share price movements.
Bloom's: Synthesis
Ans: D
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
movements.
66. If a fund manager believes that the market is fairly efficient and consistent with the efficient
market hypothesis, they will typically advocate following except:
A. trying to identify undervalued or overvalued securities and taking a position accordingly.
B. investing in an index fund.
C. using a passive investment strategy.
D. investing in an index fund and using a passive investment strategy.
Ans: D
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
movements.
67. 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.
Ans: D
Difficulty: Medium
Est time: <1 minute
movements.
68. The weak form of the efficient market hypothesis denies the use of:
A. technical analysis, but supports fundamental analysis as valid.
B. fundamental analysis, but supports technical analysis as valid.
C. both technical analysis and fundamental analysis.
D. technical analysis, but is silent on the possibility of successful fundamental analysis.
Ans: D
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
movements.
69. At which level 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 given answers
Ans: D
Difficulty: Medium
Est time: <1 minute
movements.
70. 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 given choices are correct.
Ans: C
Difficulty: Medium
Est time: <1 minute
movements.
71. 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.
Ans: C
Difficulty: Medium
Est time: <1 minute
movements.
72. 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.
Ans: C
Difficulty: Easy
Est time: <1 minute
movements.
73. 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
Ans: D
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
movements.
74. 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:
A. the strong form of the efficient market hypothesis.
B. the semi-strong form of the efficient market hypothesis.
C. the weak form of the efficient market hypothesis.
D. none of the given choices.
Ans: C
Difficulty: Medium
Est time: <1 minute
movements.
75. 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 and the volume of trading, which
form of efficient market hypothesis do you believe in?
A. Weak.
B. Semi-strong.
C. Strong.
D. Informational.
Ans: A
Difficulty: Medium
Est time: <1 minute
movements.
76. If you believe that share prices reflect all relevant information, including publicly available
information, which form of the efficient market hypothesis do you believe in?
A. Weak.
B. Semi-strong.
C. Strong.
D. Informational.
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
movements.
77. If you believe that share prices reflect all relevant information including information that is
available only to insiders, which form of the efficient market hypothesis do you believe in?
A. Weak.
B. Semi-strong.
C. Strong.
D. Informational.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
movements.
78. 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. bring no value by identifying price patterns.
Ans: D
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
movements.
79. 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.
Ans: D
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
movements.
80. It may be argued that share prices on the Australian Securities Exchange (ASX) 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
ASX?
A. Strong-form efficiency.
B. Semi-strong form efficiency.
C. Weak-form efficiency.
D. Random walk efficiency.
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
movements.
81. 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 share's beta.
Ans: B
AACSB: Analysis
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute
movements.
82. If share prices appear to follow a random walk:

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.
Ans: C
Difficulty: Easy
Est time: <1 minute
movements.
83. 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 a good indicator of future performance.
C. indicates that professional management provides investors with superior market returns.
D. indicates the majority of professional portfolio managers outperform the market.
Ans: A
Difficulty: Medium
Est time: <1 minute
movements.
84. Which of the following statements 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
Ans: C
Difficulty: Medium
Est time: <1 minute
movements.
85. Which of the following measurements would not be of interest in a top-down fundamental
analysis?
A. Interest rates
B. Increase of average level of prices
C. Pricing power of a firm
D. Rate of growth in economy
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
86. As a generalisation the following statement about macroeconomics is NOT true.

A. An increase in income in the rest of the world increases exports of a country.
B. A faster rate of growth in an economy lifts share prices.
C. Appreciation of the home currency puts upward pressure on the inflation rate.
D. A fall in interest rates would lead to an expectation of an increase in business profitability.
Ans: C
Difficulty: Medium
Est time: <1 minute
87. As a generalisation the following statement about the balance of payments is NOT true.
A. The balance of payments current account is a record of all international transactions for an
economy during a certain period of time.
B. The current account will tend to go into deficit when an economy is growing strongly.
C. Frequently when the current account deficit is large and growing, the government or central
bank will try to slow the economy.
D. The current account balance includes interest and dividends paid to or received from
foreigners.
Ans: A
Difficulty: Medium
Est time: <1 minute
88. In Australia, the Reserve Bank tries to maintain a target inflation rate between _____ per
cent. It does this through _____ policy.
A. 2 and 3; fiscal
B. 2 and 3; monetary
C. 5 and 7; fiscal
D. 5 and 7; monetary
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
89. Which of the following would be of least interest in a bottom-up analysis?
A. Current ratio of a firm
B. Board composition of a firm
C. Systematic risk of a firm
D. Rate of growth of economy
Ans: D
Difficulty: Medium
Est time: <1 minute
90. Technical analysis is NOT interested in the following metric.

A. P/E ratio
B. moving average
C. head and shoulders
D. share price trend
Ans: A
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
91. According to the random walk hypothesis:

A. once a price trend starts, it will continue until there is news.
B. a price change is independent of the previous price change.
C. a price increase is more likely than not to lead to a subsequent price decrease.
D. price changes can be predicted using technical analysis.
Ans: B
Difficulty: Medium
Est time: <1 minute
movements.
92. The finance literature in regard to the efficient markets hypothesis does not support the
statement that:
A. market prices respond promptly to publicly available new information.
B. share prices generally follow the random walk process.
C. efficiency of pricing may differ between firms that are large and those that are small.
D. because analysts have access to just about the same set of information, their conclusions are
nearly the same.
Ans: D
Difficulty: Medium
Est time: <1 minute
movements.
93. When investors become dissatisfied with a company share and sell their shares, the increased
supply of that company's shares is likely to result in a drop of its share price.
Ans: True
Feedback: Share prices are determined by the forces of supply and demand for them.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Topic: Introduction
94. Fundamental analysis top-down approach considers how the directors of the company affect
its share performance.
Ans: False
Feedback: Fundamental analysis considers macro and micro fundamentals that impact on future
share price changes.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
95. The bottom-up approach to fundamental analysis considers the impact of forecast changes in
systematic market variables.
Ans: False
Feedback: The bottom-up approach considers the historical and forecast performance of
individual company shares in a selected sector.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
96. The rate of growth in major international economies can have a strong impact on expected
performance of local companies within a domestic economy.
Ans: True
Feedback: The rate of growth of major economies represents a systematic factor.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
97. Historical growth trends in developed countries suggest sustainable long-term growth is in
the range of 3 and 4% per annum.
Ans: True
Feedback: Found in economic research of historical economic data.
Difficulty: Easy
Est time: <1 minute
98. High levels of economic growth in developing countries may not be sustainable in the long
term and may lead to depreciation of those countries' exchange rates and rises in interest rates.
Ans: True
Feedback: Historically, places such as Asian countries have had high levels of growth, resulting
in some cases in high levels of inflation and wage growth and so have experienced depreciating
exchange rates.
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
99. With the top-down approach to fundamental analysis, the balance of payments current
account deficit is not considered because it is a country factor.
Ans: False
Feedback: Balance of payments current account deficit represents a macro factor to be
considered.
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
100. Firms that conduct business in a country's domestic market may be affected by a fall in the
local exchange rate that leads to an increase in the rate of inflation.
Ans: True
Feedback: If there is a fall in the exchange rate a firm's profits when translated to the overseas
parent company could be affected unless hedged in some way.
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
101. A limitation of fundamental analysis is that forecasting using fundamentals can suggest the
market is overvalued but does not forecast the timing of the downturn.
Ans: True
Feedback: A drawback of fundamental analysis is calculating performance ratios with historical
data. It is possible that future performance will be different.
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
102. If the price pattern shows a persistent reversal pattern, an investor buys stocks this period
that performed poorly in the last period.
Ans: True
Feedback: Reversal trends are indicative of changes in the direction of price pattern. If a share
price performed poorly in the past, it is likely that the share price will perform better in the
current period.
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
103. When the moving average (MA) series is rising strongly and the share price series cuts or
touches the MA from below, this represents a sell signal for technical analysts.
Ans: False
Feedback: For analysts that use technical analysis it is a buy signal when it cuts or touches the
MA from above and moves back above.
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
104. Behavioural finance attempts to extend our understanding of investor behaviour, based on
psychological principles of decision-making.
Ans: True
Feedback: The focus of behavioural finance is to identify and recognise the importance
of cognitive factors that may shape investor behaviour and lead to a divergence between actual
share prices and those that would be expected to prevail in an efficient market.
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
movements.
105. Why should an investor consider the issue of interest rates when analysing share
investments? Explain the impact a change in interest rates might have on the performance of a
corporation and its share price.
Ans: The majority of companies are exposed to interest rate risk because they will have some
degree of debt in their capital structure and the interest must be paid to the provider. If interest
rates are predicted to increase it is expected that the cost of doing business will increase, with a
decrease in profitability. This will have a downward pressure on the share price, especially if the
company has a large degree of debt.
Bloom's: Knowledge
Difficulty: Medium
106. Compare the two main approaches to fundamental analysis: top-down and bottom-up.
Ans: Fundamental analysis considers the macro and micro variables that will impact on future
share price changes. A top-down approach first considers the overall economic environment and
how changes in the economic environment will impact on the various firms and industry sectors.
A bottom-up approach analyses individual firms within industry sectors, looking at such
variables as a company's capital structure, liquidity, debt servicing, and profitability.
Bloom's: Knowledge
Difficulty: Medium
107. What is a moving average model? Explain how it is used in technical analysis.
Ans: A moving average model is when a series of numbers are averaged to smooth out more
erratic movements. By calculating moving averages on prices, a technical analyst looks at trends
in the series to generate buy and sell signals; for example, when an actual price series cuts the
moving average series from below this is a buy rule.
Bloom's: Knowledge
Difficulty: Hard
108. Charting is a type of technical analysis. Explain the process in relation to forecasting share
price movements.
Ans: Charting procedures involve using patterns to forecast future share price movements. Trend
lines, support and resistance lines, continuation patterns and reversal patterns are some of the
major tools used by chartists; for example, if an upward trend line has been in force, the more
times it has been tested the greater is its validity of representing an upward trend in share prices.
Bloom's: Synthesis
Difficulty: Hard
109. What is program trading in relation to the share market? Discuss any impact on share price
movements.
Ans: Program trading refers to the use of computer-based programs that carry out buy and sell
orders automatically triggered by rules entered into the program. Such programs may include
relatively basic programs that include the technical analysis buy/sell rules or more sophisticated
programs that monitor share market price movements and issue buy or sell orders on specific
shares or futures contracts. Often large amounts are involved and the effect of program trading
may be to cause share prices to change faster; for example, swamping the market with sell
orders. Many stock exchanges do have rules in place to suspend trading if the share market index
moves by more than a specified percentage to reduce a potential contagion effect.
AACSB: Technology
Difficulty: Hard
110. Discuss the developments in share trading that became possible with technological
improvements.
Ans: Improvements in technology have greatly lowered the costs of trading which has led to
program trading, high-frequently trading, flash trading, dark pools and news analytics. 1.
Program trading refers to share orders, which are triggered by computer programs. These orders
may lead to massive directional trading. 2. High frequency trading also stems from computer
algorithms. Proprietary programming usually identifies near-term changes in price based upon
bid and offer prices. The volume of trading can be gigantic and the profit per transaction tiny. 3.
Flash trading. Incoming orders are observable by some who can then pick up the incoming
orders a moment before other market participants can act. 4. Dark pools. Large orders can be
placed apart from the rest of the market so the impact of the order is isolated. A large sell order
will not have the customary depressive effect on the market. 5. News analytics uses computers to
scan text and assess whether the information is positive or negative towards a company. This
way news analytics can determine sentiment and likely price change.
AACSB: Technology
Difficulty: Hard
111. Do arbitrage opportunities exist in efficient capital markets?

Ans: Arbitrage opportunities arise when investors are able to buy and sell the same or similar
assets at different prices, allowing the investors to construct a portfolio with ‘riskless’ profit.
This phenomenon is only possible if the market is not efficient, where an asset can be mispriced
and news about risks and return potential for different assets is not fully reflected in share prices.
Bloom's: Synthesis
Difficulty: Hard
movements.
1. Which of the following statements is NOT correct for simple and compound interest rates?
A. Simple interest is based on the principal amount of deposit and interest payments in every
successive period.
B. Compound interest is based on the principal amount and interest that accumulates over time.
C. Compound interest allows depositors to reinvest interest income by adding to the original
principal.
D. For depositors, it makes no difference whether interest income is calculated on the basis of
simple or compound interest rates.
Ans: D
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
Section: 8.01 Simple interest
Topic: Simple interest
2. The term ‘simple', with regard to interest, refers to the fact that:
A. the interest calculation is easy to work out.
B. principal repayment is guaranteed.
C. interest payments are guaranteed.
D. interest is calculated on the initial principal only.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 8.01 Understand and carry out a range of simple interest calculations, including simple interest accumulation,
present value with simple interest, initial yields and holding period yields.
3. Which one of the following statements is NOT true about simple interest rate?
A. the calculation of simple interest is based only on the initial amount of deposits, thus bank
will pay interest on original amount of deposit.
B. An interest amount is calculated based on the principal amount of a loan.
C. For an amortised loan, interest charges on each successive period are calculated on the loan
balance.
D. Interest earned on the principal is added to the principal as part of re-investment.
Ans: D
Difficulty: Medium
Est time: <1 minute
4. If you invest $1600 for a year at 6.8% per annum simple interest, how much interest will you
earn?
A. $10.80
B. $108.00
C. $1088.00
D. $1708.80
Ans: B
AACSB: Analysis
Bloom's: Analysis
Difficulty: Easy
Est time: <1 minute
5. If you borrow $100 000 for 90 days with simple interest of 6.2% per annum, what is the total
amount of interest paid on the loan?
A. $1528.77
B. $6200.00
C. $620.00
D. $15 287.67
Ans: A
AACSB: Analysis
Bloom's: Analysis
Difficulty: Easy
Est time: <1 minute
6. An investor deposits $1000. How long will it take them to double the initial deposit if the
investment earns a simple interest rate of 10% per annum?
A. 10 years
B. 15 years
C. 20 years
D. Cannot be determined
Ans: A
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
7. What is the simple interest earned in five years when $1000 is invested at a rate of 5 per cent?
A. $250.00
B. $50.00
C. $125.00
D. $105.00
Ans: A
AACSB: Analysis
Bloom's: Analysis
Difficulty: Easy
Est time: <1 minute
8. If you invest $7500 for a year at 7.4% per annum simple interest, what is the value of your
investment at the end of the year?
A. $555.00
B. $5550.00
C. $8055.00
D. $13 050.00
Ans: C
AACSB: Analysis
Bloom's: Analysis
Difficulty: Easy
Est time: <1 minute
9. If you invest $1200 for two years at 6.9% per annum simple interest, what is the value of your
investment at the end of the two years?
A. $165.60
B. $1365.60
C. $1656.00
D. $2856.00
Ans: B
AACSB: Analysis
Bloom's: Analysis
Difficulty: Easy
Est time: <1 minute
10. If you invest $13 500 for 18 months at 6.9% per annum simple interest, what is the value of
your investment at the end of the 18 months?
A. $14 431.50
B. $14 897.25
C. $21 647.25
D. $22 815.00
Ans: B
AACSB: Analysis
Bloom's: Analysis
Difficulty: Easy
Est time: <1 minute
11. What is the future value of $12 000 on deposit for four years at 7.00% per annum simple
interest?
A. $3360.00
B. $12 336.00
C. $15 360.00
D. $15 729.55
Ans: C
AACSB: Analysis
Bloom's: Analysis
Difficulty: Easy
Est time: <1 minute
12. What is the present value of $1 million payable in 90 days at 8.00% per annum simple
interest?
A. $835 240.27
B. $974 372.66
C. $980 655.56
D. $1 002 747.25
Ans: C
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
13. If you invest _______ to earn simple interest of 6.8% per year, you will receive $12 375 at
the end of two years.
A. $4759.62
B. $5156.25
C. $9728.77
D. $10 893.49
Ans: D
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
14. The market convention to use a 360-day year in the financial markets applies in:
A. the United Kingdom.
B. Australia.
C. Euromarkets and the US.
D. the United States.
Ans: C
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
15. If a company sells (discounts) a bank bill with a face value of $100 000, a term to maturity of
90 days, and a yield of 7.23% per annum, how much will the company raise on the issue?
(Ignore transaction fees.)
A. $84 869.90
B. $98 248.49
C. $98 269.99
D. None of given answers.
Ans: B
AACSB: Analysis
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute
16. If a company sells (discounts) a bank bill with a face value of $500 000, a term to maturity of
120 days, and a yield of 8.45% per annum, how much will the company raise on the issue?
(Ignore transaction fees.)
A. $391 295.03
B. $445 312.02
C. $486 485.05
D. $486 302.48
Ans: C
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
17. When a company discounts a commercial bill to obtain funds, this means the company:
A. issues a commercial bill.
B. lends funds.
C. buys a commercial bill.
D. invests in commercial bills.
Ans: A
Difficulty: Medium
Est time: <1 minute
18. When a company sells a commercial bill, this means the company:
A. lends funds.
B. lends a commercial bill.
C. issues a commercial bill.
D. invests in a commercial bill.
Ans: C
Difficulty: Medium
Est time: <1 minute
19. When a company discounts a commercial bill, this means the company:
A. borrows funds.
B. buys a commercial bill.
C. lends surplus funds.
D. invests in commercial bills.
Ans: A
Difficulty: Medium
Est time: <1 minute
20. A 90-day promissory note with a face value of $500 000 is issued at a yield of 7.789% per
annum. Calculate its price.
A. $379 971.77
B. $419 442.84
C. $490 578.08
D. $490 711.67
Ans: C
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
21. If the current yield on 180-day Treasury notes is 6.42% per annum, what price per $100 of
face value would an investor pay to purchase them?
A. $75.95
B. $96.93
C. $96.94
D. $99.98
Ans: B
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
22. If you receive $100 000 back as principal and interest at the end of the year for an initial
investment of $93 456 at the start of the year, what interest has been earned on your investment?
A. 6.54%
B. 65.4%
C. 7.00%
D. 70.00%
Ans: C
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
23. If you receive $100 000 back as principal and interest for an investment of $92 368 that you
made six months earlier, what simple rate of interest has been earned on your investment?
A. 7.63% per annum
B. 15.48% per annum
C. 16.16% per annum
D. 16.75% per annum
Ans: D
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
24. If you receive $10 000 back as principal and interest at the end of two years for an initial
investment of $9127 at the start of the term, what is the yield on your investment?
A. 4.37% per annum
B. 4.78% per annum
C. 8.73% per annum
D. 9.57% per annum
Ans: B
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
25. If your deposit of $30 000 becomes $30 919 at the end of 120 days, what is the annual yield
earned?
A. 9.04%
B. 9.19%
C. 9.23%
D. 9.32%
Ans: D
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
26. What is the simple annualised interest rate on a company transaction to raise $100 000
financing by drawing a bank bill with a face value of $104 000, payable in 120 days?
A. 4%
B. 12%
C. 12.17%
D. 12.67%
Ans: C
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
27. A bank bill with a face value of $500 000 and 90 days to maturity is purchased with a yield to
maturity of 6.92% per annum. After the bill has been held for 28 days, it is sold at a yield of
6.78% per annum. What is the holding period yield for the holder of the note?
A. 3.23% per annum
B. 7.11% per annum
C. 7.15% per annum
D. 7.51% per annum
Ans: C
AACSB: Analysis
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute
28. A company invests its surplus funds by buying a commercial bill with a face value of
$100 000, at a current yield to maturity of 7.35% per annum and 120 days to maturity. After 45
days, the bill is sold at a yield of 6.84% per annum. What rate of return did the company earn on
the bill?
A. 4.85% per annum
B. 8.01% per annum
C. 8.09% per annum
D. 8.90% per annum
Ans: C
AACSB: Analysis
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute
29. When will a future value calculated with a simple interest rate exceed a future value
calculated with compound interest at the same rate?
A. When the interest rate exceeds 100% per annum
B. When the investment period exceeds 50 years
C. When the initial deposit exceeds $1 billion
D. This is not possible with positive interest rates
Ans: D
Difficulty: Medium
Est time: <1 minute
30. The idea of compound interest refers to:

A. the payment of interest on previously earned interest.
B. investing for multiple periods in one year.
C. earning interest only on the initial investment.
D. changing interest rates during an investment.
Ans: A
Difficulty: Easy
Est time: <1 minute
Learning Objective: 8.02 Understand and carry out important compound interest calculations, including compound interest
accumulation (future value), present value with compound interest, present value of an annuity, accumulated value of an annuity
(future value) and effective rates of interest.
Section: 8.02 Compound interest
Topic: Compound interest
31. If you borrow $11 000 for four years at an annually compounding rate of 8.2% per annum,
what is the total interest on the loan if the interest due is added to the principal over the period
and repaid at the maturity date?
A. $2933.96
B. $3608.00
C. $3842.51
D. $4076.54
Ans: D
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
32. If your investment of $5000 with the bank carries a compound interest of 8.75% per annum,
the value of your investment at the end of three years is:
A. $1430.69
B. $6312.50
C. $6430.69
D. $5437.50
Ans: C
AACSB: Analysis
Bloom's: Analysis
Difficulty: Easy
Est time: <1 minute
33. An $8000 bank deposit earning compound interest of 8.21% per annum grows to _______ in
5.25 years.
A. $11 284.00
B. $12 058.14
C. $12 105.81
D. $16 019.15
Ans: C
AACSB: Analysis
Bloom's: Analysis
Difficulty: Easy
Est time: <1 minute
34. What is the future value in six years of $10 000 invested today, compounding at 6.87% per
annum?
A. $14 122.00
B. $14 898.24
C. $15 128.26
D. $23 051.04
Ans: B
AACSB: Analysis
Bloom's: Analysis
Difficulty: Easy
Est time: <1 minute
35. What is the future value in four-and-a-half years of $5000 invested today at 9.50%
compounded semi-annually?
A. $6161.17
B. $7522.00
C. $7592.00
D. $9875.00
Ans: C
AACSB: Analysis
Bloom's: Analysis
Difficulty: Easy
Est time: <1 minute
36. If you borrow $20 000 for four years at an interest rate of 7.23% per annum, with the interest
compounding quarterly, how much will you have to pay at the end of the period?
A. $21 485.68
B. $26 442.06
C. $25 784.00
D. $26 638.29
Ans: D
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
37. If you invest $12 000 for 4.75 years at 7.88% per annum, with interest compounded monthly,
what will your total investment be worth at the end of the period?
A. $12 378.94
B. $15 476.29
C. $16 232.40
D. $17 426.34
Ans: D
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
38. If interest rates are 8.21% per annum, compounded annually, the present value of $31 000
received at the end of three years is:
A. $2819.17
B. $9549.33
C. $24 465.80
D. $28 647.99
Ans: C
AACSB: Analysis
Bloom's: Analysis
Difficulty: Easy
Est time: <1 minute
39. What is the price today of an investment that will pay the single sum of $20 000 after three
and a half years if the discount rate is 7.64% per annum, compounded annually?
A. $2743.37
B. $15 456.89
C. $15 780.00
D. $16 036.48
Ans: B
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
40. You are considering an investment that will pay a lump sum of $50 000 at the end of six
years and you decide that 9% per annum compounded monthly is an appropriate discount factor.
What is the value of the investment in today's dollar terms?
A. $31 508.48
B. $32 496.57
C. $31 934.98
D. $47 846.89
E. 29.196.18
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
41. What is the present value of the following cash flow stream, discounted at 6.5% per annum,
compounded monthly?
Year 1: $1000; Year 2: $1500; Year 3: $2000; Year 4: $2500
A. $5844.58
B. $5863.11
C. $5874.79
D. $5986.23
Ans: A
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
42. A finite stream of regular cash flows over a given period is known as a/an:
A. perpetuity.
B. annuity.
C. debenture.
D. allowance.
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
43. The main difference between an annuity and an annuity due lies in the:
A. number of payments.
B. time of the first payment.
C. interest rate.
D. frequency of payments.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
44. In regard to an annuity, if the first cash flow is made immediately, it becomes:
A. a simple annuity.
B. an ordinary annuity.
C. an annuity due.
D. the present value of an annuity.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
45. The present value of an annuity of $11 000, received at the end of every year for ten years,
where the required rate of return is 5.6% per annum, compounded annually, is:
A. $6379.01
B. $7051.28
C. $8251.76
D. $82 517.62
Ans: D
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
46. The present value of an annuity of $800, received at the end of every month for 20 years,
where the required rate of return is 6.5% per annum, compounded monthly, is:
A. $33 366.03
B. $43 367.94
C. $107 300.02
D. $192 000.00
Ans: C
AACSB: Analysis
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute
47. The present value of an ordinary annuity of $1000 each year for six years, assuming current
market interest rates is 5.75%, is:
A. $1625.20
B. $2982.64
C. $4596.19
D. $4956.19
Ans: D
AACSB: Analysis
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute
48. The present value of an ordinary annuity with equal monthly payments of $300 over the next
four years, assuming market interest rates are 12% per annum, is:
A. $911.20
B. $1170.59
C. $11 392.19
D. $18 366.78
Ans: C
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
49. You take out a loan to buy a property and agree to pay $53 000 one year from now, another
$53 000 two years from now, and a final payment of $53 000 three years from now. If your
interest rate is fixed at 8.5% per annum, compounded annually, calculate the value of the loan
today.
A. $135 363.19
B. $139 426.13
C. $146 543.78
D. $157 515.25
Ans: C
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
50. A property investor receives rental payments of $1900 at the start of each month for five
years. If the required rate of return is 7.2% per annum, compounded monthly, what is the value
of the property investment today?
A. $83 067.50
B. $90 092.50
C. $95 498.05
D. $96 071.04
Ans: D
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
51. If you make an investment and agree to pay regular monthly payments of $450 at the end of
the next twelve months, starting one month from today, what is the present value of this
investment if the interest rate is 8.4% per annum compounded monthly?
A. $3322.06
B. $4916.30
C. $5162.12
D. $5198.25
Ans: C
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
52. What is the current price of a financial security that pays a fixed coupon of 10.2% per annum
per $100 face value, compounding half-yearly and maturing in four years, when current yields in
the market are 8.6% per annum?
A. $103.9575
B. $70.3185
C. $103.887
D. $132.8295
Ans: A
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
53. If the interest rate is 6.9% per annum, compounded annually, what is the future value of a
five-year ordinary annuity with yearly payments of $4000?
A. $5584.04
B. $18 709.07
C. $22 957.10
D. $30 984.06
Ans: C
AACSB: Analysis
Bloom's: Analysis
Difficulty: Easy
Est time: <1 minute
54. If the interest rate is 7.4% per annum, compounding quarterly, what is the future value of a
six-year ordinary annuity with quarterly payments of $4000?
A. $28 903.12
B. $85 938.40
C. $62 647.89
D. $119 485.11
Ans: D
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
55. An investor plans to save $1000 per year for the next ten years as a retirement fund, and
expects to earn 8.4% per annum, compounded monthly over the period, on all invested funds.
How much will the investor have at the end of ten years?
A. $187 085.48
B. $296 035.24
C. $126 882.77
D. $153 178.10
Ans: A
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
56. What is the current price of an existing debenture with a face value of $1000 that pays a fixed
coupon of 8.4% per annum, compounded annually, and maturing in five years? Current yields in
the market are 6.6% per annum.
A. $941.65
B. $999.96
C. $1016.26
D. $1049.54
Ans: C
AACSB: Analysis
AACSB: Analysis
Bloom's: Analysis
Bloom's: Analysis
Difficulty: Medium
Difficulty: Medium
Est time: <1 minute
Learning Objective: 10.04 Calculate the price of a fixed-interest bond.
Section: 10.04 Calculations: fixed-interest securities
Topic: Calculations: fixed-interest securities
57. What is the current price of a corporate bond with a $1 000 000 face value, a coupon rate of
12 per cent paid semi-annually, 10 years remaining to maturity and market interest rates
increased to 10 per cent?
A. $1 122 891.34
B. $886 995.54
C. $410 644.78
D. $1 124 622.10
Ans: B
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
58. What is the current price of an existing Treasury bond that pays a fixed coupon of 6.4% per
annum per $100 face value, compounding half-yearly, and maturing in four years? Current
market yields are 6.8% per annum.
A. $22.0888
B. $44.1775
C. $76.5307
D. $98.6195
Ans: D
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
59. An investor wishes to have $5 million to retire on in 30 years’ time. They are risk averse and
concerned about saving for retirement. If they can earn an average term deposit rate of 4% per
annum, compounded quarterly, how much do they need to invest today?
A. $605 989.56
B. $600 989.00
C. $2 000 000
D. $2 500 000
Ans: A
AACSB: Analysis
Bloom's: Analysis
Difficulty: Hard
60. If you are saving for an overseas trip and put $400 every month into an account paying 6.8%
per annum, compounding monthly, how much will you have at the end of 3.25 years?
A. $5014.43
B. $16 907.41
C. $17 001.84
D. $17 403.22
Ans: D
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
61. Calculate the effective annual interest rate corresponding to 9.6% per annum, compounded
monthly.
A. 10.03%
B. 9.6%
C. 8.0%
D. 6.9%
Ans: A
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
62. Calculate the effective annual interest rate if you are quoted 8% per annum, compounded half
yearly.
A. 8.27%
B. 8.16%
C. 8.0%
D. 4.0%
Ans: B
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
63. Which of the following statement/s describe/s the major distinctions between nominal and
effective interest rates?
A. Nominal rate or annual percentage rate is a quoted interest rate (usually expressed as an
annual rate).
B. Where the interest may be calculated more frequently than once a year, the effective rate is
used.
C. The higher the number of compounding period within each year, the higher the effective rate
is.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Topic: Introduction
64a. For a commercial bill, the interest rate is quoted as a/an:
A. annual percentage rate.

B. rate based on its maturity.
C. effective rate
D. holding period yield
Ans: A
64. What is the effective rate of interest if the nominal rate is 10 per cent and compounded
annually?
A. 10.00 per cent
B. 10.56 per cent
C. 5.35 per cent
D. 5.84 per cent
Ans: D
AACSB: Analysis
Bloom's: Analysis
Difficulty: Easy
Est time: <1 minute
65. Calculate the effective annual interest rate if your bank quotes you 10% per annum,
compounded quarterly.
A. 14.01%
B. 10.38%
C. 10%
D. 2.50%
Ans: B
AACSB: Analysis
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute
66. Calculate the effective annual interest rate if you are quoted 8% per annum, compounded
every three months.
A. 11.10%
B. 8.24%
C. 8.22%
D. 8.00%
Ans: B
AACSB: Analysis
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute
67. If a bank’s quoted rate is 12% per annum, what will be the effective rates if the interest rates
are compounded annually, quarterly and monthly?
A. 12%;12.55%; 12.68%
B. 12.5%; 11.50%; 13.00%
C. 12.00%;12%; 12%
D. 12.20%; 3.00%; 4.00%
Ans: A
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
68. If the effective annual interest rate is known to be 19.4 per cent on a debt that has quarterly
payments, what is the annual percentage rate?
A. 19.40%
B. 19.10%
C. 18.13%
D. 18.00%
Ans: C
AACSB: Analysis
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute
69. If the effective annual interest rate is known to be 16.0% on a debt that has monthly
payments, what is the annual percentage rate?
A. 16.00%
B. 14.93%
C. 12.45%
D. 1.33%
Ans: B
AACSB: Analysis
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute
70. An investor is planning to purchase a 180-day bill with a face value of $100 000. The price of
the bill is currently $95 000. What is the yield on the investment?
A. 10.67 per cent
B. 5.26 per cent
C. 5.33 per cent
D. 5.00 per cent
Ans: A
AACSB: Analysis
Bloom's: Analysis
Difficulty: Hard
71. What is the rate of return on a deposit of $70 000 with a value of $72 618 in 165 days?
A. 3.74%
B. 7.21%
C. 7.98%
D. 8.27%
Ans: D
AACSB: Analysis
Bloom's: Analysis
Difficulty: Hard
Difficulty: Medium
Topic: Mathematics of finance: an introduction to basic concepts and calculations
72. An investor recently bought a financial asset with a price of $97 000 that will mature in 120
days with a face value of $100 000. What is the annualised holding period yield for this financial
security?
A. 9.407 per cent
B. 4.00 per cent
C. 3.00 per cent
D. None of the given answers.
Ans: A
AACSB: Analysis
Bloom's: Analysis
Difficulty: Hard
73. Investor buys asset for $44 000 and 200 days later sells it for $45 123. The holding period
yield (non-annualised yield) is:
A. 2.49%.
B. 2.55%.
C. 4.54%.
D. 4.66%.
Ans: B
AACSB: Analysis
Bloom's: Analysis
Difficulty: Hard
74. You borrow $12 000 from your sister at 10 per cent interest annually compounded for four
years. How much do you owe at the end of year four?
A. $16 800
B. $17 184
C. $17 569
D. $19 326
Ans: C
AACSB: Analysis
Bloom's: Analysis
Difficulty: Easy
75. Find the total compound interest payment due on a loan of $100 000 for five years if the rate
of interest is 12% per annum, compounded monthly.
A. $22 019.3
B. $81 669.7
C. $12 000.5
D. $6000.0
Ans: B
AACSB: Analysis
Bloom's: Analysis
Difficulty: Hard
76. How much money should you have in a bank account after one year if your balance at the
beginning of the year is $60 000 and you are earning 2.50% per annum compounded daily?
A. $61 500
B. $61 519
C. $61 521
D. $61 523
Ans: B
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
77. Find the present value of an annuity of $1200 received at the end of the month for the next
four years. The required rate of return is 4% per annum, compounded monthly.
A. $53 147
B. $53 447
C. $53 847
D. $54 347
Ans: A
AACSB: Analysis
Bloom's: Analysis
Difficulty: Hard
78. What is the effective rate of interest of 8% per annum, compounded quarterly?
A. 7.70%
B. 8.12%
C. 8.18%
D. 8.24%
Ans: D
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
79. An individual who draws down savings at a ____ rate than the return on the savings will
_____.
A. faster; eventually run out of the savings
B. faster; never run out of savings
C. slower; eventually run out of the savings
D. slower; run out of savings after a long time
Ans: A
Difficulty: Easy
Est time: <1 minute
80. An investor purchases a commercial bill with a face value of $200 000, 90 days until
maturity and a yield to maturity of 6.00% per annum. They sell the bill 20 days later, when its
yield to maturity is 6.15 per cent. What rate of return did the investor earn?
A. 0.07%
B. 1.55%
C. 2.16%
D. 5.41%
Ans: D
AACSB: Analysis
Bloom's: Analysis
Difficulty: Hard
81. When a company obtains an interest-only business bank loan and is required to make annual
interest payments on the principal borrowed and repay the full principal at the maturity date, the
type of interest is called simple interest.
Ans: True
Feedback: Simple interest is calculated on the principal only.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
82. The principal of a six-month bank deposit is the amount you receive at the end of its term.
Ans: False
Feedback: The principal is the amount you originally deposited with the bank.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
83. The euromarkets, unlike those of the US, follow the market convention that a per-annum rate
relates to a 365-day year.
Ans: False
Feedback: Both the USA and the euromarkets follow the convention of a 360-day year.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
84. Accumulation of final amounts under simple interest happens at a slower rate than with
compounding interest.
Ans: True
Feedback: As simple interest is calculated only on the principal it will grow at a slower rate.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
85. The amount that an investor puts up initially for a commercial bill is called the principal.
Ans: False
Feedback: The investor pays a discounted price to the principal that they will receive back at
maturity.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
86. When a company issues a commercial bill it is said to discount it.

Ans: True
Feedback: The term discount comes about from how the interest rate is used in the calculation.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
87. When a holder of a commercial bill sells it before its maturity date the return to the holder is
called the holding period return.
Ans: True
Feedback: The holding period return is likely to be different from the return it would fetch if it
had been held to maturity.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
88. If a commercial bill is sold into a market in which its yield works out higher than the yield
that prevailed at the original purchase date, a capital gain would have been made.
Ans: False
Feedback: A capital loss would have been made as there is an inverse relation between yield and
price.
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
89. If an investor purchases a commercial bill with a face value of $100 000 with a yield of
7.00% per annum and then, in 60 days, sells it at a yield of 6.70% per annum, the investor will
make a capital loss on the sale of the bill.
Ans: False
Feedback: When the investor sells it at the lower yield it means the price is higher. So the
investor actually makes a capital gain.
AACSB: Analysis
Bloom's: Evaluation
Difficulty: Medium
Est time: <1 minute
90. An investment with an initial deposit of $10 000 that earns compound interest over the years
grows faster than an initial deposit of $10 000 that earns simple interest.
Ans: True
Feedback: Compound interest is based on the principal amount and the interest that accumulates
on it in every period.
AACSB: Analysis
Bloom's: Analytic
Difficulty: Medium
Est time: <1 minute
91. If an investor purchases a commercial bill with a face value of $100 000 with a yield of
7.00% per annum and then, in 60 days, sells it at a yield of 7.50% per annum, the investor will
make a capital gain on the sale of the bill.
Ans: False
Feedback: When the investor sells it at the higher yield it means the price is lower. So the
investor actually makes a capital loss.
AACSB: Analysis
Bloom's: Evaluation
Difficulty: Medium
Est time: <1 minute
92. An investment with an initial deposit of $10 000 that earns a simple interest of 10% per
annum will double the investment over 10 years.
Ans: True
Feedback: Based on the simple interest rate, interest income calculated in every successive
period is not added to the initial principal. For each period over 10 years the investment earns
$1000.
AACSB: Analysis
Bloom's: Evaluation
Difficulty: Medium
Est time: <1 minute
93. Explain the differences(s) between an interest rate and a rate of return.
Ans: The rate of return is the financial benefit gained from the investment of savings. It is
calculated by the ratio of net inflows to the cash outflows produced by a financial instrument. An
interest rate is used in place of rate of return for debt financial contracts to represent the cost of
funds for the borrower.
Bloom's: Knowledge
Difficulty: Section: 8.01 Simple interest
94. Distinguish between simple interest and compound interest.

Ans: Simple interest is the method of calculating interest in which, during the entire term of the
loan, interest is calculated on the original amount borrowed. Compound interest is when interest
is calculated each period on the principal amount and on any interest added to the principal
amount up to that point.
Bloom's: Knowledge
Difficulty: Medium
95. Distinguish between an ordinary annuity and an annuity due. Give examples.
Ans: An ordinary annuity is made up of equal amounts, equally spaced in time. In other words,
the first cash flow occurs after one time period (i.e. at t = 1). An annuity due is an annuity for
which the first cash flow is to occur straight away (i.e. on the valuation date) and at the
beginning of subsequent periods.
Bloom's: Knowledge
Difficulty: Medium
96. In relation to interest rates, explain what a yield is.

Ans: A yield is an interest rate that is the return on an investment or the cost of borrowing. In the
context of investment it is the cash flow (or income) that, when added to any capital loss or gain,
gives the total return for an investment.
Difficulty: Medium
97. If compounding of interest occurs more often than annually, explain how you would compare
three interest rates of the same amount: one that is quoted annually, one semi-annually and one
quarterly. At which rate would you expect the same investment amount to grow the most over
ten years?
Ans: In order to compare interest rates that reflect a common frequency of interest rate and
compounding it is necessary to calculate an effective rate of interest. The interest rate with the
greatest frequency of compounding will result in the greatest compounding effect—the quarterly
rate.
Difficulty: Medium
98. You wish to buy a house in a beach area that presently sells for $700 000. You are wanting to
save money until you can buy this house. How much do you have to save, end of year, for each
of the next 20 years so that you have enough money to buy the house? You estimate that you will
earn 8 per cent on any invested funds and that real estate appreciation will be 7 per cent. Ignore
any tax effects.
Ans: First, replace the value of the house 20 years from now. This is a simple future value of a
present amount. 700 000 × (1+.07) ^20 = 700 000 × 3.8697 = 2 708 779. This house price
becomes the FV of our invested savings.
Second, we replace the annuity amount that will compound to a future value of 2 708 779. C
×[(1+.08)^20–1]/.08 = C × 45.7620. Now set this equal to the house price. 2 708 779 = C ×
45.7620. Simplify C = 2 708 779 / 45.7620 = 59 193. Therefore, when we save an equal amount
every year of $59 193 and invest at 8 per cent, we will have just enough money to buy a house 20
years later that has appreciated at 7 per cent from $700 000.
AACSB: Analysis
Bloom's: Analysis
Difficulty: Hard
99. Australia quotes interest rates on a 365-day year, whilst the US and some European countries
use a 360-day year for money market securities. How would you compare them? Suppose
commercial paper in the US is yielding 3.80 per cent and commercial paper in Australia is
yielding 3.95 per cent. Is there really a 15 basis point difference?
Ans: To compare the rates we would need to convert one of the quotations to a quote using the
same number of days as the other quotation. It is sensible to convert the quotations to the actual
number of days in a year. A US rate of 3.80 per cent per 360 days ought to be translated into a
somewhat higher rate per 365 days, 3.80% × 365/360 ≈ 3.85%. So the difference is around 10
basis points.
AACSB: Analysis
Bloom's: Analysis
Difficulty: Hard
100. An investment earns a compound interest rate of just 7.17 per cent per annum that makes
the initial investment of $500 000 into a million in just 10 years. Show the rate at which initial
investment turns into double just in 10 years.
Ans: To double the initial wealth of $500 000, with a known investment horizon of 10 years, it is
important to determine how fast the investment will grow.
FV=PV(1+i) N
Where, i=interest earns on investment, N= investment Horizon,

FV = future value at year 10, PV= original value of investment at period zero
FV=$1 000 000, PV=$500 000, N=10 years
(1+i) =FV/PV
N
(1+i) = 1 000 000/500 000
10
i = 7.17%
AACSB: Analysis
Bloom's: Analytic
Difficulty: Hard
1. In relation to long-term financing, a fully drawn advance is a:

A. bank loan advanced for a precise period for an unspecified purpose.
B. term loan where the full amount is provided at the start of the loan, usually for a specified
purpose.
C. term loan where the borrower has the option of putting its operating account in deficit up to an
agreed limit.
D. term loan where the bank does not pay out the loan until after a specified period.
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
Learning Objective: 10.01 Explain term loans and fully drawn advances, including their structure, loan covenants and the calculation
of a loan instalment.
Section: 10.01 Term loans or fully drawn advances
Topic: Term loans or fully drawn advances
2. A loan can be amortised or interest only. The term ‘amortisation’ in the context of a term loan
can be best described as the process of:
A. charging interest on the loan.
B. gradually reducing the outstanding loan amount by fixed periodic payments.
C. calculating interest payment over the loan maturity.
D. estimating interest payment on the initial deposit.
Ans: B
Difficulty: Medium
Est time: <1 minute
3. A 10-year loan with monthly interest payments but whose principal is not repaid until the end
of the maturity is called a/an:
A. amortised loan.
B. interest only loan.
C. simple interest only loan.
D. compound interest only loan.
Ans: A
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
4. If a company wishes to finance a printing press with a five-year life, it would be advisable to
finance it with a/an:
A. overdraft.
B. bank bill.
C. commercial paper.
D. fully drawn advance.
Ans: D
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
5. If a company wished to structure its financing so it repaid funds borrowed only when a project
begins to have positive cash flows, it would choose a/an:
A. fully drawn advance.
B. term loan.
C. interest-only loan.
D. deferred payment loan.
Ans: D
Difficulty: Medium
Est time: <1 minute
6. Long-term debt can be categorised as financing with an initial maturity:

A. over 180 days and less than a year.
B. between 1 and 3 years.
C. over 1 year.
D. between 3 and 12 years.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
7. In relation to long-term financing, an amortised loan involves:

A. periodic payments principal and interest repaid at maturity.
B. periodic interest and principal repayments when positive cash flows begin.
C. periodic interest payments and principal repaid at maturity.
D. periodic equal repayments of interest and principal throughout the term.
Ans: D
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
8. Which of the following statements best describes a fully amortised term loan?
A. A fully amortised term loan is an interest-only loan with principal repayable at maturity.
B. A fully amortised term loan has periodic repayments, including interest and principal
reduction.
C. Interest repayments on a fully amortised term loan are fixed for the period of the loan.
D. A fully amortised term loan is a ‘low-start' loan whose repayments are increased over the
term.
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
9. Term loans where each periodic loan payment consists of interest payments and then the
principal is repaid in full at maturity are:
A. fully drawn advances.
B. amortised loans.
C. interest-only loans.
D. credit foncier loans.
Ans: C
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
10. The fees that represent bank costs in considering loan applications and document preparation
are called:
A. commitment fees.
B. establishment fees.
C. line fees.
D. service fees.
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
11. The fees charged by banks onto the total amount of the loan facility and are normally payable
in advance are:
A. commitment fees.
C. line fees.
D. service fees.
Ans: C
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
12. Compared with an amortised loan, a deferred repayment loan involves:

A. periodic interest and principal repayments.
D. periodic principal payments and interest repaid at maturity.
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
13. The main longer-term finance provided by financial intermediaries is/are:

A. certificates of deposit.
C. corporate bonds.
D. term loans.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
14. ________ granted by banks generally have maturities of three to 15 years and are often made
to finance capital expenditure such as building construction and the purchase of real estate.
A. Debentures
B. Mortgage bonds
C. Term loans
D. Capital leases
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
15. A term loan is:

A. a bill issued to finance a specific trade transaction.
B. a bill issued to raise funds for general purposes.
C. a flexible funding arrangement for companies.
D. when funds are borrowed for a set period.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
16. Banks usually charge a/an _______ for any portion of a term loan that has not been drawn
down.
A. establishment fee
B. service fee
C. commitment fee
D. term fee
Ans: C
Difficulty: Medium
Est time: <1 minute
17. A bank charge on any part of a loan that has not been fully drawn down by a company is
called a/an:
A. establishment fee.
B. commitment fee.
C. line fee.
D. service fee.
Ans: B
Difficulty: Easy
Est time: <1 minute
18. All of the following affect interest rates charged on term loans except:
A. default risk.
B. the maturity.
C. the repayment schedule.
D. refinancing risk.
Ans: D
Difficulty: Easy
Est time: <1 minute
19. Which of the following rates serves as a reference interest rate in Australia?
A. BBSW
B. LIBOR
C. USCP
D. SIBOR
Ans: A
Difficulty: Easy
Est time: <1 minute
19a. Compared with a company with a strong financial rating, a company with a weaker rating is likely to
be charged:
A. Libor
B. LIBOR plus 10 basis points
C. LIBOR plus 25 basis points
D. LIBOR plus 50 basis points
Ans: D
20. If the interest rates on shorter term-to-maturity deposits are higher than those of longer term
deposits, it is likely that the costs for the longer term financing for a company are:
A. higher.
B. lower.
C. the same.
D. not related.
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
21. One of the advantages of a prime rate set by a financial institution is that it is less likely to be
affected by:
A. changes in the bank bill swap rate.
B. short-term market illiquidity.
C. short-term credit fluctuations.
Ans: C
Difficulty: Medium
Est time: <1 minute
22. A company can borrow from a bank at a margin to the bank's base rate. According to the
text, all of the following factors affect this margin except:
A. the credit risk of the company.
B. the term of the loan.
C. the term structure of interest rates.
D. the loan repayment schedule.
Ans: C
Difficulty: Medium
Est time: <1 minute
23. When a lender includes conditions in a loan agreement to protect its loan, these are known
as:
A. loan agreements.
B. loan covenants.
C. loan terms.
D. loan actions.
Ans: B
Difficulty: Medium
Est time: <1 minute
24. When a loan agreement contains actions for a borrowing company to comply with, such as
supplying financial statements, these are called:
B. negative covenants.
C. positive covenants.
D. loan options.
Ans: C
Difficulty: Medium
Est time: <1 minute
25. Which of the following is NOT usually an example of restrictive debt covenants?
A. Limitations on additional borrowing
B. Constraints on disposal of non-current assets
C. Minimum levels of cash flow
D. Supplying the creditors with annual, audited financial statements
Ans: D
Difficulty: Medium
Est time: <1 minute
26. Which of the following is NOT an example of negative debt covenants?

A. Specifying what activities the business can enter into
B. Restrictions on amalgamation with other companies
C. Supplying creditors with annual audited reports
D. Limiting annual dividend payments to shareholders
Ans: C
Difficulty: Medium
Est time: <1 minute
27. Which of the following is NOT an example of a positive debt covenant?

A. The company has to maintain a minimum level of working capital.
B. The company is restricted from doing mergers and acquisitions.
C. The company has to supply periodic cash flow statements to the lender.
D. The company has to supply annual audited statements to the lender.
Ans: B
Difficulty: Medium
Est time: <1 minute
28. The purpose of debt covenants that require the firm to rank any subsequent borrowing below
the original loan is to:
A. limit the amount of fixed-interest payments.
B. make sure that any cash restraints do not affect current obligations.
C. protect the lender in their claim over pledged assets in the event of failure.
D. protect the shareholders' claims over assets.
Ans: C
Difficulty: Medium
Est time: <1 minute
29. The purpose of debt covenants that ban borrowers from entering into certain types of leases
is to:
B. prevent the firm from supplying too many cars to employees.
Ans: A
Difficulty: Medium
Est time: <1 minute
30. A breach of any specified loan covenant by the borrower generally gives the lender the right
to do all of the following, except:
A. increase the interest rate.
B. demand immediate repayment of the loan.
C. alter the term of the agreement, such as by reducing the maturity date.
D. insist the company hand over its assets.
Ans: D
Difficulty: Medium
Est time: <1 minute
31. A key difference between a positive covenant and a negative covenant is, for a:
A. positive covenant, a company must comply with restrictions on its financial structure.
B. negative covenant, a company must maintain a minimum level of working capital.
C. negative covenant, a company must provide annual audited financial statements.
D. positive covenant, a company must maintain a minimum debt to gross cash flow ratio.
Ans: D
Difficulty: Hard
Est time: <1 minute
32. Which of the following is a positive loan covenant?

A. A minimum working capital ratio
B. A maximum gearing ratio
C. A maximum level of unsecured debt
Ans: A
Difficulty: Medium
Est time: <1 minute
33. A ________ is provided to a business by a financial institution and has a maturity of more
than one year.
A. debenture
B. mortgage bond
C. term loan
D. zero-coupon bond
Ans: C
Difficulty: Easy
Est time: <1 minute
34. The type of loan where a company pays periodic interest payments over its term and the
principal at maturity to a lender is called:
A. amortised.
B. a debit foncier.
C. deferred payment.
D. interest-only.
Ans: A
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
35. All of the following financial institutions arrange mortgage finance for companies except:
B. insurance companies.
C. building societies.
Ans: D
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
Learning Objective: 10.02 Describe the nature, purpose and operation of mortgage finance and the mortgage market, and calculate
an instalment on a mortgage loan.
Section: 10.02 Mortgage finance
Topic: Mortgage finance
36. The lender who registers a mortgage as a security for a loan is the:
A. mortgagor.
B. mortgagee.
C. mortgager.
D. mortgage.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
37. The borrower who issues a mortgage with real property as collateral to the bank is the:
A. mortgagor.
B. mortgagee.
C. mortgager.
D. mortgage.
Ans: A
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
38. A company borrows $75 000 from a bank, to be amortised over five years at 8.5% per
annum. The annual instalment is:
A. $12 657.43.
B. $16 275.00.
C. $19 032.43.
Ans: C
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
annum. If the payments are to be made on an annual basis, for the first year, the annual principal
repayment will be:
A. $12 657.43.
B. $16 275.00.
C. $19 032.43.
Ans: A
AACSB: Analysis
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute
annum. If the payments are to be made on an annual basis, what will be the remaining
outstanding loan at the end of year one?
A. $65 657.43
B. $62 342.57
C. $19 032.43
D. none of the given answers
Ans: B
AACSB: Analysis
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute
41. A company borrows $125 000 from a bank at 7.2% per annum to be amortised over six years.
The monthly instalment is:
A. $1861.11
B. $2143.15
C. $7274.21
D. $26 386.61
Ans: B
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
42. In Australia which of the following long-term debt markets are the largest?
A. The corporate bond market
B. The mortgage market
C. The unsecured note market
D. The leasing market
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
43. When illiquid assets are transformed into new asset-backed securities, the process is called:
A. conversion.
B. liquidisation.
C. securitisation.
D. transformation.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
44. The value of a bond is the present value of the:

A. dividends and coupon payments.
B. dividends and maturity value.
C. maturity value.
D. coupon payments and maturity value.
Ans: D
Difficulty: Easy
Est time: <1 minute
Learning Objective: 10.03 Discuss the bond market, in particular the structure and issue of debentures, unsecured notes and
subordinated debt.
Section: 10.03 The bond market: debentures, unsecured notes and subordinated debt
Topic: The bond market: debentures, unsecured notes and subordinated debt
45. The coupon interest of a bond is calculated based on its _______, and is paid periodically.
A. market value
B. book value
C. face value
D. surrender value
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
subordinated debt.
46. Commonwealth Government Treasury bonds are issued through a _______ managed
by_________.
A. tender system; Australian Office of Financial Management (AOFM)
B. private negotiation; Office of Treasury Management
C. tender system; Office of Treasury Management
D. tender system; Office of Prime Minister’s
Ans: A
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
subordinated debt.
47. Which of the following type of bond generally has the lowest interest rate?
A. Treasury bonds
B. Corporate bonds with BAA rating
C. Semi-government bonds
D. Corporate bonds with ABB rating
Ans: A
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
subordinated debt.
48. Corporations and governments use long-term debt financing called:

A. retained earnings.
B. bonds.
C. shares.
D. preferred stock.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
subordinated debt.
49. Bonds are:

A. a type of equity financing.
B. a short-term financial arrangement with periodic interest payments.
C. a debt instrument issued at discount with interest and principal repaid at maturity.
D. long-term debt instruments.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
subordinated debt.
50. Compared with unsecured notes, a debenture can offer:

A. a fixed charge over the issuer's already pledged assets.
B. a floating charge over the issuer's unpledged assets.
C. less chance of sale before maturity, as they are not usually traded.
D. provisions for interest rate changes.
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
subordinated debt.
51. An unsecured note differs from a debenture in that it has:

A. as security only unpledged assets.
B. as security a floating charge over assets.
C. as security a fixed charge over assets.
D. no supporting security.
Ans: D
Difficulty: Medium
Est time: <1 minute
subordinated debt.
52. A debt security supported or secured by mortgage assets held by a bank is a/an:
A. debenture.
B. income bond.
C. mortgage bond.
D. fixed-charge debenture.
Ans: C
Difficulty: Easy
Est time: <1 minute
subordinated debt.
53. All of the following are examples of long-term debt instruments except:
A. term loans.
B. debentures.
D. bonds.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
subordinated debt.
54. In relation to an issue of bonds, the method where the bond offer is made only to institutions
that deal regularly in securities is called:
A. public issue.
B. family issue.
C. private placement.
D. institutional issue.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
subordinated debt.
55. A debenture is a/an:

A. unsecured bond that only best-name corporate borrowers can issue.
B. legal document stating the restrictive covenants on the loan.
C. bond secured by a charge over the assets of the issuer.
D. corporate bond with a credit enhancement.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
subordinated debt.
56. A company issues a long-term debt security with specified interest payments and fixed
charges over unpledged assets. What type of security has been issued?
A. Subordinated debt
B. Unsecured notes
C. Commercial mortgage
D. Debenture
Ans: D
Difficulty: Medium
Est time: <1 minute
subordinated debt.
57. When a company defaults on interest payments for a debenture, the floating charge is said to
______ a fixed charge.
A. transform into
B. crystallise into
C. originate as
D. adjust to
Ans: B
Difficulty: Easy
Est time: <1 minute
subordinated debt.
58. In the event of failure for a company that has issued a bond, the highest claims on the
company's assets generally comes from:
A. floating-charge debenture holders.
B. fixed-charge debenture holders.
C. unsecured note holders.
D. the shareholders.
Ans: B
Difficulty: Easy
Est time: <1 minute
subordinated debt.
59. A holder of ________ has generally no charge over the issuing company's unpledged assets.
A. a debenture
B. a subordinated debenture
C. a floating charge debenture
D. an unsecured note
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
subordinated debt.
60. Many securities contain an option that is included as part of a bond or preferred share, which
allows the holder to convert the security into a predetermined number of shares. This feature is
called a:
A. conversion feature.
B. put option.
C. repurchase agreement.
D. warrant.
Ans: A
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
subordinated debt.
61. Which type of financial claim is NOT satisfied until those of the creditors holding certain
senior debts have been fully satisfied?
A. Mortgage bonds
B. Unsecured notes
C. Subordinated debentures
D. Deferred interest debentures
Ans: C
Difficulty: Medium
Est time: <1 minute
subordinated debt.
62. If a bond investor pays $1030 for an annual coupon bond with a face value of $1000, it
follows that:
A. the coupon rate is higher than the current market yield.
B. the current market yield and coupon rate are equal.
C. the current market yield is higher than the coupon rate.
D. not enough information is given to compare the coupon rate and current market yield.
Ans: A
AACSB: Analysis
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute
63. Which one of the following statements about bonds is correct?

A. Most bonds pay interest annually.
B. The yield on a bond for a bond investor is generally a fixed rate.
C. Bond prices vary inversely with interest rates.
D. Bond coupon rates vary with interest rates.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
64. The _______ value of a bond is also called its par value. Bonds with a current price greater
than their par value sell at _______, while bonds with a current price less than their par value sell
at _______.
A. premium; face value; a discount
B. discount; a premium; face value
C. face; a premium; a discount
D. premium; a reduction; a discount
Ans: C
Difficulty: Medium
Est time: <1 minute
65. What happens to the coupon rate of a $100 face value bond that pays $7 coupon annually, if
market interest rates change from 8 to 9%? The coupon rate:
A. increases to 8%.
B. increases to 9%.
C. remains at 7%.
D. increases to nearly 9%.
Ans: C
AACSB: Analysis
Bloom's: Analysis
Difficulty: Easy
Est time: <1 minute
66. The market price of previously issued bonds is often different from face value because:
A. the coupon rate has altered.
B. the maturity date has altered.
C. the market rate of interest has altered.
D. previously issued bonds sell at a discount to new bonds.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
67. The price of a bond with a fixed coupon has a/an _______ relationship with the market
interest rates.
A. constant
B. linear
C. varying
D. inverse
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
68. When the coupon rate of a bond is above the current market interest rates, a bond will sell at:
A. discount.
B. its original value.
C. premium.
D. face value.
Ans: C
Difficulty: Medium
Est time: <1 minute
69. When the coupon rate of a bond is below the current market interest rates, a bond will sell at:
A. discount.
C. premium.
D. face value.
Ans: A
Difficulty: Medium
Est time: <1 minute
70. When the coupon rate of a bond is equal to the current market interest rates, a bond will sell
at:
A. discount.
B. par or face value.
C. premium.
D. book value.
Ans: B
Difficulty: Easy
Est time: <1 minute
71. A company has two outstanding bonds with the same features, apart from the maturity date.
Bond A matures in five years, while bond B matures in 10 years. If the market interest rate
changes by 5%:
A. bond A will have the greater change in price.
B. bond B will have the greater change in price.
C. the price of the bonds will not alter.
D. the price of the bonds will change by the same amount.
Ans: B
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
72. A company has two outstanding bonds with the same features, apart from their coupon. Bond
A has a coupon of 5%, while bond B has a coupon of 8%. If the market interest rate changes by
10%:
Ans: A
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
A. Short-term debt instruments are more volatile in price than long-term instruments.
B. Coupon rates are generally fixed when the bond is issued.
C. Bond prices and market interest rates move together.
D. The higher the coupon of a bond, the lower its price.
Ans: B
Difficulty: Medium
Est time: <1 minute
74. A $1000 face value bond, with coupon rate of 8% paid annually, has five years to maturity. If
bonds of similar risk are currently earning 6%, what is the current price of the bond?
A. $920.15
B. $1000
C. $1084.25
Ans: C
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
75. A $1000 face value bond, with coupon rate of 9% paid annually, has six years to maturity. If
A. $915.39
B. $1000
C. $1089.72
Ans: A
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
76. All of the following features of a bond are fixed except the:
A. coupon rate.
B. face value.
C. price.
D. interest payments.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
77. A $1000 face value bond, with a 7.5% coupon rate paid semi-annually and maturing in five
years, is currently yielding 6.4% in the market. What is the current price of the bond?
A. $1000
B. $1045.84
C. $1046.44
D. $1079.45
Ans: C
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
78. When the market interest rates decline after a bond is issued, the:
A. face value of the bond decreases.
B. market value of the bond increases.
C. market value of the bond decreases.
D. bond price is at a discount.
Ans: B
Difficulty: Medium
Est time: <1 minute
79. When market interest rates increase after a bond is issued, the:
A. face value of the bond increases.
D. bond price is at a premium.
Ans: C
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
80. If a bond's price is at a premium to face value, it has a:

A. yield below its coupon rate of interest.
B. yield equal to its coupon rate of interest.
C. yield above its coupon rate.
D. decreased risk premium.
Ans: A
Difficulty: Medium
Est time: <1 minute
81. If a bond's price is at a discount to face value, it has a:

Ans: C
Difficulty: Medium
Est time: <1 minute
82. A bond's price will be _______ when the coupon rate is higher than current market interest
rates; _______ when the coupon rate is equal to the current market interest rates; and _______
when the coupon rate is less than the current market interest rates.
A. at a premium; equal to the face value; at a discount
B. at a premium; at a discount; equal to the face value
C. at a discount; at a premium; equal to the face value
D. equal to the face value; at a discount; at a premium
Ans: A
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
83. What is the current price of a debenture with a $500 000 face value, a coupon rate of 9.5%
paid semi-annually, six years remaining to maturity and market interest rates increased to 14%?
A. $320 149.12
B. $401 613.48
C. $410 644.78
D. $688 638.80
Ans: C
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
84. Which of the following statements about ‘net' finance leases is NOT correct?
A. The lessor will be responsible for the periodic maintenance of the asset.
B. At the end of the lease period, the company will be required to make a residual payment.
C. Upon payment of the residual amount, ownership of the asset transfers to the company.
D. The lessor's role is one of financing, while the lessee makes regular rental payments.
Ans: A
Difficulty: Medium
Est time: <1 minute
Learning Objective: 10.05 Explain lease financing, including types of lease arrangements and lease structures.
Section: 10.05 Leasing
Topic: Leasing
85. A/An _______ lease is a short-term arrangement where the lessee agrees to make periodic
payments to the lessor for the right to use the asset. This arrangement usually contains only
minor or no penalties for cancellation of the lease.
A. financial
B. operating lease
C. direct
D. leveraged
Ans: B
Difficulty: Medium
Est time: <1 minute
Topic: Leasing
86. The type of lease where the costs of ownership and operation are borne by the lessee, who
agrees to make a residual payment at the end of the lease period, is a/an:
A. direct lease.
B. financial lease.
C. operating lease.
D. leveraged lease.
Ans: B
Difficulty: Medium
Est time: <1 minute
Topic: Leasing
87. When a finance company purchases assets with its own funds and leases them to a lessee for
a negotiated long-term period this is called a/an:
A. direct lease.
B. sale and lease-back.
C. operating lease.
D. leveraged lease.
Ans: A
Difficulty: Medium
Est time: <1 minute
Topic: Leasing
88. For what type of lease does the lessee borrow a large part of the funds, typically in a multi-
million dollar arrangement, often with a lease manager, while one or more financial institutions
provide the remainder?
A. An equity lease
B. A leveraged lease
C. A sale and leveraged lease
D. A financial lease
Ans: B
Difficulty: Medium
Est time: <1 minute
Topic: Leasing
89. A direct finance lease is best described as a/an:

A. operating lease.
B. sale and leaseback arrangement.
C. full-service lease.
D. leveraged lease.
Ans: B
Difficulty: Medium
Est time: <1 minute
Topic: Leasing
90. Which of the following is NOT an advantage of leasing from the lessee's viewpoint?
A. 100% financing
B. The company's capital is not involved
C. Flexible repayment scheduling
D. With a net lease, costs of ownership remain with the lessee
Ans: D
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
Topic: Leasing
91. Which of the following is NOT an advantage of leasing from the lessor's perspective
(compared with offering a straight loan)?
A. Leasing has a relatively low default risk.
B. Administration costs may be lower for a lease than for a straight loan.
C. The return to the lessor may be higher than for a straight loan.
D. The lessor may use the funds for other investment opportunities.
Ans: D
Difficulty: Medium
Est time: <1 minute
Topic: Leasing
92. For what type of lease does the lessee provide a significant part of the funds to purchase the
asset, often losing the advantage of leveraged leasing, while a financial institution provides the
remainder?
A. A capital lease
B. An equity lease
Ans: B
Difficulty: Medium
Est time: <1 minute
Topic: Leasing
93. The Paisios Company issued a bond with a face value of $500 000, a coupon rate of 8% with
semi-annual payments. The bond matures on 31 December 2020. The yield for similar bonds is
12% per annum. The semi-annual interest payment is given as:
A. $20 000.
B. $40 000.
C. $30 000.
D. $60 000.
Ans: A
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
semi-annual payments. The bond matures on 31 December 2020. If similar bonds are yielding
8% per annum, then replace its price on 14 April 2017.
A. $426 399
B. $437 902
C. $500 000
D. $458 090
Ans: C
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
A. $426 399
B. $437 902
C. $452 811
D. $458 090
Ans: C
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
96. The Paisios Company issued a bond with a face value of $2 000 000, a coupon rate of 11%
with semi-annual payments. The bond matures in exactly 10 years. If similar bonds are yielding
9.37%, replace its price.
A. $1 808 011
B. $2 205 851
C. $2 208 671
D. $2 224 881
Ans: C
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Difficulty: Medium
Est time: <1 minute
97. Everything being equal, which bond can be sold at the highest price?
B. Unsecured note
C. Junk bond
D. Debenture
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
subordinated debt.
98. An amortised mortgage loan of $1 500 000 is to be paid back over 10 years with monthly
payments providing a return to the lender of 11% per annum. Find the monthly payments.
A. $13 875
B. $20 663
C. $35 493
D. $165 001
Ans: B
AACSB: Analysis
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute
99. Corporations may choose to issue bonds rather than borrowing from banks because:
A. it may be cheaper to do so.
B. banks may not want to give a high credit rating to the corporation.
C. of the crowding-out effect.
D. they may have reached their bank credit limit.
Ans: A
Bloom's: Knowledge
Difficulty: Easy
subordinated debt.
100. When interest rates have begun to rise the _____ reference rate would be more beneficial
for a borrower with a variable interest rate because _____.
A. BBSW; it is reset frequently
B. BBSW; it tends to stay the same
C. prime rate; it is reset frequently
D. prime rate; it tends to stay the same
Ans: D
Bloom's: Knowledge
Difficulty: Medium
101. Which of the following is NOT true about lease financing?

A. Lease financing has more flexible repayment schedules than debt financing.
B. Lease financing may avoid the application of covenants prohibiting additional debt funding.
C. The lessor retains title during the lease.
D. Lease financing is more expensive to administer than debt funding.
Ans: D
Bloom's: Knowledge
Difficulty: Medium
Difficulty: Medium
Topic: Leasing
102. Which of the following is NOT true about the typical securitisation process?
A. The special purpose vehicle issues securities to the financial intermediary.
B. The special purpose vehicle may arrange for an AAA credit enhancement of the securities.
C. The special purpose vehicle will appoint a service manager.
D. Assets held by the special purpose vehicle support the securities.
Ans: A
Bloom's: Knowledge
Difficulty: Hard
Learning Objective: 10.06 Understand the detailed process of financial asset securitisation.
Topic: Extended Learning
103. A term loan is referred to as a fully drawn advance when the borrower obtains the full
amount at the start of the loan.
Ans: True
Feedback: The full amount of the loan is provided to the borrower at the start of the loan.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
104. A term loan with interest and principal repayments that are amortised over the term are
sometimes called credit foncier loans.
Ans: True
Feedback: This is a term loan that involves regular equal payments that include an interest
payment part and a principal reduction part.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
105. A long-term loan will generally attract a higher rate of interest than a short-term loan.
Ans: True
Feedback: Generally a borrower will have to pay higher interest for a longer term loan than a
short-term loan owing to the lenders wanting compensation for liquidity and interest rate risk.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
106. Banks often calculate a prime rate lending as they can adjust it more quickly than other
reference money market rates.
Ans: False
Feedback: The prime rate of a bank reflects its borrowing costs but in practice a prime rate tends
to be less volatile than market interest rates.
Difficulty: Medium
Est time: <1 minute
107. Term loans are provided to fund a specific purpose or project for a fixed period of time.
Ans: True
Feedback: A term loan is designed to provide a specific amount of funds for a stated business
purpose over a certain period of time. Term loan contracts may incorporate different forms of
interest rates and loan repayment structures.
Bloom's: Evaluation
Difficulty: Medium
Est time: <1 minute
108. Corporate bond yields are generally determined on the basis of credit rating. If current AA+
corporate bond yields in the market are 8.00 per cent, the yields for BB corporate bonds in the
market would be lower than 8.00 per cent.
Ans: False
Feedback: The credit rating represents the creditworthiness of the borrowers. There is a negative
relationship between credit rating and yields on bonds. A corporate bond issue with a rating of
AA+ is considered safer than a corporate bond with a BB rating. Therefore, the yields for a
corporate bond with BB rating would be higher than the yield for a corporate bond with an AA+
rating.
Bloom's: Evaluation
Difficulty: Hard
Est time: <1 minute
subordinated debt.
109. Apart from an interest charge on funds advanced to a borrower, a bank will charge a service
fee for considering the loan application and loan preparation.
Ans: False
Feedback: Apart from an establishment fee, a bank will charge a service fee for ongoing loan
account administration costs, not for considering the loan application—that is the establishment
fee.
Difficulty: Medium
Est time: <1 minute
110. A positive loan covenant can state that a company must maintain a minimum level of
working capital.
Ans: True
Feedback: Loan covenants are rules in the actual loan contract about how much borrowing a
borrower may do and a positive covenant specifies acts to be taken by the borrower.
Difficulty: Medium
Est time: <1 minute
111. The inclusion of covenants in a term loan is designed to protect the borrower from taking on
too much debt.
Ans: False
Feedback: Covenants in loan contracts are designed to protect the lender's financial risk exposure
by imposing rules on the borrower.
Difficulty: Medium
Est time: <1 minute
112. Under mortgage financing, the mortgagor is the lender of the mortgage funds.
Ans: False
Feedback: The mortgagor is the borrower who issues a mortgage contract to the lender of funds
with the land and property as collateral.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
113. A bond is a long-term debt instrument issued directly into the capital markets.
Ans: True
Feedback: It is the long-term financial instrument when a borrower issues a financial security
directly into the debt markets. A bond promises to pay its holder regular coupon payments and
principal is repaid at maturity.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
subordinated debt.
114. The terms subordinated debt and unsecured note are interchanged as they are both corporate
bonds that have identical features.
Ans: False
Feedback: Subordinated debt refers to different debt issues with different ranking in respect to
payment claims in the case of default by the company. An unsecured note is a corporate bond
with no security or collateral attached.
Difficulty: Medium
Est time: <1 minute
subordinated debt.
115. Discuss major features of a term loan.

Ans: A term loan is the main type of intermediated finance provided by financial institutions. It
is a loan advanced for a specific period for a variety of purposes such as purchase of real estate,
construction of premises or for buying plant and equipment. It is generally granted for a period
from between three and 15 years and the lender generally requires some form of security to be
attached to the loan that may be structured as an amortised loan or an interest-only loan.
Bloom's: Knowledge
Difficulty: Medium
116. Define and discuss a reference interest rate in relation to lending.

Ans: A loan agreement will generally specify a reference interest rate that will apply for the loan
and any subsequent reset of the loan, such as the BBSW rate, which is an adjusted average of the
bank bill rate in the Australian money market. Published benchmarks are used as benchmarks for
pricing loans. Banks also calculate their own reference benchmark called a prime rate.
Difficulty: Medium
117. Discuss the features of mortgage agreements for commercial loans.
Ans: Companies may obtain debt finance by providing security to the lender by way of a
mortgage over land and in some cases leasehold land. Commercial mortgage finance tends to be
provided on shorter terms to maturity than retail mortgage loans. In Australia commercial
property mortgages typically range up to 10 years and are available with a choice of variable
interest rate or fixed interest rate.
Difficulty: Medium
118. Identify the main debt securities of the Australian bond market.
Ans: The main debt securities are bonds issued by the Australian government, bonds issued by
state government borrowing authorities known as semis, bonds issued by financial institutions
such as National Bank of Australia, bonds issue by Australian corporations, asset-backed
securities and Kangaroo bonds, which are Australian dollar bonds issued by non-residents.
Bloom's: Synthesis
Difficulty: Medium
subordinated debt.
119. Discuss the use of a prospectus in relation to the issue of debt securities.
Ans: In most countries where a corporate bond market exists, legislation will require any
invitation to the public to deposit money with or lend to a corporation to be accompanied by a
prospectus. A prospectus is a formal written offer to sell securities and will generally contain
specified details about the business such as financial statements, and specialist accounting,
taxation and legal reports. It is intended to protect the investor but does create certain
disadvantages for the borrower such as being time consuming to prepare.
Bloom's: Synthesis
Difficulty: Medium
subordinated debt.
120. What happens to the balance sheet of a mortgage originator which customarily sells its
mortgages? Can you see any effect this would have on mortgage rates?
Ans: Mortgages are long-term illiquid assets. A market in mortgages and mortgage securities
allows the originator to sell the mortgages and become liquid. A lender will probably be more
willing to lend if the asset it is creating can then be sold. This has led to lower mortgage rates.
Difficulty: Hard
121. Financial institutions such as commercial banks accumulate financial assets such as
mortgage-backed loans. The securitisation of subprime mortgage-backed securities was one of
the major contributors to the subprime mortgage crisis. In this context describe the term
‘securitisation’.
Ans: Financial institutions and corporations accumulate financial assets and other entitlements,
such as accounts receivable, mortgage-backs housing loans, credit card receivables and utility
rates, which generate future cash flows over time. There are no secondary markets that
specifically trade in individual assets such as these, so the process of securitisation has evolved
to allow the sale of these types of non-liquid financial assets that have specified future cash flows
associated with them. For example, mortgage loans have future cash flows attached in the form
of periodic interest payments and principal repayment.
Difficulty: Hard
Learning Objective: 10.06 Understand the detailed process of financial asset securitisation.
Topic: Securitisation
1. The policy where the Reserve Bank of Australia influences the level of short-term interest
rates in order to manage inflation is:
A. fiscal policy.
B. economic policy.
C. monetary policy.
D. inflation rate policy.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 12.01 Consider the reasons for the existence of government debt markets and the government borrowing
requirement.
Topic: Introduction to government debt, monetary policy and the payments system
2. In most developed economies, monetary policy actions are directed at influencing interest
rates. Which of the following statements are true for monetary policy?
A. Monetary policy decisions are expressed in terms of a target for the cash rate, which is the
overnight money market interest rate.
B. If the short-term cash rate changes, there is an expectation that, in an efficient market,
medium- to long-term interest rates will change over time to establish a new equilibrium.
C. Policy actions are directed towards influencing the level of interest rates in the financial
system in order to maintain inflation within a target range.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 12.04 Outline the monetary policy techniques currently employed by the Reserve Bank through which it
influences the level of interest rates in Australia, including open market operations and the impacts on system liquidity.
Section: 12.04 Monetary policy
Topic: Monetary policy
3. The management of the revenues and expenditure of a government is called:

A. monetary policy.
B. fiscal policy.
C. debt management.
D. economic policy.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
requirement.
4. Which of the following statements in relation to the Australian Commonwealth Government's

borrowing programs is NOT correct?
A. The early 1990s saw an increase in debt issues to fund the budget deficits at that time.
B. The government tends to fund short-term liquidity requirements with the issue of Treasury
notes.
C. When government income exceeds forecast expenditures, the resulting deficit tends to be
funded by short-term debt.
D. Fiscal constraint by successive Australian governments for the second part of the 1990s
brought the government budgets back into surplus until recently.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
requirement.
Section: 12.01 The Commonwealth Government borrowing requirement
Topic: The Commonwealth Government borrowing requirement
5. Which of the following statements in relation to the Commonwealth Government's borrowing

programs is NOT correct?
A. The government must issue longer term paper to fund its budget surplus
B. Treasury notes can be issued to manage intra-year liquidity
C. Debt issues are used to finance seasonal deficit/surplus patterns
D. The past few years have seen a decrease in debt issuance to fund the budget
Ans: A
Difficulty: Medium
Est time: <1 minute
requirement.
6. If a government's income from tax receipts exceeds its expenditure, the government is running
a:
A. deficit, and is a net borrower of funds.
B. surplus, and is a net borrower of funds.
C. deficit, and is a net saver of funds.
D. surplus, and is a net saver of funds.
Ans: D
Difficulty: Easy
Est time: <1 minute
requirement.
7. When a government's budget is in _____, it is required to issue new government securities,

and when the budget is in _______, it may retire maturing debt and redeem some debt prior to
maturity.
A. surplus; surplus
B. deficit; surplus
C. deficit; deficit
D. surplus; deficit
Ans: B
Difficulty: Easy
Est time: <1 minute
requirement.
8. 8. A liquidity shortfall for a government may occur within a year if:

A. there is a mismatch between the timing of government intra-year expenditures and the receipt
of revenues.
B. there is a mismatch between the timing of government fiscal year expenditures and the receipt
of revenues.
C. there is a mismatch between the timing of government intra-year expenditures and the receipt
from private sector export.
D. there is a mismatch between the timing of government fiscal year expenditures and the
receipts of export.
Ans: A
Difficulty: Medium
Est time: <1 minute
requirement.
9. If a government's budget is in surplus, it may:
A. issue more securities.
B. retire maturing securities.
C. issue more long-term securities.
D. allow the institutions to hold less government debt.
Ans: B
Difficulty: Medium
Est time: <1 minute
requirement.
10. Participants in the financial markets seek to hold government paper because:
A. investors can sell the paper quickly to raise funds.
B. government securities pay a steady rate of return.
C. banks are required to hold government securities as part of liquidity management.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
requirement.
11. When the Australian government faces month-by-month mismatches between inflow of
funds and cash outflows it may issue:
A. Treasury bonds.
B. Treasury bills.
C. Treasury notes.
D. Treasury paper.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
requirement.
12. When the government demand for funding reduces the available funds within a nation-state,
this is known as:
A. fiscal constraint.
B. illiquidity effect.
C. crowding-out effect.
D. capital expenditure effect.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
requirement.
13. The crowding-out effect refers to:

A. corporate borrowing exceeding government borrowing.
B. government borrowing reducing the available funds for borrowing.
C. heavy long-term borrowing by government.
D. corporations issuing securities of long maturity.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
requirement.
14. Other things being equal, an increase in the government budget deficit:
A. can increase business prospects.
B. can force interest rates down.
C. can force interest rates up.
D. may not have any effect on interest rates.
Ans: C
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
requirement.
15. Which of the following is NOT a feature of types of Treasury bonds that are currently issued
by the Commonwealth Government?
A. A fixed-interest security that pays half-yearly coupon payments
B. Issued with a face value which is repayable at maturity
C. Existing Treasury bond issues are exposed to price risk
D. Issued as either a bearer bond or as inscribed stock
Ans: D
Difficulty: Medium
Est time: <1 minute
Learning Objective: 12.02 Outline features of the main debt instruments issued by the Commonwealth Government, that is, the
Treasury bond and the Treasury note, and describe the issuance process, participants and complete relevant calculations.
Section: 12.02 Commonwealth Government securities
Topic: Commonwealth Government securities
16. The advantages associated with the issue of inscribed stock for bond issues are:
A. it is less costly to maintain a register of bond holders than print and distribute physical bonds.
B. inscribed stock protects holders from risk of theft.
C. coupon payments are easily made electronically to the registered holders.
Ans: D
Difficulty: Medium
Est time: <1 minute
17. Which of the following about the primary market issue of Treasury bonds is correct?
A. Treasury bonds are issued by a tender system.
B. Treasury bonds are issued by the ‘tap' system of selling.
C. The issue of Treasury bonds is currently managed by the Reserve Bank.
D. The minimum bid for treasury bonds must be for a face value of $1000 000.
Ans: A
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
18. Which of the following procedures for bidding for Australian Treasury bonds is NOT
correct?
A. Bids must be submitted electronically by registered bidders.
B. The minimum bid must be for a face value of $1 million and multiples thereafter.
C. Bids are made in terms of prices up to three decimal places.
D. Bids are accepted in ascending order.
Ans: C
Difficulty: Medium
Est time: <1 minute
19. Which of the following about the primary market issue of Treasury bonds is NOT correct?
A. The issues are currently managed by AOFM.
B. Tenders will be lodged to buy the bonds in terms of yield to maturity.
C. The minimum bid must be for a face value of $1 million.
D. Bids are accepted in descending order: that is highest-yield first.
Ans: D
Difficulty: Medium
Est time: <1 minute
20. Which of the following statements regarding the Treasury bond tender system is correct?
A. The timing of Treasury bond tenders is set each year in the government's budget papers.
B. Buyers of bonds effectively nominate the price at which they purchase the bond.
C. The tender system removes the need for a secondary market in Treasury bonds.
D. The maturities and quantities of bond tenders are determined by the Loan Council.
Ans: B
Difficulty: Medium
Est time: <1 minute
21. Which of the following statements is correct for the current system of bidding for
government bond tenders?
A. Bids must be in terms of price.
B. Bids are accepted in terms that correspond to the yield to maturity.
C. The minimum bid must be for a face value of $500 000.
D. The maximum limit for a total amount is $100 million.
Ans: B
Difficulty: Medium
Est time: <1 minute
22. The Commonwealth Government has announced a $550 million Treasury bond issue by
competitive tender. The 10-year bonds have a fixed coupon of 6.0% per annum. The Reserve
Bank plans to take $100 million of the allocation and the remaining $450 million will be
allocated according to bids received. The following bids are received:
Bank A $150 million Yield 6.50% p.a.
Bank B $125 million Yield 6.90% p.a.
Bank C $150 million Yield 6.70% p.a.
Bank D $250 million Yield 7.00% p.a.
Bank E $100 million Yield 6.00% p.a.
Determine the amount of allocation received by the bidding banks in the order of priority.
A. Bank E ($100 million); Bank A ($150 million); Bank C ($150 million); Bank B ($50 million)
B. Bank D ($250 million); Bank B ($125 million); Bank C ($75 million)
C. Bank A ($150 million); Bank B ($125 million); Bank C ($75 million); Bank D ($150 million)
D. All bidding bank will receive allocation equally.
Ans: A
AACSB: Analysis
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute
23. The selling of Government bonds is currently handled by the following agency:
A. APRA.
B. RBA.
C. AOFM.
D. Austraclear.
Ans: C
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
24. A Treasury bond holder who wishes to redeem a bond early may sell it:
A. back to Treasury.
B. back to the central bank.
C. in the secondary market.
D. back to the broker.
Ans: C
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
25. If market interest rates move upwards after an investor buys a government bond, the investor
may:
A. sell the bond back to Treasury.
B. sell the bond in the secondary markets for a capital loss.
C. sell the bond in the secondary markets for a capital gain.
D. hold the bond until the market rates return to their original level and then have a capital gain.
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
26. Government securities generally:

A. are highly liquid instruments, especially the short-term ones.
B. have an active secondary market.
C. are regarded as fault-free.
D. meet all of the given answers.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
27. Government securities are generally:

A. illiquid.
B. issued when a government's budget is in surplus.
C. highly negotiable.
D. coupon-paying debt securities.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
28. Which of the following procedures is NOT true for bidding for Treasury bonds under the
tender system?
A. Only bids submitted electronically by registered bidders through AOFM tender system are
accepted.
B. Minimum bid must be for $1 000 000 and multiples of $1 000 000 thereafter.
C. Bids are made in terms of yield to maturity up to three decimal places.
D. Bids are accepted in descending order; that is, the lowest price is allotted first.
Ans: D
Difficulty: Medium
Est time: <1 minute
29. Which of the following is NOT an advantage associated with the issue of inscribed stock?
A. It is expensive to print and distribute the physical instrument.
B. Without a register, there is a potential for non-disclosure of income.
C. It protects the holder from the risk of capital loss.
D. It protects the holder from the risks of theft or misplacement.
Ans: C
Difficulty: Medium
Est time: <1 minute
30. When bonds are traded in either the primary or secondary markets in Australia, they are
quoted in terms of their:
A. current yield.
B. current price.
C. redemption yield.
D. annual interest, divided by the face value.
Ans: C
Difficulty: Easy
Est time: <1 minute
31. The total return of interest and capital gains received by an investor when a security is held to
maturity is called:
A. current yield.
B. maturity yield.
C. historical yield.
D. yield to maturity.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
32. Which of the following statements regarding the secondary market for Australian
government securities is NOT correct?
A. The volume of on-exchange trades of government securities is very high.
B. Treasury notes and bonds may be listed on the Australian Securities Exchange (ASX).
C. Banks buy and sell government securities to manage their operational liquidity.
D. All wholesale electronic transactions involving Commonwealth Government securities are
settled through Austraclear.
Ans: A
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
33. For government securities listed on the ASX, there is a higher volume of off-exchange trades
compared with on-exchange transactions because:
A. of difficulties in payment.
B. greater profits may be made.
C. of brokers that can act as an agent between two parties.
D. of the high fees involved.
Ans: C
Difficulty: Medium
Est time: <1 minute
34. Which of the following financial institutions currently has the largest holdings of
Commonwealth Government securities?
A. A state government public authority
B. The Reserve Bank of Australia
C. General insurance offices
D. Life assurance offices
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
35. Financial institutions hold government securities because of:

A. liquidity requirements.
B. interest rate expectations.
C. funding requirements.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
36. Banks hold Commonwealth Government security (CGS) for the following reasons except:
A. to manage their operational liquidity.
B. for prudential liquidity requirement.
C. to make a primary source of income for the bank.
D. as part of banks’ balance sheet maturity structure.
Ans: C
Difficulty: Medium
Est time: <1 minute
37. If interest rates move lower after a Treasury note is issued, a holder selling it into the
secondary markets:
A. receives a capital gain.
B. receives a capital loss.
C. receives the original price, as short-term markets are not so affected by interest rate
movements.
D. receives a higher yield owing to the time elapsed.
Ans: A
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
38. When an institution buys government securities, it settles the transaction by:
A. sending the seller of the security a cheque.
B. sending the funds to the broker.
C. using the clearing house Austraclear.
D. sending funds electronically to the seller via a bank.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
39. Which of the following about Treasury bonds is NOT correct?

A. Banks invest excess short-term funds in Treasury bonds as they are liquid.
B. A financial institution with a need for funds can quickly sell some its government securities.
C. Treasury bonds can be held to manage the maturity profile of a bond portfolio.
D. Commercial banks are required by the prudential supervisor to hold a prescribed number of
Treasury bonds.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
40. When the current market interest rates rise, the price of Treasury bonds:
A. appreciates in value.
B. depreciates in value.
C. is unchanged.
D. may go up or down or be unchanged, depending on market conditions.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
41. Which of the following about Treasury bonds is NOT correct?

A. The volume of over-the-counter transactions for Treasury bonds is far larger than the volume
of on-exchange trades.
B. Banks hold Treasury bonds for liquidity management.
C. If fund managers expect interest rates to fall they may decrease their holdings of long-term
Treasury bonds.
D. The Reserve Bank of Australia holds government securities as part of monetary policy.
Ans: C
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
42. All of the following are Reserve Bank monetary policy objectives except:
A. to manage inflation level between 2 per cent and 3 per cent.
B. the stability of the AUD.
C. maintenance of full employment in Australia.
D. to minimise the budget deficit.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
43. Monetary policy action can be implemented through open market operations. All of the
following actions can be considered open market operations except:
A. those conducted primarily by repurchase agreements (repos) on nominated debt securities.
B. sales of CGSs to reduce supply of cash in money market.
C. purchases of CGSs to inject additional cash into the financial system.
D. all of the given answers are considered open market operation.
Ans: D
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
44. Australian government securities that are short term are:

A. Treasury bills.
B. Treasury notes.
C. Treasury paper.
D. Treasury bonds.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
45. Which of the following about Australian Treasury notes is NOT correct?
A. Australian Treasury notes are discount securities.
B. The minimum bid must be for a face value of $1 million.
C. Bids are accepted in ascending order; that is, the lowest yield bid.
D. Bids are made in terms of yield to maturity up to three decimal places.
Ans: D
Bloom's: Knowledge
Difficulty: Hard
Est time: <1 minute
46. In Australia a Treasury bond differs from a Treasury note in that it:
A. is issued for a period less than a year.
B. pays interest quarterly, unlike the monthly interest payments for a Treasury note.
C. is a discount instrument.
D. is a longer term coupon security.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
47. Which of the following is NOT a feature or function of Treasury notes (T-notes)?
A. T-notes are issued with short-term maturities.
B. T-notes are discount securities; that is, they are sold at a price below face value.
C. Coupon payment, plus the face value, is paid at maturity.
D. T-notes are used to manage the liquidity for the government.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
48. Compared with a Treasury bond, a Treasury note:

A. pays a higher interest rate.
B. is sold at a price below its face value.
C. is sold in terms of price to the highest bidder.
D. has a higher yield.
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
49. Which of the following is NOT a feature of the tendering of Treasury notes (T-notes) in
Australia?
A. T-notes are issued by tender.
B. The registered bidders of the AFOM submit their bids electronically.
C. Successful bidders settle their purchases through Austraclear.
D. Each bid must be for a minimum parcel of $100 000.
Ans: D
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
50. An investor is purchasing an existing Treasuring bond, which has a face value of $1 million,
pays half-yearly coupons at 12% per annum, and matures in exactly seven years. Yields on
similar securities are currently paying 10.5% per annum. Calculate the price of the Treasury
bond.
A. $1 073 067.26
B. $1 000 000
B. $958 000
C. $1 071 839.54
Ans: A
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
51. A bank puts in a bid for $500 000 of 182-day Treasury notes at a yield of 5.8% per annum.
What price will the bank pay if the tender is successful?
A. $448 028.67
B. $485 756.54
C. $485 946.17
D. $486 101.73
Ans: C
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
52. A bank is considering purchasing a Treasury note with a face value of $500 000 that is
currently selling for $487 324, with 180 days to maturity. What is the note currently yielding?
A. 4.90%
B. 5.14%
C. 5.27%
D. 5.41%
Ans: C
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
53. On Tuesday, the Reserve Bank announces details of a 26-week T-note tender, with
competitive bids to close on Wednesday. A bank lodged a successful bid for $5 000 000 in T-
notes at a yield of 6.57% per annum. Settlement is required on Thursday through RITS. What
amount will the bank need to pay on settlement?
A. $4 841 395.87
B. $4 843 084.08
C. $4 988 327.31
D. $4 998 362.54
Ans: A
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
54. A funds manager is revaluing their investment portfolio, which includes a $2 000 000
holding of Treasury bonds. The bonds pay a coupon of 10% per annum, payable half-yearly. A
coupon payment has just been made, and the bonds have exactly five years to maturity. Similar
bonds are currently yielding 12% per annum in the market. What is the value of the fund
manager's Treasury bond portfolio?
A. $1 495 331.33
B. $1 620 921.33
C. $1 852 798.26
D. $2 000 000.00
Ans: C
AACSB: Analysis
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute
55. Which of the following is NOT an advantage for a state's central borrowing authority?
A. By grouping issues as a single one, lower economies of scale can be obtained.
B. Potential conflict between different debt issuers may be overcome.
C. The timing of debt issues can be controlled so they are brought to the market at the most
opportune time.
D. The central borrowing authority can do a public issue more effectively than a private
placement.
Ans: D
Difficulty: Medium
Est time: <1 minute
Learning Objective: 12.03 Describe the purpose and structure of state government central borrowing authorities.
Section: 12.03 State government securities
Topic: State Government securities
56. The Commonwealth Government currently issues Treasury notes with varying terms to
maturity:
A. twice a year.
B. three times a year.
C. four times a year.
D. to match the government's main revenue receipt dates.
Ans: D
Difficulty: Medium
Est time: <1 minute
57. The Reserve Bank of Australia's monetary policy is directed to influence first:
A. money market rates.
B. Treasury notes interest rates.
C. the overnight cash rate.
D. the base bank interest rates.
Ans: C
Difficulty: Easy
Est time: <1 minute
58. The transmission channel related to changing the money supply, followed by changes in
short-term rates and pressure on interest rates to change the cost of funds, and consequently to
influence economic activity, is known as a:
A. credit channel.
B. monetary policy channel.
C. foreign exchange channel.
D. wealth channel.
Ans: B
Difficulty: Easy
Est time: <1 minute
59. The transmission channel related to changing the money supply to change the pattern of bank
lending and the availability of funds, to influence economic activity, is known as a:
A. credit channel.
D. wealth channel.
Ans: A
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
60. When actions by the Australian Reserve Bank affect bank lending and consequently
borrowers replace it more difficult to replace funding, this effect is called the:
A. monetary channel.
B. credit channel.
C. wealth channel.
D. foreign exchange channel.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
61. The transmission channel that affects the value of assets and liabilities within the domestic
economy, and thus influences economic activity, is known as a:
A. credit channel.
D. wealth channel.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
62. The transmission channel that eventually affects the demand for Australian exports and
imports by affecting their relative costs, and thus influences economic activity, is known as a:
A. credit channel.
D. wealth channel.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
63. Open market operations by the Australian Reserve Bank refer to:
A. the method by which the Australian Reserve Bank allows banks to raise short-term funds up
to a year.
B. the method by which the Australian Reserve Bank implements monetary policy.
C. the market for short-term securities.
D. the method by which the Australian Reserve Bank monitors the financial sector.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
64. Monetary policy in Australia is implemented by the Reserve Bank, and is currently
principally directed towards:
A. affecting the level of short-term interest rates.
B. effecting a reduction in the current account deficit.
C. affecting the level of growth in the money supply.
D. affecting the value of the AUD, and the exchange rate.
Ans: A
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
65. The Reserve Bank focuses much of its attention on the level of underlying inflation in the
Australian economy. What are the important implications of a low level of underlying inflation
for the markets?
A. A low level of underlying inflation restricts the potential for future economic growth and
business investment.
B. The Reserve Bank needs to maintain tight monetary policy to ensure inflation remains low.
C. A low level of underlying inflation leads to increased business confidence and capital
investment.
D. A low level of underlying inflation adds to expectations of significant future interest rate
increases.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
66. The main method the Reserve Bank of Australia uses to manage the money market cash
position is:
A. conducting FX transactions.
B. issuing Treasury bonds.
C. managing the amount of Commonwealth securities in the market.
D. issuing Treasury notes.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
67. Price stability is desirable because:

A. everyone is better off when prices are stable.
B. inflation creates uncertainty about future planning.
C. it guarantees full unemployment.
D. it increases the efficiency of the Reserve Bank of Australia.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
68. The Reserve Bank conducts market operations in order to effect its monetary policy
objectives. Which of the following best describes the Reserve Bank's market operations?
A. Market operations may be conducted to neutralise official FX transactions.
B. Reserve Bank market operations target the overnight cash rate.
C. Market operations affect day-to-day system liquidity.
Ans: D
Difficulty: Medium
Est time: <1 minute
69. The use of open-market operations as a monetary tool has the advantage that:
A. they can be implemented rapidly, without administrative delays.
B. they are flexible and precise.
C. they can be easily reversed if errors are made.
Ans: D
Difficulty: Easy
Est time: <1 minute
70. When the Reserve Bank sells Commonwealth Government securities, it:
A. injects extra cash into the financial markets.
B. loosens monetary policy.
C. puts downward pressure on interest rates.
D. tightens monetary policy.
Ans: D
Difficulty: Medium
Est time: <1 minute
71. If the Reserve Bank wants to decrease the money supply in the long term, it will:
A. buy repurchase agreements.
B. buy Commonwealth Government securities.
C. lower the cash rate.
D. sell Commonwealth Government securities.
Ans: D
Difficulty: Medium
Est time: <1 minute
72. Which of the following is NOT true of tightening of monetary policy?

A. Banks' supplies of funds are depleted through open-market operations.
B. Interest rates fall.
C. The dollar may increase in value.
D. Bank lending is reduced.
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
73. When an easing of monetary policy is accomplished by open-market operations:

A. interest rates rise.
B. banks' supplies of funds are increased.
C. the dollar appreciates.
D. bank lending generally decreases.
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
74. If the Reserve Bank wants to expand the money supply, it will:
A. buy Commonwealth Government securities.
B. increase the cash rate.
C. sell Commonwealth Government securities.
D. sell repurchase agreements.
Ans: A
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
75. When the Reserve Bank wants to ease the monetary policy, it will:
A. sell Commonwealth Government securities.
B. increase the overnight cash rate.
C. buy Commonwealth Government securities.
D. sell repurchase agreements.
Ans: C
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
76. The main types of Commonwealth Government transactions that influence the daily cash
positions are:
A. taxation receipts.
B. government receipts.
C. budget expenditures.
Ans: D
Difficulty: Easy
Est time: <1 minute
77. The short-term interest rate that is almost immediately affected by changes in the Reserve
Bank's monetary policy is the:
A. real interest rate.
B. overnight interbank rate.
C. 30-day bank bill rate.
D. intercompany lending rate.
Ans: B
Difficulty: Easy
Est time: <1 minute
78. In relation to impacts on the Australian financial system liquidity, if payments from the
official sector to the private sector exceed the flow of funds to the official sector then there will
be:
A. a system down.
B. a system surplus.
C. a system deficit.
D. a system square.
Ans: B
Difficulty: Medium
Est time: <1 minute
79. In relation to impacts on the Australian financial system liquidity, if payments to the official
sector exceed official payments to the private sector then there will be:
A. a system down.
B. a system surplus.
C. a system deficit.
D. a system square.
Ans: A
Difficulty: Medium
Est time: <1 minute
80. Through its impact on cash rates, the Reserve Bank can affect rates further out on the
maturity spectrum. What is usually the order of transmission?
A. Cash rates; commercial bill yields; banks' deposit rates; banks' prime lending rates
B. Cash rates; commercial bill yields; banks' prime lending rates; banks' deposit rates
C. Cash rates; banks' deposit rates; commercial bill yields; banks' prime lending rates
D. Cash rates; banks' prime lending rates; commercial bill yields; banks' deposit rates
Ans: B
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
81. Banks are required to maintain exchange settlement accounts with the Reserve Bank.
Settlement of exchange settlement account transactions requires the use of same-day funds.
Which of the following is NOT generally a source of same-day funds?
A. Repurchase arrangements with the Reserve Bank
B. Reserve Bank payments in its market operations
C. Commonwealth Government securities held for liquidity purposes
D. Surplus balances in banks' exchange settlement accounts
Ans: C
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
Learning Objective: 12.05 Describe the purpose and operation of the payments system, including exchange settlement accounts,
real-time gross settlement and repurchase agreements.
Section: 12.05 The payments system
Topic: The payments system
82. In relation to the payments system the huge number of low-value transactions is:
A. cleared by real-time gross settlement.
B. netted and settled at the end of each day.
C. settled immediately by banks' settlement accounts at the Reserve Bank of Australia.
D. netted and settled through banks dealing with Austraclear.
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
83. The payment clearing system that settles trades in Commonwealth Government securities is:
A. APCA.
B. MasterCard.
C. Austraclear.
D. CHESS.
Ans: C
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
84. Commercial banks and other authorised providers of payments services maintain a special
account with the Reserve Bank to facilitate the settlement of value transactions within the
payments system. This account is called the:
A. exchange settlement account.
B. electronic settlement account.
C. margin account.
D. line of credits account.
Ans: A
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
85. The greatest monetary value of payments in the Australian financial system occurs for:
A. cash.
B. non-cash payments.
C. debt securities.
D. equity securities.
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
86. The special account that providers of payment services have at the Reserve Bank is called
a/an:
A. balance of payments account.
B. exchange settlement account.
C. payment services account.
D. Reserve Bank payment account.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
87. The Reserve Bank provides an end-of-day repurchase arrangement for banks to enable them
to manage their exchange settlement account liquidity position. Which of the following terms
and conditions is attached to repurchase arrangements?
A. T-notes with maturities of less than 91 days may be discounted.
B. A penalty margin of 0.25 per cent is applied to all repurchase transactions.
C. The Reserve Bank publishes its rediscount rate daily.
Ans: A
Difficulty: Medium
Est time: <1 minute
88. Banks frequently engage in repurchase agreements to:

A. manage liquidity.
B. take advantage of anticipated changes in interest rates.
C. lend or borrow for a day or two with what is basically a collateralised loan.
D. do all of the given answers.
Ans: D
Difficulty: Medium
Est time: <1 minute
89. Repurchase agreements are:

A. usually collateralised with Commonwealth Government securities.
B. usually low-interest rate loans.
C. usually loans that have real assets as collateral.
Ans: A
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
90. For a debt payment system, the processing of the payment begins at the:
A. payer's financial institution.
B. payee's financial institution.
C. Australian Reserve Bank.
D. exchange settlement account of the payer.
Ans: B
Difficulty: Medium
Est time: <1 minute
91. For a credit payment system, the processing of the payment begins at the:
A. payer's financial institution.
B. payee's financial institution.
C. Reserve Bank of Australia.
D. exchange settlement account of the payee.
Ans: A
Difficulty: Medium
Est time: <1 minute
92. Which of the following statements regarding real-time gross settlement (RTGS) is NOT
correct?
A. High-value payment transactions that are settled immediately require transfer of the monies
held in settlement accounts of the respective banks at the Reserve Bank.
B. The aim of RTGS is to minimise potential systematic risk.
C. High-value transactions are those involving more than $100 000.
D. RITS and Austraclear are the two providers recognised by the Australian Reserve Bank as
providers of RTGS.
Ans: C
AACSB: Analysis
Difficulty: Medium
Est time: <1 minute
93. Assume the government increases its spending to stimulate the economy. As a consequence
the government budget may go into a _____ deficit. In turn this would result in _____
government borrowing and _____ crowding out of private investment spending.
A. bigger; smaller; smaller
B. bigger; larger; larger
C. bigger; larger; smaller
D. smaller; larger; smaller
Ans: B
Bloom's: Knowledge
Difficulty: Medium
requirement.
94. A $10 million T-note has 63 days until maturity. T-notes with a similar maturity are currently
yielding 3.49% per annum. Find the fair market value of this T-note.
A. $9 803 956
B. $9 939 296
C. $9 940 122
D. $10 077 342
Ans: C
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
95. A repo is best described as:

A. the sale of CGSs to the Reserve Bank by a financial institution on condition the seller will
normally buy them back by day’s end.
B. the purchase of CGSs from the banks by the Reserve Bank on condition the Reserve Bank
will normally buy them back by day’s end.
C. the sale of CGSs to the public by the Reserve Bank on condition the Reserve Bank will
normally buy them back by day’s end.
D. the sale of CGSs to the public by the financial institution on condition the financial
institutions will normally buy them back by day’s end.
Ans: A
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
96. An appropriate vehicle for investing or borrowing money overnight or intra-day would be:
A. Treasury notes.
B. Treasury bonds.
C. shares.
D. repurchase agreements.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
97. A sale of government securities by the Reserve Bank _____ the supply of funds, which
_____ the money supply.
A. increases; increases
B. increases; decreases
C. decreases; increases
D. decreases; decreases
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
98. If the rate of inflation were too high the Reserve Bank would try to _____ the cash rate by
_____ government securities in the open market.
A. increase; buying
B. increase; selling
C. decrease; buying
D. decrease; selling
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
99. State government securities are sold through a central borrowing authority. These
transactions are in the _____ market. A central borrowing authority seeks to achieve _____.
A. primary; tax savings
B. primary; economies of scale
C. secondary; tax savings
D. secondary; economies of scale
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
Learning Objective: 12.03 Describe the purpose and structure of state government central borrowing authorities.
100. The largest holders (ignore ‘other’ categories) in declining order of Commonwealth
Government securities are:
A. Reserve Bank, banks, life offices.
B. Reserve Bank, life offices, banks.
C. banks, Reserve Bank, life offices.
D. banks, life offices, Reserve Bank.
Ans: C
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
101. When there is a significant reduction in recurrent government expenditures, the process is
known as fiscal limitation.
Ans: False
Feedback: The process is known as fiscal restraint when there is a significant reduction in
recurrent government expenditure.
Difficulty: Medium
Est time: <1 minute
requirement.
102. An investor might hold government securities as part of a portfolio to lower its risk.
Ans: True
Feedback: Government securities are considered to be risk free as under normal circumstances a
government does not default on its debt.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
requirement.
103. There is often a crowding-out effect when a government deficit is high and the government
issues large amounts of long-term bonds.
Ans: True
Feedback: When a government needs to borrow as a result of a deficit, its demand for funds will
reduce the amount of funds in the overall economy.
Difficulty: Medium
Est time: <1 minute
requirement.
104. For Treasury bonds issue tender, bids are to be made in terms of yield to maturity up to
three decimal places, not in terms of price.
Ans: True
Feedback: For the Commonwealth Government, bids with lower yield will be given preference
to bids with higher level of yield. The allocation of bids is filled with lowest yield to maturities.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
105. Treasury bonds are not bearer securities and so coupon payments are made electronically to
holders.
Ans: True
Feedback: There is an electronic registry to keep track of Treasury bond holders.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
106. The Australian office of financial management (AOFM) on behalf of the federal treasurer
has the power to decide on the timing, maturities and quantities of Treasury bonds but their price
is decided by tender.
Ans: True
Feedback: The primary market for Treasury bonds is based on a tender system where investors
bid on price.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
107. If a bond issue is announced carrying a coupon of 5% per annum and an investor requires a
greater rate of return, they will put in a bid price below the face value in order to try to get the
higher yield they require.
Ans: True
Feedback: If current market interest rates have changed, an investor will put in a lower bid so
that the existing coupon plus the capital gain on maturity gives a higher yield.
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
108. For bond issues through the AOFM, bids are made in terms of price up to three decimal
places.
Ans: False
Feedback: Bids are made in terms of yield to maturity up to three decimal places.
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
109. Fiscal policy involves changing government spending and taxation, while monetary
policy involves influencing the demand and supply of money, primarily through the use
of interest rates.
Ans: True
Feedback: The government manages economic activities by adopting a prudent fiscal policy that
involve the collection of taxes and other revenues while prudently allocating government’s
revenues towards infrastructure, medical care and socioeconomic development programs.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
requirement.
110. Since each state government is responsible for providing a wide range of services, every
state has its own borrowing authority to issue debt securities.
Ans: True
Feedback: Each Australian state has formed a central borrowing authority to undertake
borrowings on behalf of the state government and its instrumentalities.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
111. If the Australian Reserve Bank, through its monetary policy market operations, buys
government securities, this will lead to an easing of interest rates.
Ans: True
Feedback: When the Reserve Bank of Australia buys government securities, the sellers of the
securities receive funds and, in the case of banks, have more funds for lending out, leading to a
drop in interest rates.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
112. Discuss the characteristics of short-term government securities in relation to a government's

liquidity position.
Ans: The matching principle applies to any shortfall in short-term liquidity requirements that
arise out of within-year timing mismatches between a government's revenues and expenditure
cash flows. In the case of the Australian government, short-term securities called short-term T-
notes are issued. Up till recently the strong cash position of the Commonwealth Government has
not seen any issue of T-notes since 2003. It is possible at some future date when the economy
slows that the issue of T-notes may resume.
Bloom's: Knowledge
Difficulty: Medium
requirement.
113. Discuss the role and features of secondary market transactions for Treasury bonds.
Ans: Treasury bonds can be bought and sold as on-exchange transactions or over-the-counter
transactions. In Australia treasury bonds are listed on the ASX but the volume of trades is
traditionally low compared with the volume of over-the-counter transactions. When they are
traded they are quoted in terms of their redemption yield or yield to maturity.
Difficulty: Medium
114. Discuss the current features of how Australian state governments manage their borrowings.
Ans: Each Australian state has formed a central borrowing authority to undertake borrowings on
behalf of the state government and its instrumentalities. States require funds for a variety of
services such as roads and hospitals. Some of the advantages of a central borrowing authority are
economies of scale, timing of issues, reduced potential for competition between states, more
effective tender and dealer panels and potentially larger size of debt issue.
Difficulty: Medium
115. Discuss what factors influence financial system liquidity in Australia.

Ans: Three major factors affect financial system liquidity. They are Commonwealth Government
budget surpluses, official foreign exchange transactions, and net sales of government bonds
(CGS) and repurchase agreements. Taxation receipts, budget recurrent and capital expenditures
and interest and payments on T-notes and Treasury bonds all influence the daily cash position.
The Reserve Bank of Australia can enter the FX market to conduct transactions on behalf of the
Commonwealth Government or occasionally support the value of the AUD. When the
government buys overseas goods, the Reserve Bank arranges purchase of the FX currency to do
so and, in the process, creates an increase of liquidity in the financial system. To offset this, the
central bank will neutralise its FX transactions through its market operations.
Difficulty: Medium
116. Discuss how the Australian financial system manages settlement risk for its market
participants.
Ans: The clearing of value payments system transactions in Australia is coordinated by the
Australian Payments Clearing Association (APCA). APCA is a limited liability company formed
by banks, building societies, credit unions and the Reserve Bank. It manages clearing for
cheques, direct entry payments, ATM and debit card transactions and high-value payments. The
adoption of real-time gross settlement (RTGS) also lessens settlement risk. Banks and other
authorised providers of payments services maintain a special account with the Reserve Bank of
Australia to facilitate settlement.
AACSB: Analysis
Difficulty: Medium
117. Trace the impact of an expansionary monetary policy in terms of the channels.
Ans: When the Reserve Bank embarks on an expansionary policy, it buys government securities,
increasing the money supply, and pushing down the cash rate. In the monetary policy channel the
interest change spreads to intermediate and longer terms to maturity. This should stimulate
business and some consumer spending. In the credit channel businesses will replace it easier to
borrow and be able to borrow at lower rates of interest. With lower interest rates and increased
money supply asset prices will be bid up, increasing wealth. This will further induce higher
spending. A lower interest rate together with more spending, including spending on imports,
should push down the foreign exchange value of the dollar. This will make Australian products
cheaper to foreigners, stimulating the export industry. All told, through these various channels
the Reserve Bank would have stimulated the economy, creating a boom (and possible bust later,
but that’s another story).
Difficulty: Hard
118. Investor buys a $5 million T-note for $4 808 808 and holds it to maturity, which is in 100
days.
a. Find the holding period yield (actual return, not annualised).
b. Find the annualised yield using simple annualisation.
c. Find the annualised yield using compounding.
Ans: a. (5 000 000 – 4 808 808) / 4 808 808 = 191 192 / 4 808 808 = .0398 = 3.98%
b. [(5 000 000 – 4 808 808) / 4 808 808] x 365/100 = .0398 x 3.65 = .1451 = 14.51%
c. {1+[(5 000 000 – 4 808 808) / 4 808 808]}^365/100 – 1 = 1.0398^3.65 – 1 = 1.1529 – 1
= .1529 = 15.29%
AACSB: Analysis
Bloom's: Analysis
Difficulty: Hard
119. The Commonwealth Government has announced a $500 million Treasury bond issue by
competitive tender. The 10-year bonds have a fixed coupon of 6.0% per annum. The Reserve
Bank plans to take $100 million of the allocation and the remaining $400 million will be
allocated according to bids received. The following bids are received:
Bank A $150 million Yield 6.50% p.a.
Bank B $125 million Yield 6.90% p.a.
Bank C $150 million Yield 6.70% p.a.
Bank D $250 million Yield 7.00% p.a.
Bank E $100 million Yield 6.00% p.a.
Ans: Bids are sorted in ascending order of yields and allotments are given accordingly.
Bid Yield Competitive Competitive Reserve Bank

(%p.a.) bids allotment allotment
($ millions) ($ millions) ($millions)
D 6.50 250 250
B 6.70 150 150
A 6.75 150 nil
C 6.80 175 nil
E 8.50 100 nil
Reserve Bank 6.58 100
(weighted average
yield)
Total 825 400 100
The Reserve Bank will receive its allocation based on the weighted average yield:
Weighted Average Yield = (6.50 * 250 + 6.70 * 150)/400 = 2642.5/400 = 6.58 %
AACSB: Analysis
Bloom's: Analysis
Difficulty: Hard
1. All of the following will generally make a central bank increase interest rates, except:
A. excessive credit growth.
B. increasing surplus balance of payments.
C. large changes in price levels.
D. heavy downward pressure in the foreign exchange.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 13.01 Describe at a macroeconomic level how the liquidity effect, the income effect and the inflation effect
influence the determination of interest rates.
Section: 13.01 The macroeconomic context of interest rate determination
Topic: The macroeconomic context of interest rate determination
2. If a country's balance of payments is constantly in a large deficit, a central bank will generally:
A. lower interest rates.
B. buy government securities regularly.
C. increase interest rates.
D. encourage looser monetary policy.
Ans: C
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
3. If credit growth and associated debt levels are growing too quickly, a central bank will
generally:
A. decease interest rates.
B. use open market operations and sell government securities.
C. increase interest rates.
D. loosen monetary policy.
Ans: C
Difficulty: Medium
Est time: <1 minute
4. If a central bank increases interest rates, then gradually:
A. the country's gross domestic product is likely to increase.
B. foreign exchange rate is likely to come under downward pressure.
C. demand for imported goods and services is likely to decrease.
D. flows of investment funds into the country are likely to decrease.
Ans: C
Difficulty: Medium
Est time: <1 minute
5. Monetary policy changes in interest rates are said to have three effects over time. These
include:
A. the liquidity effect, the income effect and the inflation effect.
B. the liquidity effect, the crowding-out effect and the budgetary effect.
C. the inflation effect, the supply of bond effect and the economic growth effect.
D. the inflation effect, the demand effect for good and services and the income effect.
Ans: A
Difficulty: Medium
Est time: <1 minute
6. If a central bank decreases interest rates, then gradually:

A. the country's gross domestic product is likely to decrease.
B. foreign exchange rate is likely to appreciate.
C. demand for exported goods and services is likely to increase.
D. flows of investment funds into the country are likely to decrease.
Ans: D
Difficulty: Medium
Est time: <1 minute
7. If a central bank sells government securities as part of implementing monetary policy:
A. the liquidity in the financial system will increase.
B. interest rates are likely to increase.
C. spending in the economy is likely to increase.
D. the price of the currency is likely to depreciate.
Ans: B
Difficulty: Medium
Est time: <1 minute
8. A lower level of income in all sectors of the economy causes the demand for funds to _______
and the interest rate to _____.
A. increase; rise
B. decrease; fall
C. increase; fall
D. decrease; rise
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
9. A higher level of income in all sectors of the economy causes the demand for funds to
_______ and the interest rate to _____.
A. increase; rise
B. decrease; fall
C. increase; fall
D. decrease; rise
Ans: A
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
10. An increase in the prices of goods and services causes the demand for funds to _____ and
market interest rates should _______.
A. fall; increase
B. fall; decrease
C. rise; increase
D. rise; decrease
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
11. A decrease in the prices of goods and services causes the demand for funds to _____ and
market interest rates should _______.
A. fall; increase
B. fall; decrease
C. rise; increase
D. rise; decrease
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
12. When a change in monetary policy is implemented, the initial effect on interest rates is
generally the:
A. income effect.
B. liquidity effect.
C. expected inflation effect.
D. wealth effect.
Ans: B
Difficulty: Easy
Est time: <1 minute
13. When interest rates increase and normal cash holdings are decreased and invested in
securities, this is called:
A. consumption.
B. dishoarding.
C. reinvestment.
D. disintermediation.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
14. The Reserve Bank increases interest rates to reduce the level of spending in the economy. As
the rate of growth in economic activity slows, the demand for funds also slows. This impact of a
change in interest rates is described as the:
A. inflation effect.
B. liquidity effect.
C. income effect.
D. monetary effect.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
15. In relation to economic indicators, a leading indicator is:

A. one that provides same-time tracking of the level of economic activity.
B. one that measures from peak to peak of the business cycle.
C. an indicator such as unemployment data.
D. one that changes before changes in the business cycle.
Ans: D
Difficulty: Medium
Est time: <1 minute
16. In relation to economic indicators, a lagging indicator is:

A. an indicator that provides same-time tracking of the level of economic activity.
B. an indicator that changes after a change in the business cycle.
C. an indicator that measures from peak to peak of the business cycle.
D. an indicator that changes before changes in the business cycle.
Ans: B
Difficulty: Medium
Est time: <1 minute
17. Consider the following graphs:
Which of the following types of economic indicators do the above graphs depict?
A. Coincident indicator
B. Leading indicator
C. Price-index indicator
D. Lagging indicator
Ans: B
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
18. An economic indicator that tends to follow changes in the business cycle is a:
A. coincident indicator.
B. lagging indicator.
C. leading indicator.
D. secondary indicator.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
19. A monetary policy change in interest rates is said to have three effects over time. In relation
to the diagram, which effect/s could be said to dominate?
A. The liquidity effect dominates income and inflation effects.

B. The income and inflation effects dominate the liquidity effect.
C. The net effect of liquidity and income effects on interest rate is zero.
D. No causal effect can be observed from the diagram.
Ans: A
Bloom's: Communication
Difficulty: Hard
Est time: <1 minute
20. According to the loanable funds approach to interest rate determination, the demand curve
slopes downward because:
A. when interest rates are low, inflation is low.
B. the lower the interest rates, the greater the demand for funds.
C. the higher the interest rates, the greater the demand for funds.
D. the lower the interest rates, the smaller the demand for funds.
Ans: B
Difficulty: Medium
Est time: <1 minute
Learning Objective: 13.02 Explain the loanable funds approach to interest rate determination, highlighting variables that affect the
demand and supply for loanable funds. Consider the effects of changes in those variables on interest rate equilibrium.
Section: 13.02 The loanable funds approach to interest rate determination
Topic: The loanable funds approach to interest rate determination
21. 21. According to the loanable fund approach to interest rate determination, any increase in
expected inflation will have an impact on the following effects except:
A. an increased supply of bond relative to demand for bond, thus lead to lower bond prices,
hence increased interest rate.
B. an increased supply of bond relative to demand for bond, thus lead to bond supply curve shift
to the right, hence increased interest rate.
C. a reduced demand for bond relative to supply of bond, thus lead to bond demand curve to be
shifted to the left, hence increased interest rate.
D. an increased supply of bond relative to relative demand for bond, thus lead to lower bond
price, hence reduced interest rate.
Ans: D
Difficulty: Hard
Est time: <1 minute
22. According to the loanable funds approach to interest rate determination, the supply curve
slopes up because:
A. the lower the interest rates, the more loanable funds will be supplied.
B. higher interest rates reduce the inflation rate.
C. a rise in interest rates makes lenders more willing to supply funds.
D. when bond prices are high, more loanable funds will be supplied.
Ans: C
Difficulty: Easy
Est time: <1 minute
23. In the loanable funds approach to interest rate determination, if the business sector _____ its
demand for funds, then the demand curve would shift to the _____:
A. increase; to the left
B. increase; to the right
C. decrease; to the right
D. decrease; up
Ans: B
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
24. The term ‘loanable funds' refers to:

A. only those funds loaned to banks by the central bank.
B. only those funds loaned by one bank to another bank.
C. only those funds loaned to banks by the public.
D. all those funds changing hands between the lenders and borrowers in the financial markets.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
25. Which of the following determine(s) the level of interest rates?

i. The supply of savings by households and businesses
ii. The demand for investment funds
iii. The government's net supply of and/or demand for funds
A. i only
B. ii only
C. i and ii only
D. i, ii and iii
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
26. Under the loanable funds approach to explaining and forecasting interest rates, the concept of
dishoarding is introduced. Which of the following statements regarding dishoarding is correct?
A. Dishoarding will occur as interest rates rise.
B. Dishoarding will occur as interest rates fall.
C. Dishoarding will change the slope of the demand curve.
D. Dishoarding is caused by government budget deficits.
Ans: A
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
27. Which of the following would cause the quantity of loanable funds supplied to increase?
A. A decrease in inflationary pressures
B. An increase in inflationary pressures
C. An increase in interest rates
D. A decline in interest rates
Ans: C
Difficulty: Medium
Est time: <1 minute
28. All other things being equal, a decrease in the demand for loanable funds:
A. drives the interest rate up.
B. drives the interest rate down.
C. results from an increase in business circumstances and a decrease in the level of savings.
D. might not have any effect on the interest rate.
Ans: B
Difficulty: Medium
Est time: <1 minute
29. All else being equal, the demand curve for loanable funds may shift to the right (increase) as
a result of:
A. a fall in the supply of loanable funds.
B. expectations of a forthcoming recession.
C. technological improvements.
D. a fall in business prospects.
Ans: C
Difficulty: Medium
Est time: <1 minute
30. All else being equal, the demand curve for loanable funds may shift to the left (decrease) as a
result of:
A. an increase in the supply of loanable funds.
B. expectations of forthcoming economic growth.
C. an increase in the risk of bonds relative to other assets.
D. an improvement in business prospects.
Ans: C
Difficulty: Medium
Est time: <1 minute
31. All else being equal, the supply curve for loanable funds may shift to the left (decrease) as a
result of:
A. government borrowing.
B. expectations of an increase in inflation.
C. businesses borrowing to finance profitable investments.
D. an increase in corporate taxes.
Ans: D
Difficulty: Medium
Est time: <1 minute
32. Interest rates will fall when the demand curve for loanable funds:
A. shifts up.
B. shifts to the right.
C. is affected by poor growth prospects in the economy.
D. shifts sideways.
Ans: C
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
33. All else being equal, if a central bank buys government bonds from the market it would:
A. increase the money supply.
B. increase interest rates.
C. mean savings in the economy are likely to increase.
D. mean the supply of loanable funds would move to the left.
Ans: A
Difficulty: Easy
Est time: <1 minute
34. All else being equal, if a central bank sells government bonds from the market it would:
A. decrease interest rates.
B. decrease the money supply.
C. most likely decrease savings in the economy.
D. mean the supply of loanable funds would move to the right.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
35. Consider the following graph:
Using the loanable funds approach to interest rate determination, what does the curve in the
above graph represent?
A. Household sector supply of loanable funds
B. Business sector demand for loanable funds
C. Overseas sector and household sector supply of loanable funds
D. Government sector and business sector demand for loanable funds
Ans: D
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
36. If there is an excess demand for loanable funds at a given interest rate:
A. bond prices will increase.
B. bond prices will decrease.
C. the interest rate will rise.
D. bond prices may rise or fall, depending on the cause for excess funds.
Ans: B
AACSB: Analysis
Difficulty: Medium
Est time: <1 minute
37. If there is an excess supply of loanable funds at a given interest rate:
A. bond prices will increase.
B. bond prices will decrease.
C. the interest rate will rise.
D. bond prices may rise or fall, depending on the cause for excess funds.
Ans: A
Difficulty: Medium
Est time: <1 minute
38. If the equilibrium interest rate in the market is estimated to be 6 per cent, which of the
following is likely to occur if rates increase to 7 per cent?
A. The supply of funds shifts to the right.
B. The total supply of lending shifts to the right.
C. The quantity of funds supplied is greater than the quantity of funds demanded.
D. The quantity of funds demanded is greater than the quantity of funds supplied.
Ans: C
AACSB: Analysis
Difficulty: Easy
Est time: <1 minute
39. During a period of economic expansion, when expected profitability is high, the:
A. equilibrium price of bonds increases.
B. equilibrium interest rate falls.
C. supply curve for bonds shifts to the left.
D. demand curve for loanable funds shifts to the right.
Ans: D
AACSB: Analysis
Difficulty: Medium
Est time: <1 minute
40. If inflation is expected to increase, this may cause:
A. interest rates to rise.
B. the demand for loanable funds to fall.
C. the supply of loanable funds to increase.
D. interest rates to fall.
Ans: A
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
41. It is argued that one of the weaknesses of the loanable funds approach is that a final
equilibrium interest rate cannot be determined. Which of the following statements supports this
argument?
A. An equilibrium interest rate will affect savings at that level, which will affect the loanable
funds demand curve.
B. Dishoarding of loanable funds will continue for successive periods.
C. In the loanable funds approach, the supply and demand curves are interdependent.
D. Changes in the money supply in one period need to be matched in ensuing periods.
Ans: D
AACSB: Analysis
Difficulty: Medium
Est time: <1 minute
42. The term structure of interest rates is generally defined with respect to yields on which
securities?
A. Commercial paper
B. Corporate bonds
C. Government securities
D. State securities
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 13.03 Understand interest rate yields and the shape of various yield curves. Apply the expectations theory, the
segmented markets theory and the liquidity premium theory within the context of the term structure of interest rates.
Section: 13.03 The term structure of interest rates
Topic: The term structure of interest rates
43. Bonds with the same level default risk but different terms to maturity have different interest
rates. The relationship of interest rates on these bonds is called:
A. the term structure of interest rates.
B. the risk structure of interest rates.
C. the liquidity structure of interest rates.
D. the maturity structure of interest rates.
Ans: B
Difficulty: Medium
Est time: <1 minute
Learning Objective: 13.04 Explain the risk structure of interest rates, discuss the so-called risk-free interest rate and consider the
effect of default risk on interest rates.
Section: 13.04 The risk structure of interest rates
Topic: The risk structure of interest rates
44. The expression ‘term structure of interest rates':

A. reflects the differing tax treatment received by different securities.
B. represents the variation in yields for similar instruments differing in maturity.
C. always results in an upward-sloping yield curve.
D. generally results in a downward-sloping yield curve.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
45. _______ graphically represent the relationship between term to maturities and yield to
maturity.
A. Risk-return curves
B. Yield curves
C. Supply and demand curves
D. Total demand curves
Ans: B
AACSB: Analysis
Difficulty: Easy
Est time: <1 minute
46. The information in the table represents comparable yields for treasury securities with
different terms to maturity.
Term to maturity Yield (%) Security

1 year 2.5 Treasury
3 year 3.0 Treasury
5 year 4.0 Treasury
This information can be best described as the:

A. term structure of interest rates.
B. risk structure of interest rates.
C. default structure of interest rates.
D. liquidity structure of treasury bonds.
Ans: A
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
47. If the yields on short-term securities are higher than comparable long-term securities, the
yield curve will be:
A. level.
B. negative.
C. positive.
D. undefined.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
48. When a yield curve has a negative slope:

A. long-term yields are higher than short-term yields.
B. short-term yields are higher than long-term yields.
C. the money market is expecting default by issuers of bank bills.
D. the inflation rate is expected to rise.
Ans: B
AACSB: Analysis
Difficulty: Easy
Est time: <1 minute
49. The following monthly data of yields on five-year Treasury bonds comes from the Reserve
Bank Bulletin:
20xx/xx Jul. 7.65% Jan. 7.30%

Aug. 7.75% Feb. 7.15%
Sep. 7.80% Mar. 6.91%
Oct. 7.90% Apr. 6.80%
Nov. 7.75% May 6.65%
Dec. 7.50% Jun. 6.55%
What type of yield curve is indicated by the above data set?

A. Normal yield curve
B. Inverse yield curve
C. Humped yield curve
D. Variable yield curve
Ans: C
AACSB: Analysis
Bloom's: Analysis
Difficulty: Easy
Est time: <1 minute
50. A 10-year zero coupon T-bond with a face value of $10 000 sells for $6000, offering an
average yield of:
A. 5.24 per cent.
B. 6.67 per cent.
C. 66.6 per cent.
D. 14.00 per cent.
Ans: B
AACSB: Analysis
Bloom's: Analysis
Difficulty: Hard
51. When a yield curve has a positive slope:
A. long-term yields are higher than short-term yields.
B. short-term yields are higher than long-term yields.
C. the bond market is expecting default by bond issuers.
D. the inflation rate is expected to fall.
Ans: A
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
52. If the yields on short-term securities are the same as those for comparable long-term
securities, the yield curve will have a/an:
A. a zero slope.
B. negative slope.
C. positive slope.
D. undefined slope.
Ans: A
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
53. A yield curve where the market participants expect higher future rates of interest is:
A. downward-sloping.
B. upward-sloping.
C. flat.
D. inverse.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
54. The yield curve is flat and the central bank makes a substantial increase in the supply of
short-term government securities. According to the segmented markets approach, the result
should be:
A. a humped yield curve.
B. an inverse yield curve.
C. a usual yield curve.
D. a variable yield curve.
Ans: B
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
55. A yield curve where market participants expect lower future rates of interest is:
A. downward-sloping.
B. upward-sloping.
C. flat.
D. linear.
Ans: A
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
56. Using the expectations approach to the determination of interest rates, calculate the expected
interest rate on a one-year investment that will be available in 12 months’ time (E i ), given the 1 1
following data:
• current rate of return on a one-year-to-maturity ( i ) instrument is 3% per annum
0 1
• current rate of return on a two-year-to-maturity ( i ) instrument is 5% per annum (Formula:

0 2
E i = ( i * 2 ) − i ).
1 1 0 2 0 1
A. 7.00 per cent

B. 7.75 per cent
C. 6.75 per cent
D. 8.25 per cent
Ans: A
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
57. Using the expectations theory of term structure, a negatively sloped yield curve indicates that
investors expect:
A. falling long-term interest rates.
B. rising long-term interest rates.
C. falling short-term interest rates.
D. rising short-term interest rates.
Ans: C
Difficulty: Medium
Est time: <1 minute
58. Using the expectations theory of term structure, a positively sloped yield curve indicates that
investors expect:
A. falling long-term interest rates.
B. rising long-term interest rates.
C. short-term interest rates to be lower in the near future.
D. short-term interest rates to be higher in the near future.
Ans: D
Difficulty: Medium
Est time: <1 minute
59. Which of the following is NOT a hypothesis or theory used to explain the general shape of
the yield curve?
A. Expectations hypothesis
B. Liquidity premium hypothesis
C. Market segmentation theory
D. Capital markets theory
Ans: D
Difficulty: Medium
Est time: <1 minute
60. The yield curve theory that hypothesises that investors prefer short-term securities because of
the risk associated with longer term securities is the:
A. expectations hypothesis.
B. liquidity premium hypothesis.
C. market segmentation theory.
D. capital markets theory.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
61. Because long-term securities face greater risk of capital loss than do short-term securities,
investors generally:
A. pay a higher price for long-term securities.
B. require a higher yield on long-term securities.
C. require a lower yield on long-term securities.
D. stay away from long-term securities.
Ans: B
Difficulty: Medium
Est time: <1 minute
62. In an economic period of high inflation, the yield curve would most likely be:
A. upward-sloping.
B. downward-sloping.
C. flat.
D. more curved.
Ans: A
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
63. The yield curve most frequently observed over the years is:
A. positively sloped.
B. negatively sloped.
C. flat.
D. hump-backed.
Ans: A
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
64. The idea that a normal yield curve is most frequently observed can be explained by the
__________ theory/theories.
A. expectations
B. segmented
C. expectations and liquidity premium
D. segmented and liquidity premium
Ans: C
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
65. At any time, the shape and slope of the yield curve is affected by:
A. the demand and supply conditions in the various segments of the market.
B. inflationary expectations.
C. liquidity preferences.
Ans: D
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
66. In relation to the term structure of interest rates, the expectations theory assumes:
A. there are a large number of financial investors who hold heterogeneous expectations about
future interest rates.
B. investors need to take into account costly transactions as they change their expectations.
C. long-term rates paid bonds will be equal to the average of short-term interest rates expected to
prevail over the longer term period.
D. there is some impediment to market rates moving to equilibrium.
Ans: C
Difficulty: Medium
Est time: <1 minute
67. The expectations theory of term structure suggests that the:

A. yield curve should be upward-sloping.
B. yield curve should be downward-sloping.
C. shape of the yield curve reflects the risk premium incorporated into the yields on long-term
bonds.
D. shape of the yield curve depends on the expected future path of short-term interest rates.
Ans: D
Difficulty: Easy
Est time: <1 minute
68. According to the expectations theory of term structure, if market participants expect future
short-term rates to be higher than current short-term rates, the yield curve will:
A. be upward-sloping.
B. be downward-sloping.
C. be flat.
D. slope upward or downward or be flat, depending on risk and liquidity considerations.
Ans: A
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
69. According to the expectations theory of term structure, if next year's short-term interest rate
is expected to be higher than the current short-term rate, the:
A. current short-term rate will be equal to the current long-term rate.
B. current short-term rate will be higher than the current long-term rate.
C. current short-term rate will be lower than the current long-term rate.
D. yield curve will be downward-sloping.
Ans: C
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
70. According to the expectations theory of term structure, if next year's short-term interest rate
is expected to be lower than the current short-term rate, the:
A. current short-term rate will be equal to the current long-term rate.
B. current short-term rate will be higher than the current long-term rate.
C. current short-term rate will be lower than the current long-term rate.
D. yield curve will be upward-sloping.
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
71. The implication of the expectations theory that expected returns for a holding period must be
the same for bonds of different maturities depends on the assumption that:
A. yield curves normally slope downward.
B. yield curves normally slope upward.
C. instruments with different terms to maturity are perfect substitutes.
D. lenders are generally risk-averse.
Ans: C
AACSB: Analysis
Difficulty: Medium
Est time: <1 minute
72. The segmented markets theory rejects two of the assumptions of the expectations theory,
namely:
A. there are a large number of financial investors who hold homogeneous expectations about
future interest rates and no impediments to market rates moving to equilibrium.
B. there are no transactions costs and investors hold homogeneous expectations.
C. that investors are indifferent between short-term or long-term bonds and that all bonds are
perfect substitutes.
D. there is no impediment to market rates moving to equilibrium and the goal of investors is to
maximise their expected rate of return.
Ans: C
Difficulty: Medium
Est time: <1 minute
73. Using the pure expectations approach to the determination of interest rates, what is the shape
of the yield curve indicated in the following data?
( i ) 9.47% per annum

0 1

1 1

0 2
A. Humped yield curve

B. Inverse yield curve
C. Normal yield curve
D. Variable yield curve
Ans: B
AACSB: Analysis
Bloom's: Analysis
Difficulty: Easy
Est time: <1 minute
74. The segmented markets theory of term structure:
A. explains upward-sloping yield curves as a result of the demand for long-term bonds being
high, relative to the demand for short-term bonds.
B. explains upward-sloping yield curves as a result of the demand for long-term bonds being
low, relative to the demand for short-term bonds.
C. explains upward-sloping yield curves as a result of the favourable tax treatment of long-term
bonds.
D. is unable to explain upward-sloping yield curves.
Ans: B
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
75. Which of the following statements about segmented markets theory of term structure is
correct?
A. It assumes that lenders always lend for short periods.
B. It assumes that borrowers have particular periods for which they want to borrow.
C. It gives a good explanation of why yield curves usually slope upward.
D. It assumes that all bonds are perfect substitutes for each other.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
76. The segmented markets theory of term structure:

A. has difficulty explaining why yield curves are usually upward-sloping.
B. has difficulty explaining why yield curves are usually downward-sloping.
C. ignores the existence of market participants who seek to take advantage of price differences.
D. provides a good explanation of why yields on bonds of varying maturities tend to move
together.
Ans: C
Difficulty: Medium
Est time: <1 minute
77. The segmented markets theory for explaining the term structure of interest rates assumes
that:
A. bond prices and yields are positively related.
B. the yield curve is upward-sloping.
C. the yield curve is flat.
D. securities in different maturity ranges are not alternatives for one another.
Ans: D
Difficulty: Medium
Est time: <1 minute
78. The assumption that prices for short-term and long-term securities are determined in the
different maturity ranges is the basis for the _____ approach to explaining the term structure.
A. liquidity premium
B. expectations
C. segmented markets
D. yield curve
Ans: C
Difficulty: Easy
Est time: <1 minute
79. What is the most important contrast between the expectations theory and the segmented
markets theory?
A. The segmented markets theory states that investors view similar instruments that differ only
with respect to maturity as perfect substitutes.
B. The expectations theory states that investors view similar instruments that differ only with
respect to maturity as perfect substitutes.
C. The expectations theory does a better job of explaining why yield curves are usually upward-
sloping.
D. The segmented markets theory does a better job of explaining why the yields on bonds of
different maturities tend to move together.
Ans: B
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
80. To compensate for the uncertainty of future interest rates and the greater default risk for
longer term loans, the lender generally:
A. charges a higher rate of interest on long-term loans.
B. includes a very high number of restrictive debt provisions.
C. is entitled to change the terms of the loan at any time.
D. is entitled to demand repayment of the loan at any time.
Ans: A
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
81. The liquidity premium theory of the term structure assumes:

A. that interest rates on long-term bonds respond to supply and demand conditions for those
bonds.
B. investors have a preference for short-term bonds, as they have lower interest-rate risk.
C. that an average of expected short-term rates is an important component of interest rates on
long-term bonds.
Ans: D
Difficulty: Medium
Est time: <1 minute
82. The liquidity premium theory of the term structure proposes:

A. it is the relative supply and demand of securities in the various maturity ranges that
determines yields.
B. investors have a preference for short-term bonds, as they have greater liquidity.
C. longer-term bonds have less default risk.
D. longer-term bonds are less volatile in price.
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
83. Support for the addition of a liquidity premium to the expectations theory is derived from:
A. the slope of the observed normal yield curve is steeper than that of expectation theory.
B. the slope of the observed normal yield curve is flatter than that of expectation theory.
C. the liquidity premium decreases over time.
D. in times of tight monetary policy an inverse yield curve becomes more inverse.
Ans: A
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
84. If the yield curve is observed to be flat, according to the liquidity premium theory, this
indicates that the market is predicting:
A. a small rise in short-term rates in the near future and a small decline further out in the future.
B. constant short-term interest rates in the near future, and further out in the future.
C. a small decline in short-term interest rates in the near future, continuing to decline slowly
further out in the future.
D. constant short-term interest rates in the near future and a small decline further out in the
future.
Ans: C
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
85. The risk structure of interest rates refers to the:

A. amount of extra interest necessary to compensate investors for the greater default risk of some
bonds.
B. relationship among the interest rates on bonds with the same maturity.
C. relationship among the interest rates on similar bonds with different maturities.
D. amount of extra interest needed to compensate investors for the lesser liquidity of some
bonds.
Ans: B
Difficulty: Medium
Est time: <1 minute
86. Generally, an increase in default risk will result in a/an _______ required return or interest
rate.
A. lower
B. higher
C. unaltered
D. undetermined
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
87. As a factor explaining yield differences between Australian Treasury bonds, default risk is:
A. important, but other factors such as market risk are more crucial.
B. always an important factor.
C. rarely important.
D. never an issue.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
88. In relation to the risk structure of interest rates:

A. the yield on a BBB rated bonds is higher than an AA-rated bond.
B. the risk premium of borrowers may vary over time.
C. the government bonds are assumed to be the benchmark rate.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
89. Other things being equal, an increase in the default risk of corporate bonds shifts the demand
curve for corporate bonds to the ________ and the demand curve for Treasury bonds to the
________.
A. right; right
B. right; left
C. left; right
D. left; left
Ans: C
Difficulty: Medium
Est time: <1 minute
90. For debt instruments, if interest rates increase:

A. prices of long-term bonds will increase more than short-term bonds.
B. prices of short-term bonds will increase more than long-term bonds.
C. the coupons of long-term bonds will increase more than short-term bonds.
D. coupons of long-term bonds will increase more than short-term bonds.
Ans: A
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
91. Unsecured notes are generally:

A. more risky than debentures.
B. less risky than Treasury bonds.
C. less risky than Treasury notes.
D. less risky than commercial paper.
Ans: A
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
92. During periods of economic recession, it is probable that the risk premium gaps for different
corporate borrowers will:
A. decrease.
B. increase.
D. widen.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
93.
Using the pure expectations approach to the determination of interest rates, calculate the
expected (E) rate of interest of a one-year investment that will be available in 12 months' time
( i ), given the following data:
1 1
• current rate of return on a one-year-to-maturity ( i ) instrument: 7.75% per annum

0 1
• current rate of return on a two-year maturity ( i ) instrument: 8.25% per annum.

0 2
A. 7.75% per annum

B. 8.25% per annum
C. 8.75% per annum
D. 9.25% per annum
Ans: C
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
Learning Objective: 13.05 Apply calculations used to forecast interest rates based on the assumptions of the expectations theory.
Topic: The expectations theory
94.
Using the pure expectations approach to the determination of interest rates, calculate the
expected (E) rate of interest of a two-year investment that will be available in 12 months’ time
( i ), given the following data:
1 3
• current rate of return on a one-year-to-maturity ( i ) instrument: 7.75% per annum

0 1
• current rate of return on a two-year maturity ( i ) instrument: 8.25% per annum

0 2
• current rate of return on a three-year maturity ( i ) instrument: 8.65% per annum.

0 3
A. 8.35% per annum

B. 9.10% per annum
C. 9.56% per annum
D. 19.03% per annum
Ans: B
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
95. If investors are not indifferent to whether they hold long-term or short-term securities, and
need a liquidity premium to hold longer term securities, an investor who needs a liquidity
premium of 0.25% per annum will expect to receive _______ on a two-year investment, given
the following data:
(i)
0 1 8.46% per annum
(E i )
1 1 8.55% per annum
A. 8.51% per annum

B. 8.63% per annum
C. 8.80% per annum
D. 8.88% per annum
Ans: B
AACSB: Analysis
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute
96. _____ is an example of a leading indicator, while _____ is an example of a lagging indicator.
A. The unemployment rate; non-farm payroll data
B. Industrial production; housing loan approvals data
C. Non-farm payroll data; industrial production
D. Housing loan approvals data; unemployment rate
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
97. When the public expects an increase of the inflation rate the demand for loanable funds
_____ and the supply of loanable funds _____.
A. increases; increases
B. increases; decreases
C. decreases; increases
D. decreases; decreases
Ans: B
Difficulty: Medium
Est time: <1 minute
98. The pure expectations theory assumes:

A. investors prefer lending / investing for longer periods.
B. investors prefer lending / investing for shorter periods.
C. investors do not have a preference regarding time to maturity.
D. longer-term bonds are more risky than shorter-term bonds.
Ans: C
Difficulty: Easy
Est time: <1 minute
99. According to the pure expectations theory an upward-sloping yield curve reflects a:
A. preference for investing long-term over short-term.
B. preference for investing short-term over long-term.
C. belief that short-term interest rates are likely to increase.
D. belief that short-term interest rates are likely to decrease.
Ans: C
Difficulty: Medium
Est time: <1 minute
100. Liquidity premium theory (by itself) can explain:

A. a humped yield curve.
B. an inverse yield curve.
C. an upward-sloping yield curve.
D. a flat yield curve.
Ans: C
Difficulty: Medium
Est time: <1 minute
101. According to the expectations theory, if the current three year rate is 3 per cent and the
current four-year rate is 4 per cent, then the expected one-year rate three years from now should
be about:
A. 4 per cent.
B. 5 per cent.
C. 6 per cent.
D. 7 per cent.
Ans: D
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
102. The transmission of monetary policy moves in the following order:

A. open market operations, inflation rate, cash rate.
B. inflation rate, cash rate, open market operations.
C. open market operations, cash rate, inflation rate.
D. cash rate, inflation rate, open market operations.
Ans: C
Difficulty: Medium
103. If the current account of the balance of payments of a country is significantly in deficit, the
central bank will generally lower interest rates in order to help borrowers with their interest rate
costs.
Ans: False
Feedback: A central bank will generally increase interest rates if the current account is
significantly in deficit.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
104. The central bank such as the Reserve Bank of Australia is normally responsible for the
determination and implementation of the country’s monetary policy. Current monetary policy in
a number of countries is principally directed towards containing inflation within a specified
target range.
Ans: True
Feedback: One of the major objectives of monetary policy is to maintain inflation level within
the range 2–3 per cent. If inflation goes beyond this range, the Reserve Bank will initiate a
number of actions including conducting open market operation by buying and selling CGSs to
influence interest rates.
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
105. Unfortunately, economic indicators don't provide clear and unambiguous messages about
the future direction of economic activity and growth.
Ans: True
Feedback: Often releases of new data or information present conflicting indications.
Difficulty: Medium
Est time: <1 minute
106. Liquidity premium theory assumes that bonds of different maturities are substitutes, but are
not perfect substitutes.
Ans: True
Feedback: Based on liquid premium theory, investors prefer short rather than long bonds, thus
investors must be paid a positive term premium, L, to hold long-term bonds.
Bloom's: Knowledge
Difficulty: Medium
107. The liquidity effect of expansionary monetary policy is likely to see interest rates fall in the
first place but as the pace of economic activity increases the income effect is likely to result in a
rise in the interest rates in the market.
Ans: True
Feedback: Money market operations such as direct buying of government securities affect the
money supply and level of liquidity in the financial system.
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
108. According to the loanable funds approach, the supply of loanable funds is derived from the
government sector and the business sector.
Ans: False
Feedback: Supply is from the household sector, changes in money supply and dishoarding.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
109. An increase in interest rates is likely to result in a permanent, higher level of hoarding.
Ans: False
Feedback: An increase in interest rates is likely to result in a higher level of dishoarding.
AACSB: Analysis
Difficulty: Medium
Est time: <1 minute
110. The term structure of interest rates describes how interest rates move over time.
Ans: False
Feedback: It is the relationship between interest rates and term to maturity for debt instruments
in the same risk class.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
111. When yield curves are downward-sloping, long-term interest rates are above short-term
interest rates.
Ans: False
Feedback: When yield curves are downward-sloping, short-term interest rates are above long-
term interest rates.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
112. According to expectations theory of term structure, a normal curve will result from
expectations that future short-term rates will be higher than current short-term rates.
Ans: True
Feedback: According to this theory since the market believes that future short-term rates will be
higher than current short-term rates, the yield curve will be upward-sloping.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
113. According to the liquidity premium theory of term structure, a mildly upward-sloping yield
curve suggests the market is predicting constant short-term interest rates.
Ans: True
Feedback: A liquidity premium is suggested to change the slope so that if the market is
predicting little change, once liquidity premium is added, the slope appears mildly upward-
sloping.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
114. The risk structure of interest rates describes the relationship between interest rates of
different bonds with the same maturity.
Ans: True
Feedback: Securities issued by different borrowers will have different levels of risk such as
default risk. The yields offered by them will differ in their margin above the risk-free rate of
government bonds.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
115. Discuss when a central bank will generally increase interest rates.
Ans: After forming economic variables such as balance of payments and a view on the desired
level of economic activity and employment, a central bank will generally increase interest rates
for some of the following: if the rate of inflation over the business cycle is outside its target
range; if the rate of growth in gross domestic product is too high; if the current account of the
balance of payments is significantly in deficit; if credit growth and associated debt levels are
growing too rapidly; or if the currency is under excessive downward pressure in the foreign
exchange markets.
Bloom's: Synthesis
Difficulty: Medium
116. Discuss the difficulties a central bank faces in trying to forecast how liquidity, income and
inflation effects in relation to interest rates will be affected by interest rate changes.
Ans: One of the problems is that often releases of new information or data on the state of the
economy present conflicting indications, with some data indicating a slowdown while other data
suggesting that the economy is still growing. With different sectors of the economy often
experiencing different growth patterns, the problem is compounded.
Difficulty: Hard
117. Interest rates are commonly observed to be pro-cycle. Using both the loanable fund
approach and liquidity preference theory approaches to interest rate determination, show that
interest rates are pro-cyclical. Provide both a graph and an explanation.
Ans: Loanable fund approach to interest rate determination
`
As the economy expands, firms’ growth opportunities improve, and so does the funding
requirement to finance growth opportunities. Firms tend to issue more debt securities (supply of
bonds). With an improved economic outlook, the income prospect for investors improves.
Investors tend to replace investment opportunities by buying bonds issued by firms. If overall
bonds supply by firms exceeds bonds demand by investors, there is potential for the bonds’ price
to decline, thus increasing the yields for bond holders.
Liquidity preference approach to interest rate determination
Within the liquidity preference framework, when the economy booms, the demand for money
increases: people need more money to carry out an increased amount of transactions and because
their wealth has risen. The demand curve, Md, thus shifts to the right, raising the equilibrium
interest rate. When the economy enters a recession, the opposite occurs (i.e. the demand for
money falls and the demand curve shifts to the left, which results in the lowering of the
equilibrium interest).
Difficulty: Hard
118. Define and discuss briefly the three common types of economic indicators.
Ans: Economic indicators are often divided into: leading indicators that change before changes
in the trend in the level of economic activity, coincident indicators that provide same-time
tracking of the level of economic activity and lagging indicators that change after a change in the
business cycle. However, as no single indicator is constantly in one category, numerous
indicators are analysed by market participants.
Bloom's: Knowledge
119. In the context of the loanable funds theory, discuss the sectors that have a demand for funds
in relation to demand and supply curves.
Ans: The two sectors of the overall economy that demand funds are the businesses that demand
funds for short-term working capital and for longer-term investment. The second sector is the
government that demands funds for intra-year liquidity and for the case of a budget deficit.
Bloom's: Knowledge
120. In the context of the loanable funds theory, discuss the sectors that supply funds in relation
to demand and supply curves.
Ans: Sources of funds are the savings of the household sector that are relatively insensitive to
increases in interest rates, changes in the money supply through actions of a central bank and the
proportion of total savings in an economy held as currency that changes with interest rates. For
example, when interest rates increase there is the incentive to buy more securities to obtain the
increased yields, so decreasing the amount of currency holdings.
Bloom's: Knowledge
121. Explain why an expansionary monetary policy lowers interest rates initially, but raises them
eventually. That is, in the long run expansionary monetary policy leads to high interest rates.
Ans: An expansionary policy increases the money supply (supply of funds) causing an excess
supply of funds. People wish to lend out more than they wish to borrow at the existing interest
rate. Accordingly the interest rate is pressured downwards. This is the liquidity effect and it
typically dominates initially. Later, with lower interest rates, spending picks up and incomes rise.
This will lead to an increased desire to borrow funds and an increased desire to hold cash, as
anticipated spending has increased. Now the interest rate is pushed up. At some point the
increased spending bids up prices. With actual and anticipated inflation increasing, supply of
loanable funds falls and demand for loanable funds increases. This is the Fisher effect. Interest
rates increase, reflecting the expected fall in the purchasing power of future money.
Difficulty: Hard
122. Assume that both the liquidity premium theory and the expectations theory have about
equal weight in explaining the term structure of interest rates. Put the segmented market theory
to the side. What does a flat yield curve imply about future interest rates?
Ans: Liquidity premium theory indicates that the yield curve should be upward sloping. If the
actual yield curve is flat then the other factor, the expectations theory, is offsetting the impact of
the liquidity premium. This means that the expectations theory posits a downward-sloping yield
curve, which tells us that the market expects the future short-term interest rate to fall.
Difficulty: Hard
1. The importance of the foreign exchange market is best described in the following statement/s.
A. Banks’ borrowings from off-shore markets are usually converted into home-based currency.
B. The payment of interest and principal needs to be made in the denominated currency of the
loan.
C. Banks’ major sources of funding come from off-shore markets.
Ans: D
AACSB: Analysis
Difficulty: Easy
Est time: <1 minute
Learning Objective: 15.01 Understand the nature, size and scope of the global FX markets and the main exchange rate regimes
used by different countries.
Topic: The structure and operation of the FX market
2. Most foreign exchange transactions are conducted:

A. by governments.
B. by tourists.
C. in the FX over-the-counter markets.
D. on the Australian Securities Exchange.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Topic: Introduction to the structure and operation of the FX market
3. The following types of FX market transactions are common except:

A. spot transactions—where the exchange rate is determined today but delivery occurs in two
business days.
B. forward transactions—where the FX contract value date occurs at a specified date beyond the
spot date and the exchange rate is set today and delivered in the specified future date.
C. tod transactions—an FX contract with settlement and delivery today.
D. forex market transactions settled on the same day.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 15.02 Identify and discuss the major groups of participants in the FX markets.
Topic: Foreign exchange market participants
4. The institutions that transact between the foreign exchange (FX) dealers in banks and act as
principals in the FX market are called the:
A. foreign-currency dealer houses.
B. currency syndicates.
C. foreign-exchange brokers.
D. inter-bank currency clearinghouses.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
5. A large international organisation representing the central banks of the major developed
countries is called:
A. the OECD.
B. the ECB.
C. Bank for International Settlements.
D. the World Trade Organization.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
6. There are risks involved in the FX market. Which of the following scenarios does NOT
describe the risk exposure faced by market participants?
A. The value of a particular currency will move in the opposite direction to that anticipated.
B. The value of a particular currency will move in an anticipated direction, but less than
expected.
C. Unanticipated changes in the value of one currency relative other currency results a
significant loss to investment returns.
D. the value of a particular currency moves certain way as expected because the currency has
been managed by a central bank such as Reserve Bank of Australia.
Ans: D
Difficulty: Medium
Est time: <1 minute
Learning Objective: 15.03 Describe the functions and operations of the FX markets.
Section: 15.03 The operation of the FX market
7. Currently, the largest FX centre is in:

A. New York.
B. London.
C. Hong Kong.
D. Tokyo.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
8. All of the following are primary centres of foreign exchange trading except:
A. London.
B. New York.
C. Munich.
D. Tokyo.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
9. Which of the following about global FX markets is NOT correct?

A. Trading in FX is conducted using telephones and computer–based technological systems.
B. New York is the largest FX market.
C. The Bank for International Settlements estimates turnover in excess of USD 4000 billion.
D. A free float FX regime is one where the exchange rate moves according to the forces of
supply and demand.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Section: 15.01 Exchange rate regimes
Topic: Exchange rate regimes
10. If the value of a currency is determined by market forces, this is regarded as a:

A. partial floating regime.
B. floating rate regime.
C. managed floating regime.
D. crawling peg regime.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
11. If the value of a currency moves within a defined band, relative to another major currency
this is a:
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
12. An exchange rate regime that allows the currency to appreciate gradually over time but
within a specified limited band set by government is a:
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
13. The exchange rate where the value of the pegged currency is tied into the value of another
currency or basket of currencies is a:
A. crawling peg regime.
D. linked exchange rate regime.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
14. A managed float exchange rate regime is one which limits exchange rate movements within a
band that is set by:
A. the major banks.
B. the central bank.
C. government legislation.
D. the major FX traders.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
15. A floating exchange rate regime is one:

A. which limits exchange rate movements within a band that is set by the major banks.
B. which limits exchange rate movements within a band that is set by the central bank.
C. exchange rate for a currency is allowed to move as factors of supply and demand dictate.
D. which limits exchange rate movements within a band that is set by the major FX traders.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
16. Foreign exchange brokers:

A. quote two-way prices at which they are willing to buy and sell at.
B. in Australia require an authority from the central bank to operate.
C. arbitrage price differences between the various FX markets.
D. seek out the best exchange rates and deal mostly with FX dealers.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Section: 15.02 Foreign exchange market participants
17. The foreign exchange participant who quotes prices at which they are prepared to buy and
sell foreign currencies is a:
A. foreign exchange broker.
B. foreign exchange arbitrageur.
C. foreign exchange dealer.
D. foreign exchange adviser.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
18. Foreign exchange market participants who seek out the best FX rates in the markets and
match the buy and sell orders for a fee are called:
A. FX dealers.
B. FX brokers.
C. FX arbitrageurs.
D. FX day traders.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
19. The financial institutions that quote buy and sell prices and act as principals in the FX
markets are called:
A. FX brokers.
B. FX dealers.
C. FX arbitrageurs.
D. FX day traders.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
20. Foreign exchange dealers quote _________ at which they are prepared to deal in foreign
currency.
A. ask prices
B. two-way prices
C. bid prices
D. margin prices
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
21. The dealer quotes of a buy and a sell price on an FX currency are called:
A. arbitrage quotes.
B. two-way prices.
C. dealer spreads.
D. term quotes.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
22. Which of the following market participants tend to keep exchange rates the same in all the
world markets?
A. Forward markets
B. Foreign exchange counter trades
C. Futures markets
D. Arbitrageurs
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
23. The FX party that conducts buy and sell transactions in two or more markets simultaneously
to take advantage of price differentials is called a/an:
A. FX broker.
B. FX arbitrageur.
C. FX dealer.
D. FX agent.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
24. The central bank resources made up of foreign currencies, gold and international drawing
rights are called:
A. central bank capital.
B. official reserve assets.
C. central bank floats.
D. official bank assets.
Ans: B
Difficulty: Easy
Est time: <1 minute
25. If the value of a currency is influenced by a central bank that intervenes from time to time in
the foreign exchange market, this is regarded as a:
A. partial float.
B. clean float.
C. dirty float.
D. soft float.
Ans: C
Difficulty: Medium
Est time: <1 minute
26. If a FX dealer buys USD from a client and holds USD on its own account on the expectation
of the USD rising in value in the near future, it is taking a:
A. a hold position in the USD.
B. a long position in the USD.
C. a short position in the USD.
D. forward position in the USD.
Ans: B
AACSB: Analysis
Difficulty: Medium
Est time: <1 minute
27. If a FX speculator sells USD that the speculator currently does not hold the speculator has
entered into a:
A. a hold position in the USD.
B. a long position in the USD.
C. a short position in the USD.
D. forward position in the USD.
Ans: C
Difficulty: Medium
Est time: <1 minute
28. The holding of foreign currency in the hope of a future sale is called a/an:
A. arbitrage position.
B. long position.
C. short position.
D. selling position.
Ans: B
Difficulty: Medium
Est time: <1 minute
29. An Australian company has received USD in payment for goods exported. At the time of
receiving the USD, the exchange rate is quoted as AUD/USD 0.5650. Rather than immediately
converting the USD into AUD, the company decides to ‘speculate' on a favourable movement in
the exchange rate. In ‘today + n days' the exchange rate is AUD/USD 0.5750. Which of the
following statements is correct?
A. The company has taken a ‘long' position in the USD.
B. The exporter company has made a loss on its FX position.
C. The opportunity cost of interest forgone will affect the profitability of the FX position.
Ans: D
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
30. For a floating exchange rate regime, if a central bank does not intervene to influence the
currency this is called a:
A. partial float.
B. clean float.
C. dirty float.
D. hard float.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
31. Which of the following statements about the foreign exchange markets is NOT correct?
A. Much of the trading volume in the FX markets can be described as speculative transactions.
B. Most foreign-exchange trading takes place in London.
C. The FX markets are over-the-counter markets.
D. Trading volume worldwide exceeds USD 4000 billion per day.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
32. If the Australian central bank wished to cause the AUD to appreciate, it would _______
AUD and _______ foreign currency.
A. buy; sell
B. sell; sell
C. sell; buy
D. buy; buy
Ans: A
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
33. If the Australian central bank wished to cause the AUD to _______, it would _______ AUD
and _______ foreign currency.
A. depreciate; buy; sell
B. appreciate; sell; buy
C. depreciate; sell; buy
D. appreciate; buy; buy
Ans: C
Difficulty: Easy
Est time: <1 minute
34. A/An _______ position is when an FX dealer enters into a forward contract to sell FX that is
not held at that time.
A. arbitrage
B. long
C. short
D. dirty
Ans: C
Difficulty: Easy
Est time: <1 minute
35. If differences occur for FX rates between three or more currencies, FX dealers may perform:
A. locational arbitrage.
B. triangular arbitrage.
C. cross arbitrage.
D. speculative arbitrage.
Ans: B
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
36. Given the following rates, what arbitrage profit may be made with respect to the Australian
dollar?
USD 1 = AUD 1.70
USD 1 = SGD 1.70
AUD 1 = SGD 0.96
A. 0.1753 cents
B. 0.5882 cents
C. 1.7526 cents
D. 5.882 cents
Ans: C
AACSB: Analysis
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute
37. Foreign exchange dealers are regarded as forming a/an __________ market.
A. regulated and organised
B. over-the-counter
C. auction
D. exclusively broker
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Topic: The operation of the FX market
38. Which one of the following statements is correct for FX market trading?
A. It stops after the London markets have closed.
B. It is restricted to the hours that the Australian banks are open.
C. It takes place at any hour of the night or day.
D. It stops after the London and New York markets have closed.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
39. Which of the following statements in relation to the operation of the FX market is NOT
correct?
A. A corporation will generally need to sell foreign currency when it borrows funds from
overseas capital markets for use in its own domestic operations.
B. The main trading floor of the Australian FX market is located in Sydney, with subsidiary
branches in other main cities.
C. The Reserve Bank may conduct FX transactions in order to change the composition of its
‘official reserve assets'.
D. ‘Dealers' in the Australian FX market use global electronic networks such as Bloomberg and
Reuters.
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
40. The _______ is the price at which Australian dollars can be converted into another currency.
A. direct exchange rate
B. spot exchange rate
C. exchange rate between AUD and a foreign currency
D. forward exchange rate
Ans: C
Difficulty: Easy
Est time: <1 minute
Learning Objective: 15.04 List and explain the types of FX transactions, in particular spot and forward transactions.
Section: 15.04 Spot and forward transactions
Topic: Spot and forward transactions
41. For currency transactions, the spot exchange rate is the rate _______, and the forward
exchange rate is the rate _______.
A. on that day; today
B. at some specified future date; today
C. today; on that date
D. on that date; at some specified future date
Ans: D
Difficulty: Easy
Est time: <1 minute
42. In the FX markets, the spot exchange rate can be defined as the:
A. exchange rate that is settled within two business days.
B. exchange rate that is settled within five working days.
C. direct exchange rate.
D. exchange rate between two currencies.
Ans: A
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
43. In the FX markets a forward transaction refers to the:

A. spot rate.
B. exchange rate that is determined at a specified date beyond the spot rate.
C. exchange rate that is specified now, but with delivery and payment at some predetermined
future date.
D. upper limit of a currency bid-ask spread.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
44. It is Tuesday, 27 March 201X, and an Australian importing company has to pay a US
exporter USD 75 000 within the next six weeks. The company enters into a forward exchange
contract with an FX dealer for ‘one month forward delivery' of USD. On what date will value
settlement occur?
A. 29 March 201X
B. 27 April 201X
C. 29 April 201X
D. 30 April 201X
Ans: D
AACSB: Analysis
Difficulty: Medium
Est time: <1 minute
45. The first currency mentioned in an FX quote is called the:

A. basis currency.
B. base currency.
C. root currency.
D. terms currency.
Ans: B
AACSB: Analysis
Difficulty: Easy
Est time: <1 minute
Learning Objective: 15.05 Introduce the conventions adopted for the quotation and calculation of spot exchange rates.
Section: 15.05 Spot market quotations
Topic: Spot market quotations
46. The second currency named in an FX quote is called the:

A. basis currency.
B. base currency.
C. unit currency.
D. terms currency.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
47. A difference arises between the bid and offer rates of foreign currency because:
A. the rates are between different dealer banks.
B. of arbitrage opportunities between currencies.
C. foreign exchange dealers need to earn income.
D. it takes time to replace buyers or sellers of foreign currency.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
48. In general, high value transactions _______ the foreign exchange dealer's bid-offer spread.
A. have no impact on
B. increase
C. widen
D. narrow
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
49. In general, the foreign exchange dealer's bid ask spread _______ as liquidity in dealers
market improves.
A. is not concerned
B. increases
C. decreases
D. narrows
Ans: D
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
50. In general, the spread for retail transactions is:

A. quite narrow, about 10 points.
B. in the range of 20 to 30 points.
C. in the range of 10 to 20 points.
D. in excess of 50 points.
Ans: D
Difficulty: Medium
Est time: <1 minute
51. In general, the foreign exchange dealer's bid-offer spread _______ with increased volatility
of FX.
A. is not concerned
B. decreases
C. widens
D. narrows
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
52. For a FX quote of AUD/GBP0.6250-53 has a spread of:

A. 250 points.
B. 50 points.
C. 53 points.
D. 3 points.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
53. If a British car sells for £20 000 and the British pound is worth A$2.75, the Australian dollar
price of the car is:
A. $13 333.
B. $30 000.
C. $55 000.
D. $133 333.
Ans: C
AACSB: Analysis
Bloom's: Analysis
Difficulty: Easy
Est time: <1 minute
54. Calculate the current exchange rate EUR/JPY, given these two quotes:
USD/EUR 0.9780-90
USD/JPY 119.20-30
A. EUR/JPY 116.57-79
B. EUR/JPY 116.67-70
C. EUR/JPY 121.86-88
D. EUR/JPY 121.76-98
Ans: D
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
55. Calculate the current exchange rate GBP/JPY, given these two quotes:
USD/JPY 114.20-30
GBP/USD 1.6750-60
A. GBP/JPY 190.71-88
B. GBP/JPY 191.29-57
C. GBP/JPY 191.40-45
D. GBP/JPY 192.07-24
Ans: B
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
56. An Australian company exports to Japan and generates receipts in JPY. The same company
also imports goods and services from the United States, incurring commitments in USD. The
company needs to determine the AUD/JPY cross rate. Rates are quoted at:
USD/JPY 104.23–46
AUD/USD 0.7546–56.
Which rate is correct?
A. AUD/JPY 78.65–93
B. AUD/JPY 78.93–65
C. JPY/AUD 78.65-93
D. JPY/AUD 78.93-65
Ans: A
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
57. Calculate the current exchange rate AUD/GBP, given these two quotes:
AUD/USD 0.5640-50
GBP/USD 1.5850-60
A. AUD/GBP 0.3558-62
B. AUD/GBP 0.3556-65
C. AUD/GBP 0.8945-55
D. AUD/GBP 0.8939-45
Ans: B
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
58. For spot transactions, the FX contract value date is:

A. that day.
B. one business day from the day of the transaction.
C. two business days from the day of the transaction.
D. three business days from the day of the transaction.
Ans: C
AACSB: Analysis
Bloom's: Analysis
Difficulty: Easy
Est time: <1 minute
59. The convention in the FX markets is that the second-named currency in a FX quote that is
used to express the value is:
A. direct currency.
B. indirect currency.
C. terms currency.
D. unit of the quotation.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
60. The convention in the FX markets is the first-named currency in a FX quote is:
A. direct currency.
C. terms currency.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
61. The convention in the FX markets is the currency on the left-hand side of a quote is:
A. direct currency.
C. terms currency.
D. base currency.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
62. The convention in the FX markets is for the first currency mentioned in a FX quote is:
A. direct currency.
C. terms currency.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
63. An Australian export company wishes to sell its euro receipts, EUR 500 000, through an FX
dealer and receives the following quote: ‘Aussie mark spot is one-twenty-two fifty-five to sixty-
five'. What is the value of the export receipt?
A. $407 664.09
B. $407 996.74
C. $612 750.00
D. $613 250.00
Ans: A
AACSB: Analysis
Bloom's: Analysis
Difficulty: Easy
Est time: <1 minute
64. A company treasurer has received the following foreign exchange quote from an FX dealer:
AUD/USD 0.5655-60. For the financial report to the board of directors, the treasurer is required
to ensure the USD is the unit of the quotation. Which exchange rate quotation will the treasurer
include in the report?
A. AUD/USD 0.5655-60
B. USD/AUD 1.7668-83
C. AUD/USD 0.5660-55
D. USD/AUD 1.7683-68
Ans: B
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
65. The _______ quote is the number of units of foreign currency an Australian FX dealer is
willing to give, in order to buy the unit of the quotation, that of AUD 1.
A. direct
B. indirect
C. bid
D. offer
Ans: C
AACSB: Analysis
Difficulty: Easy
Est time: <1 minute
66. The _______ quote is the number of units of foreign currency an Australian FX dealer is
willing to take, in order to buy the unit of the quotation, that of AUD 1.
A. direct
B. indirect
C. bid
D. offer
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
67. In the FX markets a/an _____ quote is where the USD is the base currency.
A. cross-rate
B. direct
C. American
D. indirect
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
68. Generally foreign currencies are quoted against USD. In relation to direct, indirect and cross-
quotation quotations, which one of the following statements is NOT correct?
A. For a direct quote, the USD is the base currency and the foreign currency is the term currency.
B. For an indirect quote, the foreign currency is the base currency and the USD is the term
currency.
C. For a cross-quote between two currencies, neither currency is the USD.
D. For an indirect quote, the foreign currency is the term currency and the USD is the base
currency.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
69. Which statement is correct for a bid and ask quote?

A. The bid is the price at which a dealer will buy another currency.
B. The ask or offer is the price at which a dealer will sell another currency.
C. Irrespective of the market condition at a particular point in time, the bid price remains lower
than ask price.
D. The bid price can be higher than the ask during an up market where demand for a currency is
higher than supply relative to other currency.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
70. In the FX markets a/an _____ quote is where the USD is the terms currency and the other
currency is the unit of the quotation.
A. cross rate
B. direct
C. American
D. indirect
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
71. An indirect exchange rate can be converted to a direct exchange rate by:
A. dividing the indirect rate by 100.
B. multiplying the indirect rate by the spot rate.
C. dividing the indirect rate by the number of US dollars required to purchase one unit of the
terms' currency.
D. transposing the indirect rate.
Ans: D
AACSB: Analysis
Difficulty: Easy
Est time: <1 minute
72. If it takes 1.25 euros to buy 1 US dollar, the direct quote for the exchange rate is:
A. USD/EURO 0.25
B. EURO/USD 0.8
C. EURO/USD 1.00
D. USD/EURO 1.25
Ans: D
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
73. A student researching the AUD/USD exchange rate on a particular day is confused to replace
the following two quotations:
i. AUD/USD 0.5825-30
ii. USD/AUD 1.7152-67
Which of the following statements is correct?
A. Quote i is the convention adopted in Australia and is a direct quote
B. Quote ii is the convention adopted in Australia and is a direct quote.
C. Quote i is the convention adopted in Australia and is an indirect quote.
D. Quote ii is the convention adopted in Australia and is an indirect quote.
Ans: C
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
74. For the Aussie/euro spot rate (AUD/EUR 1.8088-1.8098), the percentage spread is:
A. 1bsp
B. 5.5 bsp
C. 10 bsp
Ans: B
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
75. When a smaller amount of a foreign currency is required to buy the Australian dollar, the
currency is said to have _______ with respect to the dollar.
A. appreciated
B. consolidated
C. depreciated
D. remained fixed
Ans: A
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
76. An Australian company is to export electronic equipment into Europe, in particular Germany
and Sweden, and needs to consider the exchange rate implications of conducting business in
euros and Swedish kroner. Spot rates quoted are:
USD/EUR 0.9275-85
USD/SEK 8.4531-41
Calculate the EUR/SEK cross-rate.
A. EUR/SEK 0.1097–0.1098
B. EUR/SEK 9.1139–9.1051
C. EUR/SEK 9.1051–9.1139
D. EUR/SEK 9.1040–9.1149
Ans: D
AACSB: Analysis
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute
77. The difference between the spot rate and the forward rate quotation is the:
A. exchange rate arbitrage.
B. forward points.
C. interest rate parity.
D. indirect exchange rate.
Ans: B
Difficulty: Easy
Est time: <1 minute
Learning Objective: 15.06 Describe the role of the forward market and calculate forward exchange rates.
Section: 15.06 Forward market quotations
Topic: Forward market quotations
78. The theory that the annual percentage differential in the forward market for a currency
quoted in terms of another currency is equal to the approximate difference in the interest rates
between two countries is known as:
A. covered interest arbitrage.
B. the Fisher equation.
C. a forward rate agreement.
D. interest rate parity.
Ans: D
Difficulty: Easy
Est time: <1 minute
79. The principle of interest rate parity asserts that the:

A. relative spot exchange rates determine the relativity between the forward exchange rates and
spot rates.
B. relativity between spot and forward exchange rates reflects the interest rate differentials
between countries.
C. relative forward exchange rates determine the relativity between the spot exchange rates and
the forward interest rate.
D. relative forward exchange rates determine the relativity between the forward exchange rates
and forward interest rates.
Ans: B
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
80. If interest rate parity holds, the currency of the country with the relatively _______ interest
rates will trade at a forward _______ to the country with the relatively high interest rate.
A. low; discount
B. low; premium
C. low; loss
D. none of the given choices
Ans: B
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
81. If interest rate parity holds, the currency of the country with the relatively _______ interest
rates will trade at a forward _______ to the country with the relatively _______ interest rate.
A. high; premium; low
B. low; discount; high
C. high; discount; low
D. None of the given choices
Ans: C
Difficulty: Easy
Est time: <1 minute
82. An importer will be required to purchase USD in approximately six months to pay for a
consignment of goods. The company is concerned that the AUD may depreciate before the due
date and therefore decides to enter into a forward exchange contract to protect its position. The
company receives the following quote: ‘the Aussie is fifty-eight forty-five to fifty-three, sixty-
two to sixty-six'. Calculate the forward exchange rate.
A. AUD/USD 0.5783-87
B. AUD/USD 0.5907-19
C. AUD/USD 0.5911-15
D. AUD/USD 0.6465-13
Ans: B
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
83. If the spot rate is AUD/USD 0.5510-0.5515, and the six-month forward points are 48 to 53,
the six-month outright forward rate would be:
A. AUD/USD 0.5462-0.5462
B. AUD/USD 0.5563-0.5558
C. AUD/USD 0.5558-0.5563
D. AUD/USD 0.5558-0.5568
Ans: D
AACSB: Analysis
Bloom's: Analysis
Difficulty: Easy
Est time: <1 minute
84. If the spot rate is AUD/USD 0.5526-0.5531 and the 90-day forward rate is AUD/USD
0.5578-0.5588, the AUD is trading at a/an:
A. expected gain.
B. premium.
C. reciprocal.
D. discount.
Ans: B
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
85. If the forward exchange rate is priced higher than the spot rate the currency is said to be
trading at a:
A. discount.
B. gain.
C. premium.
D. loss.
Ans: C
Difficulty: Easy
Est time: <1 minute
86. If the forward points are _______at a specific date, the base currency is at a _______.
A. rising; forward discount
B. falling; forward discount
C. rising; forward loss
D. falling; forward gain
Ans: B
Difficulty: Medium
Est time: <1 minute
87. Given the 3-month forward rate exchange between the USA and Switzerland is USD/CHF
1.1589 this suggests:
A. that interest rates in the USA are higher than in Switzerland.
B. the 3-month forward rate is at a premium.
C. that interest rates in the USA are lower than in Switzerland.
D. a person requires more data before making a conclusion.
Ans: C
AACSB: Analysis
Bloom's: Analysis
Difficulty: Easy
Est time: <1 minute

A. A currency with a higher interest rate will sell at a forward premium.
B. A currency with a higher interest rate will sell at a forward discount.
C. A currency with a higher interest rate will have a higher spot rate.
D. A currency with a higher interest rate will have a lower spot rate.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
89. Which of the following principles refers to the circumstance that interest rates in different
countries provide equal returns, taking into account the spot and forward exchange rates between
the two countries?
A. Exchange rate parity
B. Interest rate parity
C. Law of one price
D. Purchasing power parity
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
90. A bank has been asked to provide a three-month forward AUD/USD ‘buy' quote for a
corporate client. The following information is available to the FX dealer at the bank:
Spot rate: AUD/USD 0.7654–0.7659
US interest rates: 7.73% per annum
Australian interest rates: 8.64% per annum
Estimate the three-month forward ‘buy' rate.
A. 0.7637
B. 0.7639
C. 0.7642
D. 0.7644
Ans: A
AACSB: Analysis
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute
91. A bank has been asked to provide a three-month forward EUR/USD ‘buy' quote for a
Bid Offer
Spot EUR/USD 1.0770 1.0782
3-month US interest rate 3.75% p.a. 3.85% p.a.
3-month euro interest rate 2.65% p.a. 2.75% p.a.
Calculate the bid and ask a three-month forward rate.

A. EUR/USD 1.0796–1.0781
B. EUR/USD 1.0797–1.0782
C. EUR/USD 1.0738–1.0755
D. EUR/USD 1.0743–1.0750
Ans: B
AACSB: Analysis
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute
92. All of the following are considered ‘hard' or major currencies, except the:
A. US dollar.
B. euro.
C. Mexican peso.
D. British pound.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 15.07 Identify factors that complicate FX market price quotations and calculations.
Section: 15.07 Economic and Monetary Union of the EU and the FX markets
Topic: Economic and Monetary Union of the EU and the FX markets
93. The financial institution responsible for monetary policy in the European Union is called the:
A. Bundesbank.
B. European Parliament.
C. Bank for International Settlements.
D. European Central Bank.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 15.07 Identify factors that complicate FX market price quotations and calculations.
Section: 15.07 Economic and Monetary Union of the EU and the FX markets
Topic: Economic and Monetary Union of the EU and the FX markets
94. The foreign exchange quotation, EUR/AUD1.4112–20, means that a bank is willing to pay
A. AUD1.4112 for one euro and to sell a euro for AUD1.4120.
B. AUD1.4120 for one euro and to sell a euro for AUD1.4112.
C. EUR1.4120 for one AUD and to sell one AUD for EUR1.4112.
D. EUR1.4112 for one AUD and to sell one AUD for EUR1.4120.
Ans: A
AACSB: Analysis
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute
95. With a bank quotation of AUD/NZD1.1832–42, 24–20, the bank is willing to

A. pay NZD1.1856 for one AUD forward.
B. pay NZD1.1808 for one AUD forward.
C. sell one AUD forward for NZD1.1852.
D. sell one AUD forward for NZD1.1856.
Ans: B
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
96. Which of the following statements about forward exchange rates is NOT correct?
A. Forward exchange rates are quoted as forward points, either above or below the spot rate
(forward premium or forward discount).
B. Forward points represent the forward exchange rate variation to a spot rate base.
C. If the forward points are rising, then add them to the spot rate; if the forward points are
falling, then subtract them from the spot rate.
D. The forward rate is only determined by volatility of spot rates.
Ans: D
Difficulty: Medium
Est time: <1 minute
97. From the quotation AUD/USD.7458–68, 25–30 we know that the AUD is selling at a
forward _____ to the USD and that the forward rate is _____.
A. premium; AUD/USD.7433–38
B. premium; AUD/USD.7483–98
C. discount; AUD/USD.7433–38
D. discount; AUD/USD.7483–98
Ans: B
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
98. An importer who must pay in three months would hedge by _____ the foreign currency
forward. The importer is concerned with _____ of the foreign currency.
A. selling; an appreciation
B. selling; a depreciation
C. buying; an appreciation
D. buying; a depreciation
Ans: C
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
99. With a forward contract the parties enter into a contract _____ and pay or receive the foreign
currency _____.
A. today; today
B. today; at the forward date
C. at the forward date; today
D. at the forward date; at the forward date
Ans: B
Bloom's: Knowledge
Difficulty: Easy
100. Suppose the interest rate in Inland is higher than the interest rate in Outland. The Inland
currency will be at a forward _____. This relationship occurs because of _____.
A. premium; arbitrage
B. premium; speculation
C. discount; arbitrage
D. discount; speculation
Ans: C
Bloom's: Knowledge
Difficulty: Medium
101. The spread in foreign exchange markets tends to be smaller:

A. for retail transactions.
B. when uncertainty has increased.
C. for commonly traded currencies.
D. on days when there is a lot of news.
Ans: C
Difficulty: Easy
Difficulty: Medium
Est time: <1 minute
11. For a FX quote of AUD/GBP0.6250-53 has a spread of:
a) 250 points
b) 50 points
c) 53 points
d) 3 points
Given the spot exchange rate between the USA and Switzerland is USD/CHF 1.1579 and the 3 month
forward rate exchange is USD/CHF 1.1589 this suggests:
Selected Answer:
the 3 month forward rate is at a premium
Correct Answer:
that interest rates in the USA are lower than in Switzerland
102. The FX market is organised as an over-the-counter market in which deposits denominated

in foreign currencies are bought and sold.
Ans: True
Feedback: The FX markets are vast global markets.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
103. The largest FX market is based in New York.

Ans: False
Feedback: Owing in part to historical factors, London is the largest FX market.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
104. When two parties agree to exchange currency and execute a deal at a specific date in the
future, this is described as a forward rate agreement.
Ans: False
Feedback: A forward contract is a commitment to purchase at a future date a given amount of a
commodity or an asset at a price agreed on today. Forward contracts are over-the-counter risk
management products primarily designed to enable the management of a specified risk.
Bloom's: Knowledge
Difficulty: Medium
105. The FX brokers quote two-way prices at which they are prepared both to buy and sell
foreign currencies and act as principals in the FX markets.
Ans: False
Feedback: It is FX dealers that quote bid and ask prices.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
106. If an Australian importer has a contract for Japanese goods denominated in yen payable in
three months' time and is concerned that the AUD may appreciate, the importer may enter into a
forward contract to sell the yen for delivery in three months' time.
Ans: False
Feedback: The importer should buy a forward contact to buy the yen (and sell the AUD) in three
months' time.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
107. A triangular arbitrage opportunity arises in the FX market when three or more currencies
are misquoted or mispriced.
Ans: True
Feedback: When the exchange rates of the currencies are not in equilibrium, triangular arbitrage
will force them back into equilibrium.
Example: Triangular arbitrage

USD1 =
USD1 =
SGD1 =
Therefore, AUD1 =
If these currencies are perfectly quoted, 1 SGD should be equal to 1 AUD.

AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
108. A USD/YEN quote means the price of USD1 in terms of YEN.

Ans: True
Feedback: The first currency of a quote is the unit of the quotation.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
109. Given USD/EURO0.6450-0.6455 an FX dealer would buy USD1 from you and give you
EURO0.6455
Ans: False
Feedback: The dealer would give you EUR0.6450
AACSB: Analysis
Bloom's: Analysis
Difficulty: Easy
Est time: <1 minute
110. When a currency is quoted against the USD and the USD is the base currency, this is direct
quoting.
Ans: True
Feedback: Having the USD as the unit makes the quote direct.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
111. A rule for working out a bid-ask cross rate for direct and indirect FX quotations is to
multiply the two bid rates and multiply the two ask rates.
Ans: True
Feedback: Multiplying the two bid rates and multiplying the two ask rates gives a bid-ask cross-
rate.
Difficulty: Easy
Est time: <1 minute
112. Given that AUD/USD (spot) is 0.6830-40 and the six-month forward rate is 0.6798-0.6813,
the six-month forward points must have been falling.
Ans: True
Feedback: By calculating the difference the points are seen to be 0.0032-0.0027
AACSB: Analysis
Bloom's: Analysis
Difficulty: Easy
Est time: <1 minute
113. When an FX dealer calculates a forward exchange rate for NZD/JPY they must adjust both
interest rates to allow for the different quotation rates between Japan and New Zealand.
Ans: False
Feedback: Only one of the rates needs to be adjusted on the basis of Japan using the 360-day
convention.
Difficulty: Medium
Est time: <1 minute
114. Discuss the current exchange rate regimes of the major currencies.
Ans: Major currencies such as the US dollar, the UK pound, the Japanese yen, the European
Monetary Union euro and the Australian dollar have all adopted a floating exchange rate regime
or a free float. A floating exchange rate regime exists when an exchange rate for the currency of
a country is allowed to move as the factors of supply and demand decree. If the demand for a
currency increases the value of that currency will increase relative to other currencies.
Difficulty: Medium
115. In relation to exchange rates, discuss a managed float regime, a crawling peg regime and a
pegged exchange rate.
Ans: Countries that operate a managed float regime normally allow the currency to move within
a defined band or range, relative to another currency such as the USD. A crawling peg regime
limits exchange rate movements by being a managed float where an exchange rate is allowed to
appreciate in controlled steps over time. A pegged exchange rate as used by Hong Kong is where
a currency is directly linked to another currency. In the case of Hong Kong, the Hong Kong
dollar is directly linked to the USD.
Bloom's: Synthesis
Difficulty: Medium
116. Discuss briefly why a central bank might enter the FX markets.
Ans: Central banks may enter the FX markets in order to pay for a government's purchases; to
change the composition of the central bank's holdings of foreign currencies as part of its
management of official foreign reserve assets; and to influence a foreign exchange rate.
Bloom's: Knowledge
Difficulty: Medium
117. Distinguish between forward transactions and tom value transactions.

Ans:
Transactions entered into today, with same-day value or settlement, are referred to as ‘today’, or
tod value transactions. Those entered into today, for settlement tomorrow, are referred to as
‘tomorrow’, or tom value transactions. In addition, one way of covering, or hedging, against that
risk is to enter into a forward contract. The basic features of the forward buying of the EUR are
as follows:
• the contract to buy EUR is entered into today
• the price of the EUR is determined and locked in today
• the value or delivery date, when the local currency is paid and EUR received, is a date in the
future, but specified today
AACSB: Analysis
Difficulty: Medium
118. Describe interest rate parity. Why does it tend to exist?
Ans: The forward rate relationship to the current spot rate will mirror the interest rate
differential. For example, if the home country interest rate is 7 per cent and the foreign country
interest rate is 5 per cent, then the interest rate differential is 2 per cent. At the same time the
home currency will be at forward discount of approximately 2 per cent.
Like many pricing theorems in modern finance, the basic reason is arbitrage. To show this, for
the moment assume there is no forward discount or premium. Anyone wanting foreign currency
in the future would replace it advantageous to hold the domestic currency, earn 7 per cent and
exchange the domestic currency at the forward rate rather than buying the foreign currency at
today’s spot rate and earning the lower 5 per cent return. There would be large demand for the
foreign currency at the forward rate. This pushes up the forward rate and creates a premium for
the foreign currency in the forward market. This force would continue until the gain from the
differential interest rate is about offset by the loss (higher price compared to spot rate) on
exchanging at the forward rate.
AACSB: Analysis
Difficulty: Hard
119. You have just found these quotations—AUD/SGD0.9886, AUD/JPY85, SGD/JPY88. You
may assume that there is no bid–ask spread. Determine whether there is an arbitrage profit. If so
describe how to do this.
Ans: If we take the first two exchange rates, which value the AUD, we can then compute a
consistent third rate. Essentially SGD0.9886 = JPY85. Finding the value of one unit of SGD, we
replace that SGD = JPY85/.9886 = JPY85.98. This consistent rate would preclude arbitrage. To
buy one SGD we should have to pay about JPY86 instead of the actual rate of JPY88. Hence
SGD is overpriced relative to JPY. This suggests that we would like to sell SGD and buy JPY.
We effect arbitrage by taking AUD, buying SGD, then buying JPY, and finally back to AUD.
Thus, for each AUD we obtain SGD0.9886. Then in selling SGD, we obtain .9886 x 88 =
JPY87.00. Finally, we sell JPY for AUD and receive 87.00/85 = AUD1.0235. This means for
every AUD we begin with, we end up with AUD1.0235. Had we deployed one million Aussie
dollars, we would have made a profit of AUD23 492.
Bloom's: Analysis
Difficulty: Medium
120. A company approaches an FX dealer for a forward quote on the USD/CHF with a three-
month (90-day) delivery. The spot rate is USD/CHF1.1560.
a) Calculate the forward point given that the three-month eurodollar interest rate is 3.00% per
annum and the three-month euroswiss franc interest rate is 4.00% per annum.
b) Calculate the three-month forward quote on a forward quote on the USD/CHF with a three-
month (90-day) delivery.
Ans:
1. The forward point is given as:
b) To calculate the forward quote, the forward points are either added to or deducted from the
spot rate. If the forward point is positive, then added to the sport rate and vice versa. The three-
month forward rate is thus USD/CHF1.1589.
AACSB: Analysis
Difficulty: Hard
1. The value of a currency is determined by:

A. the interaction between the demand and supply of the currency relative to the demand and
supply of other currencies.
B. the economic prosperity of an economy.
C. a consortium of international currency traders.
D. the central banks.
Ans: A
Difficulty: Medium
Est time: <1 minute
Learning Objective: 16.01 Explain how factors that affect the demand for a currency, or the supply of a currency, affect the
determination of an equilibrium exchange rate.
Topic: Introduction to foreign exchange: factors that influence the exchange rate
2. Which one of following is considered the most important determinant of the FX value of a
currency?
A. Relative inflation rates
B. Relative income levels
C. Central bank intervention
D. Exchange rate expectations
Ans: D
Difficulty: Medium
Est time: <1 minute
3. The regime whereby the value of a currency is determined by demand and supply conditions
in the FX markets is called:
A. fixed.
B. floating.
C. pegged.
D. variable.
Ans: B
Difficulty: Easy
Est time: <1 minute
4. The FX rate at the point where the demand and supply curves for a currency intersect is called
a/an:
A. balanced exchange rate.
B. equilibrium exchange rate.
C. intersection exchange rate.
D. stable exchange rate.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
5. If Japan imports more Australian goods, all else being equal, there will be an increased:
A. Australian demand for yen.
B. Australian demand for dollars.
C. Japanese demand for yen.
D. Japanese demand for dollars.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Section: 16.01 The FX markets and an equilibrium exchange rate
Topic: The FX markets and an equilibrium exchange rate
6. A decline in Chinese demand for the Australian dollar will:

A. decrease in the value of AUD with respect to Chinese yuan.
B. increase in the value of AUD with respect to Chinese yuan.
C. decrease in the value of Chinese yuan relative to AUD.
D. increase in the value of Chinese yuan relative to AUD.
Ans: A
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
7. If the exchange rate of YEN/AUD rises, we should expect Australian exports to Japan to:
A. increase in quantity.
B. decrease in quantity.
C. remain the same, but imports from Japan should increase.
D. remain the same, but imports from Japan should decrease.
Ans: B
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
8. Under a managed-float exchange rates regime, if the rate of inflation in Australia is less
than the rate of inflation of its trading partners, the AUD will likely:
A. appreciate against foreign currencies.
B. depreciate against foreign currencies.
C. be officially revalued by the Reserve Bank.
D. be officially devalued by the Reserve Bank.
Ans: A
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
9. The foreign exchange rate regime used by most international countries is a _____ regime.
A. linked
B. crawling peg
C. managed
D. floating
Ans: B
Difficulty: Easy
Est time: <1 minute
10. A rising Australian dollar makes Australian goods:
A. more expensive abroad and increases the volume of Australian exports.
B. less expensive abroad and increases the volume of Australian exports.
C. less expensive abroad and decreases the volume of Australian exports.
D. more expensive abroad and decreases the volume of Australian exports.
Ans: D
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
11. An increase in demand for a country's _______ will cause its currency to appreciate in the
long run, while an increase in demand for its _______ will cause its currency to depreciate.
A. exports; exports
B. imports; imports
C. imports; exports
D. exports; imports
Ans: D
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
12. If the demand for _______ goods falls, relative to ______ goods, the domestic currency will
depreciate.
A. foreign; foreign
B. foreign; domestic
C. domestic; domestic
D. domestic; foreign
Ans: D
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
13. On a foreign exchange diagram of the equilibrium exchange rate, there is equilibrium at
AUD 0.94 per USD. If the actual exchange rate is AUD/USD0.90 at AUD 0.90, there would be
excess _____ the dollar and the AUD dollar would _____ in the return to equilibrium.
A. demand for, appreciate
B. supply of, appreciate
C. demand for, depreciate
D. supply of, depreciate
Ans: A
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
14. On a foreign exchange diagram of the equilibrium exchange rate, there is equilibrium at
AUD 0.94 per USD. At AUD0.97, there would be excess _____ the dollar and the dollar would
_____ in the return to equilibrium.
A. demand for, appreciate
B. supply of, depreciate
C. supply of, appreciate
D. demand for, depreciate
Ans: B
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
15. In a floating exchange rate regime, the exchange rate is the equilibrium price of the currency.
Changes in demand for a currency will cause changes in the equilibrium exchange rate. Which of
these statements in relation to the AUD demand curve in the FX market is NOT correct?
A. The purchase of AUD goods, services or assets generates a demand for AUD.
B. A depreciation of the AUD equates to a fall in the price of Australian goods, services and
assets.
C. The demand curve is downward-sloping; as the price of the AUD increases the demand for
the AUD also increases.
D. A fall in the cost of Australian goods, services or assets will result in increased demand for
the AUD.
Ans: C
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
16. According to purchasing power parity (PPP) theory, if the expected inflation for Australia
relative to the eurozone increases, the value of AUD_________ and EUR_______.
A. depreciates; depreciates
B. depreciates; appreciates
C. appreciates; appreciates
D. appreciates; depreciates
Ans: B
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
17. If the Japanese buy more Australian goods, they _____ more yen and _____ more dollars in
the foreign exchange market.
A. demand; supply
B. demand; demand
C. supply; supply
D. supply; demand
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
18. When a country's exchange rate appreciates, the price of:

A. that country's goods abroad decreases.
B. that country's goods abroad increases.
C. foreign goods sold in that country increases.
D. that country's goods produced and sold locally increase.
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
19. When a country's exchange rate depreciates, the price of:

A. that country's goods abroad decreases.
B. that country's goods abroad increases.
C. foreign goods sold in that country increases.
D. that country's goods produced and sold locally increases.
Ans: A
Difficulty: Medium
Est time: <1 minute
20. If the currency AUD/USD moves from 0.9527-32 to 0.9555-60, there has been:
A. an appreciation of the USD.
B. appreciation of the AUD.
C. depreciation of the AUD.
D. a change in the bid-offer spread.
Ans: B
AACSB: Analysis
Bloom's: Analysis
Difficulty: Easy
Est time: <1 minute
21. If the currency AUD/USD moves from 0.9870-75 to 0.9364-89, there has been:
A. an appreciation of the USD.
B. appreciation of the AUD.
C. a depreciation of the AUD.
D. a change in the bid-offer spread.
Ans: C
AACSB: Analysis
Bloom's: Analysis
Difficulty: Easy
Est time: <1 minute
22. A change in the Australian dollar value of the British pound from $2.60 to $2.50 means:
A. there has been an increase in the pound price of British goods.
B. the pound has appreciated relative to the Australian dollar.
C. the Australian dollar has appreciated relative to the pound.
D. an increase in the dollar price of British goods.
Ans: C
AACSB: Analysis
Difficulty: Medium
Est time: <1 minute
23. A change in the Australian dollar value of the British pound from $2.60 to $2.80 means:
A. there has been a decrease in the pound price of British goods.
B. the pound has appreciated relative to the Australian dollar.
C. the Australian dollar has depreciated relative to the pound.
D. an increase in the dollar price of British goods.
Ans: C
AACSB: Analysis
Difficulty: Medium
Est time: <1 minute
24. In a floating exchange rate regime, the exchange rate is the equilibrium price of the currency.
Changes in supply for a currency will cause changes in the equilibrium exchange rate. Which of
these statements in relation to the AUD supply curve in the FX market is NOT correct?
A. For AUD holders, a rise in the price of foreign exchange means foreign currency priced
goods, services and assets become cheaper.
B. The AUD supply curve is upward-sloping, reflecting the demand for foreign currency by
AUD holders.
C. Supply of AUD onto the FX market rises as holders of AUD buy foreign currency.
D. As the price of the AUD increases, the price of the foreign currency falls.
Ans: A
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
25. All else being equal, if there is a heavy selling of AUD relative to other currencies, the value
of AUD will:
A. appreciate significantly.
B. depreciate significantly.
C. not change.
D. appreciate and stabilise immediately.
Ans: B
Difficulty: Medium
Est time: <1 minute
26. All else being equal, a significant appreciation of the Australian dollar is likely to result in:
A. a reduced demand for Australian goods and layoffs of Australian workers.
B. an increased demand for Australian goods and increased employment of Australian workers.
C. lower foreign currency prices of Australian goods in foreign countries.
D. higher Australian dollar prices for foreign goods in Australia.
Ans: A
Difficulty: Medium
Est time: <1 minute
27. If the British pound appreciates against the Australian dollar:

A. British businesses gain by a fall in the dollar price of exports to Australia.
B. British consumers gain by a fall in the pound price of Australian exports to Britain.
C. British consumers lose on account of a rise in the pound price of Australian exports to Britain.
D. Australian consumers gain by a fall in the dollar price of British exports to Australia.
Ans: B
Difficulty: Medium
Est time: <1 minute
28. If the price of a local currency declines, then it follows:

A. holders of the local currency will see the price of foreign goods decrease.
B. it is equivalent to an increase in the price of the foreign currency.
C. the demand for foreign currency will decrease.
D. there will be a greater quantity of local currency supplied to the market.
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
29. If the price of a local currency increases, then it follows:

A. holders of the local currency will see the price of foreign goods increase.
B. It is equivalent to an increase in the price of the foreign currency.
C. The demand for local currency will increase.
D. There will be an increase in the quantity of local currency supplied to the market.
Ans: D
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
30. If the Japanese yen depreciates against the Australian dollar:

A. Japanese businesses gain by a rise in the dollar price of exports to Australia.
B. Japanese consumers gain by a fall in the yen price of Australian exports to Japan.
C. Japanese consumers lose on account of a rise in the yen price of Australian exports to Japan.
D. Australian consumers lose on account of a rise in the dollar price of Japanese exports to
Australia.
Ans: C
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
31. If one country is experiencing prolonged lower inflation than another country, the currency
of the first country should, in general, _______ with respect to the currency of the second
country.
A. remain unchanged
B. appreciate
C. depreciate
D. Impossible to say without values
Ans: B
Difficulty: Easy
Est time: <1 minute
Learning Objective: 16.02 Understand how the major factors that influence exchange rate movements operate, particularly relative
inflation rates, relative national income growth rates, relative interest rates, exchange rate expectations, and central bank or
government intervention.
Section: 16.02 Factors that influence exchange rate movements
Topic: Factors that influence exchange rate movements
32. Consider a textbook situation in which Australia and the USA are experiencing similar
inflation rates. If the rate of inflation were to increase significantly in Australia, relative to the
USA, which of the following impacts would be expected to occur?
A. There would be an increased demand by Australians for US goods and services.
B. Overseas demand for AUD goods would switch to relatively cheaper US goods.
C. The price of goods and services exported to the USA would increase.
Ans: D
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
33. Consider a textbook situation in which Australia and the USA are experiencing similarly low
rates of inflation. Then if the rate of inflation were to increase significantly in USA, relative to
the Australia, which of the following impacts would be expected to occur?
A. The prices of goods and services in USA would decrease in USD terms.
B. Australian demand for USA goods and services would decline.
C. There should be an increase in Australian demand for the US dollar.
D. There would be an increase in the supply of AUD in the FX markets.
Ans: B
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
34. Consider a textbook situation in which Australia and the USA are experiencing similarly low
rates of inflation. Then if the rate of inflation were to decrease significantly in USA, relative to
the Australia, which of the following impacts would be expected to occur?
A. The prices of goods and services in USA would increase in USD terms.
B. Australian demand for USA goods and services would increase.
C. There should be a decrease in Australian demand for the US dollar.
D. There would be a decrease in the supply of AUD in the FX markets.
Ans: B
Difficulty: Medium
Est time: <1 minute
35. If Australia's national income begins to grow quite rapidly and Australia's demand for
German imports grows, then there would be:
A. a decrease of supply of AUD.
B. an increase of supply of AUD.
C. a decrease in demand for euros.
D. no change in demand for AUD.
Ans: B
Difficulty: Medium
Est time: <1 minute
36. If the inflation rate in Australia is higher than that of Italy, and productivity is growing at a
slower rate in Australia than it is in Italy, in the long run:
A. the euro should depreciate, relative to the dollar.
B. the euro should appreciate, relative to the dollar.
C. there should be no change in the euro price of the dollar.
D. it is uncertain what will happen to the euro price of dollars.
Ans: B
Difficulty: Easy
Est time: <1 minute
37. The relationship between the exchange rate and changes in the relative growth rates in
national income operates through:
A. changes in the real exchange rate.
B. changes in the demand for exports and imports.
C. variations in the inflation differentials between countries.
D. changes in interest-rate differentials between countries.
Ans: B
Difficulty: Medium
Est time: <1 minute
38. It may be argued that a factor that can affect the equilibrium exchange rate is changes in
relative income growth between countries. If the growth in Australian national income rises
substantially, while that in the USA remains stagnant, which of the following impacts would you
expect to occur?
A. A new equilibrium exchange rate may see the AUD depreciate.
B. The relative strength of import growth and foreign investment inflows will impact upon the
equilibrium exchange rate.
C. A new equilibrium exchange rate may see the AUD appreciate.
Ans: D
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
39. If the rate of growth of Australian national income increases while the rate of growth of
national income in most other countries remains constant, we would expect:
A. prices for foreign goods in Australia to fall.
B. the Australian dollar to appreciate.
C. the Australian dollar to depreciate.
D. prices for Australian goods in Australia to rise.
Ans: C
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
40. If the rate of growth of Australian national income decreases while the rate of growth of
national incomes in most other countries remains constant, we would expect:
A. prices for foreign goods in Australia to rise.
B. the Australian dollar to appreciate.
C. the Australian dollar to depreciate.
D. prices for Australian goods in Australia to fall.
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
41. According to the text, if Australia's national income begins to grow quite rapidly while the
rate of growth in USA remains constant, then:
A. Australian businesses may decide to expand due to increased growth prospects.
B. foreign funds could be attracted to Australian equities.
C. there could be an increase in demand for the AUD.
Ans: D
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
42. If German demand for Australian exports increases at the same time as Australian
productivity increases, relative to German productivity, in the long run:
A. the euro should appreciate, relative to the AUD dollar.
B. the AUD dollar should depreciate, relative to the euro.
C. the AUD dollar should appreciate, relative to the euro.
D. it is uncertain whether the euro would appreciate or depreciate, relative to the AUD dollar.
Ans: C
Difficulty: Medium
Est time: <1 minute
43. If US interest rates fall, relative to those in Australia, this will tend to _______ net lending by
the Americans to Australia and may ________ the equilibrium exchange rate of US dollars to the
AUD.
A. increase; increase
B. decrease; decrease
C. increase; decrease
Ans: A
Difficulty: Medium
Est time: <1 minute
44. If the interest rate in Australia rises, overseas investors:
A. increase their demand for Australian dollars and the Australian exchange rate falls.
B. increase their demand for Australian dollars and the Australian exchange rate increases.
C. decrease their demand for Australian dollars and the Australian exchange rate rises.
D. decrease their demand for Australian dollars and the Australian exchange rate falls.
Ans: B
Difficulty: Medium
Est time: <1 minute
45. If the interest rate in Australia falls, overseas investors:

A. increase their demand for Australian dollars and the Australian exchange rate falls.
B. increase their demand for Australian dollars and the Australian exchange rate increases.
C. decrease their demand for Australian dollars and the Australian exchange rate rises.
D. decrease their demand for Australian dollars and the Australian exchange rate falls.
Ans: D
Difficulty: Medium
Est time: <1 minute
46. If foreign interest rates increase relative to Australian rates, the demand for domestic
currency:
A. falls, causing it to appreciate.
B. rises, causing it to appreciate.
C. rises, causing it to depreciate.
D. falls, causing it to depreciate.
Ans: D
Difficulty: Medium
Est time: <1 minute
47. If foreign interest rates decrease relative to Australian rates, the demand for domestic
currency:
A. falls, causing it to appreciate.
B. rises, causing it to appreciate.
C. rises, causing it to depreciate.
D. falls, causing it to depreciate.
Ans: B
Difficulty: Medium
Est time: <1 minute
48. If currency traders are anticipating a currency's foreign exchange value to fall, the:
A. current foreign exchange value of the currency will increase.
B. current foreign exchange value of the currency will decrease.
C. demand for the currency will rise in anticipation.
D. country's nominal interest rate will rise.
Ans: B
Difficulty: Easy
Est time: <1 minute
49. If currency traders are anticipating a currency's foreign exchange value to increase, the:
A. current foreign exchange value of the currency will decrease.
B. current foreign exchange value of the currency will increase.
C. demand for the currency will fall in anticipation.
D. country's nominal interest rate will fall.
Ans: B
Difficulty: Easy
Est time: <1 minute
50. If foreign exchange traders become certain that the value of the yen will rise against the
Australian dollar in the future, the likely result is that the:
A. demand for yen will fall in anticipation.
B. current value of the yen against the Australian dollar will fall.
C. current value of the yen against the Australian dollar will rise.
D. nominal rates in Japan will fall.
Ans: C
Difficulty: Easy
Est time: <1 minute
51. Relative interest rate levels between countries is a determinant that will, from time to time,
impact upon the equilibrium exchange rate. When considering the impact of relative interest rate
differentials, which of the following is NOT correct?
A. If an increase in the interest rate is a result of an increase in inflationary expectations, all else
being constant, the currency will appreciate.
B. If an increase in the interest rate is due to an increase in the real rate of interest, all else being
constant, the currency will depreciate.
C. Interest rate differentials must be viewed together with expected percentage changes in
exchange rates over the period.
Ans: C
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
52. A depreciating nominal foreign exchange rate may arise from a/an:
A. low domestic inflation rate, relative to the foreign inflation rate.
B. depreciating real foreign exchange rate.
C. appreciating real foreign exchange rate.
D. small Australian Government budget deficit.
Ans: B
Difficulty: Medium
Est time: <1 minute
53. Exchange rate expectations may play an important role in the determination of an
equilibrium exchange rate. Given that a very high percentage of turnover in the Australian FX
market is not associated with payments for imports and exports, what would you expect to
happen if speculators believed that the AUD was about to depreciate?
A. Funds would be moved offshore in anticipation of the expected depreciation.
B. There would be increased demand for the AUD as transactions are brought forward before the
expected depreciation occurs.
C. The AUD supply curve would move to the left, reflecting the reduced supply of AUD.
Ans: A
Difficulty: Medium
Est time: <1 minute
54. All else being constant, a currency should _______ if there is _______ in the real rates of
return, relative to those in other countries.
A. depreciate; no change
B. depreciate; an increase
C. appreciate; a decrease
D. appreciate; an increase
Ans: D
Difficulty: Medium
Est time: <1 minute
55. All else being constant, a currency should _______ if there is _______ in a country's
inflationary expectations, relative to those in other countries.
A. depreciate; an increase
B. depreciate; a decline
C. appreciate; increase
D. appreciate; no change
Ans: A
Difficulty: Medium
Est time: <1 minute
56. A central bank may seek to influence its country's currency by:
A. imposing limits on the number of goods that may be imported.
B. restricting the outflow of funds from the home country.
C. intervening directly in the FX market to support the currency.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
57. When a central bank takes action to offset or reduce any volatility in the currency, this is
called:
A. FX smoothing.
B. risk-hedging monetary operations.
C. reserve nullification.
D. reserve management strategy.
Ans: A
Difficulty: Medium
Est time: <1 minute
58. In international trade flows, an embargo is:
A. a charge levied on imports.
B. a government restriction on imports.
C. a prohibition on imports of goods and services.
D. a tax levied on imports.
Ans: C
Difficulty: Medium
Est time: <1 minute
59. When a government prohibits exports or imports of specified goods this is called a/an:
A. quota.
B. embargo.
C. entry tax.
D. tariff.
Ans: B
Difficulty: Medium
Est time: <1 minute
60. A government restriction that places a direct limit on the amount of particular goods that can
be imported into a country is called a/an:
A. entry limit.
B. embargo.
C. quota.
D. tariff.
Ans: C
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
61. A tax levied on imports into a country is called a/an:
A. quota.
B. embargo.
C. value added tax.
D. tariff.
Ans: D
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
62. If Australia puts a quota on the importing of cars, the:

A. Australian dollar will rise.
B. Australian dollar will fall.
C. price of Australian-made cars will fall.
D. efficiency of the Australian economy will be improved.
Ans: A
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
63. All else being equal, if Australia’s trade deficit with the USA increases, the value of the
AUD will _______relative to its trading partners.
A. increase
B. decrease
C. be unchanged
D. depreciate (but depends on the magnitude of the deficit)
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
64. If Australia puts a tariff on the importing of cars, the:

A. price of Australian cars will fall.
B. Australian dollar will fall.
C. Australian dollar will rise.
D. price of foreign-produced cars sold in Australia will fall.
Ans: C
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
65. 65 In the _______ run, higher quotas and tariffs cause a country's currency to _______.
A. short; depreciate
B. short; appreciate
C. long; depreciate
D. long; appreciate
Ans: D
Difficulty: Medium
Est time: <1 minute
66. In the _______ run, lower quotas and tariffs cause a country's currency to _______.
A. short; depreciate
B. short; appreciate
C. long; depreciate
D. long; appreciate
Ans: C
Difficulty: Medium
Est time: <1 minute
67. In addition to economic variables, intervention of the government in the FX market may
affect the equilibrium exchange rate. Which of the following interventions does the Australian
government continue to pursue?
A. Increased tariff protection in the car industry and textile, clothing and footwear industries
B. Implementing tougher foreign investment guidelines, imposed by the Foreign Investment
Review Board
C. Active participation in the FX market to maintain the AUD exchange rate within a target
exchange rate band published in the Reserve Bank Bulletin
Ans: D
Difficulty: Medium
Est time: <1 minute
68. In relation to the international FX markets before 1973:

A. the majority of countries followed a floating peg regime.
B. the majority of countries followed a fixed exchange rate system.
C. exchange rates were floating against the US dollar.
D. most countries followed a managed floating exchange rate regime.
Ans: B
Difficulty: Medium
Est time: <1 minute
69. In the long run, foreign exchange rates are determined by:
A. an agreement between governments of the major industrial countries.
B. economic fundamentals, such as productivity levels or price levels in different countries.
C. the difference between the short-term and long-term interest rates in each country.
D. the rate at which each country's currency can be exchanged for gold.
Ans: B
Difficulty: Easy
Est time: <1 minute
70. Which of the following statements regarding the floating exchange rate regime adopted by
Australia in December 1983 is NOT correct?
A. When the Reserve Bank sells foreign exchange, its intention may be to depress the price of
the foreign currency and support the AUD.
B. Increased demand for the AUD by foreign investors will lead to an appreciation of the AUD
and therefore an increase in the domestic money supply.
C. When the Reserve Bank buys foreign currency, the intervention may be aimed at pushing up
the price of foreign currency, resulting in a depreciation of the AUD.
D. A balance of payments surplus would lead to an appreciation of the AUD and a reduction in
the quantity of foreign currency supplied to the market.
Ans: B
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
71. For a country, a fully floating currency regime:

A. allows a government to remove most restrictions on investment flows.
B. relieves the central bank of the need to maintain a particular fixed value of the currency in the
FX markets.
C. does not require a country to maintain large amounts of FX reserves to support the currency.
Ans: D
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
72. Foreign exchange rates are affected by:

A. financial flows.
B. trade flows.
C. government intervention.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
73. An improvement in a country’s political stability and expected economic prosperity is likely
to:
A. have a positive impact on value of the currency.
B. appreciate the value of the currency.
C. depreciate the value of the currency.
D. have no impact on the value of the currency.
Ans: A
Difficulty: Medium
Est time: <1 minute
74. All of the following factors are likely to influence exchange rates, except:
A. financial flows.
B. trade flows.
C. government intervention.
D. an increase in the number of dealers of foreign exchange.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
75. The theory of purchasing power parity seeks to explain how exchange rates are determined in
the:
A. short run.
B. long run.
C. short run and long run.
D. none of the given answers are correct.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
76. The theory of purchasing power parity asserts that exchange rates between any two countries
will adjust to reflect changes in:
A. the current account balances of the two countries.
B. the trade balances of the two countries.
C. monetary policies of the two countries.
D. the price levels of the two countries.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
77. One important view of the determination of the foreign exchange value of a currency is given
in the purchasing power parity theory. The theory states, in effect, that:
A. any national currency should have equal buying power, given current exchange rates.
B. although prices in one country may rise faster than in another, parity is maintained.
C. lower prices in one country are offset by a depreciation of the currency in another country.
Ans: D
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
78. Under the theory of purchasing power parity, an increase in the Australian price level of 5
per cent, relative to the Japanese price level, should result in a:
A. 5 per cent rise in the Australian dollar.
B. 5 per cent rise in the Japanese yen.
C. rise in the yen by an amount depending on what happens to the real exchange rate.
D. rise in the Australian dollar by an amount depending on what happens to the real exchange
rate.
Ans: B
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
79. In the long run, if purchasing power parity (PPP) is maintained, a rise in a country's price
level (relative to the foreign price level) should cause its currency to _______, while a fall in the
country's relative price should cause its currency to _______.
A. appreciate; appreciate
B. appreciate; depreciate
C. depreciate; appreciate
D. depreciate; depreciate
Ans: C
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
80. If the regression analysis of the relationship between exchange rates and changes in the factor
inflation has the coefficient 0.85, this suggests:
A. a negative relationship between the exchange rate and inflation.
B. that the theory of purchasing power parity (PPP) does not hold.
C. positive support for the theory of PPP.
D. that the relationship is not clear.
Ans: C
Difficulty: Medium
Est time: <1 minute
Learning Objective: 16.03 Explore regression analysis as a statistical technique applied to variables that impact on an exchange
rate.
Section: 16.03 Measuring exchange rate sensitivity to changes in economic variables
Topic: Measuring exchange rate sensitivity to changes in economic variables
81. The Indonesian economy is predicted to average 64% per annum inflation over the next two
years. If the forecast inflation for Australia over the same period is 2.5% per annum, how much
will a rupiah cost you in two years' time if the current exchange rate is $0.1293/rupiah and PPP is
maintained?
A. $0.0505
B. $0.0808
C. $0.3310
D. $0.2069
Ans: A
AACSB: Analysis
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute
Learning Objective: 16.04 Apply purchasing power parity concepts and calculations to the determination of foreign exchange risk
measurement.
82. Two identical items are manufactured in both Australia and the USA. Using your knowledge
of the purchasing power parity theory and the following data, forecast the AUD/USD exchange
rate in years 2 and 3.
Price (AUD) Price (USD) AUD/USD

Year 1 $17.50 $13.60 0.7680
Year 2 $19.25 $14.28 ?
Year 3 $19.25 $14.99 ?
A. 0.7296 and 0.7661

B. 0.8064 and 0.7661
C. 0.8064 and 0.8467
D. 0.8448 and 0.8870
Ans: A
AACSB: Analysis
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute
measurement.
83. Research into the purchasing power parity theory may well identify a number of issues
relating to the theory. Using your knowledge of the theory, which of the following is correct?
A. The theory is most effective in explaining short-term exchange rate movements.
B. PPP theory incorporates a broad range of variables that act as determinants of an exchange
rate.
C. It assumes that residents in a higher-inflation country can easily replace product substitutes in
another country with lower inflation.
Ans: C
Difficulty: Medium
Est time: <1 minute
measurement.
84. For several years the inflation rate in the UK has been less than the inflation rate in Australia.
We would predict that the demand for the _____ will _____ and the British pound will _____.
A. GBP; increase; appreciate
B. GBP; increase; depreciate
C. AUD; increase; appreciate
D. AUD; decrease; depreciate
Ans: A
Difficulty: Easy
Est time: <1 minute
85. The impact of a relative increase in income on the exchange rate is not so clear because:
A. a rise in income will cause wealth to increase, which causes exports to go up, which can offset
the impact of income on imports.
B. income will go up and then later go down, reversing the initial effect.
C. a rise in income is associated with increased sales of securities to foreigners which offsets the
impact of income on imports.
D. a rise in income generates more imports but also leads to more exports.
Ans: C
Difficulty: Medium
Est time: <1 minute
86. An increase in the real interest rate in Singapore with no change of the real interest rate in
Malaysia should lead to an increased _____ and therefore an appreciation of the _____.
A. supply of SGD; SGD
B. supply of SGD; MYR
C. demand for SGD; MYR
D. supply of MYR; SGD
Ans: D
Difficulty: Medium
Est time: <1 minute
87. There is no change in the interest rate in Singapore and the interest rate in Thailand has
increased. Inflationary expectations in both countries have not changed. The demand for the
_____ should _____ and the Thai baht will _____
A. Thai baht; increase; appreciate
B. Singapore dollar; increase; depreciate
C. Singapore dollar; decrease; depreciate
D. Thai baht; decrease; appreciate
Ans: A
Difficulty: Easy
Est time: <1 minute
88. Your analysis indicates that the NZD will appreciate vis-à-vis the AUD. Therefore you
recommend clients
A. buy NZD and AUD denominated bonds immediately.
B. wait until the NZD has appreciated and then buy NZD denominated bonds.
C. buy NZD denominated bonds and sell the AUD immediately.
D. sell NZD denominated bonds immediately and wait until the appreciation to re-invest.
Ans: C
Difficulty: Medium
Est time: <1 minute
89. The evidence for the purchasing power parity theorem is _____ in the short term and _____
in the long term.
A. good; good
B. good; poor
C. poor; good
D. poor; poor
Ans: C
Difficulty: Easy
Est time: <1 minute
measurement.
90. If a government were trying to:

A. push up the value of the domestic currency, it would sell the domestic currency.
B. reduce the value of the domestic currency, it would sell the foreign currency.
C. reduce the value of the foreign currency, it would buy the foreign currency.
D. reduce the value of the foreign currency, it would buy the domestic currency.
Ans: D
Difficulty: Medium
91. Central bank intervention is likely to be least when it wishes:

A. to smooth currency rate changes.
B. for the exchange rate to float.
C. to impact international trade flows.
D. for the exchange rate to be fixed.
Ans: B
Difficulty: Medium
Est time: <1 minute
92. Australia is a major commodity exporting country. Which of the following statements is
NOT true for the AUD?
A. The expected value of the AUD and the commodity price index would be related.
B. The relationship can be expected to be positive between commodity export and the value of
the AUD.
C. As the value of commodities increases, all else being constant, the value of the AUD should
also increase.
D. As the value of commodities increases, all else being constant, the value of the AUD should
also decrease.
Ans: D
Difficulty: Medium
Est time: <1 minute
93. A demand curve for a local currency slopes downward as the higher the price of the local
currency the less demand there would be for it.
Ans: True
Feedback: It is reasonable to expect FX participants would act in this manner.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
94. Increased demand for a country's exports causes its currency to depreciate.
Ans: False
Feedback: In order to pay for the country's exports, the local currency needs to be bought, so
pushing the price up.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
95. In determining the equilibrium exchange rate, the supply curve is upward sloping,
representing an increase in supply of the local currency when the price of the local currency
increases in the FX markets relative to the foreign currencies.
Ans: True
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
96. When there is a shortage of currency in the FX markets dealers will bid the price and the
quantity of currency would increase.
Ans: True
Feedback: The forces of supply and demand work to restore equilibrium.
Difficulty: Easy
Est time: <1 minute
97. With the USD/AUD currency pair, an increase in the demand for the USD is equivalent to an
increase in the supply of AUD in the FX markets and would result in the supply curve moving
upwards and to the right.
Ans: True
Feedback: Supply curves move to the right for an increase.
Difficulty: Medium
Est time: <1 minute
98. A decrease in inflation in the USA relative to that in another country could be expected to
result in increased demand for goods from the USA and the demand curve would move to the
right.
Ans: True
Feedback: Residents from the other country will buy the cheaper US goods and so sell their own
currency.
Difficulty: Medium
Est time: <1 minute
99. If the inflation rate in one country is higher than that of Australia and productivity is growing
at a slower rate in that country relative to Australia, that country's foreign currency should
appreciate, relative to the Australian dollar.
Ans: True
Feedback: Relative inflation rates as well as productivity are factors in foreign exchange rates.
Difficulty: Easy
Est time: <1 minute
100. If the interest rate in Australia rises relative to the rest of the world, it is likely foreign
investors would decrease their demand for Australian dollars and the Australian foreign
exchange rate would rise.
Ans: False
Feedback: It is more likely that foreign investors would increase their demand for Australian
dollars and that the Australian foreign exchange rate would rise.
Difficulty: Easy
Est time: <1 minute
101. When a government places a direct limit on goods that may be imported, this intervention is
called a tariff.
Ans: False
Feedback: A direct limit on goods that may be imported is called a quota.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
102. It is quite probable that expectations will dominate other variables in influencing the value
of a currency.
Ans: True
Feedback: The importance of expectations is particularly evident with speculative FX
transactions, as speculative FX transactions represent a large proportion of the daily turnover in
the FX markets. For example, an expectation by market participants that
there will be an alteration in the policy settings of a country in the near future will also affect the
value of the currency.
Difficulty: Medium
103. Under a floating exchange rate regime, central banks may still intervene in the FX market to
stabilise volatility in the value of the currency.
Ans: True
Feedback: After inexplicable increases or decreases in the currency, the central bank tries to
smooth the FX currency.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
104. The statement ‘The yen rose against Australian dollar today from 81 to 80’ makes sense
because these numbers measure yen per AUD.
Ans: True
Feedback: ‘The value of yen rose today’ suggests that fewer numbers of yen are required to buy
one Australian dollar compared to previous periods, suggesting the value of Japanese currency
has appreciated against the Australian dollar.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
105. Discuss how relative inflation rates may influence exchange rates.
Ans: Differential inflation rates will influence exchange rates as illustrated in the following
example. Consider what will happen to US demand for euros and the supply of euros for sale if
US inflation suddenly becomes much higher than European inflation. The US demand for
European goods will increase, reflecting the increased US demand for euros. As well, the supply
of euros to be sold for US dollars will decline as the European desire for US goods decreases as
the US goods are dearer. Both forces will place upward pressure on the value of the euro. In the
reverse situation, where European inflation becomes higher, the result is downward pressure on
the value of the euro.
Bloom's: Knowledge
Difficulty: Medium
106. Discuss how relative national income growth may influence exchange rates.
Ans: A possible mechanism is if a country's national income increases substantially in relation to
another, say Australia in relation to US. If Australia's demand for imports from the US increases,
to pay for the imports there would be an increase in the supply of AUD on the FX markets. If US
income growth remained unchanged, the demand for the AUD would remain at the same level
and so the AUD would depreciate. On the other hand, if there are foreign investment inflows
owing to the higher prospects of economic growth this could lead to an appreciation of the AUD.
Bloom's: Synthesis
Difficulty: Hard
107. Discuss how relative interest rates may influence exchange rates.
Ans: Interest rates affect exchange rates by influencing the capital flows between countries.
Consider if Australian interest rates rise while those in the US remain relatively stable. Demand
for Australian interest-bearing securities increases and as US investors increase their purchases
of Australian securities, the supply of US dollars to be sold in exchange for AU dollars increases.
So, both forces put an upward pressure on the AUD. In general, the currency of the country with
the higher (or smaller decrease in) interest rates is expected to appreciate, other factors held
constant. However, investors need to consider what may happen to interest rates over the time of
their investment if there is a change in the real rate of return or inflationary expectations.
Bloom's: Synthesis
Difficulty: Medium
108. Discuss how a central bank or government may directly intervene in the FX markets.
Ans: A central bank may intervene to dampen volatility in the currency, sometimes referred to as
an FX smoothing. This may happen if the bank perceives speculators are dominating the
currency and are causing volatility not justified by the economic fundamentals. When sell orders
are swamping the currency market the central bank may enter the market as a buyer of the local
currency. Second, a central bank may intervene to try to achieve an exchange rate target value
that is different from the market's perception of the value of the currency.
Difficulty: Hard
109. If a regression analysis was run for the AUD/USD exchange rate and obtained the following
coefficients, a = 0.8 for (I -I ), a = 0.5 for (Y - Y ) and a = 0.6 for (i -i ), explain the meaning
1 US A 2 US A 3 US A
of the coefficients.
Ans: The coefficient a = 0.8 suggests that a one-unit change in the inflation differential is
1
associated with a 0.8 per cent change in the value of the AUD.
a = 0.5 suggests a positive coefficient between the income growth differential and the value of
2
the AUD.
For a = 0.6 the sign suggests a positive relationship between the value of the AUD and the
3
interest rate differential, possibly as a result of changes in inflationary expectations.

AACSB: Analysis
Bloom's: Analysis
Difficulty: Hard
Learning Objective: 16.03 Explore regression analysis as a statistical technique applied to variables that impact on an exchange
rate.
Section: 16.03 Measuring exchange rate sensitivity to changes in economic variables
Topic: Measuring exchange rate sensitivity to changes in economic variables
110. What happens to the Reserve Bank of Australia’s balance sheet when it intervenes in
foreign exchange markets?
Ans: If the central bank wishes to push up the value of domestic currency, it would buy AUD
and sell foreign currencies. So, over time the RBA’s holdings of foreign currency would fall. If
the RBA wished to push down the value of the AUD, it would sell AUD and buy foreign
currencies. The holdings of foreign currencies would rise. Smoothing operations at any one time
would entail purchase or sale of foreign currencies so that the holdings would fall or rise. Over
time smoothing operations would involve both buying and selling of foreign currencies so that
holdings would not radically change because of smoothing.
Difficulty: Medium
111. Discuss and describe how a central bank’s intervention may influence the exchange rate.
Ans: There are numerous ways in which central banks or governments may affect the value of a
currency. First, any of their policy measures that alter the relative rate of inflation, relative
income or relative interest rates will have an impact on exchange rate. An example of a policy
change would be a central bank’s action in changing monetary policy settings in order to
influence inflation levels within certain range. The central bank can also intervene directly in the
FX markets to dampen volatility in the value of the currency. This is sometimes referred to as
‘FX smoothing’, and is occasionally undertaken when a central bank perceives that speculators
are dominating the market and causing volatility in the value of the currency that is not
warranted by the underlying economic fundamentals.
1. Foreign exchange risk refers to the risk that arises from:

A. the fixed exchange rate between two currencies.
B. the variable exchange rate between two currencies.
C. tax changes in a foreign country where a multinational corporation operates.
D. the potential nationalisation of a multinational corporation's operations by a foreign
government.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 17.01 Formulate an FX policy document including FX objectives, management structure, authorisations,
reporting systems, communications, performance evaluation, audit and review procedures.
Topic: Foreign exchange: risk identification and management
2. Companies that compete in an international marketplace may be faced with three types of risk
owing to foreign exchange. These are:
A. specific, translation and transaction risk.
B. translation, transaction and economic risk.
C. accounting, transaction and translation risk.
D. accounting, specific and transaction risk.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
3. All of the following represent types of foreign currency risk, except:

A. transaction risk.
B. translation risk.
C. economic risk.
D. unexpected movement in commodity futures.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
4. _______ is the risk that arises from the effects of foreign exchange rates on the translated
value of a corporation's accounts, denominated in a given foreign currency.
A. Accounting exposure
B. Economic exposure
C. Macro-political risk
D. Micro-political risk
Ans: A
Difficulty: Medium
Est time: <1 minute
Topic: Introduction
5. An Australian company that exports iron ore is concerned that cash received from export sales
will not be as expected due to unexpected changes in exchange rate movements. This exposure
can be best described as:
A. translation risk.
B. economic risk.
C. interest rate risk.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Topic: Introduction
6. _______ is the risk that changes in the foreign exchange rate will affect future ongoing
revenues and costs for a company.
C. Operating exposure
D. Translation exposure
Ans: C
Difficulty: Easy
Est time: <1 minute
Topic: Introduction
7. _______ is the risk that arises from the effects of unexpected fluctuations in foreign exchange
rates on the net present value of a corporation's future cash flows.
D. Micro-political risk
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
Topic: Introduction
8. All of the following describe foreign exchange risk exposure, except:

A. it is a measure of potential changes in an investor’s return from an international investment
portfolio because of a change in exchange rates.
B. it is a measure of the potential change for a firm’s market value because of a change in
exchange rates.
C. it is a measure of potential changes in a firm’s account payable position because of a change
in exchange rates.
D. it is a measure of potential changes in value of an investor’s portfolio because of changes in
London interbank offered rate (LIBOR).
Ans: D
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
9. The risk for a company that future foreign currency denominated cash flows will vary owing
to exchange rate movements is:
A. accounting exposure.
B. economic exposure.
C. transaction exposure.
D. translation exposure.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
10. When a company has entered into a contract denominated in yen to buy cars from Japan, it
faces:
A. accounting exposure.
B. economic exposure.
C. operating exposure.
D. transaction exposure.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
11. If a company has overseas assets and at a future date must represent these assets on its
balance sheet, it faces ______ when doing so.
A. transaction exposure
B. economic exposure
C. operating exposure
D. translation exposure
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
12. Transaction exposure measures the changes in the value of contractually binding outstanding
foreign-currency obligations:
A. acquired after exchange rate changes.
B. acquired before exchange rate changes.
C. realised before the outstanding obligation is settled.
D. that must be settled before economic exposure is established.
Ans: B
Difficulty: Medium
Est time: <1 minute
13. Transaction exposure:

A. measures the extent to which foreign exchange volatility may affect a firm's future ongoing
revenues and costs.
B. measures the effects of FX changes on the balance sheet of the firm.
C. refers to the extent to which the value of the firm's cash flows may be affected by changes in
the exchange rate.
D. tries to measure the impact of unexpected exchange rate fluctuations on the net present value
of the firm's future cash flows.
Ans: B
Difficulty: Medium
Est time: <1 minute
14. Operating exposure:

A. measures the extent to which foreign exchange volatility may affect a firm's future ongoing
revenues and costs.
B. measures the effects of FX changes on the balance sheet of the firm.
C. refers to the extent to which the value of the firm's cash flows may be affected by changes in
the exchange rate.
D. tries to measure the impact of unexpected exchange rate fluctuations on the net present value
of the firm's future cash flows.
Ans: D
Difficulty: Medium
Est time: <1 minute
15. An Australian tourist, who is planning a trip to Germany and anticipates a change in
exchange rates, faces what kind of FX risk?
A. Economic exposure
B. Foreign exposure
C. Translation exposure
D. Transaction exposure
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
16. When a foreign subsidiary's assets are _______ than its liabilities, if the foreign currency
value depreciates for the country in which the foreign subsidiary operates, _______ will occur.
A. greater; currency exchange gains
B. greater; currency exchange losses
C. less; nothing
D. greater; nothing
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
17. When a foreign subsidiary's assets are _______ than its liabilities, if the foreign currency
value appreciates for the country in which the foreign subsidiary operates, _______ will occur.
A. greater; currency exchange gains
B. greater; currency exchange losses
C. less; nothing
D. greater; nothing
Ans: A
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
18. _______ is the risk that arises from the effects of foreign exchange rates on the foreign cash
flows of a corporation's financial accounts, denominated in a given foreign currency.
A. Economic exposure
B. Competitive exposure
D. Transaction exposure
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
19. Which of the following does NOT relate to a transaction exposure being undertaken by a
company?
A. A contract denominated in US dollars to purchase US goods
B. Borrowing yen from a Japanese bank
C. The incorporation of a New Zealand subsidiary onto the Australian parent company balance
sheet
D. Selling Australian goods to Germany
Ans: C
Difficulty: Easy
Est time: <1 minute
20. Which of the following does NOT relate to an operating exposure for a company with a large
foreign subsidiary in Japan?
A. Payment of its Japanese employees
B. Borrowing yen from a Japanese bank
C. The incorporation of a Japanese subsidiary onto the Australian parent company balance sheet
D. Payment of its day-to-day operations in Japan
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
21. Which of the following describes the difference between transaction exposure and translation
exposure?
A. Translation exposure derives from a company's foreign-currency-denominated cash flows,
and transaction exposure derives from the foreign assets and liabilities being consolidated onto
the parent company's financial statements.
B. Transaction exposure derives from a company's foreign-currency-denominated cash flows,
and translation exposure derives from the foreign assets and liabilities being consolidated onto
the parent company's financial statements.
C. Translation exposure derives from a company's forward exchange contracts, and transaction
exposure derives from the foreign assets and liabilities being consolidated onto the parent
company's financial statements.
D. Translation exposure derives from a company's foreign-currency-denominated cash flows,
and transaction exposure derives from the company's forward exchange contracts.
Ans: B
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
Topic: Introduction
22. Transaction exposure and operating exposure differ in that transaction exposure:
A. derives from a company's foreign-currency-denominated cash flows, and operating exposure
applies to the impact of exchange rate volatility on the value of the assets and liabilities of a
company's foreign operations.
B. derives from a company's foreign-currency-denominated cash flows, and operating exposure
applies to the impact of exchange rate volatility on future cash flows.
C. derives from a company's foreign-currency-denominated cash flows, and operating exposure
applies to the impact of exchange rate volatility on foreign operations.
D. applies to the impact of exchange rate volatility on future cash flows, and operating exposure
applies to the impact of exchange rate volatility on foreign operations.
Ans: B
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
23. The following hedging method is suitable for hedging translation exposure:
A. forward exchange contract.
B. interest rate swap contract.
C. international diversification of operations.
D. keeping foreign currencies reserve.
Ans: A
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
24. An Australian company with subsidiary operations in a number of international markets has
an audit into its financial risk exposures that reveals it has a potential exposure to translation risk.
Which of the following statements relates to its translation risk exposure?
A. The company has export contracts written in USD receipts over the next twelve months.
B. Interest repayments on euromarket funding are payable in DEM.
C. Assets and liabilities of its subsidiary companies are denominated in foreign currencies.
Ans: C
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
25. An Australian company is preparing to export beer into the lucrative German market in direct
competition with the established local brewers. There is some concern within the company that it
is exposed to foreign exchange risk. To which type of foreign exchange risk is the company
initially exposed?
A. Transaction risk exposure
B. Sovereign risk exposure
C. Translation risk exposure
D. Economic risk exposure
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
26. When a company analyses and forecasts foreign exchange movements and then applies
strategies based on this, this strategy is called:
A. active.
B. defensive.
C. forward.
D. protective.
Ans: A
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Section: 17.01 Foreign exchange risk policy formulation
Topic: Foreign exchange risk policy formulation
27. Which of the following about foreign exchange objectives for a large company is NOT
correct?
A. An FX strategy that requires a company to hedge a defined percentage of its identified FX
exposures at all times is called a defensive strategy.
B. A company document should state whether it will have a centralised or decentralised FX
operation.
C. A firms' FX function is part of the organisation's treasury division.
D. Strategies that require a company to analyse and forecast movements in FX markets and then
apply based on its forecasts are called hedging strategies.
Ans: D
Difficulty: Easy
Est time: <1 minute
28. The part of a company that is responsible for balance sheet funding, managing cash flows
and financial risk management is the:
A. accounting and reporting division.
B. management and audit division.
C. treasury division.
D. tax management division.
Ans: C
Difficulty: Easy
Est time: <1 minute
29. In order to have specific policies in relation to FX management, which part of the company
needs to establish FX policies?
A. Accounting and reporting division
B. Management and audit division
C. The manager of the treasury division
D. The board of directors
Ans: D
Difficulty: Easy
Est time: <1 minute
30. According to the text, which person(s) in the company is responsible to ensure that
operational procedures concerned with FX management are developed?
A. Manager of accounting and reporting division
B. Manager of management and audit division
C. Manager of treasury division
D. The chief executive
Ans: D
Difficulty: Easy
Est time: <1 minute
31. A company that is preparing a report on its current net cash-flow exposures to foreign
exchange risk is only concerned with its net foreign currency cash exposure. Which of the
following items are necessary for the report?
i. Timing of each transaction
ii. Amount of each receivable and payable
iii. Country of origin of foreign cash flow
iv. Currency of each transaction
A. i, ii, iii
B. i, ii, iv
C. i, iii, iv
D. ii, iii, iv
Ans: B
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
32. A company is about to implement its new foreign exchange risk management strategy.
Which of the following controls should the company have in place before it actually implements
the strategy?
A. Daily and other periodic foreign currency exposure reports
B. Foreign exchange exposure limits by currency and country
C. Foreign exchange strategy reporting and review process
Ans: D
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
33. A company is reviewing the function of foreign exchange within its treasury division. Which
one of the following is NOT one of the ‘controls' the company should have in place for the FX
function?
A. There should be specified monetary limits for single transactions.
B. Authorisations should be required for FX products.
C. Only nominated FX dealers can carry out the tasks of confirmation, settlement and
reconciliation.
D. Periodic reports should be forwarded to a nominated manager.
Ans: C
Difficulty: Easy
Est time: <1 minute
34. A company is reviewing the function of foreign exchange within its treasury division. Which
one of the following is NOT one of the ‘controls' the company should have in place for the FX
function?
A. There should be specified monetary limits for single transactions.
B. Authorisations should be required for FX products.
C. The tasks of dealing, back office, technology support, administration and audit should be
segregated.
D. The net value of outstanding FX buys and sell transactions yet to be settled is called an
exception report.
Ans: D
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
35. A decentralised FX operation is where:

A. the control of Treasury policy development and FX trading is spread equally between the
directors of the company.
B. Treasury policy and FX trading is spread between the divisions of the company.
C. Treasury policy development and FX trading is associated with several regional offices.
D. Treasury policy development is associated with the head office of the company, and FX
trading is spread between several regional offices.
Ans: C
Difficulty: Easy
Est time: <1 minute
36. A centralised FX operation is where:

A. the control of Treasury policy development and FX trading is spread equally between the
directors of the company.
B. Treasury policy and FX trading is spread between the divisions of the company.
C. Treasury policy development and FX trading is associated with several regional offices.
D. for a company all FX transactions occur in one single location.
Ans: C
Difficulty: Easy
Est time: <1 minute
37. For a large multinational company the FX dealers:

A. are generally located in the FX dealing room.
B. must not be allowed to carry out back office tasks of confirmation, settlements or
reconciliation.
C. must take into account the foreign currency limit that they are authorised to trade in.
D. all the given choices are correct.
Ans: D
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
38. A US-based company that is exporting car components into Australia is about to complete an
export order and expects to receive payment of AUD 500 000 in three months' time. The spot
exchange rate is USD/AUD 1.5380. In conducting an analysis of its foreign exchange risk
exposure, the company considers the impact of the following exchange rate changes:
i. USD/AUD 1.5180
ii. USD/AUD 1.5280
iii. USD/AUD 1.5480
Which of the exchange rate scenarios represents foreign exchange risk to the company?
A. i
B. ii
C. iii
Ans: D
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
Learning Objective: 17.02 Outline methods that can be employed to measure a company’s FX transaction exposures, including net
FX cash flows, currency standard deviations and correlation coefficients.
Section: 17.02 Measuring transaction exposure
Topic: Measuring transaction exposure
39. In examining its need to cover its exposures to foreign exchange risk, a company obtains
current data on the correlation between various currencies to which it is exposed. The company
determines that its main currency exposures are to the USD and the JPY. These currencies have a
correlation coefficient of +0.96. Based on the spot rate for each of the currencies, the company
expects USD cash inflows equivalent to AUD 500 000, and JPY cash inflows equivalent to AUD
495 000. Which of the following statements is most correct?
A. High positive correlation between USD and JPY (hedge risk exposure)
B. High positive correlation between USD and JPY (little need to hedge risk) exposure
C. High positive correlation between USD and AUD (hedge risk exposure)
D. Low negative correlation between USD and AUD (no need to hedge risk exposure)
Ans: B
AACSB: Analysis
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute

i. ‘Transaction exposure' refers to the risk that in the long run a company's net present value may
be affected by future changes in the foreign exchange rate.
ii. Foreign exchange ‘economic' risk exposure is a measure of the effect that a change in the
exchange rate will have on the value of a company's worth.
iii. Foreign exchange risk implies that every change in the exchange rate will have detrimental
effects on the home currency value of a company's foreign currency assets, liabilities and
transactions.
iv. A company's board of directors is responsible for establishing policy in relation to the
measurement and management of FX risk exposures within the company.
v. If an Australian-based company has a USD 1 million payable and a USD 1 million receivable,
both due on 1 July next year, it is not exposed to FX risk.
Ans: B
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute

i. ‘Transaction exposure' refers to the risk that in the long run a company's net present value may
be affected by future changes in the foreign exchange rate.
ii. Foreign exchange ‘economic' risk exposure is a measure of the effect that a change in the
exchange rate will have on the value of a company's worth.
iii. Foreign exchange risk implies that every change in the exchange rate will have detrimental
effects on the home currency value of a company's foreign currency assets, liabilities and
transactions.
iv. A company's board of directors is responsible for establishing policy in relation to the
measurement and management of FX risk exposures within the company.
v. If an Australian-based company has a USD 1 million payable and a USD 1 million receivable,
both due on 1 July next year, it is not exposed to FX risk.
Which of the following are correct?
A. i, ii, iii and iv are true
B. i, ii, iv and v are true
C. i, iii, and iv are true
D. only ii and v are true
Ans: D
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
42. The use of hedging by a company should:

A. increase the variability of reported cash flows.
B. increase the variability of expected cash flows.
C. decrease the variability of reported cash flows.
D. decrease the variability of expected cash flows.
Ans: D
Difficulty: Medium
Est time: <1 minute
43. The purpose of hedging by a company is to:

A. maximise cash flows and profits.
B. minimise the variability of expected cash flows.
C. decrease the uncertainty of reported cash flows.
D. increase the expected cash flows.
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
44. A board of directors is concerned about the variability of the company's various foreign
currency exposures. The company treasurer prepares a report showing the standard deviations for
a range of currencies over the past decade. Which of the following is correct?
A. Standard deviation does not provide an accurate measure of the future probability of
percentage exchange rate changes.
B. Use of ten-year data smooths out periodic fluctuations, to give a more reliable future
indication of exposure.
C. Exposures in currencies that have a low standard deviation against the AUD involve greater
foreign exchange risk.
D. Different patterns of future currency movements are reflected in the historical data used in
calculating standard deviations.
Ans: A
Difficulty: Hard
Est time: <1 minute
45. Consider these five statements:

i. If an Australian-based company has a USD 1 million payable on 1 July next year and a USD 1
million receivable due on 1 August, the company has a perfect natural hedge.
ii. An Australian exporter with a transaction denominated in Singapore dollars (SGD) is exposed
to downside risk if the AUD appreciates.
iii. An exposure in a currency with a high standard deviation against the AUD entails a greater
degree of risk than does a similarly sized exposure in a currency that has a relatively low
standard deviation.
iv. If an Australian–based company has net exposures in a range of currencies, each exposure
should be not hedged because each of them involves the same degree of risk.
v. If an Australian company imports components from Italy, and at the same time exports goods
to Germany, with both contracts under a euro-denominated contract and dated 31 July next year,
the company has no FX exposure.
A. 4 statements are true and 1 is false
D. 1 statement is true and 4 are false
Ans: B
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute

i. If an Australian-based company has a USD 1 million payable on 1 July next year and a USD 1
million receivable due on 1 August, the company has a perfect natural hedge.
ii. An Australian exporter with a transaction denominated in Singapore dollars (SGD) is exposed
to downside risk if the AUD appreciates.
iii. An exposure in a currency with a high standard deviation against the AUD entails a greater
degree of risk than does a similarly sized exposure in a currency that has a relatively low
standard deviation.
iv. If an Australian–based company has net exposures in a range of currencies, each exposure
should be not hedged because each of them involves the same degree of risk.
v. If an Australian company imports components from Italy, and at the same time exports goods
to Germany, with both contracts under a euro-denominated contract and dated 31 July next year,
the company has no FX exposure.
Which of the following are correct?
A. i, ii, iii and iv are true
B. i, ii, iv and v are true
C. ii, iii, and iv are true
D. ii, iii and v are true
Ans: D
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
47. Market-based hedging techniques for FX include:

A. futures contracts.
B. options on foreign currency.
C. currency swaps.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 17.03 Explain procedures involved in the implementation of market-based hedging techniques, in particular
forward exchange contracts and money-market hedging.
Section: 17.03 Risk Management: market-based hedging techniques
Topic: Risk Management: market-based hedging techniques
48. The over-the-counter market-based FX instrument that locks in an exchange rate on a

currency pair that will apply at specified future date is:
C. forward exchange contracts.
D. currency swaps.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
49. Market-based hedging strategies involve:

A. the use of a specific financial product such as a forward contract to manage FX risk and a
source of funds to fulfil that contract.
B. the use of an internal hedging technique to manage FX risk by actively managing FX cash
flow within an organisation.
C. the use of a technique that involves arranging a cash flow shortfall with the banks.
D. the use of an option contract.
Ans: A
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
50. All of the following are market-based hedging techniques for FX, except:
C. forward exchange contracts.
D. currency swaps.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
51. Which of the following best describes forward foreign exchange contracts (FFEs)?
A. An over-the counter product that is considered to manage foreign exchange risk exposures
B. A contractual agreement between two parties to lock in an agreed future exchange rate for a
specified currency
C. An Australian company with a USD liability payable in three months can arrange FFE with
the banks to provide a three-month forward rate
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
52. An Australian company that is exposed to FX risk as the result of having a USD foreign
currency payable due in three months can enter into:
A. a three-month forward exchange contract to sell USD forward.
B. a three-month forward exchange contract to sell AUD forward.
C. a three-month futures contract to sell USD.
D. a three-month currency swap to sell USD and buy AUD.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
53. An Australian company that is exposed to FX risk as the result of having a USD foreign
currency receivable due in three months can enter into:
A. a three-month forward exchange contract to sell USD forward.
B. a forward exchange contract to sell AUD forward.
C. a three-month futures contract to sell USD.
D. a three-month currency swap to sell USD and buy AUD.
Ans: A
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
54. The currency risk of an exporter can be reduced by:

A. hedging, using the foreign exchange futures.
B. transacting only in the currency of the exporter's own country.
C. buying a forward contract for the exporter's currency.
Ans: D
Difficulty: Medium
Est time: <1 minute
55. The general principle of exchange-rate hedging is to:

A. deposit the foreign funds in the local money market until needed.
B. transact in the foreign money market where the obligation arises.
C. enter into an offsetting obligation in the same foreign currency.
D. enter into offsetting obligations in the futures and forwards markets.
Ans: C
Difficulty: Easy
Est time: <1 minute
56. A British company has a USD 1 million payable in two months. How can the British
company hedge the foreign currency payable?
A. Buy pounds in the forward market
B. Sell pounds in the spot market
C. Sell US dollars in the spot market
D. Buy US dollars in the forward market
Ans: D
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
57. A US company has an AUD 1 million receivable in two months. How can the US company
hedge the foreign currency receivable? It could:
A. buy AUD in the spot market.
B. sell AUD in the forward market.
C. sell USD in the spot market.
D. buy USD in the forward market.
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
58. If a company takes out a forward exchange contract, which of the following is correct?
A. At the maturity date, the company can pay either the forward rate that was contracted or the
then-current rate.
B. Taking out a forward exchange contract is always cheaper than waiting to pay spot rates.
C. Paying the spot price is safer than taking out a forward exchange cover.
D. The company's cost is locked in from the beginning of the contract, regardless of market
changes.
Ans: D
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
59. A company decides to hedge a foreign exchange risk associated with a USD 1 000 000
receivable by carrying out a money market hedge. Which of the following statements in relation
to the USD receivable money market hedge is correct?
A. Interest rate calculations will need to recognise US convention differences.
B. The company will borrow sufficient AUD today and spot convert into USD.
C. USD will be invested in the US money markets for the period of cover.
Ans: A
Difficulty: Medium
Est time: <1 minute
60. An Australian company that imports goods from a German supplier on credit can protect
itself against transaction exposure risk by:
A. entering into a contract in the forward exchange market.
B. borrowing Australian dollars and investing in the German money market.
C. borrowing euros and investing in the Australian money market.
D. entering into a contract in the forward exchange market AND/OR borrowing Australian
dollars and investing in the German money market.
Ans: D
Difficulty: Medium
Est time: <1 minute
61. An Australian exporter has dispatched a consignment to the USA and expects to receive
payment of USD 250 000 in three months' time. The company wishes to hedge part of its
exposure to the USD, and enters into a forward exchange contract with its bank, based on the
amount USD 125 000. Based on today's data (below), what amount in AUD will the company
receive in three months' time?
Spot rate: AUD/USD 0.7345-50
Three-month forward rate: AUD/USD 0.7430–35
A. AUD 340 136.05
B. AUD 340 367.60
C. AUD 336 473.76
D. AUD 336 247.48
Ans: D
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
62. A system of transactions involving borrowing in one currency and lending in another in order
to construct a pair of future transactions in the two currencies similar to a forward exchange is
a/an:
A. balance sheet hedge.
B. internal hedge.
C. money market hedge.
Ans: C
Difficulty: Medium
Est time: <1 minute
63. After assessing the risk of the various exposures, a company decides to take a money market
hedge. The general principle of a money market hedge is to:
A. transact in the money market of the country whose currency you are exposed to.
B. borrow the home currency and deposit it in the foreign money market until the future date of
the exposed transaction.
C. take a position in the home money market today that establishes a future obligation that is the
opposite of the exposed underlying transaction.
D. none of the given choices are correct.
Ans: C
Difficulty: Medium
Est time: <1 minute
64. An Australian company has contracted to buy a piece of machinery produced in Japan, with
delivery in six months and payment to be made in Japanese yen. How can this company reduce
its foreign exchange risk?
A. Go short yen in the futures market
B. Purchase a put option on yen
C. Sell goods in Japan to be paid in six months
Ans: C
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
65. A company wishes to obtain a loan denominated in yen but considers the US market to offer
better terms. How can the company accomplish this?
A. Borrow yen in Japan, exchange for US dollars, and arrange a currency swap
B. Borrow yen in Japan, exchange for US dollars, and arrange an interest rate swap
C. Borrow dollars in the US, exchange for yen, and arrange a currency swap
D. Borrow dollars in US, exchange for yen, and arrange an interest rate swap
Ans: C
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
66. When a company receives a USD 10 million payment for export goods on the same day as it
pays USD 10 million for imports, this is called a/an:
A. dynamic hedge.
B. passive hedge.
C. natural hedge.
D. inherent hedge.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 17.04 Consider the implementation of internal hedging techniques to minimise and manage FX risk, including
invoicing in the home currency, creating a natural hedge, currency diversification, leading transactions, lagging transactions, mark-
ups, counter-trade and offsets.
Section: 17.04 Risk management: internal hedging techniques
67. When a company uses the internal foreign exchange hedging technique and changes the
timing of a cash flow so it occurs earlier than the original agreed date, this is called:
A. currency diversification.
B. lagging.
C. leading.
D. advancing.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
68. Which of the following are strategies used to manage transaction exposure?
A. Leading and lagging foreign exchange transactions
B. Buying or selling foreign exchange in the forward market
C. Borrowing in foreign currency markets, using foreign currency receivables as collateral
Ans: D
Difficulty: Medium
Est time: <1 minute
69. All of the following are internal hedging techniques for foreign exchange exposure, except:
A. creating a natural hedge.
B. using leads and lags in FX transactions.
C. invoicing in the home currency.
D. using a swap.
Ans: D
Difficulty: Easy
Est time: <1 minute
70. Which of the following best describes an active FX strategy and a passive FX strategy?
A. Active FX strategies are more proactive approaches that require the company to analyse and
forecast movements in the FX markets and apply strategies based on its forecast of future
movements in an exchange rate over time.
B. Passive FX strategies require the company to hedge a defined FX exposure all the time.
C. Both active and passive FX strategies are designed to counter unexpected movements in
exchange rates.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
71. Which of the following are commonly used by companies to manage foreign exchange risk?
A. Money market hedges
B. Foreign currency hedges
C. Internal hedges
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
72. If a company has a EUR 100 000 account payable in three months and it expects the AUD to
appreciate by the time of payment, a reasonable strategy would be to:
A. lag the payment cash flow.
B. borrow the present value of EUR 100 000 and do a money market hedge in the Australian
market.
C. enter into a forward exchange contract to sell euros in three months' time.
D. lead the payment cash flow.
Ans: D
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
73. If a company has a YEN 1 000 000 account receivable in three months and it expects the
AUD to depreciate by the time of payment, a reasonable strategy would be to:
A. lead the payment cash flow.
B. borrow the present value of YEN 1 000 000 and do a money market hedge in the Australian
market.
C. enter into a forward exchange contract to sell YEN in three months' time.
D. lag the payment cash flow.
Ans: A
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute

A. The majority of trade transactions and international finance transactions are conducted in hard
currencies, such as the USD, euro and sterling.
B. The advantage of diversifying the currency spread of a company's transactions is enhanced if
the foreign currencies have a highly positive correlation.
C. Leading refers to changing the timing of a cash flow so it takes place prior to the originally
agreed date.
D. Counter-trade refers to an arrangement in which two companies, each exposed to FX risk,
enter into an arrangement whereby they exchange one product for another.
Ans: B
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute

i. If an Australian business decides to hedge a USD receivable at time t + 3, it would hedge
through a forward contract in which it sells the AUD forward for t + 3.
ii. An Australian exporter with a USD receivable would be hedging through a money market
hedge if it borrows USD today and repays the loan on the day on which the USDs are received
from the payments of the export account receivable.
iii. If an Australian company borrows through an offshore sale of AUD-denominated bonds in
the eurobond market, it is not exposed to FX risk.
iv. ‘Internal' hedging techniques may save a company the costs incurred in using 'market-based'
hedging techniques, but they have recognisable costs as well.
v. A net payable in one currency and a net payable in another currency is a relatively low-risk set
of exposures if the amounts and timing are identical, and the correlation coefficient between the
two currencies is -0.99.
Ans: D
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
76. An Australian company borrowing Japanese yen will benefit in which of the following
situations?
A. If the AUD depreciates or the Japanese yen appreciates
B. If the AUD appreciates or the Japanese yen depreciates
C. If the AUD and the Japanese yen both appreciate
D. If the AUD and the Japanese yen both depreciate
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
77. Which of the following about transaction exposure is NOT correct?

A. An Australian company that exports to Japan faces transaction exposure for its accounts
receivable.
B. If an Australian company exports to the USA but imports other USA goods for the same
value, then it has a natural hedge if the two payment dates are the same.
C. If an Australian company has exposures in two currencies with correlation coefficient of 0.96
then the company has a natural hedge.
D. A firm needs to calculate the net amount of cash inflows and outflows denominated in
different currencies, based on the timing of cash flows.
Ans: C
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
78. In which circumstance is the need for a hedge the greatest?

A. The firm has expected euro inflows of 5 million (AUD equivalent) and expected euro
outflows of 5 million (AUD equivalent).
B. The firm has expected euro inflows of 5 million (AUD equivalent) and expected Norwegian
krone outflows of 5 million (AUD equivalent). The euro and the krone have a very high positive
correlation.
C. The firm has expected euro inflows of 5 million (AUD equivalent) and expected Norwegian
krone outflows of 5 million (AUD equivalent). The euro and the krone have a very high negative
correlation.
D. The firm has expected euro inflows of 10 million (AUD equivalent) and expected euro
outflows of 10 million (AUD equivalent).
Ans: C
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
79. Aussie Investor’s $1 million US Treasury bill matures in 90 days. The spot rate is
AUD/USD.7729–41 and the forward rate is AUD/USD.7739–51. Aussie Investor enters into a
forward hedge that will pay:
A. AUD1 290 156
B. AUD1 291 823
C. AUD1 292 157
D. AUD1 293 828
Ans: A
AACSB: Analysis
Bloom's: Analysis
Difficulty: Easy
Est time: <1 minute
80. Aussie Investor’s $1 million US Treasury bill matures in one year. The spot rate is
AUD/USD.7729–41 and the forward rate is AUD/USD.7749–61. The Australian one-year
interest rate is 4 per cent, whilst the US one-year interest rate is 3 per cent. Aussie Investor enters
into a money market hedge. What proceeds will Aussie Investor have one year from today?
A. AUD1 279 401
B. AUD1 301 003
C. AUD1 304 365
D. AUD1 306 390
Ans: C
AACSB: Analysis
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute
81. A company may wish to _____ payments in a foreign currency when it expects the _____.
A. lead; foreign currency to appreciate
B. lead; foreign currency to depreciate
C. lag; foreign currency to appreciate
D. lag; domestic currency to depreciate
Ans: A
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
Topic: Risk management: internal hedging techniques
82. An advantage of counter-trade is _____ and a disadvantage of counter-trade is _____.

A. the double coincidence of wants; currency offsets
B. the elimination of foreign exchange risk; the double coincidence of wants
C. the ability to lead and lag payments; the double coincidence of wants
D. currency offsets; the ability to lead and lag payments
Ans: B
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
83. The money market hedge exchanges currencies _____, and the forward hedge exchanges
currencies _____.
A. at the outset only; at the outset and in the future
B. at the outset and in the future; in the future only
C. in the future only; in the future only
D. at the outset only; in the future only
Ans: D
Difficulty: Medium
Est time: <1 minute
84. Internal hedging strategies include the following except for:

A. leading and lagging.
B. invoicing in the home currency.
C. entering into an option contract.
D. creating a natural hedge.
Ans: C
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
85. A German company exports to Malaysia. As it invoices in the ringgit to accommodate its
customer, it is concerned with exchange rate risk. The following is a natural hedge.
A. Borrow funds in the euro
B. Invoice certain inputs in the ringgit
C. Enter into a swap agreement exchanging euros for ringgit
D. Invest in ringgit securities
Ans: B
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
86. Companies that operate in an international market place are faced with different FX risk
exposures. These are accounting, translation and transaction risk.
Ans: False
Feedback: The FX risks are economic, transaction, translation and operational.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
87. Operating FX exposure measures the extent to which exchange rate volatility will affect
future ongoing revenues and costs.
Ans: True
Feedback: Future ongoing revenues and costs are equivalent to the firm's future operating cash
flows.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
88. For a company's treasury FX division it is inappropriate policy to allow an FX dealer to carry
out the backroom tasks of confirmations, settlements and reconciliation.
Ans: True
Feedback: There have been many examples of financial loss when FX dealers have been able to
do backroom tasks.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
89. In calculating net FX exposures a company should collate payables and receivables
according to the currency of the transaction rather than the country of the transaction.
Ans: True
Feedback: It is movements of the different currencies that expose a company to FX risk.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
90. If a Singaporean-based company has a USD 1 million receivable due on 20 August and a
USD 1 million payable on 20 August, the company has a perfect natural hedge.
Ans: True
Feedback: Since the receivables and payables are the same and due at the same time any
movement in the currencies would be offset.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
91. An exposure to a currency with a lower standard deviation against an importer's local
currency results in a lower degree of risk than exposure to a currency that has a higher standard
deviation.
Ans: True
Feedback: A lower standard deviation means lower volatility of the currency.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
92. When one currency is appreciating in equal but opposite amounts to another currency, the
two currencies are said to be perfectly negatively correlated.
Ans: True
Feedback: A correlation coefficient of -1.0 indicates the two currencies are perfectly negatively
correlated.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
93. If an Australian company has a GBP 1 million receivable, due in three months, and takes out
a forward exchange contract to hedge, it enters into a contract to buy GBP 1 million in three
months' time.
Ans: False
Feedback: The company should enter into a forward to sell GBP and buy AUD.
Difficulty: Easy
Est time: <1 minute
94. An Australian importer with a USD payable in three months would be hedging through a
money-market hedge if it borrows AUD today, invests the funds in the US money market for
three months and then pays the account payable with the maturing money market funds.
Ans: True
Feedback: By using a money market hedge the Australian company knows the AUD cost of its
USD account payable.
Difficulty: Medium
Est time: <1 minute
95. An Australian company that has receivables in USD might adopt a strategy that involves
collecting receivables early when the USD is expected to appreciate against the AUD.
Ans: False
Feedback: Expected appreciation in USD will encourage firms to collect receivables later, as the
amount to be received in AUD will be higher.
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
96. A commonly used strategy by Australian exporters for managing FX risk exposure is the
practice of invoicing in the home currency.
Ans: False
Feedback: It is not a common practice. The majority of trade transactions are conducted in hard
currencies such as USD, the euro or yen.
Difficulty: Medium
Est time: <1 minute
97. 98. A market-based FX risk management strategy such as a forward contract is generally
used to counter unexpected movements in exchange rates. However, if the financial markets are
imperfect, there is a likely chance of credit risk.
Ans: True
Feedback: Although buying a forward contract hedges possible risk exposure as a result of
unexpected movements in exchange rates, counterparty risk remains unhedged, as the
counterparty to a forward contract may default.
Difficulty: Medium
Est time: <1 minute
98. In relation to foreign exchange risk policy formulation and the policy document, discuss the
FX objectives of an organisation.
Ans: It is the role of the board of directors to establish the objectives and policies of an
organisation. As part of a company's operations FX policies should be documented and
circulated. Some aspects of FX risk management that need to be considered are: foreign
exchange objectives and FX procedures such as management structure.
Bloom's: Knowledge
Difficulty: Medium
99. In relation to foreign exchange risk policy formulation and the policy document, discuss the
role of the management structure of an organisation.
Ans: The board of directors must ensure a suitable risk management structure is in place that has
expertise in the FX markets. If the FX exposure is large enough to be part of treasury operations,
after allocating funds to ensure personnel are appointed and infrastructure established, operating
procedures such as authorisations, exposure reporting systems, communications, performance
evaluation and audit and review procedures need to be in place.
Bloom's: Knowledge
Difficulty: Medium
100. The policy document that governs FX management should specify how communication
should occur across the organisation structure. Discuss this statement.
Ans: Given all the different units that can occur in a large organisation it is important that the
policy document specifies how FX communication should be handled. For example, it is
important if one unit of an organisation carries out a transaction involving the provision or
receipt of foreign currency for the FX division to be informed so that financial arrangements can
be made on the due date in relation to the payment or receipt of the FX.
Difficulty: Medium
101. Discuss transaction exposure for a firm with only one or two international transactions.
Ans: For such a company, identification of its potential FX exposure is quite simple. However, it
can still face uncertainty. In the case of an Australian exporter with an order worth USD1 million
and paid in USD, if the AUD appreciates, the payment for its export order is reduced and if the
AUD depreciates it may make an unexpected AUD gain on the transaction. This illustrates how
FX exposure makes accurate budgeting very difficult.
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
102. Discuss the importance of the recording of the expected cash inflows and outflows in
estimating transaction exposure.
Ans: It is exceedingly important to record the expected cash inflows and outflows for specific
time periods. This enables a firm to identify, measure, manage and monitor its ongoing FX
exposures over time. With this data a company may develop a view of the extent of the risk
associated with each exposure. The higher the probability that the spot rate for a currency will
change between the contract date and the payment date, the greater the risk associated with any
remaining exposure to it.
Difficulty: Medium
Topic: Management: market-based hedging techniques
103. Your firm has a £2 million payable in one year. The British interest rate is 5 per cent, while
the Australian interest rate is 6.5 per cent. The exchange rate quotation is AUD/GBP.5633–45,
55–52. Set up a forward hedge.
Ans: Transfer AUD funds in one year at the forward rate. Because the forward points are
declining we subtract them from the spot rate to obtain the forward rate AUD/GBP.5578–93. The
AUD is at a forward discount.
£2 million x (AUD1/£.5578) = AUD3 585 515
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
104. An Australian company has USD50 million payable, which will be due in six months. The
company is concerned that an unexpected rise in the value of the USD against the AUD might
affect company’s payable position.
Discuss and describe FX risk management strategies and set up risk management strategies that
can overcome such exposure.
Ans: An Australian company with USD50 million payable, which carries out transactions in the
international markets, maybe exposed to foreign exchange risk. Futures and forward contracts
are available that facilitate the management of foreign exchange risk exposures. Broadly, the
company may implement one or a combination of so-called ‘market base strategies’, which
involve using specific financial products such as forward contracts to cover for any losses arising
from FX risk. In this context, the company may set up a currency forward contract that allows
the company to buy a specified amount of USD, which will be available in six months, at the
exchange rate identified today.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 17.03 Explain procedures involved in the implementation of market-based
hedging techniques, in particular forward exchange contracts and money-market hedging.
Difficulty: Medium
Est time: <1 minute
105. Your firm has a £2 million payable in one year. The British interest rate is 5 per cent, while
the Australian interest rate is 6.5 per cent. The exchange rate quotation is AUD/GBP.5633–45,
55–52. Set up a money market hedge. Which hedge is more advantageous?
Ans: Transfer funds to GBP at the outset. Invest these funds for the year. Pay the payable with
these invested funds. Work the problem backwards to determine the amount of funds to be
transferred to GBP. This amount of AUD is the cost as of today. We could express this cost at
one year from now when the payable is paid.
£2 million / 1.05 = £1 904 762
£1 904 762 x (AUD1/£.5633) = AUD3 381 434
AUD3 381 434 x 1.065 = AUD3 601 227
The forward hedge is better as its cost is less by AUD 3 601 227 – AUD 3 585 515 = AUD 15
712. The money market and forward hedges are both evaluated as the AUD cost one year from
now.
AACSB: Analysis
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute
1. Corporate risk exposure is defined as:

A. the possibility that a firm’s realised cash flow may be higher or lower than the expected cash
flow as results of the firm’s exposures to the risk.
B. the deviation between actual and expected outcome as a result of risk exposure.
C. the possibility that a firm’s foreign liability increases as a result of expected changes in
exchange rate.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 18.01 Understand the nature and importance of risk and risk management, and explain the operational and
financial risk exposures that a business must manage.
Topic: An introduction to risk management and derivatives
2. Which of the following statement describes about operational and financial risks?
A. Exposures that may impact on the normal commercial functions of a business
B. Operational exposure includes technological obsolescence, loss of market share and other
factors that may impact on the normal commercial functions of a business
C. Financial risks are those that result in unanticipated changes in projected cash flows or the
structure and value of balance sheet assets and liabilities
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
3. It is argued that effective risk management is vital to the survival of an organisation because:
A. most business organisations are exposed to a wide variety of risks.
B. many business failures can be attributed to inadequate policies.
C. most organisations are exposed to interest rate risk.
D. all of the given answers are correct.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
4. Risk exposure can be managed using derivative securities. The following is true about
derivative securities.
A. Derivatives are risk management products (tools) to mitigate possible risk exposure faced by
companies, investors and financial institutions.
B. Derivatives may be used to manage or mitigate risk exposure as a result of adverse movement
in interest rates, exchange rates, share price and commodity price.
C. There are four generic types of derivative instruments: forward contacts, futures contracts,
options contracts and swap contracts.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Section: 18.01 Understanding risk
Topic: Understanding risk
5. A forward contract is best described as:

A. a commitment to purchase at a future date a given amount of a commodity or an asset at a
price agreed on today.
B. an over-the-counter risk management product to hedge possible exposure as a result of
unexpected movement exchange rate.
C. a financial instrument primarily designed to enable the management of a specified risk.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
6. Derivatives are the financial instruments that are:

A. financial assets, such as shares and bonds that derive their value from the value of the
company that issues them.
B. financial assets whose rates of return must be derived from information published in financial
pages.
C. financial assets that derive their value from underlying assets.
D. derived by investment banks, which then trade them.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
7. Risk management objectives and policies should be established by:

A. the chief executive officer.
B. the chief financial officer.
C. the board of directors.
D. a company's shareholders.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
8. Derivative markets exist in order to:

A. allow for the direct cash sale of common shares.
B. allow for the direct cash sale of corporate bonds.
C. reduce the risk of exposure to price fluctuations in cash markets.
D. overcome some of the information problems involved in trades in over-the-counter markets.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
9. Risk exposures that may impact on the normal day-to-day running of a business are called:
A. transactional.
B. operational.
C. financial.
D. functional.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
10. Portfolio managers try to use derivatives:

A. to gain from up market.
B. to limit the downside risk exposure.
C. to protect capital gain when markets decline.
Ans: D
Bloom's: Reflection
Difficulty: Medium
Est time: <1 minute
11. When an oil company suffers severe damage to one of its oil drilling platforms, this is an
example of:
A. technological risk.
B. financial risk.
C. business risk.
D. operational risk.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
12. Major financial risk exposures for corporations include:

A. a change in interest rates.
B. foreign currency appreciating.
C. company with insufficient funds to pay wages.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
13. Which of the following businesses are most exposed to interest rate risk?
A. A company with a high equity to debt ratio
B. A company with a large amount of floating rate debt
C. An all-equity company
D. An investment company with an investment portfolio that matches its investment horizon
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
14. Which of the following is NOT an example of financial risk exposure for a company?
A. When interest rates increase and a larger proportion of mortgage payments are in default for a
bank
B. When a local currency decreases for an exporter
C. When a company has taken out a short-term loan and floating interest rates increase
D. When interest rates increase for a highly geared company
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
15. The risk exposure when a corporation appears to have insufficient funds to meet day-to-day
commitments as they fall due is known as:
A. transaction risk.
B. liquidity risk.
C. interest rate risk.
D. default risk.
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
16. For a company the process of risk management needs to:

A. cover financial and operational risks only.
B. cover business and operational risks only.
C. be a structured process.
D. be flexible as the nature of risk is dynamic.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 18.02 Construct and analyse a structured risk management process that includes the identification, analysis and
assessment of risk exposures, the selection of risk management strategies and products and the establishment of control,
monitoring, audit and review procedures.
Section: 18.02 The risk management process
Topic: The risk management process
17. One of the important first steps in a risk management strategy for a company is to:
A. establish related risk and product controls.
B. analyse the impact of the risk exposure.
C. select appropriate risk management strategies.
D. continually monitor the existing strategies.
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
18. The analysis that documents each risk exposure and then tries to measure what will be the
operational and financial effect should the risk event occur is called:
A. hedging analysis.
B. cost-benefit analysis.
C. business impact analysis.
D. SMART analysis.
Ans: C
Difficulty: Medium
Est time: <1 minute
19. According to the text there are three steps:

i. Assess the attitude of the organisation to each identified risk exposure
ii. Analyse the impact of the risk exposures
iii. Identify operational and financial risk exposures
Which is the correct order?
A. i, ii, iii
B. iii, ii, i
C. ii, i, iii
D. iii, i, ii
Ans: B
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute

A. Part of a company's credit policy considers how much credit a customer should be granted.
B. Cost-benefit analysis can be used to evaluate an investment of a back-up computer centre or
outsource the back-up to an outside centre provider.
C. After identification of all of its risk exposure an organisation must seek to remove all these
risks.
D. Procedural controls of a risk management strategy documents all the products that can be used
by the organisation.
Ans: C
Difficulty: Medium
Est time: <1 minute
21. A futures contract is an agreement that specifies the delivery of a commodity or financial
security at a:
A. predetermined future date, with a price to be negotiated at the time of delivery.
B. predetermined future date, with a currently agreed-on price.
C. currently agreed-on price, with a delivery date to be negotiated later.
D. predetermined future date, with a price and delivery to be negotiated later.
Ans: B
Difficulty: Easy
Est time: <1 minute
Learning Objective: 18.03 Examine the basic fundamentals of futures contracts.
Section: 18.03 Futures contracts
Topic: Futures contracts
22. The following statements describe the major distinction between forward and futures
contracts.
A. A futures contract is a universally regulated (standardised) agreement to buy or sell a product
at a particular date in the future, at a pre-determined price.
B. A forward contract is a financial instrument primarily designed to enable the management of a
specified risk.
C. The basic feature of futures contract is that it is an exchange traded contract, traded on
organised exchange (e.g. ASX) while forward contracts are over-the-counter risk management
products.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
23. A standardised agreement traded on an organised exchange for delivery of a specified

security or commodity at a specified price on a predetermined date is a/an:
A. hedging contract.
B. futures contract.
C. option contract.
D. swap contract.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
24. In relation to futures markets, which of the following regarding initial margins is false?
A. A futures trader is required to pay an initial margin to the clearinghouse.
B. The initial margin will be higher for low market volatility.
C. If the futures contract price drops below the minimum percentage, the initial margin will have
to be increased.
D. In order to top up an insufficient initial margin a maintenance margin call will be made.
Ans: B
Difficulty: Easy
Est time: <1 minute
25. If a client investor is holding a large number of listed shares on the ASX, intends to sell in
three months' time and wishes to protect the value of the share portfolio, they may:
A. buy a futures contract based on the S&P/ASX.
B. sell a futures contract based on the S&P/ASX.
C. write a put option based on the S&P/ASX.
D. buy a call option based on the S&P/ASX.
Ans: B
Difficulty: Medium
Est time: <1 minute
26. Which of the following is NOT correct for ASX index futures?
A. They are cash settled.
B. They are traded electronically by the ASX Trade 24 trading platform.
C. The contract unit is valued at $25 per index point.
D. They are traded over the counter by commodity and security brokers.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
27. Which of the following statements relating to the use of futures contracts is NOT correct?
A. Futures contracts are derivative products that derive from a physical market product.
B. The pricing of futures contracts is based on the price of the underlying market product.
C. Future physical market price changes are offset by a profit or loss in the futures market.
D. Futures contracts are generally closed out by delivery of the physical market product.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
28. In the futures markets, if a futures contract is marked-to-market, this refers to the:
A. interaction of the demand and supply forces in the market to determine the price of the
options contract.
B. interaction of the demand and supply forces in the market to determine the price of the futures
contract.
C. settlement of gains and losses on futures contracts on a daily basis.
D. settlement of gains and losses on forward contracts on a daily basis.
Ans: C
Difficulty: Medium
Est time: <1 minute
29. In the futures markets, a maintenance margin call refers to:

A. funds paid to the clearing house by the brokers as insurance against losses.
B. funds paid to the clearing house by each trader to cover losses.
C. realised profits paid by the clearing house to traders.
D. the difference between the futures contracts price and the underlying asset.
Ans: B
Difficulty: Medium
Est time: <1 minute
30. A major advantage of forward contracts compared with futures contracts is that:
A. they are generally exposed to lower default risk.
B. they are considered more liquid.
C. they are highly standardised.
Ans: D
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
31. In the futures markets, when the initial margin of a futures account is topped up daily to
cover adverse futures price movements, this is called:
A. marked-to-market.
B. maintenance margin call.
C. short call.
D. closing-out.
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
32. The market ASX Trade 24 trades in:

A. shares 24 hours.
B. shares and bonds 24 hours.
C. futures contracts.
D. forward contracts.
Ans: C
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
33. Parties who have bought a futures contract are said to have taken a ____ position and parties
who have sold a futures contract are said to have taken a ____ position.
A. sell; short
B. buy; short
C. short; long
D. long; short
Ans: D
Bloom's: Knowledge
Est time: <1 minute
34. In the futures markets, the funds that represent 2 to 10 per cent of the futures contract that a
client pays to the futures exchange clearing house are called:
A. maintenance margin.
B. initial collateral.
C. margin call.
D. initial margin.
Ans: D
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
35. A company, worried that the cost of funds might rise during the term of their short-term
borrowing, can hedge this rise by:
A. buying futures contracts on bank-accepted bills.
B. selling futures contracts on bank-accepted bills.
C. buying bank-accepted bills on the spot market.
D. increasing the amount of money that has been borrowed.
Ans: B
Difficulty: Medium
Est time: <1 minute
36. In the futures markets, the price of a derivative contract for gold is based on:
A. prices of gold mining companies.
B. price of gold in the spot markets.
C. price of gold in the forward markets.
D. price of gold commodity indexes.
Ans: B
Difficulty: Medium
Est time: <1 minute
37. If a company intends to borrow in three months' time, it can lock in its borrowing costs by:
A. buying futures contracts.
B. selling futures contracts.
C. going long on futures contracts.
D. an arbitrage position on futures contracts.
Ans: B
Difficulty: Medium
Est time: <1 minute
38. A forward rate agreement (FRA) is an interest rate risk-management product, generally
provided by banks over the-counter. Which of the following statements regarding forward rate
agreements is correct?
A. FRAs are not standardised with regard to contract period and amount.
B. The centralised clearing house (CCH) holds the deposits and margin calls.
C. As a bank is the counterparty to the FRA, there is no credit risk.
Ans: A
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
Learning Objective: 18.04 Review the operation of forward exchange contracts and forward rate agreements.
Section: 18.04 Forward contracts
Topic: Forward contracts
39. If an FRA dealer quotes ‘6Mv9M 7.25 to 20', this means that the dealer is prepared to:
A. lend three-month money at 7.05% per annum.
B. borrow three-month money at 7.05% per annum.
C. lend three-month money at 7.25% per annum.
D. borrow three-month money at 7.25% per annum.
Ans: C
AACSB: Analysis
Difficulty: Medium
Est time: <1 minute
40. The advantage of using a forward rate agreement FRA over a futures contract is:
A. FRAs are highly standardised.
B. FRAs have only an initial margin and no ongoing maintenance margin.
C. the terms and conditions of an FRA can be negotiated.
D. FRAs have standardised maturities.
Ans: C
Difficulty: Medium
Est time: <1 minute
41. When a company contacts a bank and asks for a three-month forward rate and is quoted by
the bank's FX dealer AUD/USD0.9560-65 14.20, then the three-month forward rate is:
A. AUD/USD0.9536-45
B. AUD/USD0.9540-51
C. AUD/USD0.9574-85
D. AUD/USD0.9580-79
Ans: C
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
42. Which of the following statement describes an option contract and the major distinction
between a call and a put option?
A. An option is defined as the right, but not the obligation, to buy or to sell a specified amount of
a given stock, commodity, currency, index or debt, at a specified price (the strike price) for a
specified period of time.
B. A call option contract gives a buyer the right not the obligation to purchase an underlying
security at certain price specified in the call option contract.
C. A put option contract gives a buyer the right not the obligation to sell an underlying security
at certain price specified in the put option contract.
Ans: D
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
Learning Objective: 18.05 Understand the nature and versatility of option contracts.
Section: 18.05 Option contracts
Topic: Option contracts
43. An option buyer:

A. has a greater insurance benefit than the purchaser of a futures contract.
B. will generally incur a lower cost compared to a purchaser of a futures contract.
C. is purchasing a very risky instrument if they don't own the underlying asset as they are locked
in to buying at expiration.
D. carries the risk of unfavourable price movements.
Ans: A
Difficulty: Medium
Est time: <1 minute
44. An option that gives the option buyer the right to buy the commodity or financial instrument
specified in the contact at the exercise price is called:
A. an American option.
B. a European option.
C. a call option.
D. a put option.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
45. An option that gives the option buyer the right to sell the commodity or financial instrument
specified in the contact at the exercise price is called:
A. an American option.
B. a European option.
C. a call option.
D. a put option.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
46. For a call option, the:

A. buyer is locked into receive the underlying asset at a specified time.
B. writer is committed to handing over the specified asset if the holder of the call exercises the
option.
C. writer may choose whether or not to deliver the underlying asset at a specified time.
D. buyer will choose to exercise the option only if the price of the underlying asset falls.
Ans: B
Difficulty: Medium
Est time: <1 minute
47. In a put option, the:

A. writer is locked into handing over the underlying asset at a specified time.
B. buyer has the option to sell the specified asset at a specified time.
C. buyer is locked into receiving the underlying asset at a specified time.
D. seller must hand over the specified asset at a specified time.
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
48. Which of the following statement describes about the American and European option
contract?
A. The European-type option gives the option buyer the right, not the obligation, to exercise the
option only on the contract expiration date.
B. The American-type option gives the option buyer the right, not the obligation, to exercise the
option at any time up to the contract expiration date.
C. American-type options are more flexible risk management products while European contracts
are less liquid.
Ans: D
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
49. The holder of an American call option has the right to:
A. buy the underlying asset at the exercise price on or before the expiration date.
B. buy the underlying asset only on the expiration date.
C. sell the underlying asset at the exercise price on or before the contract expiration date.
D. sell the underlying asset only at the expiration date.
Ans: A
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
50. The European call option gives the option buyer the right to exercise the option:
A. at any time up to the expiration date.
B. only on the expiration date.
C. if the price of the underlying asset falls below the exercise price.
D. immediately after the payment of dividends.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
51. In the option markets, the price specified in the contract at which the buyer of the option can
buy or sell the specified commodity or financial instrument is called the:
A. call price.
B. exercise price.
C. settlement price.
D. spot price.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
52. For the writer of a put option, if the underlying share price:
A. moves above the strike price, the potential profits are unlimited.
B. drops below the strike price, the potential profits are unlimited.
C. moves above the strike price, the potential profits are limited to the premium.
D. moves above the strike price, the premium is reduced by the difference.
Ans: C
Difficulty: Medium
Est time: <1 minute
53. In the derivative markets a swap is:

A. another name for a call option.
B. another name for a put option.
C. an agreement between two or more persons to exchange cash flows over some future period.
D. the name for the exchange of a futures contract for an option contract.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 18.06 Consider the structure of an interest rate swap and a cross-currency swap.
Section: 18.06 Swap contracts
Topic: Swap contracts
54. When two parties exchange the respective interest payments associated with existing debt
borrowed in the capital markets, this is called a/an:
A. interest exchange.
B. financial switch.
C. swap.
D. financial transfer.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
55. An agreement between two parties to exchange a series of cash flows similar to those
resulting from an exchange of different types of bonds is called a/an:
A. credit swap.
B. interest rate swap.
C. yield curve swap.
D. notional spread.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
56. The growth of the swaps market has been due to firms wanting to:
A. lower the cost of funds.15ene
B. hedge interest rate risk.
C. lock in profit margins.
D. do all of the given answers.
Ans: D
AACSB: Analysis
Difficulty: Medium
Est time: <1 minute
57. A forward contract is _____ and a futures contract is _____.

A. an over-the-counter contract; an exchange contract
B. an over-the-counter contract; a dealer market contract
C. exchange contract; over-the-counter contract
D. exchange contract; exchange contract
Ans: A
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
58. An importer in Singapore must pay USD7 million for Dell computers in 60 days. The bank
gives the following quotation—SGD/USD.8319–22, 12:15. If the importer locks in the exchange
rate, how much SGD must be paid in 60 days?
A. SGD8 396 306
B. SGD8 402 353
C. SGD8 411 440
D. SGD8 414 473
Ans: B
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
59. A soybean farmer has paid $.40 per bushel for a put contract with a strike price of $4.50 per
bushel. The current price is $4.80. The breakeven point for the farmer is _____. The farmer will
exercise the option as long as the price falls below _____.
A. $4.10; $4.10
B. $4.50; $4.10
C. $4.10; $4.50
D. $4.50; $4.50
Ans: C
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Difficulty: Medium
Est time: <1 minute
60. In a plain vanilla interest rate swap the following is NOT true.
A. Notional principal is used to figure the payments.
B. Interest payments and principal amounts are exchanged.
C. Only the net amount need be paid.
D. Fixed-for-variable is the main type of interest rate swap.
Ans: B
Difficulty: Medium
Difficulty: Medium
Est time: <1 minute
61. A New Zealand company issues short-term notes in the Frankfurt market raising euros. At
the same time it spends these euros to fund operations in Portugal. Based upon this information,
the major risk(s) appear to be:
A. interest rate risk only.
B. foreign currency risk only.
C. interest-rate risk and operational risk.
D. interest-rate risk and foreign currency risk.
Ans: C
Difficulty: Hard
Est time: <1 minute
62. Investment Manager expects to invest in Australian equities in six months but is concerned
that they may appreciate sharply in the near future. Investment Manager can hedge by:
A. buying futures contracts based on the S&P/ASX 50 index now and receiving delivery of the
equities in six months.
B. buying futures contracts based on the S&P/ASX 50 index now and closing this position in
about six months with a sell order.
C. selling futures contracts based on the S&P/ASX 50 index now and receiving delivery of the
equities in six months.
D. selling futures contracts based on the S&P/ASX 50 index now and closing this position in
about six months with a buy order.
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
63. The holder of an option:

A. makes a down payment called a premium which acts as a credit for adverse price movements.
B. pays a premium which constitutes a known limited loss.
C. pays a premium that is refunded if the option holder exercises.
D. must put up a maintenance margin in case the market moves adversely.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
64. The reason that American options have greater value than European options is that:
A. American equity markets are larger than European equity markets.
B. European option holders will exercise on the expiry date where value tends to be the greatest.
C. prices for options tend to be higher in the US than in Europe.
D. American option holders are entitled to exercise on a greater number of days than European
option holders are allowed to exercise.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: Section: 18.05 Option contracts
65. For a corporation, external risk management strategies include leading and lagging FX
transactions.
Ans: False
Feedback: This is an internal strategy for a corporation.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Topic: Introduction
66. A government introducing legislation requiring carbon-emitting companies to lower their

carbon emissions is an example of operational risk.
Ans: True
Feedback: Operational risks are those exposures that may impact on normal commercial
operations.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
67. A commercial bank has to consider in its risk management procedures not only interest rate
risk but also credit risk and liquidity risk.
Ans: True
Feedback: Interest rate risk can directly affect loan defaults for a bank and so lead to
consequential risks of credit risk and liquidity risk.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
68. An analysis of the costs associated with establishing and maintaining a particular risk
management strategy versus the risk management benefits to be obtained is called a SMART
analysis.
Ans: False
Feedback: When an analysis of the costs associated with establishing and maintaining a
particular risk management strategy versus the risk management benefits to be obtained is done
this analysis is called a cost-benefit analysis.
Difficulty: Easy
Est time: <1 minute
69. As risks for a company vary over time a flexible and robust risk management strategy is
essential for an organisation no matter how large or small.
Ans: True
Feedback: As well as having a structured risk management process a company must also have an
ongoing one.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
70. The prime function of a futures clearing house is to bring together the buyer and seller in
each futures contract.
Ans: False
Feedback: A clearing house records transactions and facilitates value settlement.
Difficulty: Medium
Est time: <1 minute
71. Forward contracts are less risky than futures contracts because the buyers of the contracts can
negotiate with the counterparty about the terms and conditions.
Ans: False
Feedback: Forward contracts are more risky because they are subject to both liquidity and default
risk as compared with futures contracts, which are more standardised and thus can be sold on
organized exchange.
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
72. Potential gains and losses are quite different for the buyers and writers (sellers) of call and
put options.
Ans: True
Feedback: While the potential losses to a call option buyer is limited to the option premium,
losses to option writers are significant. For example, for a call option writer, maximum losses are
(S – X + c) (where S = spot price at expiration, X = exercise price and c = call option premium).
T T
Any increase in the value of the underlying security (S ), increases the losses for the call option
T
writer.
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
73. The maintenance margin call refers to the difference between the futures market price and the
futures contract.
Ans: False
Feedback: It refers to the requirement for additional funds to be added to the initial margin to
cover adverse futures contract price movements.
Difficulty: Medium
Est time: <1 minute
74. An FRA expressed as 3Mv5M means the settlement date is in three months and the interest
cover is for a five-month period.
Ans: False
Feedback: Rather it means the settlement date is in three months and the interest cover is for a
two-month period.
Difficulty: Medium
Est time: <1 minute
75. An American put option is worth more than a European put option as it can be advantageous
to exercise an American put option before expiry.
Ans: True
Feedback: Given the volatility of options a holder may replace it is worth exercising before
maturity.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
76. How is a swap similar to a bond?

Ans: The swap entails payments periodically, which resemble coupon payments. Moreover,
these payments are related to the notional amount, which resembles bond face value. Thus, you
can view a swap agreement as an exchange of bonds: first party buys a bond issued by the
second party, and second party buys a bond issued by the first party. In the case of an interest
rate swap normally they do not exchange the principal amount as the amounts would be the same
thing. However, in the case of a currency swap the exchange makes sense as the currencies are
not the same. Thus, the currency swap more closely resembles a sale and purchase of a bond, as
the purchase price of the bond is paid upfront and the principal bond payment is received at the
maturity of the bond.
Difficulty: Hard
77. Discuss financial risks and their impacts on banks’ liquidity and capital adequacy position.
Ans: Financial risks are those risk exposures as a result of unanticipated changes in projected
cash flows or the structure and value of balance sheet assets and liabilities. For example, a
commercial bank is exposed to the risk that a larger percentage of customers will default on loan
repayments in times of increased interest rates during economic downturn. This will affect the
cash flow position of the bank as loan instalments are not received as expected. This may cause a
liquidity problem for the bank in that it will have less cash available for the planning period.
Further, the bank may need to write off the bad loans against capital (shareholder funds). This
may adversely impact on the bank’s capital adequacy position.
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
Topic: Introduction
78. What is netting and why is netting in swap payments helpful?

Ans: With netting, the party that has the greater payment to make, pays just the net amount. The
other party pays nothing. Suppose the swap is fixed-for-variable and that at a particular time for
swapping, the first party owes $400 000 and the second party owes $394 000. With netting the
first party merely remits $6000. The holdings of cash and the total transaction costs would be
less as only one party remits a small amount. Probably more significant is the counterparty risk.
Without netting each party must be concerned with the other party defaulting on its obligation to
pay $400 000 or $394 000. With netting only one party has to be concerned about a default and it
involves a very small amount.
1. Which of the following about futures contracts is NOT correct?

A. Futures contracts are exchange-traded financial instruments.
B. The futures exchanges offer standardised futures contracts.
C. The interest rate futures contracts, the FRA are traded on the larger exchanges.
D. The standard features of futures contracts include the underlying physical asset, the amount
traded, how quoted and how the contract is settled.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 19.01 Consider the nature and purpose of derivative products and the use of a futures contract to hedge a
specific risk exposure.
Topic: Introduction
2. Which of the following is a derivative product?

A. Commercial paper
B. Mortgage
C. Futures
D. Treasury note
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Topic: Introduction
3. At the end of six months for a wheat farmer who sold previously a six-month wheat futures
contract, he may:
A. deliver the wheat as per the contract and pay out the original agreed-upon price.
B. can sell the wheat via the spot grain market and at the same time sell a futures contract
identical to the contract originally taken out.
C. can sell the wheat via the spot grain market and at the same time buy a futures contract
identical to the contract originally taken.
D. will make a profit if the price of wheat has gone up on the day the farmer closes out his
contract.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Section: 19.01 Hedging using futures contracts
Topic: Hedging using futures contracts
4. Which of the following statements about futures contracts is correct?

A. Most futures contracts are held to maturity.
B. Future contract holders will either buy or sell an opposite contract on or before expiry date to
close-out the contract.
C. The majority of commodity futures are held to maturity.
D. Financial futures contracts are delivered at maturity whereas all commodity futures are
closed-out.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
5. The markets for futures contracts, including financial and commodity futures, have grown
rapidly because of:
A. a highly standardised market.
B. high liquidity and the parties’ ability to close the position before maturity.
C. clearing houses ensure the enforcement of margin and settlement, meaning lower or no default
risk.
Ans: D
Difficulty: Easy
Est time: <1 minute
Learning Objective: 19.02 Discuss the main features of a futures transaction, including orders and agreement to trade, calculations,
margin requirements, closing out a contract and contract delivery.
Section: 19.02 Main features of a futures transaction
Topic: Main features of a futures transaction
6. An orange grower who is concerned that the price of oranges will fall before harvest and sale
can:
A. buy an orange futures contract today.
B. sell an orange futures contract today.
C. carry out in the futures market the opposite of what he plans to do in the physical market
when his crop is ready for sale.
D. take a long position in orange futures.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
7. Which of the following statements about futures contracts is correct?

A. Most futures contracts result in delivery.
B. Only a small percentage of financial futures contracts results in actual delivery.
C. Only a quarter of financial futures contracts results in actual delivery.
D. Financial futures contracts never result in actual delivery.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
8. Which of the following statements is characteristic of futures trading on the Australian Futures
Exchange (ASX Trade 24)?
A. Pricing of bond contracts is on the basis of their yield to maturity.
B. Transactions in the ‘trading pits' are conducted by ‘open outcry'.
C. The ASX Trade 24 clearing house enforces full payment of the initial contract amount.
Ans: A
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
9. In the futures markets the buyer of a financial futures contract:

A. takes the long position.
B. takes the short position.
C. has to record the contract with the clearing house.
D. has the obligation to deliver the underlying financial asset at the specified future date.
Ans: A
Difficulty: Medium
Est time: <1 minute
10. In the futures markets, the buyer of a financial futures contract:

A. takes the short position.
B. has the obligation to deliver the underlying financial asset at the specified future date.
C. has the obligation to receive the underlying financial asset at the specified future date.
D. has to record the contract with the clearing house.
Ans: C
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
11. In the futures markets, the seller of a futures contract:

B. has the obligation to deliver the underlying financial asset at the specified future date.
C. has the obligation to receive the underlying financial asset at the specified future date.
D. may, at their choosing, deliver or receive the underlying financial assets at the specified future
date.
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
12. In the futures markets, the seller of a futures contract:

B. takes the short position.
C. has the obligation to receive the underlying financial assets at the specified future date.
D. is expecting the price of the underlying asset to increase.
Ans: B
Difficulty: Easy
Est time: <1 minute
13. In the futures markets, the price of a futures contract is:

A. determined by market expectations of the spot price on the day of delivery.
B. determined each day by the futures exchange.
C. specified in each futures contract.
D. determined by demand and supply between market participants in the futures market.
Ans: D
Difficulty: Medium
Est time: <1 minute
14. In futures markets, the terms of a futures contract, for instance the quality and quantity of the
commodity and the delivery date, are specified by the:
A. buyers.
B. buyers and sellers.
C. futures exchange.
D. brokers and dealers.
Ans: C
Difficulty: Medium
Est time: <1 minute
15. Which of the following about futures orders is NOT correct?

A. The order generally specifies whether it is a buy or sell order.
B. The order specifies the type of contract and the delivery month.
C. The orders are put into the trading system on the basis of size details and any price
restrictions.
D. The order specifies the time limit on the order.
Ans: C
AACSB: Analysis
Difficulty: Medium
Est time: <1 minute
16. Any Australian Treasury bond futures contract for a yield of 7.50% per annum is quoted on
the futures exchange as:
A. 7.500
B. 92.50
C. 92.500
D. 107.50
Ans: C
AACSB: Analysis
Difficulty: Medium
Est time: <1 minute
17. Which of the following about Australian Treasury bond futures is NOT correct?
A. The Australian Treasury bond futures contract of 8 per cent is quoted as 92.0.
B. If a dealer buys a futures bond contract at 92.750 and sells at 93.500, she makes a profit.
C. If a dealer buys a futures contract at 7 per cent and sells at 8 per cent, he makes a profit.
D. Futures are quoted as index of 100 minus the yield so that the dealer can buy high and sell
low.
Ans: B
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
18. If an investor buys a three-year Commonwealth Treasury bond futures contract at 7 per cent
and on the delivery date the interest rate of Treasury bonds is lower than they expected at 6 per
cent, they will have:
A. gained money on their long position.
B. lost money on their long position.
C. lost money on their short position.
D. gained money on their short position.
Ans: A
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
19. If an investor buys a three-year Commonwealth Treasury bond futures contract at 6 per cent
and on the delivery date the interest rate of Treasury bonds is lower than they expected at 7 per
Ans: B
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
20. If a bond investor sells a three-year Commonwealth Treasury bond futures contract at 7 per
cent and on delivery date the interest rate of Treasury bonds is higher than they expected at 8 per
Ans: D
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
21. If a bond investor sells a three-year Commonwealth Treasury bond futures contract at 7 per
cent and on delivery date the interest rate of Treasury bonds is higher than they expected at 6 per
Ans: C
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
22. A company has sold a three-year Commonwealth Treasury bond futures contract, and now
wishes to close out its open position on maturity date. Which of the following statements relating
to the closing out of a futures position is NOT correct?
A. The company may enter into a ‘buy' contract of the same face value.
B. A new ‘buy' contract will have the identical delivery date as the original ‘sell' contract.
C. The company may choose to deliver the physical market Treasury bonds in settlement.
D. The clearing house acts as counterparty to the contracts, through the process of novation.
Ans: C
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
23. In the futures market, the instruction to a futures broker to buy or sell at the current market
price is a:
A. call order.
B. limit order.
C. market order.
D. phone order.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
24. In the futures market, an instruction to a futures broker to buy or sell up to a specified price
and within a specified time is a:
A. market order.
B. margin order.
C. limit order.
D. liquid order.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
25. An investor holds a long oil futures contract that expires in June. To close out their position
in oil futures before the delivery date, they must:
A. buy one June oil futures contract.
B. buy two June oil futures contracts.
C. sell one June oil futures contract.
D. sell one July oil futures contract.
Ans: D
Difficulty: Medium
Est time: <1 minute
26. Which of the following statements in relation to margins is correct?

A. An initial margin is held by the futures exchange.
B. The maintenance margin is the quantity of money you place with your broker when you buy
or sell a futures contract.
C. The maintenance margin is the value of the margin account below which the holder receives a
margin call.
D. All futures contracts have the same margin deposit.
Ans: C
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
27. A futures exchange imposes an initial margin:

A. as the exchange needs to make a profit.
B. as it gives the client trader more leverage.
C. to ensure brokers and traders are able to pay for any losses incurred over the life of the futures
contract.
D. the exchange wants to ensure that futures contracts are closed-out.
Ans: C
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
28. As part of futures trading, exchanges have traders place an initial margin with its clearing
house because:
A. as the exchange has to cover its costs.
B. as it acts like a performance bond to support the value of the futures contract.
C. the exchange wants to ensure that brokers make profits.
D. the exchange wants to ensure that futures contracts can be closed-out.
Ans: B
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
29. When Australian financial futures still in existence at trading close are settled with the
clearing house, final settlement in the form of standard delivery means:
A. the contract is settled in cash.
B. the contract is settled by delivery of actual underlying financial asset.
C. the contract is closed out by delivery of the opposite contract.
D. the contract is settled by the sum of the initial margin and the variation margin.
Ans: B
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
30. Which of the following relating to Commonwealth Treasury bond futures is NOT correct?
A. The three-year and 10-year Treasury bonds must be settled in cash.
B. They are quoted on the basis of their clean price.
C. A 10-year Treasury bond futures contract's yield is quoted to three decimal places.
D. Currently the three- and 10-year bond futures are traded on the SFE.
Ans: B
Difficulty: Hard
Est time: <1 minute
31. On the ASX Trade 24, financial futures contracts are currently traded on all the following
securities, except:
A. bank bills.
B. Treasury bonds.
C. corporate bonds.
D. interest rate swaps.
Ans: C
Difficulty: Medium
Est time: <1 minute
Learning Objective: 19.03 Review the types of futures contracts offered through a futures exchange.
Section: 19.03 Futures market instruments
Topic: Futures market instruments
32. The price of a short-term interest rate risk contract is generally derived from:
A. traded equity prices.
B. the money market instruments.
C. an underlying FX contract.
D. commodities.
Ans: B
Difficulty: Medium
Est time: <1 minute
33. In futures markets, investors who expect to purchase future bonds can reduce the risk of price
fluctuations by taking a/an:
A. arbitrage position on futures contracts.
B. long position on futures contracts.
C. short position on futures contracts.
D. marked-to-market position on futures contracts.
Ans: B
Difficulty: Medium
Est time: <1 minute
Learning Objective: 19.04 Identify the participants in the futures market, including hedgers, speculators, traders and arbitrageurs,
alculate the value of a long put if the exercise price is $10.00, the premium is $1.50 and t
and explain why they use futures contracts.
Section: 19.04 Futures market participants
Topic: Futures market participants
34. In futures markets, investors who expect to purchase future bonds may hedge against the
effects of falling interest rates by:
A. taking an arbitrage position on bond futures contracts.
B. buying bond futures contracts.
C. selling bond futures contracts.
D. buying and selling similar bond futures contracts.
Ans: B
Difficulty: Medium
Est time: <1 minute
35. An orange grower who wishes to protect their future orange crop from price fluctuations can
hedge by taking a/an:
A. arbitrage position on an orange futures contract.
B. long position on an orange futures contract.
C. short position on an orange futures contract.
D. marked-to-market position on an orange futures contract.
Ans: C
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
36. A wheat grower who wishes to protect their future wheat crop from price fluctuations can:
A. take an arbitrage position on a wheat futures contract.
B. buy a wheat futures contract.
C. sell a wheat futures contract.
D. take a marked-to-market position on a wheat futures contract.
Ans: C
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
37. A company who intends to borrow in three months can hedge and lock in the cost of
borrowing by:
A. buying an interest rate futures contract.
B. selling an interest rate futures contract.
C. selling an FRA.
D. buying an interest rate swap.
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
38. A futures trader who has a _______ position in oil futures wants the price of oil to _______
in the future.
A. short; double
B. short; fall
C. short; stay the same
D. short; rise
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
39. A futures trader who has a _______ position in oil futures wants the price of oil to _______
in the future.
A. long; increase
B. long; fall
C. short; stay the same
D. short; rise
Ans: A
Difficulty: Medium
Est time: <1 minute
40. A steel manufacturing company that expects a future iron price rise can hedge and take a/an:
A. arbitrage position on iron futures contracts.
B. long position on iron futures contracts.
C. short position on iron futures contracts.
D. marked-to-market position on iron futures contracts.
Ans: B
Difficulty: Medium
Est time: <1 minute
41. An Australian importer with FX payable in three months can hedge and lock in the price of
the required foreign currency by:
A. buying AUD futures.
B. buying a currency swap.
C. selling AUD futures.
D. selling a currency swap.
Ans: C
Difficulty: Medium
Est time: <1 minute
42. An Australian exporter with FX receivable in three months can hedge and lock in the price
of the required foreign currency by:
A. buying AUD futures.
B. buying a currency swap.
C. selling AUD futures.
D. selling a currency swap.
Ans: A
Difficulty: Medium
Est time: <1 minute
43. In the futures markets, hedgers are mainly interested in:

A. attempting to make a profit by betting on expected price changes.
B. reducing their exposure to risk of price changes.
C. increasing market liquidity.
D. reducing the spread between the bid and ask prices on bonds.
Ans: B
Difficulty: Easy
Est time: <1 minute
44. In the futures markets speculators are mainly interested in:

A. attempting to make a profit by betting on expected price changes.
B. reducing their exposure to risk of price changes.
Ans: A
Difficulty: Easy
Est time: <1 minute
45. In the futures markets, arbitrageurs are mainly interested in:
A. reducing their exposure to risk of price changes.
B. attempting to make a profit by taking advantage of price differentials between different
markets.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
46. In the futures markets, speculators take on extra risk in futures markets as a result of the
actions of:
A. day traders.
B. hedgers.
C. brokers.
D. traders.
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
47. _______ try to make a profit by taking advantage of price differentials between the futures
markets or different markets.
A. Hedgers
B. Arbitrageurs
C. Speculators
D. Traders
Ans: B
Difficulty: Easy
Est time: <1 minute
48. In the futures markets, price differences between the futures and the underlying assets are
reduced by the actions of:
A. speculators.
B. arbitrageurs.
C. hedgers.
D. traders.
Ans: B
Difficulty: Medium
Est time: <1 minute
49. In the futures markets, profits from speculation primarily arise because of the:
A. Spread between the bid and ask prices on bonds.
B. illiquidity of markets for derivative securities.
C. high information costs in markets for derivative instruments.
D. difference in expectations among market participants about future prices of a commodity or
financial asset.
Ans: D
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
50. Which one of the following statements about speculators in futures markets is correct?
A. Their main aim is to reduce their exposure to risk.
B. They make it difficult for hedgers to replace someone to take the opposite position.
C. They aid hedgers by adding to the liquidity in the markets.
D. Once a trader is known as a speculator they are no longer allowed to participate in the
markets.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
51. In the futures markets, speculators who strongly believe that interest rates will rise are likely
to:
A. buy futures contracts on Treasury bonds.
B. sell futures contracts on Treasury bonds.
C. buy Treasury bonds on the spot market.
D. increase the amount of money that they currently lend.
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
52. In the futures markets, speculators who strongly believe that prices of treasury bonds will fall
are likely to:
A. buy futures contracts on Treasury bonds.
B. sell futures contracts on Treasury bonds.
C. sell Treasury bonds on the spot market.
D. decrease the amount of money that they currently lend.
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
53. In the futures markets, speculators who strongly believe that interest rates will fall are likely
to:
A. go long and buy futures contracts on Treasury bonds.
B. go short and sell futures contracts on Treasury bonds.
C. sell Treasury bonds on the spot market.
D. decrease the amount of money that they currently lend.
Ans: A
Difficulty: Medium
Est time: <1 minute
54. Buying a futures contract for one delivery date and selling an identical futures contract with a
different delivery date is called a:
A. margin position.
B. spread position.
C. straddle.
D. speculative position.
Ans: C
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
55. Buying a September bank bill futures contract and simultaneously selling a June bank bill
futures contract is a/an:
A. typical trading strategy for a hedger.
B. typical trading strategy for an arbitrageur.
C. example of a spread.
D. example of a straddle.
Ans: D
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
56. Buying a September bank bill futures contract and simultaneously selling a June
Commonwealth Treasury bond futures contract is a/an:
A. typical trading strategy for a hedger.
B. typical trading strategy for an arbitrageur.
C. example of a spread.
D. example of a straddle.
Ans: C
Difficulty: Medium
Est time: <1 minute
57. A lender, worried that the value of their loan might fall during the term of the loan, can hedge
this fall by:
A. buying futures contracts on Treasury bonds.
B. selling futures contracts on Treasury bonds.
C. buying Treasury bonds on the spot market.
D. increasing now the amount of money that has been lent.
Ans: A
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
Learning Objective: 19.05 Show how financial futures contracts may be used to hedge price risks, including a borrowing hedge, an
investment hedge, an FX hedge and a share portfolio hedge.
Section: 19.05 Hedging: risk management using futures
Topic: Hedging: risk management using futures
58. An Australian bank must pay US$10 million in 90 days. It wishes to hedge the risk in the
futures market. To do so, the bank should:
A. buy AUD 10 million in US dollar futures.
B. sell AUD 10 million in US dollar futures, with three-month maturity.
C. buy USD 10 million in US dollar futures.
D. sell USD 10 million in US dollar futures.
Ans: C
Difficulty: Medium
Est time: <1 minute
59. A company has identified an exposure to movements in interest rates on its existing debt
facilities. The company is considering selling futures contracts to manage that risk and is unsure
which of the following contracts may NOT be used for managing interest rate risk exposures.
A. 90-day bank-accepted bills contract
B. S&P/ASX 200 Index
C. Three-year Commonwealth Treasury bond contract
D. Option on a 90-day bank-accepted bill futures contract
Ans: B
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
60. Calculate the market value of a bank bill futures contract with a face value of $1 000 000, a
reported price of $93.75 and 90 days to maturity.
A. $866 468.84
B. $983 628.65
C. $984 822.93
D. $998 461.28
Ans: C
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
61. Calculate how much a futures trader who enters into a 90-day bank bill futures contract on 20
September with a reported price of $93.25 will need to pay on settlement date (30 September), if
the face value of the underlying bill is $1 000 000.
A. $857 310.63
B. $983 628.65
C. $984 822.93
D. $998 338.38
Ans: B
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
62. A company has an existing $900 000 promissory note facility, which it will roll over in 90
days. It is concerned that interest rates will rise before the roll-over date and enters into a 90-day
bank-accepted bill futures contract at 92.50. Three months later, the company closes out its
futures position at 91.75. Using the following data, calculate the profit or loss position of the
futures transactions. (Disregard margin calls and transaction costs.)
A. $1 601.58 profit
B. $1 601.58 loss
C. $1 779.54 profit
D. $1 779.54 loss
Ans: C
AACSB: Analysis
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute
63. An Australian wheat farmer is concerned that the price of wheat may fall before the wheat is
ready for harvest and sale. The farmer can take the following positions to hedge possible risk
exposures, except:
A. selling a futures contract to deliver the wheat at a price determined today.
B. selling futures contracts today equal in value to the current value of the expected wheat
harvest.
C. for any unexpected loss in the physical market, the farmer could buy a future contract to sell
wheat at predetermined price today.
D. entering into an FRA.
Ans: D
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
64. A funds manager manages a diversified Australian share portfolio, but is concerned that
stock prices in the market will fall over the next three months. The manager decides to hedge the
risk by selling 100 S&P/ASX All Ordinaries Share Price Index futures contracts at 23.55. Three
months later, when the manager closes out the position, the contract is trading at 24.10. Calculate
the profit or loss position of the futures transactions.
A. $5500 loss
B. $24 100 profit
C. $137 500 loss
D. $550 000 profit
Ans: C
Difficulty: Hard
Est time: <1 minute
65. Basis risk refers to the risk:

A. associated with anticipated price movements in the cash market.
B. associated with unanticipated price movements on the underlying asset.
C. of default on the futures contract.
D. from a change in the spread between the price on the commodity or financial security in the
physical market and the price of the related futures contract.
Ans: D
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
66. Suppose that a company has EUR10 million payable in three months. The following
exchange rates are available:
Spot rate with immediate delivery: 1.5905AUD/EUR
Forward contract, delivery in three months: 1.6540AUD/EUR
Which of the following positions should be considered by the company?
A. Wait and speculate on what the exchange rate will be in three months
B. Buy EUR today and invest them until maturity
C. Buy a EUR forward contract that does not require money to change hands today
D. Buy a call option contract on currency futures
Ans: C
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
67. One of the problems of hedging with a futures contract compared with a forward contract is:
A. basis risk.
B. default risk.
C. settlement risk.
D. interest rate risk.
Ans: A
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
Learning Objective: 19.06 Identify risks associated with using a futures contract hedging strategy, including standard contract size,
margin payments, basis risk and cross-commodity hedging.
Section: 19.06 Risks in using futures contracts for hedging
Topic: Risks in using futures contracts for hedging
68. A company is considering using futures contracts to hedge an identified interest rate
exposure on its debt facilities. However, it is concerned about the impact of basis risk. Which of
the following statements regarding basis risk is NOT correct?
A. Basis is the difference between price in the physical market and the price of the relevant
futures market contract.
B. The existence of basis risk removes the opportunity for a perfect borrowing hedge.
C. Initial basis will be evident while the market is of the view that physical market prices will
remain stable.
D. Final basis will exist where a futures contract is used to hedge a risk associated with a
different physical market product.
Ans: B
Difficulty: Hard
Est time: <1 minute
69. Which of the following best describes the risks associated with futures contracts?
A. The possibility of making an unexpected profit on a futures contract
B. The probability of making a loss, or a fall in the value of a futures contract
C. The variability of changing prices and costs associated with buying and selling futures
contracts
D. The possibility of loss associated with the default by the holder of the opposite position in the
contract
Ans: C
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
70. If the market expects interest rates to rise, which of the following hedging strategies will be
best suited for a call on a bond futures contract?
A. Sell an interest rate future
B. Short a call
C. Short a put
D. Issue the bond now
Ans: A
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
Learning Objective: 20.03 Describe the structure and organisation of the international and Australian options markets, including
examples of the types of option contracts available.
Section: 20.03 The organisation of the market
Topic: The organisation of the market
71. Which of the following about hedging is NOT correct?

A. With the Australian future market an investor will have to use a 90-day bank-accepted-bill to
hedge commercial paper.
B. In the Australian futures market a borrower will have to use 3-year Treasury bond futures to
hedge a loan facility with a term to maturity of 3 to 5 years.
C. A borrower will have to use a 10-year Treasury bond future to hedge an issue of long-term
debentures.
D. When prices of 3-year Treasury bond futures varies over time with the prices of long-term
debentures this is called spread-commodity hedging.
Ans: D
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
72. In using futures contracts for hedging, which of the following is an important consideration?
A. The standard contract size
B. The margin payment
C. The basis risk
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
73. A company is to borrow $5 million in three months’ time. However, the direction of interest
rate changes. The company approaches an FRA dealer, who provides following forward
quotation:
3Mv6M(19sept,2018): 9.75–8.55
On the settlement date the BBSW is 10 per cent. Which of the following statements describes the
quotation and which party to FRA is required to make the payment?
A. In three months’ time the dealers have agreed to lend six-month money
at 9.75 and the dealer is required to make payment at settlement date.
B. In three months’ time the dealers have agreed to lend nine-month money
C. In three months’ time the dealers have agreed to lend six-month money
D. In three months’ time the dealers have agreed to lend nine-month money
Ans: D
Bloom's: Knowledge
Bloom's: Synthesis
Difficulty: Hard
Difficulty: Medium
Est time: <1 minute
Est time: <1 minute
Learning Objective: 19.07 Describe, illustrate and calculate the use of a forward rate agreement (FRA) for hedging interest rate risk.
Section: 19.07 Forward rate agreements
Topic: Forward rate agreements
74. In comparing forwards and futures, futures are typically:

A. riskier than forwards.
B. more liquid than forwards.
C. traded on an organised exchange.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
75. Futures contracts _______ traded on a formal, organised exchange, and forward contracts
_______ traded on a formal, organised exchange.
A. are; are also
B. are not; are
C. are; are not
D. are; may be
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
76. The terms of futures contracts _______ standardised and the terms of forward contracts
_______ standardised.
A. are; are also
B. are not; are
C. are; are not
D. are; may be
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
77. Which of the following statements is a key difference between forwards and futures?
A. Futures contracts are more expensive than forward contracts.
B. Forward contracts are offered only for foreign currencies.
C. Futures contracts are always delivered.
D. Forward contracts are not generally marked-to-market.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
78. Which of the following best describes an FRA?

A. It is a contractual agreement between two parties that effectively
allows the parties to lock in a rate of interest that will apply at a specified
future date based on a notional principal amount.
B. The settlement date for an FRA is specified in the agreement when the reference rate (e.g.
BBSW) relative to the contract period is compared with the agreed rate (FRA rate) and a
compensation payment is calculated.
C. FRAs are expressed to indicate the start and contract period.
Ans: D
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
79. A key characteristic of forward contracts that recommends their use over futures contracts is:
A. forwards are not traded on exchanges and marked-to-market.
B. forward contracts allow flexibility with respect to contract period.
C. forwards are not standardised instruments with regard to the amount of each contract.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
80. The over-the-counter derivative product used to manage interest rate risk is a/an:
A. futures contract.
B. forward rate agreement.
C. yield rate agreement.
D. duration agreement.
Ans: B
AACSB: Analysis
Difficulty: Medium
Est time: <1 minute
81. If an FRA covers six-month interest rates but will begin its cover in three months it will be
written:
A. 6Mv9M.
B. 3Mv9M.
C. 3Mv6M.
D. 6Mv3M.
Ans: B
AACSB: Analysis
Difficulty: Medium
Est time: <1 minute
82. If a borrower has entered into an FRA and its interest cover is specified as 3Mv9M, this
means:
A. nine-month interest rates beginning in three months.
B. six-month interest rates beginning in three-months.
C. nine-month interest rates beginning in six months.
D. six-month interest rates beginning in six months.
Ans: B
Difficulty: Medium
Est time: <1 minute
83. A key characteristic of futures contracts that recommends their use over forwards contracts
is:
A. futures are traded on exchanges and marked-to-market.
B. futures contracts allow flexibility in delivery dates.
C. futures are traded in liquid markets and allow netting of positions.
Ans: D
Difficulty: Medium
Est time: <1 minute
84. For hedging interest rates, the advantages of an FRA are:

A. it is not standardised like a futures contract.
B. it does not have associated margin payments.
C. it is flexible with regard to contract period and amount.
Ans: D
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
85. A company will need to ‘roll over' its existing $500 000 funding arrangement in two months'
time for a further 90 days. It is concerned that interest rates in the short-term debt market may
rise in the meantime, and decides to manage the risk exposure by entering into a forward rate
agreement with its bank. The bank quotes a price (2Mv5M) of 9.45 to 30. In two months' time
the reference rate (BBSW) is 10.20% per annum. Calculate the settlement amount.
A. $881.43
B. $1058.10
C. $1423.80
D. $3750.00
Ans: A
AACSB: Analysis
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute
86. A company has entered into a forward rate agreement with a corporate borrower. The
following terms and conditions apply to the contract:
Notional principal: $350 000
Contract rate: 12.65% per annum
Reference rate: 13.10% per annum
FRA period: 180 days
Who will be responsible for payment of the settlement amount?
A. The company
B. Neither party—no settlement amount is payable
C. The bank
D. The clearing house
Ans: C
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
87. Suppose Farmer hedges the value of his crop in the futures market. Subsequent to putting on
the hedge, the price of the crop increases. Farmer:
A. lost money on his crop and lost money on the hedge.
B. lost money on the hedge but made money on the crop.
C. made money on the hedge but lost money on the crop.
D. made money on the crop and made money on the hedge.
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
Topic: Introduction
88. A person with a _____ position in a futures contract promises to _____. Initial margin is
usually set at _____ of asset value.
A. short; deliver an asset; 2–10%
B. short; pay money; 10–20%
C. long; pay money; 10–20%
D. long; deliver an asset; 2–10%
Ans: A
Difficulty: Hard
Difficulty: Medium
Est time: <1 minute
89. When the underlying price moves adversely to a futures position,

A. more cash may be required depending upon whether margin has fallen below the maintenance
margin level.
B. the exchange will close the futures position.
C. more cash must be deposited to the margin account to maintain the initial margin level.
D. the exchange will commence with marking to market.
Ans: A
Difficulty: Medium
Est time: <1 minute
90. Company wishes to borrow in 90 days but wishes to lock in the cost of borrowing. Identify
the best strategy to hedge and to raise the funds.
A. Company should buy a 90-day bank bill on the futures market and then sell it in 180 days in
the money market.
B. Company should buy a 90-day bank bill on the futures market, sell it in 90 days on the futures
market and then issue a bill in the money market.
C. Company should sell a 180-day bank bill on the futures market and then buy it in 90 days in
the money market.
D. Company should sell a 90-day bank bill on the futures market, buy it in 90 days on the futures
market and then issue a bill in the money market.
Ans: D
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
91. Which of the following does not properly show how futures contract size is found?
A. For bonds by a stipulated face value
B. For shares by a stipulated face value
C. For the VIX by the index value and multiplying by a dollar amount
D. For shares by a stipulated number of shares
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
92. Which of the following is NOT true regarding a forward rate agreement (FRA)?
A. The FRA is found on the futures exchange.
B. An FRA calls for one party to compensate the other party in case the reference interest rate
differs from the agreed rate.
C. If the reference rate is lower than the agreed rate, the borrower will compensate the lender.
D. There are no margin requirements for the FRA.
Ans: A
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
93. Australian Importer wishes to hedge foreign exchange exposure of a payable of USD85 000
in three months. There is an AUD100 000 futures contract on the CME. The importer should:
A. buy one futures contract now, close out the futures position in three months and buy USD
spot in three months.
B. sell one futures contract now, buy USD on a forward contract and close out the futures
position in three months.
C. sell one futures contract now, close out the futures position in three months and buy USD spot
in three months.
D. buy one futures contract now and sell the USD spot in three months.
Ans: C
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
94. Investor has a $50 million portfolio consisting of shares in the S&P/ASX 200. The ASX
S&P/ASX 200 index is at 5035. Investor sells 397 S&P/ASX 200 contracts at an index value of
5035. Each index point is worth $25. The index falls to 4800, whereupon investor closes out his
position. The profit from the futures market is _____, and the loss on the equity portfolio is
_____.
A. $93 295; $93 347
B. $1 400 199; $1 400 972
C. $2 332 375; $2 333 664
D. $3525; $93 347
Ans: C
AACSB: Analysis
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
95. A futures contract can be defined as a contract which provides something to be bought or
sold at a future date at a price decided upon at the expiry of the contract.
Ans: False
Feedback: A futures contract involves something to be bought or sold at a future date at a price
decided today.
AACSB: Analysis
Bloom's: Analysis
Difficulty: Easy
Est time: <1 minute
96. A bond trader who buys a Treasury bond futures contract at a yield of 6.25% per annum and
then sells it at 5.5% per annum makes a profit on the contract.
Ans: True
Feedback: Using the quoting convention, the contract price is 93.750 and it is sold at 94.50.
Difficulty: Medium
Est time: <1 minute
97. The process of marking to market is when the clearing house demands funds from every
futures trader that incurs a loss.
Ans: False
Feedback: Both sets of traders are involved: those who earn a profit have funds returned and
funds are demanded from those who incur a loss.
Difficulty: Medium
Est time: <1 minute
98. If you buy a bank-accepted futures contract and on delivery date the interest rate on bank-
accepted bills is lower than you expected you will have gained money on your long position.
Ans: False
Feedback: You would have lost money on your long position.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
99. If a futures contract holder fails to meet a margin call, the futures exchange clearing house
will routinely close out the open position.
Ans: True
Feedback: Funds held in the margin account will be used to offset any futures contract loss.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
100. If someone enters into a futures contract with the intention of taking delivery of a
commodity or financial instrument specified in the futures contract for a price that was
determined before delivery, they are likely to be a hedger.
Ans: True
Feedback: Hedgers use the futures markets to try to manage risk.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
101. In the futures markets a speculator who believes strongly that interest rates will fall in the
near future would be likely to buy futures contracts on Treasury bonds.
Ans: False
Feedback: A speculator should sell futures contracts on Treasury bonds (i.e. a short contract).
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
102. When a lender uses a 10-year Treasury bond futures contract to hedge an issue of an
unsecured note, this type of hedging is called intersection-commodity hedging.
Ans: False
Feedback: It is known as cross-commodity hedging.
Difficulty: Easy
Est time: <1 minute
103. The fundamental factor driving the basic risk is determined by price of the underlying
security such as commodity or financial instruments in the physical market. The higher the
volatility of the underlying security, the higher the basis risk will be.
Ans: True
Feedback: The basis is the difference between the price of a future contract and the price of the
underlying security. Any increased volatility of the underlying security has a direct impact on the
spread between future price and spot price.
AACSB: Synthesis
Difficulty: Medium
Est time: <1 minute
104. Basis risk refers to the risk associated with unanticipated price movements.
Ans: False
Feedback: It is the risk arising from a change in the spread between the rate on the hedged
instrument and the rate on the instrument actually traded.
Difficulty: Easy
Est time: <1 minute
105. Large companies often prefer futures to FRAs because they are generally easy to close out
compared with a forward contract.
Ans: True
Feedback: There is no formal market in FRAs comparable with the futures market.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
106. The counterparty risk is more prevalent in a forward contract.

Ans: True
Feedback: Unlike futures contracts, where contracts are more standardised and traded on
organised exchanges, forward contracts are over-the-counter securities, thus lacking liquidity and
posing a counterparty risk because of the probability of the other party defaulting.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Topic: Introduction
107. Comment briefly on the history of futures contracts.

Ans: Futures contracts in some form have existed for hundreds of years. In Japan, for hundreds
of years there have been examples of rice futures contracts that set a price for risk on the contract
date but fix the delivery of the rice at some specified future date. In the US the Chicago Board of
Trade (CBOT) established an organised market in futures contracts on grains and later expanded
to offering contracts on many agricultural, mineral and timber contracts. In 1975 the CBOT
introduced the first financial futures contract on interest rates.
Difficulty: Medium
Topic: Introduction
108. Initial margin and marking to market are important risk procedures in futures markets.
Discuss their role.
Ans: Given price in futures contracts over their lifetime generally shows high volatility, futures
exchanges have evolved the risk management procedures of having market participants put up an
initial margin or deposit and follow the procedure of marking to market. As the price of futures
contracts varies on a daily basis a customer may receive a margin call to deposit more funds in
their margin account if the value of their contract has moved in an unfavourable direction.
Likewise, their account may increase in credit if the value has moved in a favourable direction.
Difficulty: Hard
109. List the range of futures contracts currently offered by ASX Trade 24 and briefly discuss
their role.
Ans: Short-term interest rate contracts offered on the ASX Trade 24 are 30-day inter-bank cash
rate and 90-day bank-accepted bills and longer term contracts are three-year Treasury bonds and
10-year Treasury bonds, together with three-year interest rate swap and 10-year interest rate
swap. Equity-linked contracts are S&P/ASX 50 Index, S&P/ASX 200 Index, S&P/200-A-REIT
and selected individual publicly listed company shares.
Bloom's: Knowledge
Difficulty: Medium
110. Explain simply what is meant by hedging and how the basic rule is implemented.
Ans: Hedging is a process whereby a risk manager attempts to manage a risk exposure, such as
potential changes in the value of financial or physical assets. In the case of hedging with futures
contracts, a hedger can use a futures contract to create a situation in which any change in the
physical market price of a commodity or financial instrument can be offset by a profit or loss
derived from a corresponding change in the value of a futures contract risk management strategy.
Bloom's: Synthesis
Difficulty: Hard
111. Discuss in relation to the Australian 10-year Treasury bond contract how it may be used to
hedge a longer term interest rate exposure.
Ans: If two companies have different and opposite risk exposures and wish to hedge their
position, one company will want to buy one 10-year Treasury bond futures contract and the other
company will want to sell one 10-year Treasury bond futures contract. Each company will place
an order with a futures broker to buy/sell an Australian 10-year Treasury bond contract on the
SFE that uses the ASX integrated electronic trading and settlement systems. The system
automatically matches the corresponding buy and sell orders in a time and price matching
process.
Bloom's: Synthesis
Difficulty: Hard
112. Describe the socially useful role of speculators in the futures markets.
Ans: Hedgers can only hedge if there is someone to contract with. Speculators often become the
counterparty for the hedgers, allowing hedgers to shift risk on to the speculators. The trading of
speculators adds to the depth of the market, leading to smaller bid–ask spreads. Speculators have
the incentive to gather information and analyse it correctly. Price discovery is aided by
incorporating the activity of speculators into the price.
Difficulty: Hard
Difficulty: Medium
Est time: <1 minute
113. State three reasons why perfect hedges do not occur and provide a one-sentence explanation
for each.
Ans: 1. Contract size. The amount to be hedged may not be an exact multiple of the futures
contract size. 2. Basis risk. The futures price at expiration may not match the underlying asset
price because of incongruent dates. 3. Cross-commodity hedging. The hedging instrument, say
the S&P/ASX 200 index, is a suitable instrument but does not exactly match our portfolio’s
equity portfolio.
Bloom's: Synthesis
Difficulty: Hard
114. A manufacturing company recently placed an order for machinery that requires the
company to borrow AUD5 million in three months’ time for 12 months. If the company borrows
today, it may cost BBSW+60 basis points. The company fears the money market interest rate
might rise in three months’ time. To mitigate this exposure, the company’s financial officer
proposes two hedging techniques: FRAs and interest rate future contract.
Describe the two techniques and demonstrate how the two techniques can tackle such exposure.
Ans: Approach one: A forward rate agreement (FRA) is an over-the-counter derivative
instrument that trades as part of the money market instruments. The buyer of the FRA essentially
borrows the notional sum at fixed rate for a specified period. The counterparty generally is a
bank, is the seller of the FRA and is also the notional lender of funds. The cash flow exchange
between the counterparties depends on the fall or rise of the reference rate. If there is a fall in
interest rates the bank will gain, and if there is a rise in rates the seller will pay the difference
equal to (BBSW − FRA) × notional amount. For example, say the company receives an FRA
quote from an FRA dealer: 3Mv1-15M for 5%. This means in three months’ time the dealers
agree to lend 12-month money at 5 per cent. If the interest rate rises to 6 per cent, the difference
will be paid by the bank.
Second approach: An interest rate future is an agreement to buy or sell (issue) a debt instrument
at a specified future date at a price that is fixed today. It is a financial derivative with an interest-
bearing instrument as the underlying asset, which can be settled daily. For example, to hedge
company exposure to interest rate risk, the company can use an interest rate future to sell a
money market instrument with a price of $5 million. Even if the interest rate rises in three
months’ time, the company will be able to sell the instruments at the specified price.
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
Chapter 20 - Test Bank Key
Multiple Choice Questions
1. An options contract:
A. is another name for a forward contract.

B. gives the right to buy or sell an underlying asset at a predetermined price by
a specified time. C. may be written for debt securities but not equities.
D. may be written for equities but not debt securities.
Difficulty: Easy
Est time: <1 minute
arts of option contracts available in the global markets.
Section: 20.1 The nature of options
2. In the option markets, the option that gives the buyer the right to buy the specified commodity
or financial instrument is a/an:
A. call option.
B. put option.
C. American option.
D. Asian option.
Difficulty: Easy
Est time: <1 minute
3. In the options market the option that gives the buyer the right to sell the specified commodity
or financial instrument is:
A. call option.
B. put option.
C. American option.
D. Asian option.
Difficulty: Easy
Est time: <1 minute
4. In the options market, the right to buy an underlying asset lies with:
A. call buyers.
B. put buyers.
C. European put buyers.
D. writers of an option.
Difficulty: Easy
Est time: <1 minute
5. In the options markets for a call option, the:
A. buyer is committed to receive the underlying asset at a specified time.

B. seller is committed to handing over the specified asset at a specified time.
C. seller may choose whether or not to deliver the underlying asset at a
specified time. D. buyer will choose to exercise the option only if the
price of the underlying asset falls.
Difficulty: Medium
Est time: <1 minute
6. In the options markets, for a call option, the:
A. buyer is committed to receive the underlying asset at a specified time.

B. seller is committed to deliver the specified asset at a specified time.
C. seller may choose whether or not to deliver the underlying asset at a specified
time. D. buyer will choose to exercise the option if the price of the underlying asset
has fallen below the exercise price.
Difficulty: Medium
Est time: <1 minute
7. In the options markets for a put option, the:
A. seller is committed to receiving the underlying asset at a specified time.

B. buyer is committed to handing over the specified asset at a specified time.
C. buyer is committed to receiving the underlying asset at a specified time.
D. seller is committed to handing over the specified asset at a specified time.
Difficulty: Medium
Est time: <1 minute
8. In a put option, the:
A. seller may choose whether to receive the underlying asset at a specified time.
B. buyer will exercise the option if the price of the underlying asset has fallen below
the exercise price. C. buyer is committed to receiving the underlying asset at a
specified time.
D. seller is committed to handing over the specified asset at a specified time.
Difficulty: Medium
Est time: <1 minute
9. In options markets an American call option lets the buyer:
B. buy the underlying asset at the exercise price only on the expiration date.
C. sell the underlying asset at the exercise price on or before the contract
expiration date. D. sell the underlying asset only at the expiration date.
Difficulty: Medium
Est time: <1 minute
10. In options markets, an American put option lets the buyer:
B. sell the underlying asset at the exercise price on or before the expiration date.
C. potentially benefit from a share decrease with less risk than selling
the share short. D. sell the underlying asset only at the contract
expiration date.
Difficulty: Medium
Est time: <1 minute
11. In the options markets, 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.
Difficulty: Medium
Est time: <1 minute
12. For the buyer of an option, the premium paid for the contract represents the:
A. transaction cost.
B. maximum return.
C. largest potential loss.
D. yield.
Difficulty: Medium
Est time: <1 minute
13. In the options markets, an American put option can be exercised:
A. only on the expiration date.

B. at any time up to the expiration date.
C. any time in the indefinite future.
D. only after the payment of dividends.
Difficulty: Easy
Est time: <1 minute
14. A European call option can be exercised:
A. only on the expiration date.

B. at any time up to the expiration date.
C. if the price of the underlying asset falls below the exercise price.
D. immediately after the payment of dividends.
Difficulty: Easy
Est time: <1 minute
15. In options markets, options that give the option buyer the right to exercise the option only on
the maturity date are:
A. call options.
B. put options.
C. European-type options.
D. American-type options.
Difficulty: Easy
Est time: <1 minute
16. In options markets, options that give the option buyer the right to exercise the option at any time
up to the maturity date are:
A. call options.
B. put options.
C. European-type options.
D. American-type options.
Difficulty: Easy
Est time: <1 minute
17. If an option buyer wanted to decide only at the expiration date whether or not to exercise the option
then and the price locked into that date, they would buy:
A. An Asian option.
B. a LEPO option.
C. a European-type option.
D. an American-type option.
Difficulty: Easy
Est time: <1 minute
18. The advantages of using an American type option compared to a European type option:
A. is American options are cheaper.

B. have a longer maturity date.
C. have lower volatility.
D. can be exercised at any time up to maturity.
Difficulty: Easy
Est time: <1 minute
19. In option markets the price specified in the option contracts for calls and puts is called the:
A. market price.
B. option price.
C. strike price.
D. expected value.
Difficulty: Easy
Est time: <1 minute
20. In options markets the strike price is the price:
A. an option buyer pays for it.

B. an option writer receives.
C. specified in an options contract at which the buyer can buy or sell the
underlying asset. D. at which a buyer can buy or sell the option in the
market.
Difficulty: Easy
Est time: <1 minute
21. In an options contract, the strike price is also known as the:
A. fixed price.
B. equilibrium price.
C. exercise price.
D. market price.
Difficulty: Easy
Est time: <1 minute
22. In options markets, the price paid by an option buyer to the writer of the option is the:
A. call price.
B. premium.
C. put price.
D. strike price.
Difficulty: Easy
Est time: <1 minute
23. A ________ option is an option to purchase a specified number of shares on or before some
future date at a specified price, whereas a _______ option is an option to sell a specified
number of shares on or before some future date at a specified price. ______ are bought if the
share is expected to rise.
A. put; call; Puts

B. call; put; Puts
C. call; put; Calls
D. put; call; Calls
Difficulty: Medium
Est time: <1 minute
24. Which of the following statements about calls and puts is incorrect?
A. Options do not provide any funding to the company.
B. Exchange-traded options are highly standardised.
C. Options are generally issued by companies.
D. Options are generally traded on an organised exchange.
Difficulty: Easy
Est time: <1 minute
25. Which of the following is NOT true of calls and puts?
A. They are generally traded on organised exchanges.

B. They can be used to hedge a gain or prevent a loss on a stock holding.
C. They provide the buyer with an opportunity of greater profits than simply from
buying and selling the underlying shares.
D. They both result in new equity capital for the company.
Difficulty: Medium
Est time: <1 minute
26. In options markets the fee charged by a seller of an option is called the:
A. call price.
B. futures fee.
C. market price.
D. option premium.
Difficulty: Easy
Est time: <1 minute
27. The decision between selecting a future or an option:
A. reflects a trade-off between the higher cost of using options and the extra insurance
benefits that options provide.
B. reflects the greater risk of using options and the extra insurance benefits that
options provide. C. reflects a trade-off between the higher cost of using futures and
the extra insurance benefits that futures provide.
D. depends on whether the underlying instrument is an equity or debt instrument.
Difficulty: Medium
Est time: <1 minute
28. In options markets, the maximum loss a buyer of a share call option can undergo is equal to
the:
A. share price minus the value of the call.
B. strike price minus the share price.
C. call premium.
D. share price.
Difficulty: Easy
Est time: <1 minute
tion contracts, and consider the requirements of covered option contracts. Section: 20.2 Option profit and loss payoff profiles
29. In options markets, the maximum loss a buyer of a share put option can undergo is equal to
the:
A. share price minus the value of the put.

B. strike price minus the share price.
C. put premium.
D. share price.
Difficulty: Easy
Est time: <1 minute
30. What type of option will an option buyer purchase if they believe a share price will rise?
A. Call
B. Put
C. Warrant
D. Swaption
Difficulty: Easy
Est time: <1 minute
31. What type of option will an option buyer buy if they believe a share price will fall?
A. Call
B. Put
C. Warrant
D. Swaption
Difficulty: Easy
Est time: <1 minute
32. On the expiration date for a call option with strike price of $10.00, premium $1.50 and the current
spot price of $9.00, the holder will:
A. have a total loss of $2.50

B. let the option contract lapse.
C. sell the shares at $9.00
D. close it out by buying a put option.
Difficulty: Medium
Est time: <1 minute
33. On the expiration date for a call option with strike price of $10.00, premium $1.50 and the current
A. buy the shares in the market place.

C. exercise the option.
D. make a profit of $1.50
Difficulty: Medium
Est time: <1 minute
34. On the expiration date for a put option with strike price of $10.00, premium $1.50 and the current

Difficulty: Medium
Est time: <1 minute
35. On the expiration date for a put option with strike price of $10.00, premium $1.50 and the current

Difficulty: Easy
Est time: <1 minute
36. Which of the following statements about option contracts is incorrect?
A. The seller of a put option loses if the spot price, plus the premium, is below the
exercise price when the option is exercised.
B. The buyer of a call option benefits if the price of the spot is above the exercise price
when the option is exercised.
C. The buyer of a put option gains if the price of the spot is below the exercise price when
the option is exercised.
D. The seller of a call option loses if the spot price, plus the premium, is below the
exercise price when the option is exercised.
Difficulty: Medium
Est time: <1 minute
37. An investor purchases a call option at a premium of $1.25, with an exercise price of $7.50 within
three months. The holder of the option will:
A. be in-the-money if the market price of the shares reaches $6.25

B. only exercise the option if the current market price reaches or exceeds $8.75
C. exercise the option at any price above $7.50, if necessary.
D. break even at a market price of $7.50, and will exercise the option.
Difficulty: Hard
Est time: <1 minute
38. Which of the following statements best reflects the following profit profile of an option
contract?
A. The profile depicts the short call position of the option seller.
B. The profile depicts the long call position of the buyer of the option.
C. The profile depicts the short put position of the option seller.
D. The profile depicts the long put position of the buyer of the option.
Difficulty: Hard
Est time: <1 minute
contract?
Difficulty: Hard
Est time: <1 minute
contract?
Difficulty: Hard
Est time: <1 minute
contract?
Difficulty: Hard
Est time: <1 minute
42. Buyers of put options expect the value of the underlying asset to _______, and the sellers of call
options expect the value of the underlying asset to ________.
A. increase; increase
B. decrease; increase
C. increase; decrease
D. decrease; decrease
Difficulty: Medium
Est time: <1 minute
43. An investor holds long call options that may be exercised at any time over the next month. The
spot price of the underlying asset is $12.75; the strike price of the option is $15.10; and the
premium paid was $2.35. What is the value of the option to the holder?
A. -$2.35
B. zero
C. $10.40
D. $15.10
Difficulty: Medium
Est time: <1 minute
44. Calculate the value of a long call if the exercise price is $10.00, the premium is $1.50 and the spot
price is $8.00, given V = max(S-X, 0) – P.
A. -$3.00
B. -$1.50
C. $0.00
D. $0.50
Difficulty: Medium
Est time: <1 minute
45. Calculate the value of a short call if the strike price is $10.00, the premium is $1.50 and the spot
price is $8.00, given V = P - max(S-X, 0).
A. -$1.50
B. -$0.50
C. $0.50
D. $1.50
Difficulty: Medium
Est time: <1 minute
46. Calculate the value of a long put if the exercise price is $10.00, the premium is $1.50 and the spot
price is $8.00, given V=max(X-S, 0) – P.
A. -$3.00
B. -$1.50
C. $0.00
D. $0.50
Difficulty: Medium
Est time: <1 minute
47. Calculate the value of a short put if the exercise price is $10.00, the premium is $1.50 and the spot
price is $8.00, given V = P - max(X-S, 0).
A. -$1.50
B. -$0.50
C. $0.00
D. $0.50
Difficulty: Medium
Est time: <1 minute
48. The main feature of the potential profit and loss profile for a long put party may be best
described as:
A. the further the spot price is above the exercise price, the greater the profit.
B. profits are made from exercising an option when the spot price falls below the
exercise price adjusted for the premium.
C. a loss is sustained if the spot price is less than the exercise price.
Difficulty: Medium
Est time: <1 minute
49. The most important benefit of an options contract strategy for a hedger is:
A. the income paid to the writer of the option.

B. risk of loss from unfavourable price movements is limited.
C. the premium is kept by the seller of the option.
D. the option can be exercised at any time.
Difficulty: Medium
Est time: <1 minute
50. Which of the following best reflects the exposure position of a writer of a put option?
A. A loss is made when the spot price is below the exercise price adjusted
by the premium. B. The extent of the loss potential is limited to a zero spot
price less the premium paid. C. The maximum profit to the writer is
limited to the extent of the premium paid.
Difficulty: Medium
Est time: <1 minute
51. A covered call position is:
A. the purchase of a share at the same time as selling a put on that share.
B. the simultaneous purchase of a call and the underlying asset.
C. selling a share short at the same time as selling a call on that share.
D. the purchase of a share at the same time as selling a call on that share.
Difficulty: Medium
Est time: <1 minute
52. A hedge fund has written a call option on shares of a company with an exercise price of $17.45,
and simultaneously also buys a call option on the same share with an exercise price of
$16.95. The hedge fund is considered to have written a/an:
A. arbitrage option.
B. naked call/put contract.
C. covered call option.
D. margin call option.
Difficulty: Hard
Est time: <1 minute
53. In options markets, where a call writer holds the underlying assets, this is called a:
A. long put.
B. short put.
C. covered call.
D. covered spread.
Difficulty: Hard
Est time: <1 minute
54. The loss for a writer of a naked call option on a share is potentially _____ and so currently short-
selling is banned in Australia.
A. limited
B. unlimited
C. larger the more the share price falls
D. equal to the call premium
Difficulty: Medium
Est time: <1 minute
55. When we contrast futures with options contracts, we can say that:
A. in a futures contract, the buyer and seller have asymmetric rights, whereas in an options
contract the buyer and writer have symmetric rights.
B. in a futures contract the buyer and seller have symmetric rights, whereas in an options
contract the buyer and writer have asymmetric rights.
C. for both futures contracts and options contracts the buyer and writer have
symmetric rights. D. for both futures contracts and options contracts the buyer
and writer have asymmetric rights.
Difficulty: Hard
Est time: <1 minute
56. Which of the following is NOT a condition applied to call options listed on the Australian
Securities Exchange (ASX Trade) on leading ordinary shares?
A. Typically, there are numerous option contracts offered on a particular share

over a range of expiration dates.
B. A long call option buyer must meet the deposit and margin calls of the clearing house
whereas the writer does not have to.
C. Typically, three or more options are traded with the same expiration date, but with
different strike prices.
D. The Options Clearing House handles the assignment of option contract exercise notices
submitted by buyers.
Difficulty: Easy
Est time: <1 minute
markets, including examples of the types of option contracts available.
57. The highly geared option contract on individual stocks on the ASX with an exercise price of
between one and ten cents is a/an:
A. capped warrant.
B. LEPO.
C. instalment warrant.
D. endowment warrant.
Difficulty: Medium
Est time: <1 minute
58. In the Australian options markets a LEPO is:
A. low-expiration price option.

B. low-exercise price option.
C. large exercise price option.
D. long-exercise price option.
Difficulty: Medium
59. In the Australian options markets the warrant that has an upper limit applied to the upside
profit available for the holder is a/an:
A. capped warrant.
B. LEPO.
C. instalment warrant.
D. endowment warrant.
Difficulty: Hard
Est time: <1 minute
60. The option that is a highly leveraged option on individual stocks, with an exercise price of between
one and ten cents, traded on the ASX Trade, with a European-type expiry, is a:
A. strip.
B. warrant.
C. barrier option.
D. LEPO.
Difficulty: Medium
Est time: <1 minute
61. In the Australian options markets, a warrant that is made up of a selection of shares from the
mining industry is an example of a/an:
A. basket warrant.
B. index warrant.
C. capped warrant.
D. instalment warrant.
Difficulty: Medium
Est time: <1 minute
62. What security gives the holder an option to purchase a specified number of shares at a
predetermined price within a certain period of time?
A. A convertible bond
B. A put option
C. An equity warrant
D. A repurchase agreement
Difficulty: Medium
Est time: <1 minute
63. A lender, concerned that its cost of funds might rise during the term of a loan it has
made, can hedge this rise without forgoing the chance to profit by a decline in the cost of
funds. This is done by:
A. selling futures contracts on Treasury bills.
B. buying futures contracts on Treasury bills.
C. buying call options on Treasury bills.
D. buying put options on Treasury bills.
Difficulty: Hard
Est time: <1 minute
64. When interest rates are forecasted to rise, a company approaches its bank before the next roll-over
date of its current debt facilities, and buys an interest rate cap option. However, the company is
concerned at the cost of the cap premium and decides to simultaneously sell an interest rate
floor option of the same maturity. Which of the following statements is correct?
A. The transactions may be described as an exchange traded options contract.

B. The company has obtained cover with a collar option strategy.
C. This option strategy will achieve a zero cost outcome for the company.
Difficulty: Hard
Est time: <1 minute
sic value, time value, price volatility and interest rates.
Section: 20.4 Factors affecting an option contract premium
65. Suppose that Maxima shares are selling for $10 per share and you own a call option to buy
Maxima shares at $7.50. The intrinsic value of your option is:
A. $10.00
B. $7.50
C. $2.50
D. not determinable without further information.
Difficulty: Medium
Est time: <1 minute
66. The intrinsic value of an option is:
A. the same as the option premium.

B. the amount the option is actually worth if it is immediately exercised.
C. the amount the option is likely to be worth on its expiration date.
D. impossible to determine given the lack of information on the future prices of the
underlying asset.
Difficulty: Medium
Est time: <1 minute
67. A call option is regarded as being in-the-money if:
A. it is written on a Treasury bond or another money market instrument.

B. it has increased in value since it was first written.
C. the price of the underlying asset is currently greater than the strike price.
D. the price of the underlying asset is currently greater than the strike price plus the option
premium.
Difficulty: Medium
Est time: <1 minute
68. In the options markets a put option is said to be in-the-money if the:
A. exercise price is less than the share price.

B. exercise price is greater than the share price.
C. exercise price is equal to the share price.
D. price of the put is higher than the price of the call.
Difficulty: Medium
Est time: <1 minute
69. In the options markets a put option is said to be out-of-the money if the:
A. exercise price is less than the share price.

B. exercise price is greater than the share price.
C. exercise price is equal to the share price.
D. price of the put is higher than the price of the call.
Difficulty: Medium
Est time: <1 minute
70. In the options markets for a covered option, the:
A. option premium never alters from the intrinsic value.

B. strike price is always above the exercise price.
C. seller owns the underlying asset.
D. seller does not have an interest in the underlying asset.
Difficulty: Medium
Est time: <1 minute
71. In the options markets a put option is regarded as being in-the-money if:
A. it is written on a Treasury bond or another money market instrument.

B. it has increased in value since it was first written.
C. the price of the underlying asset is currently less than the strike price.
D. the price of the underlying asset is currently less than the strike price plus the option
premium.
Difficulty: Medium
Est time: <1 minute
72. Which of the following factors would tend to increase the size of the premium on an options
contract?
A. The current short-term interest rates are high

B. The option is near its expiration date
C. The price volatility of the underlying asset is low
D. The option is far off its expiration date
Difficulty: Medium
Est time: <1 minute
73. The value of a put option rises when the underlying asset:
A. has reduced volatility.

B. has relatively short maturity.
C. experiences price increases.
D. experiences price falls.
Difficulty: Medium
Est time: <1 minute
74. Which of the following variables affect the value of options?

i. Difficulty of interest rates
ii. Time to maturity of the option
iii. Share price volatility
iv. Dividend yield on the underlying share
A. i and iv only
B. ii and iii only
C. i, ii and iv only
D. i, ii, iii and iv
Difficulty: Medium
Est time: <1 minute
75. Which of the following factors is NOT generally regarded as a major determinant of the price
of an option?
A. The spot price of the underlying asset, relative to the option exercise price
B. The elapsed time since the start of the option
C. The volatility of the spot price of the underlying asset
D. The level of interest rates
Difficulty: Hard
Est time: <1 minute
76. All of the following factors affect the price of a share option except the:
A. riskiness of the share.

B. risk-free rate.
C. time to expiration.
D. expected rate of return on the share.
Difficulty: Medium
Est time: <1 minute
77. In relation to options when interest rates increase, the:
A. price of call options generally falls.

B. price of the underlying share usually increases.
C. price of put options generally falls.
D. volatility of the underlying asset falls.
Difficulty: Medium
Est time: <1 minute
78. In relation to options when interest rates decrease, the:
A. price of call options generally increases.

B. price of the underlying share usually decreases.
C. price of put options generally increases.
D. volatility of the underlying asset falls.
Difficulty: Medium
Est time: <1 minute
79. The strategy whereby a company buys an interest rate option that puts a maximum level on the
interest rate for its borrowing is a:
A. limit option.
B. cap option.
C. boundary option.
D. ceiling option.
Difficulty: Medium
Est time: <1 minute
80. In option language, a ‘cap' is a:
A. boundary option.
B. ceiling option.
C. floor option.
D. perimeter option.
Difficulty: Medium
Est time: <1 minute
81. The strategy whereby a company sells an interest rate option that puts a minimum level on how
low an interest rate may fall is a:
A. boundary option.
B. limit option.
C. floor option.
D. perimeter option.
Difficulty: Medium
Est time: <1 minute
82. The option that is a combination of a cap option and a floor option is a:
A. boundary option.
B. collar option.
C. band option.
D. range option.
Difficulty: Hard
Est time: <1 minute
83. If a risk manager wants to put on an upper limit on an interest rate payable on a future borrowing
by buying an option and at the same time he wants an option that puts a minimum limit on how
low interest rate payable may fall, this combination is called:
A. a cap.
B. a floor.
C. a collar.
D. a wrap.
Difficulty: Medium
Est time: <1 minute
84. An investor purchased a call option and wrote a put option at an exercise price lower than that of
the long call option. The strategy is known as a:
A. long straddle.
B. horizontal bull spread.
C. vertical bull spread.
D. short straddle.
Difficulty: Hard
Est time: <1 minute
es that are appropriate to hedge price risk, including single-option strategies and combined-option strategies, and discuss the advantages and disadvantages of option
contracts for the management of risk.
Section: 20.5 Option risk management strategies
85. An investor purchased a call option and wrote a call option at an exercise price higher than that of
the long call option. The strategy is known as a:
A. call bull spread.

B. long straddle.
C. horizontal bull spread.
D. short straddle
Difficulty: Hard
Est time: <1 minute
86. An investor purchased a put option and wrote a call option at an exercise price higher than that of
the long put option. The strategy is known as a:
A. long straddle.
B. horizontal bear spread.
C. short straddle.
D. vertical bear spread.
Difficulty: Hard
Est time: <1 minute
87. An investor purchased a put option and at the same time wrote a put option at an exercise price
lower than that of the long put option. The strategy is known as a:
A. long straddle.
B. bull spread.
C. put bear spread.
D. short straddle.
Difficulty: Hard
Est time: <1 minute
88. If a share investor with quite a bearish outlook but also wants to hedge against a price rise, then
they could undertake a:
A. long straddle.
D. put bear straddle.
Difficulty: Hard
Est time: <1 minute
89. An investor with a very bearish attitude can limit their attitude by:
A. long straddle.
D. short straddle.
Difficulty: Hard
Est time: <1 minute
90. In expectation of increased price volatility, an investor purchased a call option and at
the same time bought a put option with common exercise prices. The strategy is known as
a:
A. horizontal spread.
B. vertical spread.
C. short straddle.
D. long straddle.
Difficulty: Hard
Est time: <1 minute
91. If an investor with a somewhat bearish attitude owns some shares but does not as yet want to sell,
then they can limit their downside exposure to a price fall by:
A. engaging in a vertical bull spread.

B. by writing a call option on the shares.
C. by engaging in a call bull spread.
D. by engaging in a put bear spread.
Difficulty: Hard
Est time: <1 minute
92. In expectation of increased price volatility, an investor purchased a call option and at the same
time bought a put option, both with out-of-the-money exercise prices on the same
underlying asset. The strategy is known as a:
A. horizontal spread.
B. vertical spread.
C. short strangle.
D. long strangle.
Difficulty: Hard
Est time: <1 minute
93. In expectation of increased price stability, an investor sells a call option and at the same
time sells a put option with common exercise prices on the same underlying asset. The strategy
is known as a:
A. vertical spread.
B. horizontal spread.
C. short straddle.
D. long straddle
Difficulty: Hard
Est time: <1 minute
94. When we contrast futures with options contracts, we can say that:
A. in a futures contract, the buyer and seller have asymmetric rights, whereas in an options
contract the buyer and writer have symmetric rights.
B. in a futures contract the buyer and seller have symmetric rights, whereas in an options
contract the buyer and writer have asymmetric rights.
C. for both futures contracts and options contracts the buyer and writer have
symmetric rights. D. for both futures contracts and options contracts the buyer
and writer have asymmetric rights.
Difficulty: Hard
Est time: <1 minute
True / False Questions

95. Options are contracts that give the purchaser the obligation to buy or sell an underlying
asset. FALSE
Options are contracts that give the purchaser the right to buy or sell an underlying asset.
Difficulty: Easy
Est time: <1 minute
96. A put option gives the owner the obligation to sell the underlying security.
FALSE
A put option gives the owner the right to sell the underlying security.
Difficulty: Easy
Est time: <1 minute
97. The seller of an option has the obligation to buy or sell the underlying asset.
TRUE
The seller or writer is obliged to carry out the contract for which they demand a
premium to compensate them for the risk.
Difficulty: Easy
Est time: <1 minute
98. In the options market the short-call party has the right to sell shares at a specified
price. FALSE
The short-call party has the obligation to sell shares at a specified price, not the right.
Difficulty: Medium
Est time: <1 minute
99. If a buyer of a particular share purchased a call option on it at a strike price of $15 and the
share is selling for $12 on the expiration date, the call option is worth $0.
TRUE
The option has expired out-of-the money as the strike price is more than the actual price.
Difficulty: Medium
Est time: <1 minute
100. A long-call party would exercise a call option with an exercise price of $9.00 and a premium of
$1.50 if the current price of the underlying physical market asset is $8.00.
FALSE
The physical asset price needs to move upwards to $11.00 to be in the money.
Difficulty: Medium
Est time: <1 minute
101. A short-call party to a call option with an exercise price of $10.00 and a premium of $1.00,
if the current price of the underlying asset is $8.00 on the exercise date, would make a loss of
$1.00
FALSE
Given V = P - max(S-X, 0) they would make a profit of $1.00.
Difficulty: Medium
Est time: <1 minute
102. The value of a put option rises when the underlying asset experiences price
declines. TRUE
A put option gives the holder the right to sell at a specified price.
Difficulty: Medium
Est time: <1 minute
103. The intrinsic value of an option is the amount the option is expected to be worth on its
expiration date. FALSE
The intrinsic value is the market price of the underlying asset relative to the option exercise
price.
Difficulty: Medium
Est time: <1 minute
104. If interest rates increase the value of a put option declines.
TRUE
There is a greater opportunity cost if one assumes the holder of the put owns the underlying
asset.
Difficulty: Medium
Est time: <1 minute
Short Answer Questions

105. Under certain circumstances an options contract may be a preferred hedging instrument.
Discuss.
As an options contract gives the option buyer the right, but not the obligation, to buy or
sell a specified commodity or financial instrument at a predetermined price on or
before a specified date, if it is not in the option buyer's best interest it need not be
exercised. So an option buyer will not exercise a right to
sell if the physical market price is above the exercise price of the option. Likewise an
option buyer will not exercise the right to buy if the physical market price is below the
exercise price of the option. The buyer of an options contract has paid a premium for
the flexibility of the option and the hedging of uncertain outcomes.

106. Discuss a call option writer's risk exposure and some strategies they might use to minimise any
possible loss exposure.
The writer of a call option is exposed to potentially unlimited loss if the spot share
price increases indefinitely. Given that the maximum profit that is made by the writer
is from the receipt of the premium, once the option is in-the-money the writer's
premium is reduced or turned into a loss. If it appears that the spot price is increasing,
it is expected that the option writer would immediately close out a negative position or
maintain a covered position obtained by owning the actual shares before the price rise
began.

107. Discuss some characteristics of writers of covered and uncovered call options.
For an exchange-traded option the writer will typically need to meet margin
requirements, unless a covered option is written guaranteeing that the writer of the option
can complete the contract should the holder decide to exercise the option. This would be
the case for a writer who owned a sufficient quantity of the underlying asset, such as
listed shares, to meet the requirement. Another alternative for a covered call is if a third
party provides a guarantee that the option writer may borrow from them the underlying
asset on or before the option contract settlement date. Another cover arrangement would
be when a call option writer was the holder of a call option in the same asset but with a
lower exercise price. If a writer did not have cover, as previously mentioned, they are
considered to have written an uncovered call. Recently, the rules on covered and
uncovered short selling have been tightened dramatically owing to the turmoil in global
financial markets.

108. Option markets have some basic organisation features. Discuss
Option markets now operate in the major financial centres around the world. Prior to
1973 and the creation of the Chicago Board Options Exchange (CBOE), option contracts
were private contracts between parties. However, market trading of standardised
contracts was stimulated by the establishment of the CBOE and the adoption of formal
trading practices and similar exchanges developed quite quickly around the world. The
organisation of options markets is similar to futures. All exchange-traded options
contract transactions are recorded by a clearing house. Once the clearing house has
entered as the counterparty to both the seller and buyer of the option the options clearing
house guarantees the performance of all contracts. It also handles the assignment of
option contract exercise notices submitted by buyers.

109. Discuss briefly the two common option contracts for shares and options on futures contracts
that are available through the AASX Trade 24.
The Australian Securities Exchange (ASX) offers exchange-traded contracts through its
subsidiary, the ASX Trade 24. Option contracts on underlying futures contracts include
90-day bank-accepted bills futures contracts, S&P/ASX 200 Index futures contracts and
three-year, and 10-year Treasury bonds futures contracts. There are also share options
with varying exercise prices on leading company ordinary shares.

lOMoARcPSD|15657051
Chapter 09 Test Bank
Fins (University of New South Wales)
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Multiple Choice Questions
1. When a company finances its short-term assets with short-term debt, this is known as the:
A. identical principle.
B. equalisation theory.
C. corresponding principle.
D. matching principle.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 09-01 Understand why the financial markets offer short-term debt and financing facilities.
2. Trade credit can be regarded as:
A. finance offered by trading banks.

B. short-term debt.
C. medium-term debt.
D. long-term debt.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 09-02 Consider the concept and reasons for the provision of trade credit.
Section: 9.1 Trade credit
3. According to the text, short-term debt arrangements means loans and instruments with maturity:
A. of a month.
B. up to six months.
C. up to a year.
D. between one year and two years.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 09-01 Understand why the financial markets offer short-term debt and financing facilities.
4. When a company provides goods to a purchaser with payment at the end of the month, this is called.
A. factoring.
B. revolving credit.
C. trade credit.
D. supplier credit.
Difficulty: Easy

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Est time: <1 minute

5. A facility offered by many suppliers of goods that provide for the purchase of goods with a specified
period before the account must be paid for is called:
A. supplier credit.
B. bank overdraft.
C. trade credit.
D. purchaser credit.
Difficulty: Easy
Est time: <1 minute
6. A 2/15, n/30 date of invoice translates as:
A. a 2% cash discount may be taken if paid in 15 days; if no cash discount is taken, the balance is due in
30 days after the middle of the month.
B. a 2% cash discount may be taken if paid in 15 days; if no cash discount is taken, the balance is due
30 days after the invoice date.
C. a 2% cash discount may be taken if paid in 15 days; if no cash discount is taken, the balance is due
30 days after the end of the month.
D. a 2% cash discount may be taken on 15% of the purchase if the account is paid within 30 days after
the end of the month.
Difficulty: Medium
Est time: <1 minute
7. The annual cost of forgoing a cash discount under the terms of sale 2/30 n/90, assuming a 365-day year
is:
A. 8.0%
B. 12.2%
C. 12.4%
D. 24.0%
Difficulty: Medium
Est time: <1 minute

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8. A company is offered credit terms of 2/10 n/40, but decides to forgo the cash discount and pay on the
45th day. What is the company's cost of forgoing the cash discount?
A. 18.6%
B. 21.28%
C. 24.83%
Difficulty: Medium
Est time: <1 minute
9. A supplier who changes its trade credit from 3/10 n/30 to 4/15 n/40 is likely to find:
A. its accounts receivable decrease.

B. its risk of bad debts reduces.
C. its accounts receivable increase.
D. a decrease in sales.
Difficulty: Medium
Est time: <1 minute
10. When a business wants to smooth out the timing of its monthly mismatch between cash inflows and
outflows and day-to-day working capital requirements, it usually:
A. issues bank bills.

B. arranges a bank overdraft facility.
C. issues a debenture.
D. issues commercial paper.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 09-03 Explain the purpose and operation of a bank overdraft facility.
Section: 9.2 Bank overdrafts
11. When a company has a deal with a bank lender that allows access to short-term funds, this is called:
A. a debt facility.
B. a credit facility.
C. a debt provision.
D. a liability provision.
Difficulty: Easy
Est time: <1 minute

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12. Which of the following statements about an overdraft facility is NOT correct?
A. Banks require an overdraft facility to be operated on a fully fluctuating basis.

B. Generally, the agreed interest rate on an overdraft is calculated by the bank on the balance at the
end of the month.
C. The bank lender will charge an establishment fee to cover the establishment costs of an overdraft.
D. There is an unused limit fee that is much less than the actual overdraft interest rate.
Difficulty: Easy
Est time: <1 minute
13. 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
Difficulty: Easy
Est time: <1 minute
14. The benchmark or prime rate of interest for overdrafts varies directly with:
A. demand for funds in the bond markets.

B. varying demand and supply for funds in the short-term markets.
C. varying demand and supply for funds in the long-term markets.
D. changing asset prices.
Difficulty: Easy
Est time: <1 minute
15. The basic feature of a/an ________ required by some banks is that it effectively raises the interest cost
to the borrower for an overdraft facility.
A. operating change restriction

B. compensating balance
C. commitment fee
D. annual cleanup
Difficulty: Hard
Est time: <1 minute

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16. If a company has a good credit standing with a bank, it will be charged ______ interest rate margin
than/as a company without an established record.
A. a higher
B. a lower
C. a much higher
D. the same
Difficulty: Easy
Est time: <1 minute
17. Which of the following statements about bank bills is NOT correct?
A. The interest rate on a bank bill is generally higher than on a bank overdraft.
B. The interest rate on a bank bill is generally lower than the yield on a Treasury note.
C. The interest rate on a bank overdraft is generally higher than the yield on a Treasury note.
D. The interest rate on a bank overdraft is generally higher than the yield on a Treasury bond.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 09-04 Describe the structure of a commercial bill, including the parties to the bill, the flow of funds, the establishment and the advantages of
issuing bank-accepted bills.
Section: 9.3 Commercial bills
18. If a company wishes to finance a printing press with a two-year life, it would be advisable to finance it:
A. with an overdraft.
B. by issuing a bank bill.
C. with the issue of commercial paper.
D. through its bill rollover facility.
Difficulty: Medium
Est time: <1 minute
19. A company is likely to issue a bank bill if it wants:
A. long-term financing.
B. to spread its interest payments over the medium term.
C. short-term financing.
D. to invest medium-term funds.
Difficulty: Easy
Est time: <1 minute

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20. Which of the following rates serves as a reference interest rate in the United Kingdom?
A. BBSW
B. LIBOR
C. USCP
D. SIBOR
Difficulty: Easy
Est time: <1 minute
21. What is a bill of exchange either accepted or endorsed by a bank called?
A. A commercial bill
B. A bank bill
C. A trade bill
D. A negotiable bill
Difficulty: Easy
Est time: <1 minute
22. Which of the following statements about the issuing of a commercial bill is incorrect?
A. Commercial bills are sold at discount to face value.

B. A bank may accept a commercial bill.
C. The drawer is the party that issues the commercial bill.
D. The discounter is the party that borrows the funds.
Difficulty: Medium
Est time: <1 minute
23. The _______ is the party that lends the funds in a commercial bill transaction.
A. acceptor
B. discounter
C. drawer
D. endorser
Difficulty: Medium
Est time: <1 minute

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24. Which of the following statements about bank bills is incorrect?
A. The drawer is the party that issues the bill.

B. The acceptor is the party that has primary liability to repay the face value of the bill.
C. The payee is the party that receives the borrowed funds when the bill is initially issued.
D. The discounter is the party that repays the acceptor at maturity.
Difficulty: Medium
Est time: <1 minute
25. 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.
Difficulty: Medium
Est time: <1 minute
26. For a commercial bill, the interest rate is quoted as a/an:

C. effective rate.
D. holding period yield.
Difficulty: Medium
“Est time: <1 minute
27. Which of the following about bank bills is incorrect?
A. For a bank bill, the drawer has the secondary liability to pay the holder of the bill at maturity.
B. A commercial bank generally carries out the role of an acceptor on a bill.
C. With a bank as an acceptor, it makes it easier to sell the bill at a higher yield.
D. When the discounter discounts the face value of the bill they provide the funds to the borrower.
Difficulty: Medium
Est time: <1 minute

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28. In relation to a commercial bill, the acceptance fee is the:
A. discounter's fee for taking on the risks associated with discounting the bill.
B. fee for drawing up the bill.
C. fee for taking the liability for paying the holder at maturity.
D. drawer's fee for taking on the risks associated with drawing the bill.
Difficulty: Medium
Est time: <1 minute
29. Which of the following statements about bills is incorrect?
A. There is an active secondary market in bank-accepted bills.

B. Once a bill has been discounted into the marketplace, the cost of funds will vary for the issuer.
C. The drawer has a liability with a bank-accepted bill to pay face value to the acceptor bank.
D. At maturity for a bank-accepted bill, the acceptor will pay face value to the holder.
Difficulty: Medium
Est time: <1 minute
30. 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.
Difficulty: Easy
Est time: <1 minute
31. Which of the following statements regarding a bank bill is correct?
A. A bank bill is not usually endorsed after it is sold for the second time in the secondary market.
B. Once a bank becomes an acceptor for a bill other financial institutions can buy and accept the same
bank bill.
C. A bank bill may be both bank-accepted and bank-endorsed.
D. A bank-accepted bill tends to trade at slightly higher yields than bank-endorsed bills.
Difficulty: Medium
Est time: <1 minute

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32. In relation to a bank bill, endorsement means:
A. that the acceptor and endorser make an agreement as to who is liable for the repayment of the face
value to the final holder of the bill.
B. if the acceptor cannot repay the face value to the holder at maturity, it must draw a bill to meet its
obligations.
C. the endorser has a contingent liability when the bill matures.
D. the drawer agrees to pay an additional fee to the acceptor for guaranteeing the repayment.
Difficulty: Medium
Est time: <1 minute
33. Upon maturity, the final holder of the bill approaches the _________ for payment.
A. drawer
B. acceptor
C. endorser
D. discounter
Difficulty: Easy
Est time: <1 minute
34. Which maturity date is NOT likely for a bank bill?
A. 30 days
B. 90 days
C. 180 days
D. 360 days
Difficulty: Medium
Est time: <1 minute
35. With a bank-accepted bill rollover facility the:
A. borrower agrees to accept bills drawn by the bank up to a specified limit.

B. borrower agrees to accept bills drawn by the bank up to an unspecified limit.
C. bank agrees to accept bills drawn by the borrower up to a specified limit.
D. The bank agrees to accept, discount and rollover bills at a fixed interest rate up to a year.
Difficulty: Medium
Est time: <1 minute

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36. A major advantage of a bill financing facility is that it:
A. lowers the acceptor's fees for a bank bill.

B. lowers the drawer's cost in drawing up the bill.
C. allows businesses to access financing at a lower cost than overdrafts.
D. lowers the discounter's fee for taking on risks associated with the bill.
Difficulty: Medium
Est time: <1 minute
37. Which of the following about bank bill financing facility is incorrect?
A. A bill rollover facility is an arrangement whereby the bank agrees to accept and discount new
commercial bills for an issuer at each maturity date.
B. The yield at which the bill is discounted depends partly on the credit rating of the party that incurs
the liability.
C. The bank agrees to discount bills up to the agreed amounts with a fixed yield over the life of the
rollover facility.
D. Bills issued via a rollover facility incorporate the higher credit standing of the bank acceptor.
Difficulty: Medium
Est time: <1 minute
38. With regard to a rollover bill financing facility:
A. the bank agrees to sell commercial bills drawn by the borrower for unspecified amounts.
B. the bank agrees to sell commercial bills drawn by the borrower up to a specified limit.
C. the discounter agrees to sell commercial bills drawn by the borrower up to a specified limit.
Difficulty: Hard
Est time: <1 minute
39. Compared to other forms of business finance such as term loans, bill financing offers:
A. the advantages of lower costs for the bank not having to fund the bill on its balance sheet.
B. disadvantages for the bank due to the issue fees involved.
C. higher costs due to the lack of collateral.
D. lower flexibility for the bank.
Difficulty: Medium
Est time: <1 minute

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A. A bank bill is a negotiable instrument.

B. A bank-accepted bill is regarded by market participants as equivalent to a bank-endorsed bill.
C. The issuer of the bank-accepted bill will repay the holder of the bill directly at maturity.
D. The issuer of a bank-endorsed bill has to pay regular interest payments to the holder, unlike with a
bank-accepted bill.
Difficulty: Medium
Est time: <1 minute
41. 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
Difficulty: Medium
Est time: <1 minute
Learning Objective: 09-05 Complete a range of calculations relevant to discount securities, including the price where the yield is known, face value where the issue
price and yield are known, yield, price where the discount rate is known and the discount rate.
Section: 9.4 Calculations: discount securities
42. 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
Difficulty: Medium
Est time: <1 minute
43. A company has decided to issue a 120-day bank-accepted bill to raise additional funding of $250 000 to
buy equipment. If the bank has agreed to discount the bill at a yield of 7.65% per annum, what will be
the face value of the bill?
A. $230 875
B. $250 000
C. $256 287.67
D. $312 876.71
Difficulty: Medium
Est time: <1 minute

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44. A company wants to invest some surplus short-term funds and plans to buy a 180-day bank bill with a
face value of $100 000. What is the yield on the bill if its price is currently $94 234?
A. 11.69%
B. 12.41%
C. 13.23%
D. 13.32%
Difficulty: Medium
Est time: <1 minute
45. What is the discount rate of a 120-day bank bill with a face value of $100 000 and currently selling for
$95 234, with a full 120 days to run?
A. 13.93%
B. 14.50%
C. 15.22%
D. 16.58%
Difficulty: Medium
Est time: <1 minute
46. A bill of exchange differs from a promissory note in that:
A. only promissory notes have an active secondary market.

B. a promissory note is a short-term instrument, whereas a bill of exchange is not necessarily short-
term.
C. there is generally an issuer and an acceptor for a bill of exchange, whereas there is no acceptor
involved for a promissory note.
D. bills of exchange are only used for trade transactions.
Difficulty: Easy
Est time: <1 minute
47. 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).
Difficulty: Easy
Est time: <1 minute
Learning Objective: 09-06 Describe the structure, advantages, establishment, underwriting and calculation of promissory notes (commercial paper).

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Section: 9.5 Promissory notes
48. ________ is a short-term, unsecured discount note issued by corporate borrowers of high credit
standing. The major banks generally issue these notes on their behalf.
A. A line of credit
B. Commercial paper
C. A revolving line of credit
D. A fully drawn advance
Difficulty: Easy
Est time: <1 minute
49. Which of the following statements about promissory notes is incorrect?
A. Promissory notes are discount securities.

B. P-notes are issued by corporations in all the major international financial markets.
C. P-notes have no acceptor, only an endorser.
D. P-notes are usually issued as unsecured instruments.
Difficulty: Medium
Est time: <1 minute
50. Which financial security is known as one-name paper?
A. Bank bills
B. CDs
C. Promissory notes
D. Unsecured notes
Difficulty: Medium
Est time: <1 minute
51. Commercial paper is usually issued in multiples of:
A. $1000 or more
B. $10 000 or more
C. $100 000 or more
D. $1 000 000 or more
Difficulty: Hard
Est time: <1 minute

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52. Commercial paper is generally sold at a discount from:
A. the prime rate.

B. its face value.
C. its cost.
D. Treasury notes.
Difficulty: Easy
Est time: <1 minute
53. Which one of the following statements is true?
A. Promissory notes are sold with contingent liability in the secondary market.
B. Both commercial bills and promissory notes are sold with contingent liability in the secondary
market.
C. Commercial bills are sold with contingent liability in the secondary market, whereas promissory
notes are sold without contingent liability.
D. Promissory notes and commercial bills are both sold without contingent liability in the secondary
market.
Difficulty: Easy
Est time: <1 minute
A. As a promissory note is a one-name paper, only the buyer is required to endorse it.
B. If a bank agrees to accept it, a corporation can issue a promissory note.
C. Usually, initial buyers of promissory notes hold them until maturity.
D. Typically, a promissory note will be issued for 90 days.
Difficulty: Medium
Est time: <1 minute
55. Which of the following statements is NOT a feature of promissory notes?
A. They are issued at discount to face value.

B. A typical P-note facility issue program is a revolving facility.
C. A company may pay an additional fee to the underwriter for endorsing the issue as well.
D. Only the largest and most creditworthy corporations issue P-notes.
Difficulty: Medium
Est time: <1 minute

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56. Compared with bill financing, commercial paper financing offers a large creditworthy company:
A. higher costs because of the need for collateral.

B. higher costs owing to the acceptance fee involved.
C. lower costs owing to no contingent liability when sold on.
D. lower costs owing to lower bank fees.
Difficulty: Medium
Est time: <1 minute
57. When compared with bank bills, commercial paper has the advantage:
A. that no interest is paid until maturity, unlike for a bank bill.

B. that a holder of commercial paper has no contingent liability when selling in the money markets.
C. that an issue of commercial paper often has a rollover facility attached, unlike for bank bills.
D. of greater liquidity in the secondary market.
Difficulty: Medium
Est time: <1 minute
58. The term 'discount security' in relation to a bank bill means:
A. when the bank bill is issued, it is less than the principal amount to be repaid at maturity.
B. the interest on a bank bill is less than other money market securities.
C. when the principal is repaid to the lender, they receive less than other money market securities.
D. the bank bill only pays interest annually, unlike other securities that pay semi-annually.
Difficulty: Easy
Est time: <1 minute
59. When issuing commercial paper, it is important for a company to have:
A. a party to act as an acceptor and guarantee payment.

B. collateral to attach to the issue.
C. a well-established reputation in the markets.
D. investors organised by the investment bankers to sell the issue.
Difficulty: Easy
Est time: <1 minute

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60. When underwriting a commercial paper issue, an investment bank's fee will usually be:
A. 10% per annum.

B. 1% per annum.
C. 0.1% per annum.
D. 0.01% per annum.
Difficulty: Medium
Est time: <1 minute
61. A commercial paper issue where dealers bid competitively for the paper is a/an:
A. tap issuance.
B. tender.
C. offer.
D. proposition.
Difficulty: Medium
Est time: <1 minute
62. Which of the following about a P-note issue program is incorrect?
A. A P-note issue program is a rollover facility whereby as P-notes mature, new notes are issued and
discounted.
B. A P-note program generally will have a lead manager.
C. When members of the dealer panel bid for the paper, bids are generally quoted to a margin over a
specified benchmark.
D. The typical P-note issue program is a revolving facility with the dealer having the right to cancel,
subject to providing the issuer with the required notice.
Difficulty: Medium
Est time: <1 minute
63. Where a company wants to guarantee all of its issue of commercial paper, it can arrange for it to be:
A. sold by tender.
B. underwritten.
C. sold by tap.
D. sold with a face value less than $10 000.
Difficulty: Easy
Est time: <1 minute

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64. The most important function of an underwriter for a promissory note issue is to:
A. provide funding for the corporation.

B. approve the prospectus before distribution to the public.
C. dilute the corporation's equity.
D. buy the issue of securities from the corporation and resell it to investors.
Difficulty: Medium
Est time: <1 minute
65. One of the advantages to the corporation of an underwriting syndicate for the issue of promissory notes
is:
A. they approve the prospectus before distribution to the public.

B. the syndicate submits a combined bid for purchase that the corporation compares with other bids.
C. the syndicate monitors and coordinates the actions of the different underwriters.
D. the underwriting commitment gives the corporation access to a line of credit extending beyond the
life of the promissory note.
Difficulty: Medium
Est time: <1 minute
66. A company has directly placed an issue of commercial paper that has a maturity of 90 days, with a face
value of $100 000 yielding 8.25% per annum. What amount would the company raise on the issue?
A. $83 096.19
B. $91 750.00
C. $97 965.75
D. $98 006.31
Difficulty: Medium
Est time: <1 minute
67. As an alternative to issuing a commercial bill for short-term financing, corporations with an excellent
credit standing may:
A. buy commercial paper.

B. issue commercial paper.
C. issue preference shares.
D. issue convertible notes.
Difficulty: Easy
Est time: <1 minute

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68. A revolving facility for a promissory note issue usually:
A. has a lead manager to organise the issuance.

B. offers corporations funding for 180 days.
C. gives the issuer the right to cancel the program, subject to 90 days' notice.
D. has only an underwriter.
Difficulty: Medium
Est time: <1 minute
69. A P-note issuer to guarantee all the funds may arrange for:
A. an underwriter.
B. a supporting guarantee.
C. collateral for the issue.
Difficulty: Medium
Est time: <1 minute
70. The role of a lead manager for a promissory note issuance program is to:
A. provide the funds to the issuer.

B. act as an arranger of the debt issue.
C. act as an underwriting syndicate and purchase paper not taken up by the market.
D. provide a supporting guarantee for the issue.
Difficulty: Medium
Est time: <1 minute
71. The interest rate charged on an unsecured short-term P-note to a company is generally ________ the
interest rate on a secured loan.
A. lower than
B. the same as
C. higher than
D. unrelated to
Difficulty: Easy
Est time: <1 minute

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72. When an issuer of commercial paper issue fails to raise the funds, this most likely means the:
A. company is in default.
B. issue is underpriced.
C. underwriter must purchase unsold notes.
D. issuer must establish a rollover facility for the remaining notes.
Difficulty: Easy
Est time: <1 minute
73. Which of the following about P-notes is incorrect?
A. Commercial paper issued in the euromarkets uses a 360-day convention.

B. The credit rating of a P-note issuer needs to be investment grade.
C. A dealer panel is chosen on their ability to distribute the paper to the market.
D. If the lead manager has arranged a tender panel, then the members of the panel do not have any
obligation to buy.
Difficulty: Medium
Est time: <1 minute
74. As part of their liability management, banks sell which financial instrument?
A. Bank bill
B. Commercial paper
D. Promissory note
Difficulty: Medium
Est time: <1 minute
75. When a bank needs funds for day-to-day operational liquidity requirements it may issue:
A. bank bills.
B. CDs.
C. CP.
D. P-notes.
Difficulty: Medium
Est time: <1 minute

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76. As an alternative to issuing a commercial bill for short-term funds, a corporation may:
A. buy a promissory note.

B. issue a convertible note.
C. use the overdraft facility of investment bank.
D. issue a negotiable certificate of deposit.
Difficulty: Easy
Est time: <1 minute
77. The major banks lend unsecured short-term funds in the following basic ways:
A. overdraft, bill financing and commercial paper.

B. overdraft and bill financing.
C. overdraft and commercial paper.
D. commercial paper, negotiable certificates of deposit and overdraft.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 09-07 Explain the structure, issue and calculation of negotiable certificates of deposit.
Section: 9.6 Negotiable certificates of deposit
78. Negotiable certificates of deposit:
A. pay interest, as they are interest-bearing accounts at a bank.

B. are short-term securities, issued by banks for financing purposes.
C. have a longer maturity date than promissory notes.
D. have little liquidity in the secondary market.
Difficulty: Medium
Est time: <1 minute
79. A negotiable certificate of deposit:
A. is a term deposit because it has a specified maturity date.

B. can be issued by banks to meet their operational liquidity.
C. is a short-term discount security.
Difficulty: Medium
Est time: <1 minute

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80. If a company wished to invest funds in the short term, it could:
A. issue a commercial bill.

B. issue a promissory note.
C. buy a negotiable certificate of deposit.
D. buy a promissory note.
Difficulty: Medium
Est time: <1 minute
81. A source of short-term funds available to smaller firms (for example, finance provided to a car
dealership for car funding) is:
A. floor plan finance.

B. factoring.
C. with-recourse factoring.
D. accounts receivable financing.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 09-08 Discuss the nature and operation of inventory finance, accounts receivable financing and factoring.
Section: 9.7 Inventory finance, accounts receivable financing and factoring
82. Most agreements involving factoring of accounts receivable are made on a _______ basis.
A. non-recourse
B. notification
C. recourse
D. non-notification
Difficulty: Hard
Est time: <1 minute
83. Which of the following is NOT an advantage of factoring?
A. Known cash flows are generated

B. Accounts receivable is turned into cash without delay
C. The credit and collection department of a company may be eliminated
D. The cost of financing is relatively high
Difficulty: Medium
Est time: <1 minute

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84. Which one of the following statements regarding factoring is correct?
A. Some banks and bank subsidiaries may provide factoring.

B. Under with-recourse factoring, when a customer makes a payment the factoring company passes the
money on to the company minus a handling fee.
C. The discount charged by the factoring company is approximately equal to the rate charged on a
secured overdraft loan.
D. With non-recourse factoring, the company cannot sell additional accounts receivable to the factoring
company after the initial amount.
Difficulty: Hard
Est time: <1 minute
85. Under a non-recourse arrangement the factoring company has:
A. a claim against the vendor.

B. no claim against the seller of the accounts.
C. a claim against the seller's bank.
D. a claim against the vendor's other assets.
Difficulty: Medium
Est time: <1 minute
86. When the factoring company can make a claim against the firm that sold them the accounts this is called
_____ arrangement
A. a non-recourse factoring
B. a recourse factoring
C. a notification factoring
D. a non-notification factoring
Difficulty: Medium
Est time: <1 minute
87. When a finance company provides a loan to a business against the security of the business's accounts
receivable this is called:
A. factoring.
B. floor plan finance.
C. trade credit.
Difficulty: Medium
Est time: <1 minute

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88. When a financier provides a business with finance by buying its business's accounts receivable this is
called:
A. factoring.
C. trade credit.
Difficulty: Medium
Est time: <1 minute
True / False Questions
89. A bank that provides an overdraft facility to business customers expects the overdraft to have a
fluctuating balance and doesn't require the customer to have the account in credit at any stage.
FALSE
A borrower is expected to reduce or bring the overdraft into credit as and when future cash flows are
received by the company.
Difficulty: Medium
Est time: <1 minute
90. One of the advantages of an overdraft facility, from the viewpoint of a borrower, is it can be used to
smooth out any seasonal mismatch between its cash inflows and outflows.
TRUE
Once the overdraft limit has been established a company may draw down the funds at any time without
notice.
Difficulty: Easy
Est time: <1 minute
91. Commercial bills are a category of bills of exchange that are issued by commercial banks.
FALSE
Commercial bills are discount securities used by corporations to borrow short-term funds in the money
markets.
Difficulty: Easy
Est time: <1 minute

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92. The return on a commercial bill for a holder at its maturity is the difference between its discounted
purchase price and the face value of the bill.
TRUE
A commercial bill is a discount instrument where the return to the holder of the bill is the difference
between the discounted price and the face value at maturity.
Difficulty: Easy
Est time: <1 minute
93. With a bank-accepted bill the drawer has a secondary liability after the acceptor to pay the holder of the
bill the face value of the bill at the maturity date.
TRUE
If the bill is dishonoured by the acceptor at maturity, the drawer has the responsibility to pay the bill
holder.
Difficulty: Medium
Est time: <1 minute
94. The initial discounter of a commercial bill is the issuer of the bill who receives the funds.
FALSE
The discounter is the entity that provides the funds to the issuer of the bill, the drawer.
Difficulty: Medium
Est time: <1 minute
95. The acceptor of a commercial bill undertakes to pay the face value of the bill to the holder at maturity.
TRUE
The acceptor of the bill, that is a bank, pays the holder. Generally a bank has a separate arrangement
with the drawer, the original borrower, for them to repay the bank.
Difficulty: Easy
Est time: <1 minute

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96. The market for bank-accepted bills is an illiquid one as banks tend to hold them until maturity.
FALSE
The bank-accepted bill market is a very liquid part of the money markets.
Difficulty: Easy
Est time: <1 minute
97. A major advantage of bill financing over other forms of short-term debt such as overdrafts is that the
cost is usually lower.
TRUE
A fundamental reason for the lower cost is that a bank does not have to fund the bill on its balance sheet
but can sell the bill into the money markets.
Difficulty: Medium
Est time: <1 minute
98. Commercial paper securities are unsecured promissory notes, issued by corporations, which generally
mature within 180 days.
TRUE
Commercial papers are discount securities issued without an acceptor by large corporations with a high
credit rating.
Difficulty: Easy
Est time: <1 minute
Short Answer Questions

lOMoARcPSD|15657051
99. In establishing an overdraft facility with a company, what are some of the firm-related factors a bank
will consider?
A bank will consider a company's past financial performance and future cash flows, the length of the
typical mismatch between a company's cash inflows and outflows and the adequacy of the collateral
available in the case of default by the borrower.

100. Discuss what factors influence the yield at which a commercial bill will be discounted
The yield will be affected by factors that determine the general level of interest rates in the economy,
and then by the credit rating of the parties involved. A bank-accepted bill will include the higher credit
standing of the acceptor and so be able to be discounted at a lower yield than a bill issued by a drawer of
lower credit standing.

101. What are some of the advantages of bill financing for a company over other forms of short-term debt?
First, a major advantage is usually it is of lower cost. Second, it provides a known cost of financing for
the borrower. It also offers considerable flexibility for the borrower; once they have drawn up a bill
facility, they can progressively issue bills over time.

102. What are some advantages of promissory notes financing for a large company?
For a large company it can mean a lower cost of funding than using a bank bill facility as the company
does not incur bank bill fees, and the owner of a P-note can sell it without incurring a future contingent
liability.


lOMoARcPSD|15657051
103. Negotiable certificates of deposit are short-term securities issued by banks. Discuss their uses.
Banks can issue short-term negotiable certificates of deposit (CDs) to institutional investors so the
banks can manage their liabilities and liquidity. As part of their liability management banks issue CDs to
raise extra funds to meet loan and funding commitments; for example, when they expect customers to
spend more money in the holiday season.


lOMoARcPSD|15657051
Chapter 09 - Test Bank Summary
Category # of Qu
estions
Difficulty: Easy 34
Difficulty: Hard 5
Difficulty: Medium 59
Est time: <1 minute 98
Est time: 1-3 minutes 5
Learning Objective: 09-01 Understand why the financial markets offer short-term debt and financing facilities. 2
Learning Objective: 09-02 Consider the concept and reasons for the provision of trade credit. 7
Learning Objective: 09-03 Explain the purpose and operation of a bank overdraft facility. 11
Learning Objective: 09-04 Describe the structure of a commercial bill, including the parties to the bill, the flow of funds, the establishment 33
and the advantages of issuing bank-accepted bills.
Learning Objective: 09-05 Complete a range of calculations relevant to discount securities, including the price where the yield is known, fa 7
ce value where the issue price and yield are known, yield, price where the discount rate is known and the discount rate.
Learning Objective: 09-06 Describe the structure, advantages, establishment, underwriting and calculation of promissory notes (commercial 30
paper).
Learning Objective: 09-07 Explain the structure, issue and calculation of negotiable certificates of deposit. 5
Learning Objective: 09-08 Discuss the nature and operation of inventory finance, accounts receivable financing and factoring. 8
Section: 9.1 Trade credit 7
Section: 9.2 Bank overdrafts 11
Section: 9.3 Commercial bills 33
Section: 9.4 Calculations: discount securities 7
Section: 9.5 Promissory notes 30
Section: 9.6 Negotiable certificates of deposit 5
Section: 9.7 Inventory finance, accounts receivable financing and factoring 8
Section: Introduction 2

lOMoARcPSD|10180112
TEST BANK 11 Forex - Question bank for Topic 11

FOREIGN EXCHANGE with answers. These questions
are/were
Financial Institutions and Markets (Western Sydney University)

Downloaded by Long Nguy?n Hoàng (nhmlongg2871@gmail.com)
lOMoARcPSD|10180112
Chapter 15: Foreign Exchange: The Structure and

Operation of the FX Market
A. by
governments
B. by
tourists
C. in the over-the-counter
market
D. on the Australian Securities
Exchange
2. The foreign exchange market is where:
A. exports and imports are

traded
B. exports and imports are interchanged for gold
bullion
C. different currencies are bought
and sold
D. companies organise their foreign long-term
financing
3. The institutions that transact between the foreign exchange (FX) dealers in banks
and act as principals in the FX market are called the:
A. foreign-currency dealer
houses
B. currency
syndicates
C. foreign-exchange
brokers
D. inter-bank currency
clearinghouses

lOMoARcPSD|10180112
4. A large international organisation representing the central banks of the major

developed countries is called:
A. the
OECD
B. the
ECB
C. Bank for International
Settlements
D. the World Trade
Organization
5. Financial institutions active in the FX markets include:
A. commercial
banks
B. commodity
traders
C. insurance
companies
D. All of the given
answers.
A. New
York
B. Londo
n
C. Hong
Kong
D. Toky
o
7. The estimates of FX trading occurring worldwide daily are:
A. USD 100 billion to USD 500

billion
B. USD 500 billion to USD 1000
billion
C. USD 1500 billion to USD 2000
billion
D. USD 2000 billion to USD 4000
billion

lOMoARcPSD|10180112
A. quote two-way prices at which they are willing to buy

and sell at
B. in Australia require an authority from the central bank
to operate
C. arbitrage price differences between the various FX
markets
D. seek out the best exchange rates and deal mostly with FX
dealers
9. Which of the following market participants tend to keep exchange rates the same in
all the world markets?
A. Forward
markets
B. Foreign exchange counter
trades
C. Futures
markets
D. Arbitrageu
rs
10. The central bank resources made up of foreign currencies, gold and international
drawing rights are called:
A. central bank
capital
B. official reserve
assets
C. central bank
floats
D. official bank
assets
11. If the value of a currency is influenced by a central bank that intervenes from time to
time in the foreign exchange market, this is regarded as a:
A. partial
float
B. clean
float
C. dirty
float
D. soft
float

lOMoARcPSD|10180112
A. partial
float
B. clean
float
C. dirty
float
D. hard
float
13. If the Australian central bank wished to cause the AUD to appreciate, it would _______
A. buy;
sell
B. sell;
sell
C. sell;
buy
D. buy;
buy
14. If the Australian central bank wished to cause the AUD to _______, it would _______
A. depreciate; buy;
sell
B. appreciate; sell;
buy
C. depreciate; sell;
buy
D. appreciate; buy;
buy
15. All of the following are primary centres of foreign exchange trading EXCEPT:
A. Londo
n
B. New
York
C. Munic
h
D. Toky
o

lOMoARcPSD|10180112
16. Which of the following statements about the foreign exchange markets is
INCORRECT?
A. Trading volume exceeds USD 100 billion a day in

the US.
B. Most foreign-exchange trading takes place in
London.
C. It is an over-the-counter
market.
D. Trading volume worldwide exceeds USD 1500 billion
per day.
17. In the FX market, trading:
A. stops after the London markets have

closed
B. is restricted to the hours that the Australian banks
are open
C. takes place at any hour of the night
or day
D. stops after the London and New York markets have
closed
18. Which of the following statements in relation to the operation of the FX market is
INCORRECT?
A. A corporation will generally need to sell foreign currency when it borrows funds
from overseas capital markets for use in its own domestic operations.
B. The main trading floor of the FX market is located in Sydney, with subsidiary
branches in other main capital cities.
C. The Reserve Bank may conduct FX transactions in order to change the composition
of its 'official reserve assets'.
D. 'Dealers' in the Australian FX market are required to hold a foreign exchange
dealers' authority from the Reserve Bank.
19. The _______ is the price at which Australian dollars can be converted into another
currency, for example the euro.
A. direct exchange
rate
B. spot exchange
rate
C. exchange rate between AUD and a foreign
currency
D. forward exchange
rate

lOMoARcPSD|10180112
20. For currency transactions, the spot exchange rate is the rate _______, and the forward
exchange rate is the rate _______.
A. on that day;
today
B. at some specified future date;
today
C. today; on that
date
D. on that date; at some specified
future date
21. Foreign exchange dealers quote _________ at which they are prepared to deal in
foreign currency.
A. ask
prices
B. two-way
prices
C. bid
prices
D. margin
prices
A. arbitrage
quotes
B. two-way
prices
C. dealer
spreads
D. term
quotes
A. regulated and
organised
B. over-the-
counter
C. auctio
n
D. exclusively
broker

lOMoARcPSD|10180112
24. Financial institutions that quote buy and sell prices and act as principals in the FX
markets are called:
A. FX
arbitrageurs
B. FX
brokers
C. FX
dealers
D. FX
speculators
A. basis
currency
B. base
currency
C. root
currency
D. terms
currency
A. basis
currency
B. base
currency
C. unit
currency
D. terms
currency
27. A difference arises between the bid and ask rates of foreign currency because:
A. the rates are between different dealer

banks
B. of arbitrage opportunities between
currencies
C. foreign exchange dealers need to earn
income
D. it takes time to find buyers or sellers of foreign
currency

lOMoARcPSD|10180112
28. In general, multi-million transactions _______ the foreign exchange dealer's bid-offer
spread.
A. have no impact
on
B. increas
e
C. wide
n
D. narro
w
29. In general, the foreign exchange dealer's bid-offer spread _______ with time to
settlement.
A. is not
concerned
B. increase
s
C. decrease
s
D. narrow
s
30. In general, the foreign exchange dealer's bid-offer spread _______ with increased
volatility of FX.
A. is not
concerned
B. decrease
s
C. widen
s
D. narrow
s

lOMoARcPSD|10180112
31. A/An _______ position is when an FX dealer enters into a forward contract to sell FX
that is not held at that time.
A. arbitra
ge
B. lon
g
C. shor
t
D. dirt
y
32. An Australian company has received USD in payment for goods exported. At the time
of receiving the USD, the exchange rate is quoted as AUD/USD 0.5650. Rather than
immediately converting the USD into AUD, the company decides to 'speculate' on a
favourable movement in the exchange rate. In 'today + n days' the exchange rate is
AUD/USD 0.5750. Which of the following statements is correct?
A. The company has taken a 'long' position in

the USD.
B. The exporter company has made a loss on its FX
position.
C. The opportunity cost of interest forgone will affect the profitability of the
FX position.
D. All of the given
answers.
33. The spot exchange rate can be defined as the:
A. exchange rate that is settled within two

business days
B. exchange rate that is settled within five
working days
C. direct exchange
rate
D. exchange rate between two
currencies

lOMoARcPSD|10180112
34. If a British car sells for £20 000 and the British pound is worth A$2.75, the Australian
dollar price of the car is:
A. $13
333
B. $30
000
C. $55
000
D. $133
333
USD/EUR 0.9780-90
USD/JPY 119.20-30
A. EUR/JPY 116.57-
79
B. EUR/JPY 116.67-
70
C. EUR/JPY 121.86-
88
D. EUR/JPY 121.76-
98
USD/JPY 114.20-30
GBP/USD 1.6750-60
A. GBP/JPY 190.71-
88
B. GBP/JPY 191.29-
57
C. GBP/JPY 191.40-
45
D. GBP/JPY 192.07-
24

lOMoARcPSD|10180112
AUD/USD 0.5640-50
GBP/USD 1.5850-60
A. AUD/GBP 0.3558-
62
B. AUD/GBP 0.3556-
65
C. AUD/GBP 0.8945-
55
D. AUD/GBP 0.8939-
45
38. A forward transaction refers to the:
A. spot
rate
B. exchange rate that is determined at a specified date beyond
the spot rate
C. exchange rate that is specified now, but with delivery and payment at some
predetermined future date
D. upper limit of a currency bid-ask
spread
A. arbitrage
position
B. long
position
C. short
position
D. selling
position
A. that
day
B. one business day from the day of the
transaction
C. two business days from the day of the
transaction
D. three business days from the day of the
transaction

lOMoARcPSD|10180112
41. It is Tuesday, 27 March 200X, and an Australian importing company has to pay a US
exporter USD 75 000 within the next six weeks. The company enters into a forward
exchange contract with an FX dealer for 'one month forward delivery' of USD. On
what date will value settlement occur?
A. 29 March
200X
B. 27 April
200X
C. 29 April
200X
D. 30 April
200X
42. If differences occur for FX rates between three or more currencies, FX dealers may
perform:
A. locational
arbitrage
B. triangular
arbitrage
C. cross
arbitrage
D. speculative
arbitrage
43. Given the following rates, what arbitrage profit may be made with respect to the
Australian dollar?
USD 1 = AUD 1.70
USD 1 = SGD 1.70
AUD 1 = SGD 0.96
A. 0.1753
cents
B. 0.5882
cents
C. 1.7526
cents
D. 5.882
cents

lOMoARcPSD|10180112
44. An Australian export company wishes to sell its euro receipts, EUR 500 000, through
an FX dealer and receives the following quote: 'Aussie mark spot is one-twenty-two
fifty-five to sixty five'.What is the value of the export receipt?
A. $407
664.09
B. $407
996.74
C. $612
750.00
D. $613
250.00
45. A company treasurer has received the following foreign exchange quote from an FX
dealer: AUD/USD 0.5655-60. For the financial report to the board of directors, the
treasurer is required to ensure the USD is the unit of the quotation. Which exchange
rate quotation will the treasurer include in the report?
A. AUD/USD 0.5655-
60
B. USD/AUD 1.7668-
83
C. AUD/USD 0.5660-
55
D. USD/AUD 1.7683-
68
46. The _______ quote is the number of units of foreign currency an FX dealer is willing to
give, in order to buy the unit of the quotation, that of AUD 1.
A. dire
ct
B. indire
ct
C. bi
d
D. as
k

lOMoARcPSD|10180112
47. The _______ quote is the number of units of foreign currency an FX dealer is willing to
take, in order to buy the unit of the quotation, that of AUD 1.
A. dire
ct
B. indire
ct
C. bi
d
D. as
k
A. dividing the indirect rate

by 100
B. multiplying the indirect rate by the
spot rate
C. dividing the indirect rate by the number of US dollars required to purchase one unit
of the terms' currency
D. transposing the indirect
rate
A. 1
B. 5.
5
C. 1
0
D. None of the given
answers.
A. 0.2
5
B. 0.
8
C. 1.0
0
D. 1.2
5

lOMoARcPSD|10180112
51. A student researching the AUD/USD exchange rate on a particular day is confused to
find the following two quotations:
I. AUD/USD 0.5825-30
II. USD/AUD 1.7152-67
A. Quote I is the convention adopted in Australia and is a

direct quote.
B. Quote II is the convention adopted in Australia and is a
direct quote.
C. Quote I is the convention adopted in Australia and is an
indirect quote.
D. Quote II is the convention adopted in Australia and is an
indirect quote.
52. When a smaller amount of a foreign currency is required to buy the Australian dollar,
the currency is said to have _______ with respect to the dollar.
A. appreciat
ed
B. consolidat
ed
C. depreciat
ed
D. remained
fixed
53. An Australian company is to export electronic equipment into Europe, in particular

Germany and Sweden, and needs to consider the exchange rate implications of
conducting business in euros and Swedish krona. Spot rates quoted are:
USD/EUR 0.9275-85
USD/SEK 8.4531-41
A. EUR/SEK 0.1097–
0.1098
B. EUR/SEK 9.1139–
9.1051
C. EUR/SEK 9.1051–
9.1139
D. EUR/SEK 9.1040–
9.1149

lOMoARcPSD|10180112
A. exchange rate
arbitrage
B. forward
points
C. interest rate
parity
D. indirect exchange
rate
55. The theory that the annual percentage differential in the forward market for a
currency quoted in terms of another currency is equal to the approximate difference
in the interest rates between two countries is known as:
A. covered interest
arbitrage
B. the Fisher
equation
C. a forward rate
agreement
D. interest rate
parity
A. relative spot exchange rates determine the relativity between the forward
exchange rates and spot rates
B. relativity between spot and forward exchange rates reflects the interest rate
differentials between countries
C. relative forward exchange rates determine the relativity between the spot
exchange rates and the forward interest rate
D. relative forward exchange rates determine the relativity between the forward
exchange rates and forward interest rates

lOMoARcPSD|10180112
57. If interest rate parity holds, the currency of the country with the relatively _______
interest rates will trade at a forward _______ to the country with the relatively high
interest rate.
A. low;
discount
B. low;
premium
C. low;
loss
answers.
interest rates will trade at a forward _______ to the country with the relatively _______
interest rate.
A. high; premium;
low
B. low; discount;
high
C. high; discount;
low
answers.
59. An importer will be required to purchase USD in approximately six months to pay for
a consignment of goods. The company is concerned that the AUD may depreciate
before the due date and therefore decides to enter into a forward exchange contract
to protect its position. The company receives the following quote: 'the Aussie is fifty-
eight forty-five to fifty-three, sixty-two to sixty six'. Calculate the forward exchange
rate.
A. AUD/USD 0.5783-
87
B. AUD/USD 0.5907-
19
C. AUD/USD 0.5911-
15
D. AUD/USD 0.6465-
13

lOMoARcPSD|10180112
60. If the spot rate is AUD/USD 0.5510-0.5515, and the six-month forward points are 48
to 53, the six-month outright forward rate would be:
A. AUD/USD 0.5462-
0.5462
B. AUD/USD 0.5563-
0.5558
C. AUD/USD 0.5558-
0.5563
D. AUD/USD 0.5558-
0.5568
A. expected
gain
B. premiu
m
C. reciproc
al
D. discou
nt
62. If the forward exchange rate is priced higher than the spot rate the currency is said to
be trading at a:
A. discou
nt
B. gai
n
C. premiu
m
D. los
s
63. If the forward points are _______at a specific date, the base currency is at a _______.
A. rising; forward
discount
B. falling; forward
discount
C. rising; forward
loss
D. falling; forward
gain

lOMoARcPSD|10180112
64. Which of the following principles refers to the circumstance that interest rates in
different countries provide equal returns, taking into account the spot and forward
exchange rates between the two countries?
A. Exchange rate
parity
B. Interest rate
parity
C. Law of one
price
D. Purchasing power
parity
65. A bank has been asked to provide a three-month forward AUD/USD 'buy' quote for a
Estimate the three-month forward 'buy' rate.
A. 0.763
7
B. 0.763
9
C. 0.764
2
D. 0.764
4

lOMoARcPSD|10180112
66. A bank has been asked to provide a three-month forward EUR/USD 'buy' quote for a
Bid Offer
Spot EUR/USD 1.0770 1.0782
3-month US interest 3.75% 3.85%
rate p.a. p.a.
3-month euro interest 2.65% 2.75%
rate p.a. p.a.
A. EUR/USD 1.0796–
1.0781
B. EUR/USD 1.0797–
1.0782
C. EUR/USD 1.0738–
1.0755
D. EUR/USD 1.0743–
1.0750
A. A currency with a higher interest rate will sell at a forward

premium.
B. A currency with a higher interest rate will sell at a forward
discount.
C. A currency with a higher interest rate will have a higher
spot rate.
D. A currency with a higher interest rate will have a lower
spot rate.
68. All of the following are considered 'hard' or major currencies, EXCEPT the:
A. US
dollar
B. eur
o
C. Mexican
peso
D. British
pound

lOMoARcPSD|10180112
69. The financial institution responsible for monetary policy in the European Union is
called the:
A. Bundesba
nk
B. European
Parliament
Settlements
D. European Central
Bank
70. The FX market is organised as an over-the-counter market in which deposits

denominated in foreign currencies are bought and sold.
True False
True False
72. The FX brokers quote two-way prices at which they are prepared both to buy and sell
foreign currencies and act as principals in the FX markets.
True False
73. If an Australian importer has a contract for Japanese goods denominated in yen
payable in three months' time and is concerned that the AUD may appreciate, the
importer may enter into a forward contract to sell the yen for delivery in three
months' time.
True False
True False
75. Given USD/EURO0.6450-0.6455 an FX dealer would buy USD1 from you and give you
EURO0.6455.
True False
76. When a currency is quoted against the USD and the USD is the base currency, this is
direct quoting.
True False
True False

lOMoARcPSD|10180112
78. Given that AUD/USD (spot) is 0.6830-40 and the six-month forward rate is 0.6798-
0.6813, the six-month forward points must have been falling.
True False
79. When an FX dealer calculates a forward exchange rate for NZD/JPY they must adjust
both interest rates to allow for the different quotation rates between Japan and New
Zealand.
True False
81. In relation to exchange rates, discuss a managed float regime, a crawling peg regime
and a pegged exchange rate.

lOMoARcPSD|10180112
84. Discuss how the way a currency is quoted affects how cross rates are calculated.

lOMoARcPSD|10180112

Operation of the FX Market Key
A. by
governments
B. by
tourists
C. in the over-the-counter
market
D. on the Australian Securities
Exchange
Difficulty: Easy
Viney f Chapter 15 #1
learning goal: EMPTY
learning objective: EMPTY
level: EMPTY
lo: EMPTY
question type: EMPTY
source: EMPTY
type: EMPTY
2. The foreign exchange market is where:
A. exports and imports are

traded
B. exports and imports are interchanged for gold
bullion
C. different currencies are bought
and sold
D. companies organise their foreign long-term
financing
Difficulty: Easy
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY

lOMoARcPSD|10180112
3. The institutions that transact between the foreign exchange (FX) dealers in banks
and act as principals in the FX market are called the:
A. foreign-currency dealer
houses
B. currency
syndicates
C. foreign-exchange
brokers
D. inter-bank currency
clearinghouses
Difficulty: Easy
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY
4. A large international organisation representing the central banks of the major

developed countries is called:
A. the
OECD
B. the
ECB
Settlements
D. the World Trade
Organization
Difficulty: Easy
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY

lOMoARcPSD|10180112
5. Financial institutions active in the FX markets include:
A. commercial
banks
B. commodity
traders
C. insurance
companies
D. All of the given
answers.
Difficulty: Easy
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY
A. New
York
B. Londo
n
C. Hong
Kong
D. Toky
o
Difficulty: Easy
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY
7. The estimates of FX trading occurring worldwide daily are:
A. USD 100 billion to USD 500

billion
B. USD 500 billion to USD 1000
billion
C. USD 1500 billion to USD 2000
billion
D. USD 2000 billion to USD 4000
billion
Difficulty: Medium

lOMoARcPSD|10180112

level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY
A. quote two-way prices at which they are willing to buy

and sell at
B. in Australia require an authority from the central bank
to operate
C. arbitrage price differences between the various FX
markets
D. seek out the best exchange rates and deal mostly with FX
dealers
Difficulty: Easy
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY
9. Which of the following market participants tend to keep exchange rates the same
in all the world markets?
A. Forward
markets
B. Foreign exchange counter
trades
C. Futures
markets
D. Arbitrageu
rs
Difficulty: Easy
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY

lOMoARcPSD|10180112
10. The central bank resources made up of foreign currencies, gold and international
drawing rights are called:
A. central bank
capital
B. official reserve
assets
C. central bank
floats
D. official bank
assets
Difficulty: Easy
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY
11. If the value of a currency is influenced by a central bank that intervenes from time
to time in the foreign exchange market, this is regarded as a:
A. partial
float
B. clean
float
C. dirty
float
D. soft
float
Difficulty: Medium
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY

lOMoARcPSD|10180112
A. partial
float
B. clean
float
C. dirty
float
D. hard
float
Difficulty: Easy
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY
13. If the Australian central bank wished to cause the AUD to appreciate, it would
_______ AUD and _______ foreign currency.
A. buy;
sell
B. sell;
sell
C. sell;
buy
D. buy;
buy
Difficulty: Easy
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY

lOMoARcPSD|10180112
14. If the Australian central bank wished to cause the AUD to _______, it would _______
A. depreciate; buy;
sell
B. appreciate; sell;
buy
C. depreciate; sell;
buy
D. appreciate; buy;
buy
Difficulty: Easy
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY
15. All of the following are primary centres of foreign exchange trading EXCEPT:
A. Londo
n
B. New
York
C. Munic
h
D. Toky
o
Difficulty: Easy
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY

lOMoARcPSD|10180112
16. Which of the following statements about the foreign exchange markets is
INCORRECT?
A. Trading volume exceeds USD 100 billion a day in

the US.
B. Most foreign-exchange trading takes place in
London.
C. It is an over-the-counter
market.
D. Trading volume worldwide exceeds USD 1500 billion
per day.
Difficulty: Easy
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY
17. In the FX market, trading:
A. stops after the London markets have

closed
B. is restricted to the hours that the Australian banks
are open
C. takes place at any hour of the night
or day
D. stops after the London and New York markets have
closed
Difficulty: Easy
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY

lOMoARcPSD|10180112
18. Which of the following statements in relation to the operation of the FX market is
INCORRECT?
A. A corporation will generally need to sell foreign currency when it borrows funds
from overseas capital markets for use in its own domestic operations.
B. The main trading floor of the FX market is located in Sydney, with subsidiary
branches in other main capital cities.
C. The Reserve Bank may conduct FX transactions in order to change the
composition of its 'official reserve assets'.
D. 'Dealers' in the Australian FX market are required to hold a foreign exchange
dealers' authority from the Reserve Bank.
Difficulty: Medium
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY
19. The _______ is the price at which Australian dollars can be converted into another
currency, for example the euro.
A. direct exchange
rate
B. spot exchange
rate
C. exchange rate between AUD and a foreign
currency
D. forward exchange
rate
Difficulty: Easy
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY

lOMoARcPSD|10180112
20. For currency transactions, the spot exchange rate is the rate _______, and the
forward exchange rate is the rate _______.
A. on that day;
today
B. at some specified future date;
today
C. today; on that
date
D. on that date; at some specified
future date
Difficulty: Easy
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY
21. Foreign exchange dealers quote _________ at which they are prepared to deal in
foreign currency.
A. ask
prices
B. two-way
prices
C. bid
prices
D. margin
prices
Difficulty: Easy
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY

lOMoARcPSD|10180112
A. arbitrage
quotes
B. two-way
prices
C. dealer
spreads
D. term
quotes
Difficulty: Easy
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY
A. regulated and
organised
B. over-the-
counter
C. auctio
n
D. exclusively
broker
Difficulty: Easy
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY
24. Financial institutions that quote buy and sell prices and act as principals in the FX
markets are called:
A. FX
arbitrageurs
B. FX
brokers
C. FX
dealers
D. FX
speculators
Difficulty: Easy

lOMoARcPSD|10180112

level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY
A. basis
currency
B. base
currency
C. root
currency
D. terms
currency
Difficulty: Easy
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY
A. basis
currency
B. base
currency
C. unit
currency
D. terms
currency
Difficulty: Easy
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY

lOMoARcPSD|10180112
27. A difference arises between the bid and ask rates of foreign currency because:
A. the rates are between different dealer

banks
B. of arbitrage opportunities between
currencies
C. foreign exchange dealers need to earn
income
D. it takes time to find buyers or sellers of foreign
currency
Difficulty: Easy
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY
28. In general, multi-million transactions _______ the foreign exchange dealer's bid-
offer spread.
A. have no impact
on
B. increas
e
C. wide
n
D. narro
w
Difficulty: Easy
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY

lOMoARcPSD|10180112
29. In general, the foreign exchange dealer's bid-offer spread _______ with time to
settlement.
A. is not
concerned
B. increase
s
C. decrease
s
D. narrow
s
Difficulty: Medium
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY
30. In general, the foreign exchange dealer's bid-offer spread _______ with increased
volatility of FX.
A. is not
concerned
B. decrease
s
C. widen
s
D. narrow
s
Difficulty: Easy
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY

lOMoARcPSD|10180112
31. A/An _______ position is when an FX dealer enters into a forward contract to sell FX
that is not held at that time.
A. arbitra
ge
B. lon
g
C. shor
t
D. dirt
y
Difficulty: Easy
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY
32. An Australian company has received USD in payment for goods exported. At the
time of receiving the USD, the exchange rate is quoted as AUD/USD 0.5650. Rather
than immediately converting the USD into AUD, the company decides to
'speculate' on a favourable movement in the exchange rate. In 'today + n days'
the exchange rate is AUD/USD 0.5750. Which of the following statements is
correct?
A. The company has taken a 'long' position in

the USD.
B. The exporter company has made a loss on its FX
position.
C. The opportunity cost of interest forgone will affect the profitability of the
FX position.
D. All of the given
answers.
Difficulty: Medium
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY

lOMoARcPSD|10180112
33. The spot exchange rate can be defined as the:
A. exchange rate that is settled within two

business days
B. exchange rate that is settled within five
working days
C. direct exchange
rate
D. exchange rate between two
currencies
Difficulty: Easy
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY
34. If a British car sells for £20 000 and the British pound is worth A$2.75, the
Australian dollar price of the car is:
A. $13
333
B. $30
000
C. $55
000
D. $133
333
Difficulty: Easy
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY

lOMoARcPSD|10180112
USD/EUR 0.9780-90
USD/JPY 119.20-30
A. EUR/JPY 116.57-
79
B. EUR/JPY 116.67-
70
C. EUR/JPY 121.86-
88
D. EUR/JPY 121.76-
98
Difficulty: Medium
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY
USD/JPY 114.20-30
GBP/USD 1.6750-60
A. GBP/JPY 190.71-
88
B. GBP/JPY 191.29-
57
C. GBP/JPY 191.40-
45
D. GBP/JPY 192.07-
24
Difficulty: Medium
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY

lOMoARcPSD|10180112
AUD/USD 0.5640-50
GBP/USD 1.5850-60
A. AUD/GBP 0.3558-
62
B. AUD/GBP 0.3556-
65
C. AUD/GBP 0.8945-
55
D. AUD/GBP 0.8939-
45
Difficulty: Medium
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY
38. A forward transaction refers to the:
A. spot
rate
B. exchange rate that is determined at a specified date beyond
the spot rate
C. exchange rate that is specified now, but with delivery and payment at some
predetermined future date
D. upper limit of a currency bid-ask
spread
Difficulty: Easy
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY

lOMoARcPSD|10180112
A. arbitrage
position
B. long
position
C. short
position
D. selling
position
Difficulty: Medium
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY
A. that
day
B. one business day from the day of the
transaction
C. two business days from the day of the
transaction
D. three business days from the day of the
transaction
Difficulty: Easy
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY

lOMoARcPSD|10180112
41. It is Tuesday, 27 March 200X, and an Australian importing company has to pay a
US exporter USD 75 000 within the next six weeks. The company enters into a
forward exchange contract with an FX dealer for 'one month forward delivery' of
USD. On what date will value settlement occur?
A. 29 March
200X
B. 27 April
200X
C. 29 April
200X
D. 30 April
200X
Difficulty: Medium
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY
42. If differences occur for FX rates between three or more currencies, FX dealers may
perform:
A. locational
arbitrage
B. triangular
arbitrage
C. cross
arbitrage
D. speculative
arbitrage
Difficulty: Easy
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY

lOMoARcPSD|10180112
43. Given the following rates, what arbitrage profit may be made with respect to the
Australian dollar?
USD 1 = AUD 1.70
USD 1 = SGD 1.70
AUD 1 = SGD 0.96
A. 0.1753
cents
B. 0.5882
cents
C. 1.7526
cents
D. 5.882
cents
Difficulty: Hard
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY
44. An Australian export company wishes to sell its euro receipts, EUR 500 000,
through an FX dealer and receives the following quote: 'Aussie mark spot is one-
twenty-two fifty-five to sixty five'.What is the value of the export receipt?
1.2255/65（500000/1.2265（
A. $407
664.09
B. $407
996.74
C. $612
750.00
D. $613
250.00
Difficulty: Easy
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY

lOMoARcPSD|10180112
45. A company treasurer has received the following foreign exchange quote from an
FX dealer: AUD/USD 0.5655-60. For the financial report to the board of directors,
the treasurer is required to ensure the USD is the unit of the quotation. Which
exchange rate quotation will the treasurer include in the report?
A. AUD/USD 0.5655-
60
B. USD/AUD 1.7668-
83
C. AUD/USD 0.5660-
55
D. USD/AUD 1.7683-
68
Difficulty: Medium
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY
46. The _______ quote is the number of units of foreign currency an FX dealer is willing
to give, in order to buy the unit of the quotation, that of AUD 1.
A. dire
ct
B. indire
ct
C. bi
d
D. as
k
Difficulty: Easy
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY

lOMoARcPSD|10180112
47. The _______ quote is the number of units of foreign currency an FX dealer is willing
to take, in order to buy the unit of the quotation, that of AUD 1.
A. dire
ct
B. indire
ct
C. bi
d
D. as
k
Difficulty: Easy
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY
A. dividing the indirect rate

by 100
B. multiplying the indirect rate by the
spot rate
C. dividing the indirect rate by the number of US dollars required to purchase one
unit of the terms' currency
D. transposing the indirect
rate
Difficulty: Easy
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY
A. 1
B. 5.
5
C. 1
0
answers.
Difficulty: Medium

lOMoARcPSD|10180112

level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY
A. 0.2
5
B. 0.
8
C. 1.0
0
D. 1.2
5
Difficulty: Medium
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY
51. A student researching the AUD/USD exchange rate on a particular day is confused
to find the following two quotations:
I. AUD/USD 0.5825-30
II. USD/AUD 1.7152-67
A. Quote I is the convention adopted in Australia and is a

direct quote.
B. Quote II is the convention adopted in Australia and is a
direct quote.
C. Quote I is the convention adopted in Australia and is an
indirect quote.
D. Quote II is the convention adopted in Australia and is an
indirect quote.
Difficulty: Medium
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY

lOMoARcPSD|10180112
52. When a smaller amount of a foreign currency is required to buy the Australian
dollar, the currency is said to have _______ with respect to the dollar.
A. appreciat
ed
B. consolidat
ed
C. depreciat
ed
D. remained
fixed
Difficulty: Easy
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY
53. An Australian company is to export electronic equipment into Europe, in particular

Germany and Sweden, and needs to consider the exchange rate implications of
conducting business in euros and Swedish krona. Spot rates quoted are:
USD/EUR 0.9275-85
USD/SEK 8.4531-41
A. EUR/SEK 0.1097–
0.1098
B. EUR/SEK 9.1139–
9.1051
C. EUR/SEK 9.1051–
9.1139
D. EUR/SEK 9.1040–
9.1149
Difficulty: Hard
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY

lOMoARcPSD|10180112
A. exchange rate
arbitrage
B. forward
points
C. interest rate
parity
D. indirect exchange
rate
Difficulty: Easy
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY
55. The theory that the annual percentage differential in the forward market for a
currency quoted in terms of another currency is equal to the approximate
difference in the interest rates between two countries is known as:
A. covered interest
arbitrage
B. the Fisher
equation
C. a forward rate
agreement
D. interest rate
parity
Difficulty: Easy
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY

lOMoARcPSD|10180112
A. relative spot exchange rates determine the relativity between the forward
exchange rates and spot rates
B. relativity between spot and forward exchange rates reflects the interest rate
differentials between countries
C. relative forward exchange rates determine the relativity between the spot
exchange rates and the forward interest rate
D. relative forward exchange rates determine the relativity between the forward
exchange rates and forward interest rates
Difficulty: Medium
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY
interest rates will trade at a forward _______ to the country with the relatively high
interest rate.
A. low;
discount
B. low;
premium
C. low;
loss
answers.
Difficulty: Easy
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY

lOMoARcPSD|10180112
interest rates will trade at a forward _______ to the country with the relatively
_______ interest rate.
A. high; premium;
low
B. low; discount;
high
C. high; discount;
low
answers.
Difficulty: Easy
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY
59. An importer will be required to purchase USD in approximately six months to pay
for a consignment of goods. The company is concerned that the AUD may
depreciate before the due date and therefore decides to enter into a forward
exchange contract to protect its position. The company receives the following
quote: 'the Aussie is fifty-eight forty-five to fifty-three, sixty-two to sixty six'.
Calculate the forward exchange rate.
A. AUD/USD 0.5783-
87
B. AUD/USD 0.5907-
19
C. AUD/USD 0.5911-
15
D. AUD/USD 0.6465-
13
Difficulty: Medium
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY

lOMoARcPSD|10180112
60. If the spot rate is AUD/USD 0.5510-0.5515, and the six-month forward points are
48 to 53, the six-month outright forward rate would be:
A. AUD/USD 0.5462-
0.5462
B. AUD/USD 0.5563-
0.5558
C. AUD/USD 0.5558-
0.5563
D. AUD/USD 0.5558-
0.5568
Difficulty: Easy
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY
A. expected
gain
B. premiu
m
C. reciproc
al
D. discou
nt
Difficulty: Easy
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY

lOMoARcPSD|10180112
62. If the forward exchange rate is priced higher than the spot rate the currency is
said to be trading at a:
A. discou
nt
B. gai
n
C. premiu
m
D. los
s
Difficulty: Easy
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY
63. If the forward points are _______at a specific date, the base currency is at a
_______.
A. rising; forward
discount
B. falling; forward
discount
C. rising; forward
loss
D. falling; forward
gain
Difficulty: Medium
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY

lOMoARcPSD|10180112
64. Which of the following principles refers to the circumstance that interest rates in
different countries provide equal returns, taking into account the spot and forward
exchange rates between the two countries?
A. Exchange rate
parity
B. Interest rate
parity
C. Law of one
price
D. Purchasing power
parity
Difficulty: Easy
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY
65. A bank has been asked to provide a three-month forward AUD/USD 'buy' quote for
a corporate client. The following information is available to the FX dealer at the
bank:
Estimate the three-month forward 'buy' rate.
A. 0.763
7
B. 0.763
9
C. 0.764
2
D. 0.764
4
Difficulty: Hard
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY

lOMoARcPSD|10180112
66. A bank has been asked to provide a three-month forward EUR/USD 'buy' quote for
a corporate client. The following information is available to the FX dealer at the
bank:
Bid Offer
Spot EUR/USD 1.0770 1.0782
3-month US interest 3.75% 3.85%
rate p.a. p.a.
3-month euro interest 2.65% 2.75%
rate p.a. p.a.
A. EUR/USD 1.0796–
1.0781
B. EUR/USD 1.0797–
1.0782
C. EUR/USD 1.0738–
1.0755
D. EUR/USD 1.0743–
1.0750
Difficulty: Hard
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY
A. A currency with a higher interest rate will sell at a forward

premium.
B. A currency with a higher interest rate will sell at a forward
discount.
C. A currency with a higher interest rate will have a higher
spot rate.
D. A currency with a higher interest rate will have a lower
spot rate.
Difficulty: Easy
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY

lOMoARcPSD|10180112
68. All of the following are considered 'hard' or major currencies, EXCEPT the:
A. US
dollar
B. eur
o
C. Mexican
peso
D. British
pound
Difficulty: Easy
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY
69. The financial institution responsible for monetary policy in the European Union is
called the:
A. Bundesba
nk
B. European
Parliament
Settlements
D. European Central
Bank
Difficulty: Easy
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY
70. The FX market is organised as an over-the-counter market in which deposits

denominated in foreign currencies are bought and sold.
TRUE
The FX markets are vast global markets.
Difficulty: Easy
level: EMPTY
lo: EMPTY

lOMoARcPSD|10180112
source: EMPTY
type: EMPTY
FALSE
Owing in part to historical factors, London is the largest FX market.
Difficulty: Easy
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY
72. The FX brokers quote two-way prices at which they are prepared both to buy and
sell foreign currencies and act as principals in the FX markets.
FALSE
It is FX dealers that quote bid and ask prices.
Difficulty: Easy
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY
73. If an Australian importer has a contract for Japanese goods denominated in yen
payable in three months' time and is concerned that the AUD may appreciate, the
importer may enter into a forward contract to sell the yen for delivery in three
months' time.
FALSE
The importer should buy a forward contact to buy the yen (and sell the AUD) in
three months' time.
Difficulty: Easy
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY

lOMoARcPSD|10180112
TRUE
The first currency of a quote is the unit of the quotation.
Difficulty: Easy
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY
75. Given USD/EURO0.6450-0.6455 an FX dealer would buy USD1 from you and give
you EURO0.6455.
FALSE
The dealer would give you EUR0.6450.
Difficulty: Easy
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY
76. When a currency is quoted against the USD and the USD is the base currency, this
is direct quoting.
TRUE
Having the USD as the unit makes the quote direct.
Difficulty: Easy
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY

lOMoARcPSD|10180112
TRUE
Multiplying the two bid rates and multiplying the two ask rates gives a bid-ask
cross-rate.
Difficulty: Easy
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY
78. Given that AUD/USD (spot) is 0.6830-40 and the six-month forward rate is 0.6798-
0.6813, the six-month forward points must have been falling.
TRUE
By calculating the difference the points are seen to be 0.0032-0.0027.
Difficulty: Easy
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY
79. When an FX dealer calculates a forward exchange rate for NZD/JPY they must
adjust both interest rates to allow for the different quotation rates between Japan
and New Zealand.
FALSE
Only one of the rates needs to be adjusted on the basis of Japan using the 360-day
convention.
Difficulty: Medium
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY

lOMoARcPSD|10180112
Major currencies such as the US dollar, the UK pound, the Japanese yen, the
European Monetary Union euro and the Australian dollar have all adopted a
floating exchange rate regime or a free float. A floating exchange rate regime
exists when an exchange rate for the currency of a country is allowed to move as
the factors of supply and demand decree. If the demand for a currency increases
the value of that currency will increase relative to other currencies.

difficulty: EMPTY
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY
81. In relation to exchange rates, discuss a managed float regime, a crawling peg
regime and a pegged exchange rate.
Countries that operate a managed float regime normally allow the currency to
move within a defined band or range, relative to another currency such as the
USD. A crawling peg regime limits exchange rate movements by being a managed
float where an exchange rate is allowed to appreciate in controlled steps over
time. A pegged exchange rate as used by Hong Kong is where a currency is
directly linked to another currency. In the case of Hong Kong, the Hong Kong dollar
is directly linked to the USD.

difficulty: EMPTY
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY
Central banks may enter the FX markets in order to pay for a government's
purchases; to change the composition of the central bank's holdings of foreign
currencies as part of its management of official foreign reserve assets; and to
influence a foreign exchange rate.

difficulty: EMPTY

lOMoARcPSD|10180112

level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY
A forward transaction is an FX contract that has a maturity date (value date) more
than two working days after the FX contract has been entered into. For example,
an importer has to pay for some goods denominated in EUR in three months and
so, to hedge a possible appreciation of EUR, may enter into a contract to buy EUR
today. A TOM value transaction is an FX contract with settlement and delivery
tomorrow.

difficulty: EMPTY
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY
84. Discuss how the way a currency is quoted affects how cross rates are calculated.
There are two ways in which currencies can be quoted against the USD: a direct
quote where the USD is the unit of the quotation, such as USD/JPY, and an indirect
quote where the USD is the terms currency and the other currency is the unit of
the quotation, such as AUD/USD.

difficulty: EMPTY
level: EMPTY
lo: EMPTY
source: EMPTY
type: EMPTY

lOMoARcPSD|10180112

Operation of the FX Market Summary
Category # of Questio
ns
Difficulty: Easy 57
Difficulty: Hard 4
Viney - Chapter 15 84

lOMoARcPSD|10180112
TEST BANK 9 Short TERM DEBT

lOMoARcPSD|10180112
Chapter 09 - Test Bank
Multuple Chiuce Questuins

B. short-term debt.
D. long-term debt.
A. of a month.
C. up to a year.
A. factoring.
C. trade credit.
D. supplier credit.
5. A facility offered by many suppliers of goods that provide for the purchase of goods with a specified period
before the account must be paid for is called:
A. supplier credit.
B. bank overdraft.
C. trade credit.

lOMoARcPSD|10180112
A. a 2% cash discount may be taken if paid in 15 days; if no cash discount is taken, the balance is due in 30
days after the middle of the month.
B. a 2% cash discount may be taken if paid in 15 days; if no cash discount is taken, the balance is due 30
days after the invoice date.
C. a 2% cash discount may be taken if paid in 15 days; if no cash discount is taken, the balance is due 30
days after the end of the month.
D. a 2% cash discount may be taken on 15% of the purchase if the account is paid within 30 days after the
end of the month.
7. The annual cost of forgoing a cash discount under the terms of sale 2/30 n/90, assuming a 365-day year is:
A. 8.0%
B. 12.2%
C. 12.4%
D. 24.0%
8. A company is offered credit terms of 2/10 n/40, but decides to forgo the cash discount and pay on the 45th
day. What is the company's cost of forgoing the cash discount?
A. 18.6%
B. 21.28%
C. 24.83%



lOMoARcPSD|10180112
A. a debt facility.

B. Generally, the agreed interest rate on an overdraft is calculated by the bank on the balance at the end of
the month.
A. prime rate
C. Treasury rate
D. overdraft rate

15. The basic feature of a/an ________ required by some banks is that it effectively raises the interest cost to
the borrower for an overdraft facility.

C. commitment fee
D. annual cleanup

lOMoARcPSD|10180112
16. If a company has a good credit standing with a bank, it will be charged ______ interest rate margin than/as
a company without an established record.
A. a higher
B. a lower
C. a much higher
D. the same
A. BBSW
B. LIBOR
C. USCP
D. SIBOR
B. A bank bill
C. A trade bill

lOMoARcPSD|10180112

A. acceptor
B. discounter
C. drawer
D. endorser



C. effective rate.

lOMoARcPSD|10180112


B. Once a bank becomes an acceptor for a bill other financial institutions can buy and accept the same bank
bill.
A. that the acceptor and endorser make an agreement as to who is liable for the repayment of the face value
to the final holder of the bill.
obligations.

lOMoARcPSD|10180112
A. drawer
B. acceptor
C. endorser
D. discounter
A. 30 days
B. 90 days
C. 180 days
D. 360 days


B. The yield at which the bill is discounted depends partly on the credit rating of the party that incurs the
liability.
C. The bank agrees to discount bills up to the agreed amounts with a fixed yield over the life of the rollover
facility.

lOMoARcPSD|10180112

D. The issuer of a bank-endorsed bill has to pay regular interest payments to the holder, unlike with a bank-
accepted bill.
A. $84 130.46
B. $92 350.21
C. $98 123.39
D. $98 148.62
42. 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

lOMoARcPSD|10180112
buy equipment. If the bank has agreed to discount the bill at a yield of 7.65% per annum, what will be the
face value of the bill?
A. $230 875
B. $250 000
C. $256 287.67
D. $312 876.71
44. A company wants to invest some surplus short-term funds and plans to buy a 180-day bank bill with a face
value of $100 000. What is the yield on the bill if its price is currently $94 234?
A. 11.69%
B. 12.41%
C. 13.23%
D. 13.32%
45. What is the discount rate of a 120-day bank bill with a face value of $100 000 and currently selling for $95
234, with a full 120 days to run?
A. 13.93%
B. 14.50%
C. 15.22%
D. 16.58%

B. a promissory note is a short-term instrument, whereas a bill of exchange is not necessarily short-term.
C. there is generally an issuer and an acceptor for a bill of exchange, whereas there is no acceptor involved
for a promissory note.
A. they are liquid.


lOMoARcPSD|10180112
48. ________ is a short-term, unsecured discount note issued by corporate borrowers of high credit standing.
The major banks generally issue these notes on their behalf.
A. A line of credit
B. Commercial paper

A. Bank bills
B. CDs
C. Promissory notes
D. Unsecured notes
A. $1000 or more
B. $10 000 or more
C. $100 000 or more
D. $1 000 000 or more
A. the prime rate.

B. its face value.
C. its cost.
D. Treasury notes.

lOMoARcPSD|10180112
B. Both commercial bills and promissory notes are sold with contingent liability in the secondary market.
C. Commercial bills are sold with contingent liability in the secondary market, whereas promissory notes
are sold without contingent liability.
market.




lOMoARcPSD|10180112

A. 10% per annum.

B. 1% per annum.
C. 0.1% per annum.
D. 0.01% per annum.
A. tap issuance.
B. tender.
C. offer.
D. proposition.
discounted.
A. sold by tender.
B. underwritten.
C. sold by tap.

lOMoARcPSD|10180112

65. One of the advantages to the corporation of an underwriting syndicate for the issue of promissory notes is:

D. the underwriting commitment gives the corporation access to a line of credit extending beyond the life
of the promissory note.
A. $83 096.19
B. $91 750.00
C. $97 965.75
D. $98 006.31
67. As an alternative to issuing a commercial bill for short-term financing, corporations with an excellent credit
standing may:



lOMoARcPSD|10180112
A. an underwriter.

A. lower than
B. the same as
C. higher than
D. unrelated to

obligation to buy.
A. Bank bill
B. Commercial paper
D. Promissory note

lOMoARcPSD|10180112
A. bank bills.
B. CDs.
C. CP.
D. P-notes.






lOMoARcPSD|10180112
81. A source of short-term funds available to smaller firms (for example, finance provided to a car dealership
for car funding) is:

B. factoring.
A. non-recourse
B. notification
C. recourse
D. non-notification


C. The discount charged by the factoring company is approximately equal to the rate charged on a secured
overdraft loan.


lOMoARcPSD|10180112
_____ arrangement
A. factoring.
C. trade credit.
called:
A. factoring.
C. trade credit.
True / False Questuins
89. A bank that provides an overdraft facility to business customers expects the overdraft to have a fluctuating
balance and doesn't require the customer to have the account in credit at any stage.
True False
90. One of the advantages of an overdraft facility, from the viewpoint of a borrower, is it can be used to smooth
out any seasonal mismatch between its cash inflows and outflows.
True False
True False
True False

lOMoARcPSD|10180112
93. With a bank-accepted bill the drawer has a secondary liability after the acceptor to pay the holder of the bill
the face value of the bill at the maturity date.
True False
True False
True False
True False
97. A major advantage of bill financing over other forms of short-term debt such as overdrafts is that the cost is
usually lower.
True False
True False
Shirt Answer Questuins
99. In establishing an overdraft facility with a company, what are some of the firm-related factors a bank will
consider?

lOMoARcPSD|10180112
100.Discuss what factors influence the yield at which a commercial bill will be discounted
101.What are some of the advantages of bill financing for a company over other forms of short-term debt?
102.What are some advantages of promissory notes financing for a large company?
103.Negotiable certificates of deposit are short-term securities issued by banks. Discuss their uses.

lOMoARcPSD|10180112
Difficulty: Easy
Est time: <1 minute
Learning Objective: 09-01 Understand ehy the financial markets offer short-term debt and financing facilities.

B. short-term debt.
D. long-term debt.
Difficulty: Easy
Est time: <1 minute
A. of a month.
C. up to a year.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 09-01 Understand ehy the financial markets offer short-term debt and financing facilities.

lOMoARcPSD|10180112
A. factoring.
C. trade credit.
D. supplier credit.
Difficulty: Easy
Est time: <1 minute
5. A facility offered by many suppliers of goods that provide for the purchase of goods with a specified
period before the account must be paid for is called:
A. supplier credit.
B. bank overdraft.
C. trade credit.
Difficulty: Easy
Est time: <1 minute
A. a 2% cash discount may be taken if paid in 15 days; if no cash discount is taken, the balance is due in
30 days after the middle of the month.
B. a 2% cash discount may be taken if paid in 15 days; if no cash discount is taken, the balance is due
30 days after the invoice date.
C. a 2% cash discount may be taken if paid in 15 days; if no cash discount is taken, the balance is due
30 days after the end of the month.
D. a 2% cash discount may be taken on 15% of the purchase if the account is paid within 30 days after
the end of the month.
Difficulty: Medium
Est time: <1 minute
7. The annual cost of forgoing a cash discount under the terms of sale 2/30 n/90, assuming a 365-day year
is:
A. 8.0%
B. 12.2%
C. 12.4%
D. 24.0%
Difficulty: Medium
Est time: <1 minute

lOMoARcPSD|10180112
8. A company is offered credit terms of 2/10 n/40, but decides to forgo the cash discount and pay on the
45th day. What is the company's cost of forgoing the cash discount?
A. 18.6%
B. 21.28%
C. 24.83%
Difficulty: Medium
Est time: <1 minute

Difficulty: Medium
Est time: <1 minute

Difficulty: Easy
Est time: <1 minute
A. a debt facility.
Difficulty: Easy
Est time: <1 minute

lOMoARcPSD|10180112

B. Generally, the agreed interest rate on an overdraft is calculated by the bank on the balance at the end
of the month.
Difficulty: Easy
Est time: <1 minute
A. prime rate
C. Treasury rate
D. overdraft rate
Difficulty: Easy
Est time: <1 minute

Difficulty: Easy
Est time: <1 minute
15. The basic feature of a/an ________ required by some banks is that it effectively raises the interest cost
to the borrower for an overdraft facility.

C. commitment fee
D. annual cleanup
Difficulty: Hard
Est time: <1 minute

lOMoARcPSD|10180112
16. If a company has a good credit standing with a bank, it will be charged ______ interest rate margin
than/as a company without an established record.
A. a higher
B. a lower
C. a much higher
D. the same
Difficulty: Easy
Est time: <1 minute
Difficulty: Medium
Est time: <1 minute
Learning Objective: 09-04 Describe the structure of a commercial bill, including the parties to the bill, the floe of funds, the establishment and the advantages of
Difficulty: Medium
Est time: <1 minute
Difficulty: Easy
Est time: <1 minute

lOMoARcPSD|10180112
A. BBSW
B. LIBOR
C. USCP
D. SIBOR
Difficulty: Easy
Est time: <1 minute
B. A bank bill
C. A trade bill
Difficulty: Easy
Est time: <1 minute

Difficulty: Medium
Est time: <1 minute
A. acceptor
B. discounter
C. drawer
D. endorser
Difficulty: Medium
Est time: <1 minute

lOMoARcPSD|10180112

Difficulty: Medium
Est time: <1 minute

Difficulty: Medium
Est time: <1 minute

C. effective rate.
Difficulty: Medium
Est time: <1 minute
Difficulty: Medium
Est time: <1 minute

lOMoARcPSD|10180112
Difficulty: Medium
Est time: <1 minute

Difficulty: Medium
Est time: <1 minute

Difficulty: Easy
Est time: <1 minute
B. Once a bank becomes an acceptor for a bill other financial institutions can buy and accept the same
bank bill.
Difficulty: Medium
Est time: <1 minute

lOMoARcPSD|10180112
A. that the acceptor and endorser make an agreement as to who is liable for the repayment of the face
value to the final holder of the bill.
obligations.
Difficulty: Medium
Est time: <1 minute
A. drawer
B. acceptor
C. endorser
D. discounter
Difficulty: Easy
Est time: <1 minute
A. 30 days
B. 90 days
C. 180 days
D. 360 days
Difficulty: Medium
Est time: <1 minute

Difficulty: Medium
Est time: <1 minute

lOMoARcPSD|10180112

Difficulty: Medium
Est time: <1 minute
B. The yield at which the bill is discounted depends partly on the credit rating of the party that incurs
the liability.
C. The bank agrees to discount bills up to the agreed amounts with a fixed yield over the life of the
rollover facility.
Difficulty: Medium
Est time: <1 minute
Difficulty: Hard
Est time: <1 minute
Difficulty: Medium
Est time: <1 minute

lOMoARcPSD|10180112

D. The issuer of a bank-endorsed bill has to pay regular interest payments to the holder, unlike with a
bank-accepted bill.
Difficulty: Medium
Est time: <1 minute
A. $84 130.46
B. $92 350.21
C. $98 123.39
D. $98 148.62
Difficulty: Medium
Est time: <1 minute
Learning Objective: 09-05 Complete a range of calculations relevant to discount securities, including the price ehere the yield is knoen, face value ehere the issue
price and yield are knoen, yield, price ehere the discount rate is knoen and the discount rate.
42. 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
Difficulty: Medium
Est time: <1 minute

lOMoARcPSD|10180112
buy equipment. If the bank has agreed to discount the bill at a yield of 7.65% per annum, what will be
the face value of the bill?
A. $230 875
B. $250 000
C. $256 287.67
D. $312 876.71
Difficulty: Medium
Est time: <1 minute
44. A company wants to invest some surplus short-term funds and plans to buy a 180-day bank bill with a
face value of $100 000. What is the yield on the bill if its price is currently $94 234?
A. 11.69%
B. 12.41%
C. 13.23%
D. 13.32%
Difficulty: Medium
Est time: <1 minute
45. What is the discount rate of a 120-day bank bill with a face value of $100 000 and currently selling for
$95 234, with a full 120 days to run?
A. 13.93%
B.
()()()
14.50%
C. 15.22%
D. 16.58%
Difficulty: Medium
Est time: <1 minute

lOMoARcPSD|10180112

B. a promissory note is a short-term instrument, whereas a bill of exchange is not necessarily short-
term.
C. there is generally an issuer and an acceptor for a bill of exchange, whereas there is no acceptor
involved for a promissory note.
Difficulty: Easy
Est time: <1 minute
A. they are liquid.

Difficulty: Easy
Est time: <1 minute
Learning Objective: 09-06 Describe the structure, advantages, establishment, undereriting and calculation of promissory notes (commercial paper).
48. ________ is a short-term, unsecured discount note issued by corporate borrowers of high credit
standing. The major banks generally issue these notes on their behalf.
A. A line of credit
B. Commercial paper
Difficulty: Easy
Est time: <1 minute

Difficulty: Medium
Est time: <1 minute

lOMoARcPSD|10180112
A. Bank bills
B. CDs
C. Promissory notes
D. Unsecured notes
Difficulty: Medium
Est time: <1 minute
A. $1000 or more
B. $10 000 or more
C. $100 000 or more
D. $1 000 000 or more
Difficulty: Hard
Est time: <1 minute
A. the prime rate.

B. its face value.
C. its cost.
D. Treasury notes.
Difficulty: Easy
Est time: <1 minute
B. Both commercial bills and promissory notes are sold with contingent liability in the secondary
market.
C. Commercial bills are sold with contingent liability in the secondary market, whereas promissory
notes are sold without contingent liability.
market.
Difficulty: Easy
Est time: <1 minute

lOMoARcPSD|10180112
Difficulty: Medium
Est time: <1 minute

Difficulty: Medium
Est time: <1 minute

Difficulty: Medium
Est time: <1 minute

Difficulty: Medium
Est time: <1 minute

lOMoARcPSD|10180112
Difficulty: Easy
Est time: <1 minute

Difficulty: Easy
Est time: <1 minute
A. 10% per annum.

B. 1% per annum.
C. 0.1% per annum.
D. 0.01% per annum.
Difficulty: Medium
Est time: <1 minute
A. tap issuance.
B. tender.
C. offer.
D. proposition.
Difficulty: Medium
Est time: <1 minute

lOMoARcPSD|10180112
discounted.
Difficulty: Medium
Est time: <1 minute
A. sold by tender.
B. underwritten.
C. sold by tap.
Difficulty: Easy
Est time: <1 minute

Difficulty: Medium
Est time: <1 minute
65. One of the advantages to the corporation of an underwriting syndicate for the issue of promissory notes
is:

D. the underwriting commitment gives the corporation access to a line of credit extending beyond the
life of the promissory note.
Difficulty: Medium
Est time: <1 minute

lOMoARcPSD|10180112
A. $83 096.19
B. $91 750.00
C. $97 965.75
D. $98 006.31
Difficulty: Medium
Est time: <1 minute
67. As an alternative to issuing a commercial bill for short-term financing, corporations with an excellent
credit standing may:

Difficulty: Easy
Est time: <1 minute

Difficulty: Medium
Est time: <1 minute
A. an underwriter.
Difficulty: Medium
Est time: <1 minute

lOMoARcPSD|10180112

Difficulty: Medium
Est time: <1 minute
A. lower than
B. the same as
C. higher than
D. unrelated to
Difficulty: Easy
Est time: <1 minute
Difficulty: Easy
Est time: <1 minute

obligation to buy.
Difficulty: Medium
Est time: <1 minute

lOMoARcPSD|10180112
A. Bank bill
B. Commercial paper
D. Promissory note
Difficulty: Medium
Est time: <1 minute
A. bank bills.
B. CDs.
C. CP.
D. P-notes.
Difficulty: Medium
Est time: <1 minute

Difficulty: Easy
Est time: <1 minute

Difficulty: Medium
Est time: <1 minute

lOMoARcPSD|10180112

Difficulty: Medium
Est time: <1 minute

Difficulty: Medium
Est time: <1 minute

Difficulty: Medium
Est time: <1 minute
81. A source of short-term funds available to smaller firms (for example, finance provided to a car
dealership for car funding) is:

B. factoring.
Difficulty: Medium
Est time: <1 minute

lOMoARcPSD|10180112
A. non-recourse
B. notification
C. recourse
D. non-notification
Difficulty: Hard
Est time: <1 minute

Difficulty: Medium
Est time: <1 minute

C. The discount charged by the factoring company is approximately equal to the rate charged on a
secured overdraft loan.
Difficulty: Hard
Est time: <1 minute

Difficulty: Medium
Est time: <1 minute

lOMoARcPSD|10180112
_____ arrangement
Difficulty: Medium
Est time: <1 minute
A. factoring.
C. trade credit.
Difficulty: Medium
Est time: <1 minute
called:
A. factoring.
C. trade credit.
Difficulty: Medium
Est time: <1 minute

lOMoARcPSD|10180112
89. A bank that provides an overdraft facility to business customers expects the overdraft to have a
fluctuating balance and doesn't require the customer to have the account in credit at any stage.
FALSE
A borrower is expected to reduce or bring the overdraft into credit as and when future cash flows are
received by the company.
Difficulty: Medium
Est time: <1 minute
90. One of the advantages of an overdraft facility, from the viewpoint of a borrower, is it can be used to
smooth out any seasonal mismatch between its cash inflows and outflows.
TRUE FALSE
Once the overdraft limit has been established a company may draw down the funds at any time without
notice.
Difficulty: Easy
Est time: <1 minute
FALSE
Commercial bills are discount securities used by corporations to borrow short-term funds in the money
markets.
Difficulty: Easy
Est time: <1 minute
TRUE
A commercial bill is a discount instrument where the return to the holder of the bill is the difference
between the discounted price and the face value at maturity.
Difficulty: Easy
Est time: <1 minute

lOMoARcPSD|10180112
93. With a bank-accepted bill the drawer has a secondary liability after the acceptor to pay the holder of the
bill the face value of the bill at the maturity date.
TRUE
If the bill is dishonoured by the acceptor at maturity, the drawer has the responsibility to pay the bill
holder.
Difficulty: Medium
Est time: <1 minute
FALSE
The discounter is the entity that provides the funds to the issuer of the bill, the drawer.
Difficulty: Medium
Est time: <1 minute
TRUE
The acceptor of the bill, that is a bank, pays the holder. Generally a bank has a separate arrangement
with the drawer, the original borrower, for them to repay the bank.
Difficulty: Easy
Est time: <1 minute
FALSE
The bank-accepted bill market is a very liquid part of the money markets.
Difficulty: Easy
Est time: <1 minute

lOMoARcPSD|10180112
97. A major advantage of bill financing over other forms of short-term debt such as overdrafts is that the
cost is usually lower.
TRUE
A fundamental reason for the lower cost is that a bank does not have to fund the bill on its balance sheet
but can sell the bill into the money markets.
Difficulty: Medium
Est time: <1 minute
TRUE
Commercial papers are discount securities issued without an acceptor by large corporations with a high
credit rating.
Difficulty: Easy
Est time: <1 minute
99. In establishing an overdraft facility with a company, what are some of the firm-related factors a bank
will consider?
A bank will consider a company's past financial performance and future cash flows, the length of the
typical mismatch between a company's cash inflows and outflows and the adequacy of the collateral
available in the case of default by the borrower.


lOMoARcPSD|10180112
100. Discuss what factors influence the yield at which a commercial bill will be discounted
The yield will be affected by factors that determine the general level of interest rates in the economy,
and then by the credit rating of the parties involved. A bank-accepted bill will include the higher credit
standing of the acceptor and so be able to be discounted at a lower yield than a bill issued by a drawer of
lower credit standing.

101. What are some of the advantages of bill financing for a company over other forms of short-term debt?
First, a major advantage is usually it is of lower cost. Second, it provides a known cost of financing for
the borrower. It also offers considerable flexibility for the borrower; once they have drawn up a bill
facility, they can progressively issue bills over time.

102. What are some advantages of promissory notes financing for a large company?
For a large company it can mean a lower cost of funding than using a bank bill facility as the company
does not incur bank bill fees, and the owner of a P-note can sell it without incurring a future contingent
liability.

103. Negotiable certificates of deposit are short-term securities issued by banks. Discuss their uses.
Banks can issue short-term negotiable certificates of deposit (CDs) to institutional investors so the
banks can manage their liabilities and liquidity. As part of their liability management banks issue CDs to
raise extra funds to meet loan and funding commitments; for example, when they expect customers to
spend more money in the holiday season.


lOMoARcPSD|10180112

lOMoARcPSD|10180112
Chapter 09 - Test Bank Summary
Category # of Qu
estions
Difficulty: Easy 34
Difficulty: Hard 5
Learning Objective: 09-01 Understand why the financial markets offer short-term debt and financing facilities. 2
Learning Objective: 09-02 Consider the concept and reasons for the provision of trade credit. 7
Learning Objective: 09-03 Explain the purpose and operation of a bank overdraft facility. 11
Learning Objective: 09-04 Describe the structure of a commercial bill, including the parties to the bill, the flow of funds, the establishment 33
and the advantages of issuing bank-accepted bills.
Learning Objective: 09-05 Complete a range of calculations relevant to discount securities, including the price where the yield is known, fa 7
ce value where the issue price and yield are known, yield, price where the discount rate is known and the discount rate.
Learning Objective: 09-06 Describe the structure, advantages, establishment, underwriting and calculation of promissory notes (commercial 30
paper).
Learning Objective: 09-07 Explain the structure, issue and calculation of negotiable certificates of deposit. 5
Learning Objective: 09-08 Discuss the nature and operation of inventory finance, accounts receivable financing and factoring. 8
Section: 9.1 Trade credit 7
Section: 9.2 Bank overdrafts 11
Section: 9.3 Commercial bills 33
Section: 9.4 Calculations: discount securities 7
Section: 9.5 Promissory notes 30
Section: 9.6 Negotiable certificates of deposit 5
Section: 9.7 Inventory finance, accounts receivable financing and factoring 8

lOMoARcPSD|10180112
Chapter 10 Testbank

lOMoARcPSD|10180112
Chapter 10 Testbank

purpose.
agreed limit.
A. amortised loan.
A. overdraft.
B. bank bill.
B. term loan.
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lOMoARcPSD|10180112

C. over 1 year.

reduction.
term.
B. amortised loans.
are called:
A. commitment fees.
C. line fees.
D. service fees.
in advance are:
A. commitment fees.
C. line fees.
D. service fees.

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C. corporate bonds.
D. term loans.
A. Debentures
B. Mortgage bonds
C. Term loans
D. Capital leases
15. A term loan is:

down.
B. service fee
C. commitment fee
D. term fee
called a/an:
B. commitment fee.
C. line fee.
D. service fee.
A. default risk.
B. the maturity.

lOMoARcPSD|10180112

A. BBSW
B. LIBOR
C. USCP
D. SIBOR
A. higher.
B. lower.
C. the same.
D. not related.
affected by:
22. A company can borrow from a bank at a margin to the bank's base rate. According to the text,
all of the following factors affect this margin except:
23. When a lender includes conditions in a loan agreement to protect its loan, these are known as:
A. loan agreements.
B. loan covenants.
C. loan terms.
D. loan actions.

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D. loan options.


29. The purpose of debt covenants that ban borrowers from entering into certain types of leases is
to:

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than one year.
A. debenture
B. mortgage bond
C. term loan
D. zero-coupon bond
A. amortised.
B. a debit foncier.
D. interest-only.
A. mortgagor.
B. mortgagee.
C. mortgager.
D. mortgage.
A. mortgagor.
B. mortgagee.

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C. mortgager.
D. mortgage.
38. A company borrows $75 000 from a bank, to be amortised over five years at 8.5% per annum.
The annual instalment is:
A. $12 657.43.
B. $16 275.00.
C. $19 032.43.
39. 39. A company borrows $75 000 from a bank, to be amortised over five years at 8.5% per
repayment will be:
A. $12 657.43.
B. $16 275.00.
C. $19 032.43.
If the payments are to be made on an annual basis, what will be the remaining outstanding loan
at the end of year one?
A. $65 657.43
B. $62 342.57
C. $19 032.43
A. $1861.11
B. $2143.15
C. $7274.21
D. $26 386.61
A. conversion.

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B. liquidisation.
C. securitisation.
D. transformation.

C. maturity value.
A. market value
B. book value
C. face value
D. surrender value
by_________.
A. Treasury bonds

B. bonds.
C. shares.
D. preferred stock.
49. Bonds are:


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A. debenture.
B. income bond.
C. mortgage bond.
A. term loans.
B. debentures.
D. bonds.
A. public issue.
B. family issue.

B. Unsecured notes

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10
D. Debenture
A. transform into
B. crystallise into
C. originate as
D. adjust to
A. a debenture
called a:
B. put option.
D. warrant.
A. Mortgage bonds
B. Unsecured notes
follows that:

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11


at _______.
A. increases to 8%.
B. increases to 9%.
C. remains at 7%.
interest rates.
A. constant
B. linear
C. varying
D. inverse
A. discount.

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12
C. premium.
D. face value.
A. discount.
C. premium.
D. face value.
at:
A. discount.
C. premium.
D. book value.
changes by 5%:
10%:

A. $920.15

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13
B. $1000
C. $1084.25
A. $915.39
B. $1000
C. $1089.72
A. coupon rate.
B. face value.
C. price.
A. $1000
B. $1045.84
C. $1046.44
D. $1079.45


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14

A. $320 149.12
B. $401 613.48
C. $410 644.78
D. $688 638.80
A. financial
B. operating lease
C. direct
D. leveraged
A. direct lease.
B. financial lease.
C. operating lease.
D. leveraged lease.

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15
A. direct lease.
C. operating lease.
D. leveraged lease.
A. An equity lease

A. operating lease.
D. leveraged lease.
A. 100% financing
remainder?
A. A capital lease
B. An equity lease

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16
A. $20 000.
B. $40 000.
C. $30 000.
D. $60 000.
A. $426 399
B. $437 902
C. $500 000
D. $458 090
A. $426 399
B. $437 902
C. $452 811
D. $458 090
A. $1 808 011
B. $2 205 851
C. $2 208 671
D. $2 224 881
B. Unsecured note
C. Junk bond
D. Debenture
A. $13 875

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17
B. $20 663
C. $35 493
D. $165 001

True False
True False
True False

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18
True False
True False
True False
True False
working capital.
True False
too much debt.
True False
True False
True False
True False

______________________________________________________________________________

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19
______________________________________________________________________________

______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________

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purpose.
agreed limit.
Ans: B
AACSB:Communi cation
Bloom' s:Knowl edge
Difficul
ty:Medi um
Esttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
01Expl
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erml
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sandt hecalculati
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Sect
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on:10.01Ter mloansorf
ull
ydr awnadv ances
Topic:Termloansorf
ull
ydr awnadv ances
Ans: B
AACSB:Communi cat
ion
Bloom's:Compr ehension
Difficul
ty:Medium
Esttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
01Expl
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erml
oansandf
ull
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awnadv
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,incl
udi
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ur e,l
oancovenantsandt hecalculat
ion
ofal oani nst
alment.
Sect
i
on:10.01Ter mloansorful
lydr awnadv ances
Topic:Termloansorful
lydr awnadv ances
A. amortised loan.
Ans: A

lOMoARcPSD|10180112
21
Bloom' s:Knowl edge
Difficul
ty:Medi um
Esttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
01Expl
aint
erml
oansandf
ull
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awnadv
ances
,incl
udi
ngthei
rst
ruct
ur e,l
oancovenant
sandt hecalculati
on
ofal oani nst
alment .
Sect
i
ull
ydr awnadv ances
Topic:Termloansorf
ull
ydr awnadv ances
A. overdraft.
B. bank bill.
Ans: D
Bloom' s:Knowl edge
Difficul
ty:Medi um
Esttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
01Expl
aint
erml
oansandf
ull
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awnadv
ances
,incl
udi
ngthei
rst
ruct
ur e,l
oancovenant
sandt hecalculati
on
ofal oani nst
alment .
Sect
i
ull
ydr awnadv ances
Topic:Termloansorf
ull
ydr awnadv ances
B. term loan.
Ans: D
AACSB:Communi cat
ion
Difficul
ty:Medium
Esttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
01Expl
aint
erml
oansandf
ull
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awnadv
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,incl
udi
ngthei
rst
ruct
ur e,l
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ofal oani nst
alment.
Sect
i
lydr awnadv ances
lydr awnadv ances

C. over 1 year.
Ans: C

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22
AACSB:Communi cati
on
Bloom's:Knowl edge
Difficul
ty
:Eas y
Estti
me:<1mi nut
e
Lear
ningObj
ect
i
ve:10.
01Expl
aint
erml
oansandf
ull
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awnadv
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,incl
udi
ngthei
rst
ruct
ur e,l
oancovenant
sandthecal culati
on
ofaloani nst
alment .
Sect
i
ull
ydrawnadv ances
Topic:Termloansorf
ull
ydrawnadv ances

Ans: D
Bloom' s:Knowl edge
Difficul
ty:Medi um
Esttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
01Expl
aint
erml
oansandf
ull
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awnadv
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,incl
udi
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rst
ruct
ur e,l
oancovenant
sandt hecalculati
on
ofal oani nst
alment .
Sect
i
ull
ydr awnadv ances
Topic:Termloansorf
ull
ydr awnadv ances
reduction.
term.
Ans: B
Bloom' s:Knowl edge
Difficul
ty:Medi um
Esttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
01Expl
aint
erml
oansandf
ull
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awnadv
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,incl
udi
ngthei
rst
ruct
ur e,l
oancovenant
sandt hecalculati
on
ofal oani nst
alment .
Sect
i
ull
ydr awnadv ances
Topic:Termloansorf
ull
ydr awnadv ances
B. amortised loans.
Ans: C

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23
Bloom' s:Knowl edge
Difficul
ty:Medi um
Esttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
01Expl
aint
erml
oansandf
ull
ydr
awnadv
ances
,incl
udi
ngthei
rst
ruct
ur e,l
oancovenant
sandt hecalculati
on
ofal oani nst
alment .
Sect
i
ull
ydr awnadv ances
Topic:Termloansorf
ull
ydr awnadv ances
are called:
A. commitment fees.
C. line fees.
D. service fees.
Ans: B
Bloom' s:Knowl edge
Difficul
ty:Medi um
Esttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
01Expl
aint
erml
oansandf
ull
ydr
awnadv
ances
,incl
udi
ngthei
rst
ruct
ur e,l
oancovenant
sandt hecalculati
on
ofal oani nst
alment .
Sect
i
ull
ydr awnadv ances
Topic:Termloansorf
ull
ydr awnadv ances
in advance are:
A. commitment fees.
C. line fees.
D. service fees.
Ans: C
Bloom' s:Knowl edge
Difficul
ty:Medi um
Esttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
01Expl
aint
erml
oansandf
ull
ydr
awnadv
ances
,incl
udi
ngthei
rst
ruct
ur e,l
oancovenant
sandt hecalculati
on
ofal oani nst
alment .
Sect
i
ull
ydr awnadv ances
Topic:Termloansorf
ull
ydr awnadv ances

Ans: B

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24
Bloom' s:Knowl edge
Difficul
ty:Medi um
Esttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
01Expl
aint
erml
oansandf
ull
ydr
awnadv
ances
,incl
udi
ngthei
rst
ruct
ur e,l
oancovenant
sandt hecalculati
on
ofal oani nst
alment .
Sect
i
ull
ydr awnadv ances
Topic:Termloansorf
ull
ydr awnadv ances

C. corporate bonds.
D. term loans.
Ans: D
AACSB:Communi cati
on
Bloom's:Knowl edge
Difficul
ty
:Eas y
Estti
me:<1mi nut
e
Lear
ningObj
ect
i
ve:10.
01Expl
aint
erml
oansandf
ull
ydr
awnadv
ances
,incl
udi
ngthei
rst
ruct
ur e,l
oancovenant
sandthecal culati
on
ofaloani nst
alment .
Sect
i
ull
ydrawnadv ances
Topic:Termloansorf
ull
ydrawnadv ances
A. Debentures
B. Mortgage bonds
C. Term loans
D. Capital leases
Ans: C
AACSB:Communi cati
on
Bloom's:Knowl edge
Difficul
ty
:Eas y
Estti
me:<1mi nut
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Lear
ningObj
ect
i
ve:10.
01Expl
aint
erml
oansandf
ull
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awnadv
ances
,incl
udi
ngthei
rst
ruct
ur e,l
oancovenant
sandthecal culati
on
ofaloani nst
alment .
Sect
i
ull
ydrawnadv ances
Topic:Termloansorf
ull
ydrawnadv ances
15. A term loan is:

Ans: D

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25
AACSB:Communi cati
on
Bloom's:Knowl edge
Difficul
ty
:Eas y
Estti
me:<1mi nut
e
Lear
ningObj
ect
i
ve:10.
01Expl
aint
erml
oansandf
ull
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awnadv
ances
,incl
udi
ngthei
rst
ruct
ur e,l
oancovenant
sandthecal culati
on
ofaloani nst
alment .
Sect
i
ull
ydrawnadv ances
Topic:Termloansorf
ull
ydrawnadv ances
down.
B. service fee
C. commitment fee
D. term fee
Ans: C
AACSB:Communi cat
ion
Difficul
ty:Medium
Esttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
01Expl
aint
erml
oansandf
ull
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awnadv
ances
,incl
udi
ngthei
rst
ruct
ur e,l
ion
ofal oani nst
alment.
Sect
i
lydr awnadv ances
lydr awnadv ances
called a/an:
B. commitment fee.
C. line fee.
D. service fee.
Ans: B
AACSB:Communi cat
ion
Difficul
ty
:Eas y
Estti
me:<1mi nute
Lear
ningObj
ect
i
ve:10.
01Expl
aint
erml
oansandf
ull
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awnadv
ances
,incl
udi
ngthei
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ur e,l
oancovenantsandthecal culat
ion
ofaloani nst
alment.
Sect
i
lydrawnadv ances
lydrawnadv ances
A. default risk.
B. the maturity.
Ans: D

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26
AACSB:Communi cat
ion
Difficul
ty
:Eas y
Estti
me:<1mi nute
Lear
ningObj
ect
i
ve:10.
01Expl
aint
erml
oansandf
ull
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awnadv
ances
,incl
udi
ngthei
rst
ruct
ur e,l
ion
ofaloani nst
alment.
Sect
i
lydrawnadv ances
lydrawnadv ances
A. BBSW
B. LIBOR
C. USCP
D. SIBOR
Ans: A
AACSB:Communi cat
ion
Difficul
ty
:Eas y
Estti
me:<1mi nute
Lear
ningObj
ect
i
ve:10.
01Expl
aint
erml
oansandf
ull
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awnadv
ances
,incl
udi
ngthei
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ur e,l
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ofaloani nst
alment.
Sect
i
lydrawnadv ances
lydrawnadv ances
A. higher.
B. lower.
C. the same.
D. not related.
Ans: B
Bloom' s:Knowl edge
Difficul
ty:Medi um
Esttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
01Expl
aint
erml
oansandf
ull
ydr
awnadv
ances
,incl
udi
ngthei
rst
ruct
ur e,l
oancovenant
sandt hecalculati
on
ofal oani nst
alment .
Sect
i
ull
ydr awnadv ances
Topic:Termloansorf
ull
ydr awnadv ances
affected by:
Ans: C

lOMoARcPSD|10180112
27
AACSB:Communi cat
ion
Difficul
ty:Medium
Esttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
01Expl
aint
erml
oansandf
ull
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awnadv
ances
,incl
udi
ngthei
rst
ruct
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ion
ofal oani nst
alment.
Sect
i
lydr awnadv ances
lydr awnadv ances
Ans: C
AACSB:Communi cat
ion
Difficul
ty:Medium
Esttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
01Expl
aint
erml
oansandf
ull
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awnadv
ances
,incl
udi
ngthei
rst
ruct
ur e,l
ion
ofal oani nst
alment.
Sect
i
lydr awnadv ances
lydr awnadv ances
A. loan agreements.
B. loan covenants.
C. loan terms.
D. loan actions.
Ans: B
AACSB:Communi cat
ion
Difficul
ty:Medium
Esttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
01Expl
aint
erml
oansandf
ull
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awnadv
ances
,incl
udi
ngthei
rst
ruct
ur e,l
ion
ofal oani nst
alment.
Sect
i
lydr awnadv ances
lydr awnadv ances
D. loan options.
Ans: C

lOMoARcPSD|10180112
28
AACSB:Communi cat
ion
Difficul
ty:Medium
Esttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
01Expl
aint
erml
oansandf
ull
ydr
awnadv
ances
,incl
udi
ngthei
rst
ruct
ur e,l
ion
ofal oani nst
alment.
Sect
i
lydr awnadv ances
lydr awnadv ances
Ans: D
AACSB:Communi cat
ion
Difficul
ty:Medium
Esttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
01Expl
aint
erml
oansandf
ull
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awnadv
ances
,incl
udi
ngthei
rst
ruct
ur e,l
ion
ofal oani nst
alment.
Sect
i
lydr awnadv ances
lydr awnadv ances

Ans: C
AACSB:Communi cat
ion
Difficul
ty:Medium
Esttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
01Expl
aint
erml
oansandf
ull
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awnadv
ances
,incl
udi
ngthei
rst
ruct
ur e,l
ion
ofal oani nst
alment.
Sect
i
lydr awnadv ances
lydr awnadv ances

Ans: B

lOMoARcPSD|10180112
29
AACSB:Communi cat
ion
Difficul
ty:Medium
Esttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
01Expl
aint
erml
oansandf
ull
ydr
awnadv
ances
,incl
udi
ngthei
rst
ruct
ur e,l
ion
ofal oani nst
alment.
Sect
i
lydr awnadv ances
lydr awnadv ances
Ans: C
AACSB:Communi cat
ion
Difficul
ty:Medium
Esttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
01Expl
aint
erml
oansandf
ull
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awnadv
ances
,incl
udi
ngthei
rst
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ofal oani nst
alment.
Sect
i
lydr awnadv ances
lydr awnadv ances
to:
Ans: A
AACSB:Communi cat
ion
Difficul
ty:Medium
Esttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
01Expl
aint
erml
oansandf
ull
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awnadv
ances
,incl
udi
ngthei
rst
ruct
ur e,l
ion
ofal oani nst
alment.
Sect
i
lydr awnadv ances
lydr awnadv ances
Ans: D

lOMoARcPSD|10180112
30
AACSB:Communi cat
ion
Difficul
ty:Medium
Esttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
01Expl
aint
erml
oansandf
ull
ydr
awnadv
ances
,incl
udi
ngthei
rst
ruct
ur e,l
ion
ofal oani nst
alment.
Sect
i
lydr awnadv ances
lydr awnadv ances
Ans: D
AACSB:Communi cat
ion
Difficul
ty
:Har d
Estti
me:<1mi nute
Lear
ningObj
ect
i
ve:10.
01Expl
aint
erml
oansandf
ull
ydr
awnadv
ances
,incl
udi
ngthei
rst
ruct
ur e,l
ion
ofaloani nst
alment.
Sect
i
lydrawnadv ances
lydrawnadv ances

Ans: A
AACSB:Communi cat
ion
Difficul
ty:Medium
Esttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
01Expl
aint
erml
oansandf
ull
ydr
awnadv
ances
,incl
udi
ngthei
rst
ruct
ur e,l
ion
ofal oani nst
alment.
Sect
i
lydr awnadv ances
lydr awnadv ances
than one year.
A. debenture
B. mortgage bond
C. term loan
D. zero-coupon bond
Ans: C

lOMoARcPSD|10180112
31
AACSB:Communi cat
ion
Difficul
ty
:Eas y
Estti
me:<1mi nute
Lear
ningObj
ect
i
ve:10.
01Expl
aint
erml
oansandf
ull
ydr
awnadv
ances
,incl
udi
ngthei
rst
ruct
ur e,l
ion
ofaloani nst
alment.
Sect
i
lydrawnadv ances
lydrawnadv ances
A. amortised.
B. a debit foncier.
D. interest-only.
Ans: A
AACSB:Communi cati
on
Bloom's:Knowl edge
Difficul
ty
:Eas y
Estti
me:<1mi nut
e
Lear
ningObj
ect
i
ve:10.
01Expl
aint
erml
oansandf
ull
ydr
awnadv
ances
,incl
udi
ngthei
rst
ruct
ur e,l
oancovenant
sandthecal culati
on
ofaloani nst
alment .
Sect
i
ull
ydrawnadv ances
Topic:Termloansorf
ull
ydrawnadv ances
Ans: D
Bloom' s:Knowl edge
Di fficult
y:Medi um
Estt ime:<1mi nute
Lear
ningObj
ect
i
ve:10.
02Descr
ibet
henat
ure,pur
poseandoper
ati
onofmor
tgagefinanceandt
hemortgagemar ket,andcal culate
ani
nst
almentonamor tgagel oan.
Sect
i
on:10.02Mor tgagefinance
Topic
:Mor tgagefinance
A. mortgagor.
B. mortgagee.
C. mortgager.
D. mortgage.
Ans: B

lOMoARcPSD|10180112
32
Bloom's:Knowl edge
Difficul
ty
:Eas y
Estti
me:<1mi nute
Lear
ningObj
ect
i
ve:10.
02Descr
ibet
henat
ure,pur
poseandoper
ati
onofmor
tgagefinanceandt
hemortgagemar ket
,andcal culate
ani
nst
Sect
i
on:10.02Mor t
gagefinance
Topic
:Mor t
gagefinance
A. mortgagor.
B. mortgagee.
C. mortgager.
D. mortgage.
Ans: A
Bloom's:Knowl edge
Difficul
ty
:Eas y
Estti
me:<1mi nute
Lear
ningObj
ect
i
ve:10.
02Descr
ibet
henat
ure,pur
poseandoper
ati
onofmor
tgagefinanceandt
hemortgagemar ket
,andcal culate
ani
nst
Sect
i
on:10.02Mor t
gagefinance
Topic
:Mor t
gagefinance
A. $12 657.43.
B. $16 275.00.
C. $19 032.43.
Ans: C
AACSB:Anal ysi
s
Bloom' s:Analysi
s
Di fficult
y:Medium
Es ttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
02Descr
ibet
henat
ure,pur
poseandoper
ati
onofmor
tgagefinanceandt
hemortgagemar ket,andcal cul
ate
ani
nst
almentonamor tgageloan.
Sect
i
Topic
:Mor tgagefinance
repayment will be:
A. $12 657.43.
B. $16 275.00.
C. $19 032.43.
Ans: A

lOMoARcPSD|10180112
33
AACSB:Anal y
sis
Bloom' s:Analy
sis
Difficul
ty:Hard
Es tti
me:<1mi nute
Lear
ningObj
ect
i
ve:10.
02Descr
ibet
henat
ure,pur
poseandoper
ati
onofmor
tgagefinanceandt
ate
ani
nst
Sect
i
on:10.02Mor t
gagefinance
Topic
:Mor t
gagefinance
A. $65 657.43
B. $62 342.57
C. $19 032.43
Ans: B
AACSB:Anal y
sis
Bloom' s:Analy
sis
Difficul
ty:Hard
Es tti
me:<1mi nute
Lear
ningObj
ect
i
ve:10.
02Descr
ibet
henat
ure,pur
poseandoper
ati
onofmor
tgagefinanceandt
ate
ani
nst
Sect
i
on:10.02Mor t
gagefinance
Topic
:Mor t
gagefinance
A. $1861.11
B. $2143.15
C. $7274.21
D. $26 386.61
Ans: B
AACSB:Anal ysi
s
Bloom' s:Analysi
s
Di fficult
y:Medium
Es ttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
02Descr
ibet
henat
ure,pur
poseandoper
ati
onofmor
tgagefinanceandt
ate
ani
nst
Sect
i
Topic
:Mor tgagefinance
Ans: B

lOMoARcPSD|10180112
34
Bloom' s:Knowl edge
Di fficult
y:Medi um
Estt ime:<1mi nute
Lear
ningObj
ect
i
ve:10.
02Descr
ibet
henat
ure,pur
poseandoper
ati
onofmor
tgagefinanceandt
ani
nst
Sect
i
Topic
:Mor tgagefinance
A. conversion.
B. liquidisation.
C. securitisation.
D. transformation.
Ans: C
Bloom's:Knowl edge
Difficul
ty
:Eas y
Estti
me:<1mi nute
Lear
ningObj
ect
i
ve:10.
02Descr
ibet
henat
ure,pur
poseandoper
ati
onofmor
tgagefinanceandt
hemortgagemar ket
,andcal culate
ani
nst
Sect
i
on:10.02Mor t
gagefinance
Topic
:Mor t
gagefinance

C. maturity value.
Ans: D
AACSB:Communi cat
ion
Difficul
ty:Easy
Es tt
ime:<1mi nute
Lear
ningObj
ect
i
ve:10.
03Di
scusst
hebondmar ket
,inpart
icul
art
hestr
uctur
eandissueofdebent
ures,unsecurednot esand
subordinateddebt.
Sect
ion:10.03Thebondmar k
et:debent
ures
,unsecur
ednotesandsubor dinat
eddebt
Topic:Thebondmark
et:debent
ures
,unsecur
ednotesandsubor di nat
eddebt
A. market value
B. book value
C. face value
D. surrender value
Ans: C

lOMoARcPSD|10180112
35
AACSB:Communi cati
on
Bloom's:Knowl edge
Difficul
ty:Easy
Estti
me:<1mi nut
e
Lear
ningObj
ect
i
ve:10.
03Di
scusst
hebondmar ket
,inpart
icul
art
hestr
uctur
eandissueofdebent
ures
,unsecurednot esand
subordi nateddebt .
Sect
et:debent
ures
,unsecur
eddebt
Topic:Thebondmark
et:debent
ures
,unsecur
eddebt
by_________.
Ans: A
AACSB:Communi cati
on
Bloom's:Knowl edge
Difficul
ty:Easy
Estti
me:<1mi nut
e
Lear
ningObj
ect
i
ve:10.
03Di
scusst
hebondmar ket
,inpart
icul
art
hestr
uctur
eandissueofdebent
ures
,unsecurednot esand
subordi nateddebt .
Sect
et:debent
ures
,unsecur
eddebt
Topic:Thebondmark
et:debent
ures
,unsecur
eddebt
A. Treasury bonds
Ans: A
Bloom' s :Knowl edge
Difficulty:Medi um
Esttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
03Di
scusst
hebondmar ket
,inpart
icul
art
hestr
uctur
eandissueofdebent
ures
,unsecur ednot esand
subor dinateddebt .
Sect
et:debent
ures
,unsecur
ednotesandsubor di
nateddebt
Topic:Thebondmark
et:debent
ures
,unsecur
ednotesandsubor dinateddebt

B. bonds.
C. shares.
D. preferred stock.
Ans: B

lOMoARcPSD|10180112
36
AACSB:Communi cati
on
Bloom's:Knowl edge
Difficul
ty:Easy
Estti
me:<1mi nut
e
Lear
ningObj
ect
i
ve:10.
03Di
scusst
hebondmar ket
,inpart
icul
art
hestr
uctur
eandissueofdebent
ures
,unsecurednot esand
subordi nateddebt .
Sect
et:debent
ures
,unsecur
eddebt
Topic:Thebondmark
et:debent
ures
,unsecur
eddebt
49. Bonds are:

Ans: D
AACSB:Communi cati
on
Bloom's:Knowl edge
Difficul
ty:Easy
Estti
me:<1mi nut
e
Lear
ningObj
ect
i
ve:10.
03Di
scusst
hebondmar ket
,inpart
icul
art
hestr
uctur
eandissueofdebent
ures
,unsecurednot esand
subordi nateddebt .
Sect
et:debent
ures
,unsecur
eddebt
Topic:Thebondmark
et:debent
ures
,unsecur
eddebt

Ans: B
Bloom' s :Knowl edge
Difficulty:Medi um
Esttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
03Di
scusst
hebondmar ket
,inpart
icul
art
hestr
uctur
eandissueofdebent
ures
subor dinateddebt .
Sect
et:debent
ures
,unsecur
ednotesandsubor di
nateddebt
Topic:Thebondmark
et:debent
ures
,unsecur

Ans: D

lOMoARcPSD|10180112
37
AACSB:Communi cat
ion
Difficulty:Medium
Es ttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
03Di
scusst
hebondmar ket
,inpart
icul
art
hestr
uctur
eandissueofdebent
ures,unsecur ednot esand
subor dinateddebt.
Sect
et:debent
ures
,unsecur
ednotesandsubor di
nateddebt
Topic:Thebondmark
et:debent
ures
,unsecur
A. debenture.
B. income bond.
C. mortgage bond.
Ans: C
AACSB:Communi cat
ion
Difficul
ty:Easy
Es tt
ime:<1mi nute
Lear
ningObj
ect
i
ve:10.
03Di
scusst
hebondmar ket
,inpart
icul
art
hestr
uctur
eandissueofdebent
subordinateddebt.
Sect
et:debent
ures
,unsecur
eddebt
Topic:Thebondmark
et:debent
ures
,unsecur
eddebt
A. term loans.
B. debentures.
D. bonds.
Ans: C
AACSB:Communi cati
on
Bloom's:Knowl edge
Difficul
ty:Easy
Estti
me:<1mi nut
e
Lear
ningObj
ect
i
ve:10.
03Di
scusst
hebondmar ket
,inpart
icul
art
hestr
uctur
eandissueofdebent
ures
,unsecurednot esand
subordi nateddebt .
Sect
et:debent
ures
,unsecur
eddebt
Topic:Thebondmark
et:debent
ures
,unsecur
eddebt
A. public issue.
B. family issue.
Ans: C

lOMoARcPSD|10180112
38
AACSB:Communi cati
on
Bloom's:Knowl edge
Difficul
ty:Easy
Estti
me:<1mi nut
e
Lear
ningObj
ect
i
ve:10.
03Di
scusst
hebondmar ket
,inpart
icul
art
hestr
uctur
eandissueofdebent
ures
,unsecurednot esand
subordi nateddebt .
Sect
et:debent
ures
,unsecur
eddebt
Topic:Thebondmark
et:debent
ures
,unsecur
eddebt

Ans: C
AACSB:Communi cati
on
Bloom's:Knowl edge
Difficul
ty:Easy
Estti
me:<1mi nut
e
Lear
ningObj
ect
i
ve:10.
03Di
scusst
hebondmar ket
,inpart
icul
art
hestr
uctur
eandissueofdebent
ures
,unsecurednot esand
subordi nateddebt .
Sect
et:debent
ures
,unsecur
eddebt
Topic:Thebondmark
et:debent
ures
,unsecur
eddebt
B. Unsecured notes
D. Debenture
Ans: D
AACSB:Communi cat
ion
Difficulty:Medium
Es ttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
03Di
scusst
hebondmar ket
,inpart
icul
art
hestr
uctur
eandissueofdebent
subor dinateddebt.
Sect
et:debent
ures
,unsecur
ednotesandsubor di
nateddebt
Topic:Thebondmark
et:debent
ures
,unsecur
A. transform into
B. crystallise into
C. originate as
D. adjust to
Ans: B

lOMoARcPSD|10180112
39
AACSB:Communi cat
ion
Difficul
ty:Easy
Es tt
ime:<1mi nute
Lear
ningObj
ect
i
ve:10.
03Di
scusst
hebondmar ket
,inpart
icul
art
hestr
uctur
eandissueofdebent
subordinateddebt.
Sect
et:debent
ures
,unsecur
eddebt
Topic:Thebondmark
et:debent
ures
,unsecur
eddebt
Ans: B
AACSB:Communi cat
ion
Difficul
ty:Easy
Es tt
ime:<1mi nute
Lear
ningObj
ect
i
ve:10.
03Di
scusst
hebondmar ket
,inpart
icul
art
hestr
uctur
eandissueofdebent
subordinateddebt.
Sect
et:debent
ures
,unsecur
eddebt
Topic:Thebondmark
et:debent
ures
,unsecur
eddebt
A. a debenture
Ans: D
AACSB:Communi cati
on
Bloom's:Knowl edge
Difficul
ty:Easy
Estti
me:<1mi nut
e
Lear
ningObj
ect
i
ve:10.
03Di
scusst
hebondmar ket
,inpart
icul
art
hestr
uctur
eandissueofdebent
ures
,unsecurednot esand
subordi nateddebt .
Sect
et:debent
ures
,unsecur
eddebt
Topic:Thebondmark
et:debent
ures
,unsecur
eddebt
called a:
B. put option.
D. warrant.
Ans: A

lOMoARcPSD|10180112
40
AACSB:Communi cati
on
Bloom's:Knowl edge
Difficul
ty:Easy
Estti
me:<1mi nut
e
Lear
ningObj
ect
i
ve:10.
03Di
scusst
hebondmar ket
,inpart
icul
art
hestr
uctur
eandissueofdebent
ures
,unsecurednot esand
subordi nateddebt .
Sect
et:debent
ures
,unsecur
eddebt
Topic:Thebondmark
et:debent
ures
,unsecur
eddebt
A. Mortgage bonds
B. Unsecured notes
Ans: C
AACSB:Communi cat
ion
Difficulty:Medium
Es ttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
03Di
scusst
hebondmar ket
,inpart
icul
art
hestr
uctur
eandissueofdebent
subor dinateddebt.
Sect
et:debent
ures
,unsecur
ednotesandsubor di
nateddebt
Topic:Thebondmark
et:debent
ures
,unsecur
follows that:
Ans: A
AACSB:Anal ysi
s
Bloom' s:Analysi
s
Difficul
ty:Hard
Estti
me:<1mi nute
Lear
ningObj
ect
i
ve:10.
04Cal culat
ethepri
ceofafixed- i
nt erestbond.
Secti
on:10.04Calcul
ati
ons:fix
ed-i
nterestsecur i
ti
es
Topic
:Calcul
ati
ons:fix
ed-i
nteres tsecuri
t
ies

Ans: C

lOMoARcPSD|10180112
41
AACSB:Communi cati
on
Bloom's :Knowl edge
Di fficul
ty:Eas y
Esttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
04Cal culat
ethepri
ceofafix ed-int erestbond.
Secti
on:10.04Calcul
ati
ons:fix
ed- i
nterestsecur it
ies
Topic
:Calcul
ati
ons:fix
ed- i
nteres tsecurit
ies
at _______.
Ans: C
AACSB:Communi cat
ion
Bloom' s
:Compr ehension
Difficulty
:Medi um
Esttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
04Cal culat
ethepri
ceofafix ed- inter
es tbond.
Secti
on:10.04Calcul
ati
ons:fix
ed-inter estsecur i
ti
es
Topic
:Calcul
ati
ons:fix
ed-inter estsecur i
t
ies
A. increases to 8%.
B. increases to 9%.
C. remains at 7%.
Ans: C
AACSB:Anal ysi
s
Bloom' s:Analysi
s
Difficul
ty:Easy
Estti
me:<1mi nute
Lear
ningObj
ect
i
ve:10.
04Cal culat
ethepri
ceofafixed- i
nt erestbond.
Secti
on:10.04Calcul
ati
ons:fix
ed-i
nterestsecur i
ti
es
Topic
:Calcul
ati
ons:fix
ed-i
nteres tsecuri
t
ies
Ans: C

lOMoARcPSD|10180112
42
AACSB:Communi cati
on
Bloom's :Knowl edge
Di fficul
ty:Eas y
Esttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
04Cal culat
ethepri
Secti
on:10.04Calcul
ati
ons:fix
ed- i
nterestsecur it
ies
Topic
:Calcul
ati
ons:fix
ed- i
nteres tsecurit
ies
interest rates.
A. constant
B. linear
C. varying
D. inverse
Ans: D
AACSB:Communi cati
on
Bloom's :Knowl edge
Di fficul
ty:Eas y
Esttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
04Cal culat
ethepri
Secti
on:10.04Calcul
ati
ons:fix
ed- i
nterestsecur it
ies
Topic
:Calcul
ati
ons:fix
ed- i
nteres tsecurit
ies
A. discount.
C. premium.
D. face value.
Ans: C
AACSB:Communi cat
ion
Bloom' s
:Compr ehension
Difficulty
:Medi um
Esttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
04Cal culat
ethepri
ceofafix ed- inter
es tbond.
Secti
on:10.04Calcul
ati
ons:fix
ed-inter estsecur i
ti
es
Topic
:Calcul
ati
ons:fix
ed-inter estsecur i
t
ies
A. discount.
C. premium.
D. face value.
Ans: A
AACSB:Communi cat
ion
Bloom' s
:Compr ehension
Difficulty
:Medi um
Esttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
04Cal culat
ethepri
ceofafix ed- inter
es tbond.
Secti
on:10.04Calcul
ati
ons:fix
ed-inter estsecur i
ti
es
Topic
:Calcul
ati
ons:fix
ed-inter estsecur i
t
ies

lOMoARcPSD|10180112
43
at:
A. discount.
C. premium.
D. book value.
Ans: B
AACSB:Communi cat
ion
Bloom' s
:Compr ehension
Difficul
ty:Easy
Estti
me:<1mi nute
Lear
ningObj
ect
i
ve:10.
04Cal culat
ethepri
ceofafix ed-i
nt erestbond.
Secti
on:10.04Calcul
ati
ons:fix
ed-int
erestsecur i
ti
es
Topic
:Calcul
ati
ons:fix
ed-int
eres tsecuri
t
ies
changes by 5%:
Ans: B
AACSB:Reflect ivethinki
ng
Bl
oom' s:Sy nthesis
Di fficul
ty:Har d
Es
ttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
04Cal culat
ethepri
ceofafixed-int erestbond.
Secti
on:10.04Calcul
ati
ons:fix
ed-i
nterestsecur it
ies
Topic
:Calcul
ati
ons:fix
ed-i
nteres tsecurit
ies
10%:
Ans: A
ng
Bl
oom' s:Sy nthesis
Di fficul
ty:Har d
Es
ttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
04Cal culat
ethepri
ceofafixed-int erestbond.
Secti
on:10.04Calcul
ati
ons:fix
ed-i
nterestsecur it
ies
Topic
:Calcul
ati
ons:fix
ed-i
nteres tsecurit
ies

lOMoARcPSD|10180112
44

Ans: B
AACSB:Communi cat
ion
Bloom' s
:Compr ehension
Difficulty
:Medi um
Esttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
04Cal culat
ethepri
ceofafix ed- inter
es tbond.
Secti
on:10.04Calcul
ati
ons:fix
ed-inter estsecur i
ti
es
Topic
:Calcul
ati
ons:fix
ed-inter estsecur i
t
ies
A. $920.15
B. $1000
C. $1084.25
Ans: C
AACSB:Anal ysis
Bloom' s:Anal
ysis
Difficulty
:Medium
Esttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
04Cal culat
ethepri
ceofafix ed- inter
estbond.
Secti
on:10.04Calcul
ati
ons:fix
ed-i
nt er estsecur
it
ies
Topic
:Calcul
ati
ons:fix
ed-i
nt er estsecur
it
ies
A. $915.39
B. $1000
C. $1089.72
Ans: A
AACSB:Anal ysis
Bloom' s:Anal
ysis
Difficulty
:Medium
Esttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
04Cal culat
ethepri
ceofafix ed- inter
estbond.
Secti
on:10.04Calcul
ati
ons:fix
ed-i
nt er estsecur
it
ies
Topic
:Calcul
ati
ons:fix
ed-i
nt er estsecur
it
ies
A. coupon rate.
B. face value.
C. price.

lOMoARcPSD|10180112
45
Ans: C
AACSB:Communi cati
on
Bloom's :Knowl edge
Di fficul
ty:Eas y
Esttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
04Cal culat
ethepri
Secti
on:10.04Calcul
ati
ons:fix
ed- i
nterestsecur it
ies
Topic
:Calcul
ati
ons:fix
ed- i
nteres tsecurit
ies
A. $1000
B. $1045.84
C. $1046.44
D. $1079.45
Ans: C
AACSB:Anal ysis
Bloom' s:Anal
ysis
Difficulty
:Medium
Esttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
04Cal culat
ethepri
ceofafix ed- inter
estbond.
Secti
on:10.04Calcul
ati
ons:fix
ed-i
nt er estsecur
it
ies
Topic
:Calcul
ati
ons:fix
ed-i
nt er estsecur
it
ies
Ans: B
AACSB:Communi cat
ion
Bloom' s
:Compr ehension
Difficulty
:Medi um
Esttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
04Cal culat
ethepri
ceofafix ed- inter
es tbond.
Secti
on:10.04Calcul
ati
ons:fix
ed-inter estsecur i
ti
es
Topic
:Calcul
ati
ons:fix
ed-inter estsecur i
t
ies
Ans: C

lOMoARcPSD|10180112
46
Bloom' s :Knowledge
Difficulty
:Medi um
Esttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
04Cal culat
ethepri
ceofafix ed- inter
estbond.
Secti
on:10.04Calcul
ati
ons:fix
ed- i
nter estsecurit
ies
Topic
:Calcul
ati
ons:fix
ed- i
nter estsecurit
ies

Ans: A
AACSB:Communi cat
ion
Bloom' s
:Compr ehension
Difficulty
:Medi um
Esttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
04Cal culat
ethepri
ceofafix ed- inter
es tbond.
Secti
on:10.04Calcul
ati
ons:fix
ed-inter estsecur i
ti
es
Topic
:Calcul
ati
ons:fix
ed-inter estsecur i
t
ies

Ans: C
AACSB:Communi cat
ion
Bloom' s
:Compr ehension
Difficulty
:Medi um
Esttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
04Cal culat
ethepri
ceofafix ed- inter
es tbond.
Secti
on:10.04Calcul
ati
ons:fix
ed-inter estsecur i
ti
es
Topic
:Calcul
ati
ons:fix
ed-inter estsecur i
t
ies
Ans: A

lOMoARcPSD|10180112
47
AACSB:Reflect i
vethi
nking
Bloom' s:Synthesis
Difficulty
:Medi um
Esttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
04Cal culat
ethepri
ceofafix ed- inter
estbond.
Secti
on:10.04Calcul
ati
ons:fix
ed-i
nt er estsecurit
ies
Topic
:Calcul
ati
ons:fix
ed-i
nt er estsecurit
ies
A. $320 149.12
B. $401 613.48
C. $410 644.78
D. $688 638.80
Ans: C
AACSB:Anal ysis
Bloom' s:Anal
ysis
Difficulty
:Medium
Esttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
04Cal culat
ethepri
ceofafix ed- inter
estbond.
Secti
on:10.04Calcul
ati
ons:fix
ed-i
nt er estsecur
it
ies
Topic
:Calcul
ati
ons:fix
ed-i
nt er estsecur
it
ies
Ans: A
AACSB:Communi cat
ion
Difficul
ty:Medium
Esttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
05Expl
ainl
easefinanci
ng,i
ncl
udi
ngt
ypesofl
easear
rangementsandleases tr
uctur
es.
Secti
on:10. 05Leasi ng
Topic:Leasing
A. financial
B. operating lease
C. direct
D. leveraged
Ans: B

lOMoARcPSD|10180112
48
AACSB:Communi cat
ion
Difficul
ty:Medium
Esttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
05Expl
ainl
easefinanci
ng,i
ncl
udi
ngt
ypesofl
easear
uctur
es.
Secti
on:10. 05Leasi ng
Topic:Leasing
A. direct lease.
B. financial lease.
C. operating lease.
D. leveraged lease.
Ans: B
AACSB:Communi cat
ion
Difficul
ty:Medium
Esttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
05Expl
ainl
easefinanci
ng,i
ncl
udi
ngt
ypesofl
easear
uctur
es.
Secti
on:10. 05Leasi ng
Topic:Leasing
A. direct lease.
C. operating lease.
D. leveraged lease.
Ans: A
AACSB:Communi cat
ion
Difficul
ty:Medium
Esttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
05Expl
ainl
easefinanci
ng,i
ncl
udi
ngt
ypesofl
easear
uctur
es.
Secti
on:10. 05Leasi ng
Topic:Leasing
A. An equity lease
Ans: B

lOMoARcPSD|10180112
49
AACSB:Communi cat
ion
Difficul
ty:Medium
Esttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
05Expl
ainl
easefinanci
ng,i
ncl
udi
ngt
ypesofl
easear
uctur
es.
Secti
on:10. 05Leasi ng
Topic:Leasing

A. operating lease.
D. leveraged lease.
Ans: B
AACSB:Communi cat
ion
Difficul
ty:Medium
Esttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
05Expl
ainl
easefinanci
ng,i
ncl
udi
ngt
ypesofl
easear
uctur
es.
Secti
on:10. 05Leasi ng
Topic:Leasing
A. 100% financing
Ans: D
ng
Bloom' s:Sy nthesis
Difficul
ty:Har d
Estti
me:<1mi nute
Lear
ningObj
ect
i
ve:10.
05Expl
ainl
easefinanci
ng,i
ncl
udi
ngt
ypesofl
easear
rangement
sandl eases tr
uct ur
es.
Secti
on:10. 05Leasi ng
Topi c:Leasing
Ans: D
AACSB:Communi cat
ion
Difficul
ty:Medium
Esttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
05Expl
ainl
easefinanci
ng,i
ncl
udi
ngt
ypesofl
easear
uctur
es.
Secti
on:10. 05Leasi ng
Topic:Leasing

lOMoARcPSD|10180112
50
remainder?
A. A capital lease
B. An equity lease
Ans: B
AACSB:Communi cat
ion
Difficul
ty:Medium
Esttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
05Expl
ainl
easefinanci
ng,i
ncl
udi
ngt
ypesofl
easear
uctur
es.
Secti
on:10. 05Leasi ng
Topic:Leasing
A. $20 000.
B. $40 000.
C. $30 000.
D. $60 000.
Ans: A
AACSB:Anal ysis
Bloom' s:Anal
ysis
Difficulty
:Medium
Esttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
04Cal culat
ethepri
ceofafix ed- inter
estbond.
Secti
on:10.04Calcul
ati
ons:fix
ed-i
nt er estsecur
it
ies
Topic
:Calcul
ati
ons:fix
ed-i
nt er estsecur
it
ies
A. $426 399
B. $437 902
C. $500 000
D. $458 090
Ans: C
AACSB:Anal ysis
Bloom' s:Anal
ysis
Difficulty
:Medium
Esttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
04Cal culat
ethepri
ceofafix ed- inter
estbond.
Secti
on:10.04Calcul
ati
ons:fix
ed-i
nt er estsecur
it
ies
Topic
:Calcul
ati
ons:fix
ed-i
nt er estsecur
it
ies

lOMoARcPSD|10180112
51
A. $426 399
B. $437 902
C. $452 811
D. $458 090
Ans: C
AACSB:Anal ysis
Bloom' s:Anal
ysis
Difficulty
:Medium
Esttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
04Cal culat
ethepri
ceofafix ed- inter
estbond.
Secti
on:10.04Calcul
ati
ons:fix
ed-i
nt er estsecur
it
ies
Topic
:Calcul
ati
ons:fix
ed-i
nt er estsecur
it
ies
A. $1 808 011
B. $2 205 851
C. $2 208 671
D. $2 224 881
Ans: C
AACSB:Anal ysis
Bloom' s:Anal
ysis
Difficulty
:Medium
Difficulty
:Medium
Esttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
04Cal culat
ethepri
ceofafix ed- inter
estbond.
Secti
on:10.04Calcul
ati
ons:fix
ed-i
nt er estsecur
it
ies
Topic
:Calcul
ati
ons:fix
ed-i
nt er estsecur
it
ies
B. Unsecured note
C. Junk bond
D. Debenture
Ans: D
AACSB:Communi cati
on
Bloom's:Knowl edge
Difficul
ty:Easy
Estti
me:<1mi nut
e
Lear
ningObj
ect
i
ve:10.
03Di
scusst
hebondmar ket
,inpart
icul
art
hestr
uctur
eandissueofdebent
ures
,unsecurednot esand
subordi nateddebt .
Sect
et:debent
ures
,unsecur
eddebt
Topic:Thebondmark
et:debent
ures
,unsecur
eddebt

lOMoARcPSD|10180112
52
A. $13 875
B. $20 663
C. $35 493
D. $165 001
Ans: B
AACSB:Anal ysi
s
Bloom' s:Analysi
s
Difficul
ty:Hard
Estti
me:<1mi nute
Lear
ningObj
ect
i
ve:10.
04Cal culat
ethepri
ceofafixed- i
nt erestbond.
Secti
on:10.04Calcul
ati
ons:fix
ed-i
nterestsecur i
ti
es
Topic
:Calcul
ati
ons:fix
ed-i
nteres tsecuri
t
ies
Ans: A
AACSB:Communi cati
on
Bl
oom's:Knowl edge
Difficul
ty:Easy
Lear
ningObj
ect
i
ve:10.
03Di
scusst
hebondmar ket
,inpart
icul
art
hestr
uctur
eandissueofdebent
ures
,unsecur
ednot esand
subor
di nateddebt .
Sect
et:debent
ures
,unsecur
ednotesandsubordi nat
eddebt
Topic:Thebondmark
et:debent
ures
,unsecur
eddebt
Ans: D
Bloom' s:Knowl edge
Difficul
ty:Medi um
Lear
ningObj
ect
i
ve:10.
01Expl
aint
erml
oansandf
ull
ydr
awnadv
ances
,incl
udi
ngthei
rst
ruct
ur e,l
oancovenant
sandt hecalculati
on
ofal oani nst
alment .
Sect
i
ull
ydr awnadv ances
Topic:Termloansorf
ull
ydr awnadv ances


lOMoARcPSD|10180112
53

Ans: D
Bl
oom' s:Knowl edge
Di
fficul
ty:Medi um
Di
fficul
ty:Medi um
Lear
ningObj
ect
i
ve:10.
05Expl
ainl
easefinanci
ng,i
ncl
udi
ngt
ypesofl
easear
rangement
sandleases tr
uctures.
Sect
i
on:10. 05Leasi ng
Topic:Leasi ng
Ans: A
Bl
oom' s:Knowl edge
Difficul
ty
:Har d
Lear
ningObj
ect
i
ve:10.
06Under
standt
hedet
ail
edpr
ocessoffinancialassetsecur i
ti
sation.
Section:10. 05Leasi ng
Topic:ExtendedLear ning
Ans: True
Feedback: The full amount of the loan is provided to the borrower at the start of the loan.
AACSB:Communi cati
on
Bloom's:Knowl edge
Difficul
ty
:Eas y
Estti
me:<1mi nut
e
Lear
ningObj
ect
i
ve:10.
01Expl
aint
erml
oansandf
ull
ydr
awnadv
ances
,incl
udi
ngthei
rst
ruct
ur e,l
oancovenant
sandthecal culati
on
ofaloani nst
alment .
Sect
i
ull
ydrawnadv ances
Topic:Termloansorf
ull
ydrawnadv ances
Ans: True
Feedback: This is a term loan that involves regular equal payments that include an interest
payment part and a principal reduction part.
AACSB:Communi cati
on
Bloom's:Knowl edge
Difficul
ty
:Eas y
Estti
me:<1mi nut
e
Lear
ningObj
ect
i
ve:10.
01Expl
aint
erml
oansandf
ull
ydr
awnadv
ances
,incl
udi
ngthei
rst
ruct
ur e,l
oancovenant
sandthecal culati
on
ofaloani nst
alment .
Sect
i
ull
ydrawnadv ances
Topic:Termloansorf
ull
ydrawnadv ances

lOMoARcPSD|10180112
54
Ans: True
Feedback: Generally a borrower will have to pay higher interest for a longer term loan than a
short-term loan owing to the lenders wanting compensation for liquidity and interest rate risk.
AACSB:Communi cati
on
Bloom's:Knowl edge
Difficul
ty
:Eas y
Estti
me:<1mi nut
e
Lear
ningObj
ect
i
ve:10.
01Expl
aint
erml
oansandf
ull
ydr
awnadv
ances
,incl
udi
ngthei
rst
ruct
ur e,l
oancovenant
sandthecal culati
on
ofaloani nst
alment .
Sect
i
ull
ydrawnadv ances
Topic:Termloansorf
ull
ydrawnadv ances
Ans: False
Feedback: The prime rate of a bank reflects its borrowing costs but in practice a prime rate tends
to be less volatile than market interest rates.
AACSB:Communi cat
ion
Difficul
ty:Medium
Esttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
01Expl
aint
erml
oansandf
ull
ydr
awnadv
ances
,incl
udi
ngthei
rst
ruct
ur e,l
ion
ofal oani nst
alment.
Sect
i
lydr awnadv ances
lydr awnadv ances
Ans: True
Feedback: A term loan is designed to provide a specific amount of funds for a stated business
purpose over a certain period of time. Term loan contracts may incorporate different forms of
interest rates and loan repayment structures.
AACSB:Communi cat
ion
Bl
oom' s:Eval
uation
Difficult
y:Medium
Esttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
01Expl
aint
erml
oansandf
ull
ydr
awnadv
ances
,incl
udi
ngthei
rst
ruct
ur e,l
oancovenant
sandt hecalculat
ion
ofal oani nst
alment.
Sect
i
ull
ydr awnadv ances
Topic:Termloansorf
ull
ydr awnadv ances
Ans: False
Feedback: The credit rating represents the creditworthiness of the borrowers. There is a negative
relationship between credit rating and yields on bonds. A corporate bond issue with a rating of
AA+ is considered safer than a corporate bond with a BB rating. Therefore, the yields for a

lOMoARcPSD|10180112
55
corporate bond with BB rating would be higher than the yield for a corporate bond with an AA+
rating.
AACSB:Communi cat
ion
Bloom's :Evaluat
ion
Difficul
ty:Hard
Es tt
ime:<1mi nute
Lear
ningObj
ect
i
ve:10.
03Di
scusst
hebondmar ket
,inpart
icul
art
hestr
uctur
eandissueofdebent
ures
,unsecurednot esand
subordinateddebt.
Sect
et:debent
ures
,unsecur
eddebt
Topic:Thebondmark
et:debent
ures
,unsecur
eddebt
Ans: False
Feedback: Apart from an establishment fee, a bank will charge a service fee for ongoing loan
account administration costs, not for considering the loan application—that is the establishment
fee.
AACSB:Communi cat
ion
Difficul
ty:Medium
Esttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
01Expl
aint
erml
oansandf
ull
ydr
awnadv
ances
,incl
udi
ngthei
rst
ruct
ur e,l
ion
ofal oani nst
alment.
Sect
i
lydr awnadv ances
lydr awnadv ances
working capital.
Ans: True
Feedback: Loan covenants are rules in the actual loan contract about how much borrowing a
borrower may do and a positive covenant specifies acts to be taken by the borrower.
AACSB:Communi cati
on
Di fficult
y:Medium
Estt ime:<1mi nute
Lear
ningObj
ect
i
ve:10.
02Descr
ibet
henat
ure,pur
poseandoper
ati
onofmor
tgagefinanceandt
ate
ani
nst
Sect
i
on:10. 02Mor tgagefinance
Topic
:Mor tgagefinance
too much debt.
Ans: False
Feedback: Covenants in loan contracts are designed to protect the lender's financial risk exposure
by imposing rules on the borrower.

lOMoARcPSD|10180112
56
AACSB:Communi cati
on
Di fficult
y:Medium
Estt ime:<1mi nute
Lear
ningObj
ect
i
ve:10.
02Descr
ibet
henat
ure,pur
poseandoper
ati
onofmor
tgagefinanceandt
ate
ani
nst
Sect
i
Topic
:Mor tgagefinance
Ans: False
Feedback: The mortgagor is the borrower who issues a mortgage contract to the lender of funds
with the land and property as collateral.
Bloom' s:Knowl edge
Di fficult
y:Medi um
Estt ime:<1mi nute
Lear
ningObj
ect
i
ve:10.
02Descr
ibet
henat
ure,pur
poseandoper
ati
onofmor
tgagefinanceandt
ani
nst
Sect
i
Topic
:Mor tgagefinance
Ans: True
Feedback: It is the long-term financial instrument when a borrower issues a financial security
directly into the debt markets. A bond promises to pay its holder regular coupon payments and
principal is repaid at maturity.
AACSB:Communi cati
on
Bloom's:Knowl edge
Difficul
ty:Easy
Estti
me:<1mi nut
e
Lear
ningObj
ect
i
ve:10.
03Di
scusst
hebondmar ket
,inpart
icul
art
hestr
uctur
eandissueofdebent
ures
,unsecurednot esand
subordi nateddebt .
Sect
et:debent
ures
,unsecur
eddebt
Topic:Thebondmark
et:debent
ures
,unsecur
eddebt
Ans: False
Feedback: Subordinated debt refers to different debt issues with different ranking in respect to
payment claims in the case of default by the company. An unsecured note is a corporate bond
with no security or collateral attached.
AACSB:Communi cat
ion
Difficulty:Medium
Es ttime:<1mi nute
Lear
ningObj
ect
i
ve:10.
03Di
scusst
hebondmar ket
,inpart
icul
art
hestr
uctur
eandissueofdebent
subor dinateddebt.
Sect
et:debent
ures
,unsecur
ednotesandsubor di
nateddebt
Topic:Thebondmark
et:debent
ures
,unsecur

lOMoARcPSD|10180112
57

Ans: A term loan is the main type of intermediated finance provided by financial institutions. It is
a loan advanced for a specific period for a variety of purposes such as purchase of real estate,
construction of premises or for buying plant and equipment. It is generally granted for a period
from between three and 15 years and the lender generally requires some form of security to be
attached to the loan that may be structured as an amortised loan or an interest-only loan.
Bloom' s:Knowl edge
Difficul
ty:Medi um
Estti
me:1- 3mi nut es
Lear
ningObj
ect
i
ve:10.
01Expl
aint
erml
oansandf
ull
ydr
awnadv
ances
,incl
udi
ngthei
rst
ruct
ur e,l
oancovenant
sandt hecalculati
on
ofal oani nst
alment .
Sect
i
lydr awnadv ances
lydr awnadv ances

Ans: A loan agreement will generally specify a reference interest rate that will apply for the loan
and any subsequent reset of the loan, such as the BBSW rate, which is an adjusted average of the
bank bill rate in the Australian money market. Published benchmarks are used as benchmarks for
pricing loans. Banks also calculate their own reference benchmark called a prime rate.
AACSB:Communi cat
ion
Bloom' s:Compr ehension
Difficul
ty:Medium
Esttime:1- 3mi nutes
Lear
ningObj
ect
i
ve:10.
01Expl
aint
erml
oansandf
ull
ydr
awnadv
ances
,incl
udi
ngthei
rst
ruct
ur e,l
ion
ofal oani nst
alment.
Sect
i
on:10.01Ter mloansorf ul
lydr awnadv ances
Topic:Termloansorf ul
lydr awnadv ances

Ans: Companies may obtain debt finance by providing security to the lender by way of a
mortgage over land and in some cases leasehold land. Commercial mortgage finance tends to be
provided on shorter terms to maturity than retail mortgage loans. In Australia commercial
property mortgages typically range up to 10 years and are available with a choice of variable
interest rate or fixed interest rate.
Bloom's:Compr ehensi on
Difficult
y:Medi um
Estti
me:1- 3mi nutes
Lear
ningObj
ect
i
ve:10.
02Descr
ibet
henat
ure,pur
poseandoper
ati
onofmor
tgagefinanceandt
ani
nst
Sect
i
Topic
:Mor tgagefinance
Ans: The main debt securities are bonds issued by the Australian government, bonds issued by
state government borrowing authorities known as semis, bonds issued by financial institutions

lOMoARcPSD|10180112
58
such as National Bank of Australia, bonds issue by Australian corporations, asset-backed

securities and Kangaroo bonds, which are Australian dollar bonds issued by non-residents.
AACSB:Reflect i
vet hi
nki
ng
Bloom' s:Sy nt
hesis
Difficulty:Medium
Es
ttime:1- 3mi nutes
Lear
ningObj
ect
i
ve:10.
03Di
scusst
hebondmar ket
,inpart
icul
art
hestr
uctur
eandissueofdebent
ures
subor dinateddebt.
Sect
et:debent
ures
,unsecur
ednotesandsubor di
nateddebt
Topic:Thebondmark
et:debent
ures
,unsecur
Ans: In most countries where a corporate bond market exists, legislation will require any
invitation to the public to deposit money with or lend to a corporation to be accompanied by a
prospectus. A prospectus is a formal written offer to sell securities and will generally contain
specified details about the business such as financial statements, and specialist accounting,
taxation and legal reports. It is intended to protect the investor but does create certain
disadvantages for the borrower such as being time consuming to prepare.
AACSB:Reflect i
vet hi
nki
ng
Bloom' s:Sy nt
hesis
Difficulty:Medium
Es
ttime:1- 3mi nutes
Lear
ningObj
ect
i
ve:10.
03Di
scusst
hebondmar ket
,inpart
icul
art
hestr
uctur
eandissueofdebent
ures
subor dinateddebt.
Sect
et:debent
ures
,unsecur
ednotesandsubor di
nateddebt
Topic:Thebondmark
et:debent
ures
,unsecur
Ans: Mortgages are long-term illiquid assets. A market in mortgages and mortgage securities
allows the originator to sell the mortgages and become liquid. A lender will probably be more
willing to lend if the asset it is creating can then be sold. This has led to lower mortgage rates.
ng
Difficul
ty:Har d
Estt
ime:2- 3minut es
Lear
ningObj
ect
i
ve:10.
02Descr
ibet
henat
ure,pur
poseandoper
ati
onofmor
tgagefinanceandt
hemortgagemar ket
,andcal culate
ani
nst
Sect
i
on:10. 02Mor t
gagefinance
Topic
:Mor t
gagefinance
Ans: Financial institutions and corporations accumulate financial assets and other entitlements,
such as accounts receivable, mortgage-backs housing loans, credit card receivables and utility
rates, which generate future cash flows over time. There are no secondary markets that
specifically trade in individual assets such as these, so the process of securitisation has evolved

lOMoARcPSD|10180112
59
to allow the sale of these types of non-liquid financial assets that have specified future cash flows
associated with them. For example, mortgage loans have future cash flows attached in the form
of periodic interest payments and principal repayment.
ng
Difficul
ty:Har d
Estti
me:2- 3minut es
Lear
ningObj
ect
i
ve:10.
06Under
standt
hedet
ail
edpr
ocessoffinancialassetsecur i
ti
sation.
Secti
on:Extendedl ear ning
Topi
c:Secur iti
sation

lOMoARcPSD|10180112
60
Chapter 10 Testbank Summary

# of
Category Questions
AACSB: Analysis 15
AACSB: Communication 98
AACSB: Reflective thinking 8
Bloom's: Analysis 15
Bloom's: Comprehension 51
Bloom's: Evaluation 2
Bloom's: Knowledge 47
Bloom's: Synthesis 6
Difficulty: Easy 37
Difficulty: Hard 12
Learning Objective: 10.01 Explain term loans and fully drawn advances, 43
including their structure, loan covenants and the calculation of a loan instalment.
Learning Objective: 10.02 Describe the nature, purpose and operation of 14
mortgage finance and the mortgage market, and calculate an instalment on a
mortgage loan.
Learning Objective: 10.03 Discuss the bond market, in particular the structure 25
and issue of debentures, unsecured notes and subordinated debt.
Learning Objective: 10.04 Calculate the price of a fixed-interest bond. 27
Learning Objective: 10.05 Explain lease financing, including types of lease 10
arrangements and lease structures.
Learning Objective: 10.06 Understand the detailed process of financial asset 2
securitisation.
Section: 10.01 Term loans or fully drawn advances 43
Section: 10.02 Mortgage finance 14
Section: 10.03 The bond market: debentures, unsecured notes and subordinated 25
debt
Section: 10.04 Calculations: fixed-interest securities 27
Section: 10.05 Leasing 11
Section: Extended learning 1
Topic: Calculations: fixed-interest securities 27
Topic: Extended Learning 1
Topic: Leasing 10
Topic: Mortgage finance 14
Topic: Securitisation 1
Topic: Term loans or fully drawn advances 43
Topic: The bond market: debentures, unsecured notes and subordinated debt 25

lOMoARcPSD|10180112
Chapter 05 Testbank

a/an:

A. daily financing.
D. working capital.

lOMoARcPSD|10180112


financing:


lOMoARcPSD|10180112
financial risk.

economic forecasts?
ii. Industry norms
A. i, iii, v, vi
B. ii, iii, v, vi
C. ii, iii, iv, v
D. iii, iv, v, vi
A. covenants.
B. limits.
C. arrangements.
D. contracts.


lOMoARcPSD|10180112

D. no other holder.



exchange.
exchange.
exchange.

company.

lOMoARcPSD|10180112
flotation?
B. prospectus
B. prospectus.

A. cheaper.
B. preferred.
D. much cheaper.
exchange.

lOMoARcPSD|10180112

lOMoARcPSD|10180112

D. a major bank.

A. an underwriter.
B. a proxy.
D. a substitute.

A. public float.
C. stock exchange.

lOMoARcPSD|10180112


A. a rights issue.
B. a placement.
D. pro-rata right.


lOMoARcPSD|10180112



cut-off date.


lOMoARcPSD|10180112
10

permitted.
B. a placement.
D. share transfer.

costs.
reinvestment plan.

lOMoARcPSD|10180112
11

C. Stakeholders
D. Creditors
A. participating
B. cumulative
C. non-cumulative
D. secured
A. options
B. rights
C. ordinary shares

lOMoARcPSD|10180112
12
dividend rate.
A. participating
B. cumulative
C. non-cumulative
D. secured

A. Convertible
B. Redeemable
C. Cumulative

liquidation.
issue?
A. i, ii, iii, iv
B. i, ii, iv, v
C. ii, iii, iv, v

A. debentures.
B. bonds.

lOMoARcPSD|10180112
13
C. shares.
D. warrants.


shares.
shares.


note.
A. higher than
B. equal to
C. lower than
D. unrelated to

lOMoARcPSD|10180112
14
A. well below
B. close to
C. well above
D. not related to

lOMoARcPSD|10180112
15

C. If the holder of the option exercises the right to buy the shares offered then the company raises
additional equity funds.

B. A put option
D. A debenture
shares.

lOMoARcPSD|10180112
16
held.

price.
corporate bond.
on the ASX?
$2000.

lOMoARcPSD|10180112
17
company is called:
A. agency theory.




lOMoARcPSD|10180112
18


creditors.
year.
or invest in.
True False
True False
company.
True False
True False
be delisted.
True False

lOMoARcPSD|10180112
19
True False
company shares.
True False
True False

True False
investors.
True False

______________________________________________________________________________
decisions.
______________________________________________________________________________

______________________________________________________________________________

______________________________________________________________________________
______________________________________________________________________________

lOMoARcPSD|10180112
Chapter 04 Testbank - Test bank of Financial Institutions and

Markets - Practice materials

lOMoARcPSD|10180112

lOMoARcPSD|10180112
Chapter 04 Testbank
B. partnership.
D. corporation.

longer be traded.

4. A corporation:
corporation.

C. shareholders.
D. creditors.
of the company.

lOMoARcPSD|10180112
C. shareholders
D. creditors
to-day affairs.
C. shareholders
D. creditors

A. Sole partnership
B. Partnership
D. Corporation
B. partnership.

11. The liability of shareholders in ‘limited liability' companies means:

contribution.
company.
12. Because of their _____ liability, corporate stockholders are more interested in chances of
_____.
A. limited; failure than success

lOMoARcPSD|10180112
B. limited; success than failure

C. unlimited; success than failure
D. unlimited; failure than success



new owners.
as:

lOMoARcPSD|10180112

A. bond options
B. share options
C. company cars
D. debentures


lOMoARcPSD|10180112


B. partnership.
C. private company.
D. public company.
B. shareholders.
C. creditors.
D. debt holders.

have been deducted.
A. bond

lOMoARcPSD|10180112
B. debenture
C. share
D. preference share


larger.



lOMoARcPSD|10180112
take place.
raise capital.
A. increased.
B. decreased.
C. remained stable.
A. rights issues.
B. placements.
D. new floats.
funds is known as:
A. share buybacks.
C. share issues.
D. rights issues.
A. Ordinary shares
B. Treasury bonds
C. Debentures
D. Commercial paper

B. an underwriter.

lOMoARcPSD|10180112
A. interest rate
B. information
C. primary
D. secondary

A. share placement.
D. rights issue.

lOMoARcPSD|10180112
10
called a:
A. new float.
C. secondary float.
A. share release.
C. share float.
is to:

issue is called a:
A. share directory.
B. memorandum.
C. share plan.
D. prospectus.


lOMoARcPSD|10180112
11



called:
A. market depth.
B. market flow.
C. market transfer.

point in time.
movements.
exchange.

lOMoARcPSD|10180112
12

A. call option.
B. put option.
called:
A. augmentation.
B. diversification.
C. expansion.
D. optimisation.


A. decrease.
B. increase.

lOMoARcPSD|10180112
13
D. pay a dividend.
investor:

C. option funds.
D. warrant funds.


lOMoARcPSD|10180112
14

A. Bank bills
D. Commercial paper

A. corporate bonds.
A. adjustable note.
B. A clearing house

is called a:
A. corporate bond.
D. debenture.

lOMoARcPSD|10180112
15
platforms.
A. Herstatt risk.
B. default risk.
C. settlement risk.
D. market risk.
A. basis risk.
B. clearing risk.
C. settlement risk.
2001 (Cwlth) is to:
market.

lOMoARcPSD|10180112
16

A. RBA and ASX.
B. ASIC and ASX.
C. APRA and ASX.
D. EFIC and ASIC.

reports to the ASX.
A. APRA
C. ASIC
A. bank funding.
D. equity funding.

lOMoARcPSD|10180112
17

B. a rights issue.

B. five; CHESS
D. three; CHESS
A. Rights
B. Convertible bond
D. Corporate bond


A. tax preference.
B. liquidity.


lOMoARcPSD|10180112
18
annual dividends.
True False
True False
True False
True False
True False
funds.
True False
be delisted.
True False
the shareholders.
True False
True False

lOMoARcPSD|10180112
19
True False
True False
True False
______________________________________________________________________________
such as the ASX.
______________________________________________________________________________
______________________________________________________________________________

______________________________________________________________________________
______________________________________________________________________________
the company.
______________________________________________________________________________
estate? Explain.
______________________________________________________________________________

lOMoARcPSD|10180112
20
______________________________________________________________________________

lOMoARcPSD|10180112
21
interested in chances of _____.

lOMoARcPSD|10180112
22

lOMoARcPSD|10180112
23

lOMoARcPSD|10180112
24

lOMoARcPSD|10180112
25
B. partnership.
D. corporation.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
listed corporation.

longer be traded.
Ans: A
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
listed corporation.

Ans: D

lOMoARcPSD|10180112
26
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
listed corporation.
4. A corporation:
corporation.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
listed corporation.

C. shareholders.
D. creditors.
Ans: C
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
listed corporation.
of the company.
C. shareholders
D. creditors
Ans: B

lOMoARcPSD|10180112
27
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
listed corporation.
to-day affairs.
C. shareholders
D. creditors
Ans: A
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
listed corporation.

A. Sole partnership
B. Partnership
D. Corporation
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
listed corporation.
B. partnership.
Ans: D

lOMoARcPSD|10180112
28
Difficulty: Medium
Est time: <1 minute
listed corporation.

Ans: B
Difficulty: Medium
Est time: <1 minute
listed corporation.

contribution.
company.
Ans: B
Difficulty: Medium
Est time: <1 minute
listed corporation.
12. Because of their _____ liability, corporate stockholders are moreD. unlimited; failure than
success
Ans: B

lOMoARcPSD|10180112
29
Difficulty: Medium
Est time: <1 minute
listed corporation.

Ans: D
Difficulty: Medium
Est time: <1 minute
listed corporation.
Ans: D
Difficulty: Easy
Est time: <1 minute
listed corporation.

lOMoARcPSD|10180112
30
Ans: C
Difficulty: Medium
Est time: <1 minute
listed corporation.

Ans: D
Difficulty: Easy
Est time: <1 minute
listed corporation.

new owners.
Ans: B
Difficulty: Easy
Est time: <1 minute
listed corporation.
as:

lOMoARcPSD|10180112
31
Ans: A
Difficulty: Easy
Est time: <1 minute
listed corporation.
Ans: B
Difficulty: Easy
Est time: <1 minute
listed corporation.

Ans: D
Difficulty: Easy
Est time: <1 minute
listed corporation.
A. bond options
B. share options
C. company cars
D. debentures
Ans: B

lOMoARcPSD|10180112
32
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
listed corporation.

Ans: A
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
listed corporation.
Ans: B
AACSB: Ethical
Difficulty: Easy
Est time: <1 minute
listed corporation.
Ans: D

lOMoARcPSD|10180112
33
AACSB: Ethical
Difficulty: Medium
Est time: <1 minute
listed corporation.
Ans: D
AACSB: Ethical
Difficulty: Medium
Est time: <1 minute
listed corporation.

Ans: D
AACSB: Ethical
Difficulty: Medium
Est time: <1 minute
listed corporation.

B. partnership.
C. private company.
D. public company.
Ans: A

lOMoARcPSD|10180112
34
AACSB: Ethical
Difficulty: Medium
Est time: <1 minute
listed corporation.
B. shareholders.
C. creditors.
D. debt holders.
Ans: B
Difficulty: Medium
Est time: <1 minute
listed corporation.

Ans: C
Difficulty: Medium
Est time: <1 minute
listed corporation.
Ans: C

lOMoARcPSD|10180112
35
Difficulty: Medium
Est time: <1 minute
listed corporation.
have been deducted.
A. bond
B. debenture
C. share
D. preference share
Ans: C
Difficulty: Easy
Est time: <1 minute
listed corporation.

Ans: D
Difficulty: Easy
Est time: <1 minute
listed corporation.

larger.

lOMoARcPSD|10180112
36

Ans: A
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
listed corporation.
Ans: D
Difficulty: Easy
Est time: <1 minute

Ans: D
Difficulty: Medium
Est time: <1 minute

lOMoARcPSD|10180112
37

take place.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
raise capital.
Ans: A
Difficulty: Medium
Est time: <1 minute
A. increased.
B. decreased.
C. remained stable.
Ans: A
Difficulty: Easy
Est time: <1 minute
A. rights issues.
B. placements.

lOMoARcPSD|10180112
38
D. new floats.
Ans: D
Difficulty: Medium
Est time: <1 minute
funds is known as:
A. share buybacks.
C. share issues.
D. rights issues.
Ans: B
Difficulty: Easy
Est time: <1 minute
A. Ordinary shares
B. Treasury bonds
C. Debentures
D. Commercial paper
Ans: D
Difficulty: Medium
Est time: <1 minute

B. an underwriter.
Ans: A

lOMoARcPSD|10180112
39
Difficulty: Medium
Est time: <1 minute
Ans: C
Difficulty: Medium
Est time: <1 minute
Ans: C
Difficulty: Medium
Est time: <1 minute
A. interest rate
B. information
C. primary
D. secondary
Ans: C

lOMoARcPSD|10180112
40
Difficulty: Medium
Est time: <1 minute

Ans: B
Difficulty: Medium
Est time: <1 minute
Ans: C
Difficulty: Easy
Est time: <1 minute
A. share placement.
D. rights issue.
Ans: D

lOMoARcPSD|10180112
41
Difficulty: Easy
Est time: <1 minute
called a:
A. new float.
C. secondary float.
Ans: D
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
A. share release.
C. share float.
Ans: B
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
Ans: C

lOMoARcPSD|10180112
42
Difficulty: Medium
Est time: <1 minute
is to:
Ans: D
Difficulty: Medium
Est time: <1 minute

Ans: D
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
issue is called a:
A. share directory.
B. memorandum.
C. share plan.
D. prospectus.
Ans: D

lOMoARcPSD|10180112
43
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

Ans: D
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
sold.

Ans: D
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
sold.

Ans: D

lOMoARcPSD|10180112
44
Difficulty: Medium
Est time: <1 minute
sold.
called:
A. market depth.
B. market flow.
C. market transfer.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
sold.

point in time.
Ans: D
Difficulty: Medium
Est time: <1 minute
movements.

lOMoARcPSD|10180112
45
exchange.
Ans: D
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute

Ans: A
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
A. call option.
B. put option.
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
called:
A. augmentation.

lOMoARcPSD|10180112
46
B. diversification.
C. expansion.
D. optimisation.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

Ans: C
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute

lOMoARcPSD|10180112
47

Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
A. decrease.
B. increase.
D. pay a dividend.
Ans: B
Difficulty: Medium
Est time: <1 minute
investor:
Ans: C
Difficulty: Easy
Est time: <1 minute


lOMoARcPSD|10180112
48

Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
C. option funds.
D. warrant funds.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

lOMoARcPSD|10180112
49

Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Ans: D
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
A. Bank bills
D. Commercial paper
Ans: C
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

A. corporate bonds.
Ans: D

lOMoARcPSD|10180112
50
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
A. adjustable note.
Ans: C
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
B. A clearing house
Ans: B
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute

Ans: D

lOMoARcPSD|10180112
51

Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
is called a:
A. corporate bond.
D. debenture.
Ans: C
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
platforms.
Ans: B
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
Ans: C

lOMoARcPSD|10180112
52

Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
A. Herstatt risk.
B. default risk.
C. settlement risk.
D. market risk.
Ans: C
Difficulty: Medium
Est time: <1 minute
A. basis risk.
B. clearing risk.
C. settlement risk.
Ans: C
Difficulty: Easy
Est time: <1 minute
2001 (Cwlth) is to:
market.
Ans: D

lOMoARcPSD|10180112
53
Difficulty: Medium
Est time: <1 minute
Ans: B
AACSB: Ethical
Difficulty: Medium
Est time: <1 minute
Ans: B
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
Ans: D

lOMoARcPSD|10180112
54
AACSB: Ethical
Difficulty: Medium
Est time: <1 minute

A. RBA and ASX.
B. ASIC and ASX.
C. APRA and ASX.
D. EFIC and ASIC.
Ans: C
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

reports to the ASX.
Ans: C
Bloom's: Evaluation
Difficulty: Medium
Est time: <1 minute
A. APRA
C. ASIC
Ans: C

lOMoARcPSD|10180112
55
AACSB: Ethical
Difficulty: Easy
Est time: <1 minute
A. bank funding.
D. equity funding.
Ans: D
Difficulty: Medium
Est time: <1 minute

B. a rights issue.
Ans: A
Difficulty: Medium
Est time: <1 minute
listed corporation.

Ans: D

lOMoARcPSD|10180112
56
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
B. five; CHESS
D. three; CHESS
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
A. Rights
B. Convertible bond
D. Corporate bond
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

Ans: C

lOMoARcPSD|10180112
57
Bloom's: Knowledge
Difficulty: Medium
Difficulty: Medium
Est time: <1 minute
listed corporation.

A. tax preference.
B. liquidity.
Ans: A
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
annual dividends.
Ans: False
Feedback: Shareholders are entitled to a share in profits but are not automatically entitled to
dividend payments, unlike bond holders.

lOMoARcPSD|10180112
58

Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
listed corporation.
Ans: False
Feedback: The executive management group is appointed by the board of directors.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
listed corporation.
Ans: False
Feedback: Limited liability concerns the shareholders.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
listed corporation.
Ans: True
Feedback: This arises out of the concept of the right of perpetual succession where a corporation
continues to operate regardless of changes in ownership.

lOMoARcPSD|10180112
59
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
listed corporation.
Ans: True
Feedback: The shareholders are residual claimholders, as such they receive their entitlement of
benefits after all other stakeholders are paid.
Bloom's: Knowledge
Difficulty: Hard
Est time: <1 minute
listed corporation.
funds.
Ans: False
Feedback: Derivative securities such as options, futures and swaps are risk management products
used by individual investors, fund managers, financial institutions and others to manage possible
risk exposure.
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
be delisted.
Ans: True
listed companies do not comply with the listing rule, they may be delisted.

lOMoARcPSD|10180112
60
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
the shareholders.
Ans: False
Feedback: It is generally accepted in corporate finance that an organisation should be managed in
such a way as to maximise shareholder value.
Difficulty: Easy
Est time: <1 minute
listed corporation.
Ans: True
Feedback: The secondary market transactions in a stock exchange involve the buying and selling
of existing securities.
Difficulty: Easy
Est time: <1 minute
sold.
Ans: True
Feedback: It is a widely used measure of market liquidity.
Difficulty: Easy
Est time: <1 minute
sold.

lOMoARcPSD|10180112
61
Ans: False
Feedback: A company does not receive any funds from secondary market transactions, only
primary.
Difficulty: Easy
Est time: <1 minute
sold.
Ans: True
Feedback: As the underlying security price increases (decreases) so the derivative's price directly
increases (decreases).
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Ans: Since the shareholders are not directly involved in running the company, but the managers
are, there is the problem of separation of control. Since the managers of the company do not own
the company they will not necessarily have a strong incentive to act in the best interests of the
shareholders. Since they may be tempted to run the company for their own personal benefit, this
may lead to a conflict of interest known as the agency problem.
Bloom's: Knowledge
Difficulty: Medium
listed corporation.
such as the ASX.
Ans: The different types of equity capital for a modern stock exchange are ordinary shares (the
most common type), preference shares, rights and derivative products such as options and

lOMoARcPSD|10180112
62
warrants. Ordinary shares have a residual claim on the company assets if the company goes into
liquidation. But ordinary shareholders are the ‘owners' of the company and may share in any
profits. Preference shareholders have a fixed payment.
Bloom's: Evaluation
Difficulty: Medium
Ans: The participants in a primary market issue of shares are the advisers and underwriters
(usually brokers, investment banks and other specialists), the corporations, brokers and the stock
exchange.
Bloom's: Evaluation
Difficulty: Medium

Ans: Stock exchanges may provide a market for the trading of equity-related derivative products
such as options, warrants and futures, where a derivative is a financial security that derives its
price from an underlying commodity or financial instrument.
Bloom's: Knowledge
Difficulty: Medium
Ans: Not only may a stock exchange have a market for equities but it may also offer a market for
debt instruments such as straight corporate bonds, debentures, floating rate notes, convertible
notes and preference shares.
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute

lOMoARcPSD|10180112
63
the company.
Ans: The secondary market does not raise funds for a firm as only newly issued securities in the
primary market would do that. However, a good secondary market helps support the future
issuance of securities. Investors are more willing to buy new securities if they foresee that they
can easily sell. The secondary market also provides important information such as pricing.
Difficulty: Medium
Est time: <1 minute
sold.
estate? Explain.
Ans: Real estate investment trusts (REIT) are listed on the stock exchange. A REIT is a trust
which holds properties. These are diversified up to a point as usually the REIT has a focus on a
type of real estate, such as shopping centres, hotels, housing units and so forth. They generate
capital gains and rental income. Note that the REIT investment is much more liquid than the
underlying assets held in the trust—modern finance at work.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
Ans: A CFD is a contract listed on a stock exchange that is an agreement between two parties,
typically described as a ‘buyer’ and ‘seller’, to exchange the difference in the value of a CFD.
The difference in value is calculated by subtracting the value of the CFD contract at the start date
from the value of the contract at the close date. Typically, the seller will pay to the buyer the
difference between the current value of an asset and its value at contract time if the difference is
positive, and vice versa. The CFD may be based on a nominated security listed on a local or
international stock exchange, stock exchange indices, foreign currencies or commodities. For
example, a CFD may be based on BHP Billiton Limited shares listed on the ASX. The value of
the CFD is directly correlated with the value of the underlying BHP shares at the start and close
date specified in the CFD contract. A CFD provides a high level of leverage for an investor as the
buyer of a CFD only pays a deposit or initial margin; that is, the investor does not pay the full
value of the underlying shares. This means that an investor may be able to take a much larger

lOMoARcPSD|10180112
64
exposure to the market in that more of the underlying security can be bought or sold because full
payment is not required.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

lOMoARcPSD|10180112
65
Chapter 04 Testbank Summary

# of
Category Questions
AACSB: Communication 85
AACSB: Diverse and multicultural 3
AACSB: Ethical 8
AACSB: Reflective thinking 22
Bloom's: Comprehension 55
Bloom's: Evaluation 3
Bloom's: Knowledge 43
Bloom's: Synthesis 17
Difficulty: Easy 57
Difficulty: Hard 6
Learning Objective: 4.01 Understand the structure of a corporation and identify 42
advantages and disadvantages of being a publicly listed corporation.
Learning Objective: 4.02 Consider the origins and purpose of a stock exchange. 6
Learning Objective: 4.03 Understand the primary market role of a stock 18
exchange through which corporations raise new funding.
Learning Objective: 4.04 Discuss the secondary market role of a stock exchange 8
through which existing securities are bought and sold.
Learning Objective: 4.05 Examine the managed product (exchange traded funds, 19
contracts for difference, real estate investment trusts and infrastructure funds)
and derivative product (options, warrants and futures contracts) roles of a stock
exchange.
Learning Objective: 4.06 Examine the interest rate market role of a stock 11
exchange.
Learning Objective: 4.07 Explain the electronic trading (ASX Trade) and 6
settlement (CHESS) platforms used for share-market transactions by the
Australian Securities Exchange (ASX).
Learning Objective: 4.08 Recognise the importance of information flows to the 2
efficiency and integrity of stock exchanges.
Learning Objective: 4.09 Identify the principal regulators that affect the 6
behaviour of participants in the Australian share market.
Section: 4.01 The nature of a corporation 40
Section: 4.02 The stock exchange 6
Section: 4.03 The primary market role of a stock exchange 18
Section: 4.04 The secondary market role of a stock exchange 9
Section: 4.05 The managed product and derivative product roles of a stock 18
exchange
Section: 4.06 The interest rate market role of a stock exchange 11
Section: 4.07 The trading and settlement roles of a stock exchange 6

lOMoARcPSD|10180112
66
Section: 4.08 The information role of a stock exchange 2

Section: 4.09 The regulatory role of a stock exchange 6
Topic: The information role of a stock exchange 2
Topic: The interest rate market role of a stock exchange 11
Topic: The managed product and derivative product roles of a stock exchange 19
Topic: The nature of a corporation 40
Topic: The primary market role of a stock exchange 18
Topic: The regulatory role of a stock exchange 6
Topic: The secondary market role of a stock exchange 8
Topic: The share market and the corporation 2
Topic: The stock exchange 6
Topic: The trading and settlement roles of a stock exchange 6

lOMoARcPSD|10180112
Chapter 04 Testbank
B. partnership.
D. corporation.

longer be traded.

4. A corporation:
corporation.

C. shareholders.
D. creditors.
of the company.

lOMoARcPSD|10180112
C. shareholders
D. creditors
to-day affairs.
C. shareholders
D. creditors

A. Sole partnership
B. Partnership
D. Corporation
B. partnership.


contribution.
company.
12. Because of their _____ liability, corporate stockholders are more interested in chances of
_____.

lOMoARcPSD|10180112

D. unlimited; failure than success



new owners.
as:

lOMoARcPSD|10180112

A. bond options
B. share options
C. company cars
D. debentures


lOMoARcPSD|10180112


B. partnership.
C. private company.
D. public company.
B. shareholders.
C. creditors.
D. debt holders.

have been deducted.
A. bond

lOMoARcPSD|10180112
B. debenture
C. share
D. preference share


larger.



lOMoARcPSD|10180112
take place.
raise capital.
A. increased.
B. decreased.
C. remained stable.
A. rights issues.
B. placements.
D. new floats.
funds is known as:
A. share buybacks.
C. share issues.
D. rights issues.
A. Ordinary shares
B. Treasury bonds
C. Debentures
D. Commercial paper

B. an underwriter.

lOMoARcPSD|10180112
A. interest rate
B. information
C. primary
D. secondary

A. share placement.
D. rights issue.

lOMoARcPSD|10180112
10
called a:
A. new float.
C. secondary float.
A. share release.
C. share float.
is to:

issue is called a:
A. share directory.
B. memorandum.
C. share plan.
D. prospectus.


lOMoARcPSD|10180112
11



called:
A. market depth.
B. market flow.
C. market transfer.

point in time.
movements.
exchange.

lOMoARcPSD|10180112
12

A. call option.
B. put option.
called:
A. augmentation.
B. diversification.
C. expansion.
D. optimisation.


A. decrease.
B. increase.

lOMoARcPSD|10180112
13
D. pay a dividend.
investor:

C. option funds.
D. warrant funds.


lOMoARcPSD|10180112
14

A. Bank bills
D. Commercial paper

A. corporate bonds.
A. adjustable note.
B. A clearing house

is called a:
A. corporate bond.
D. debenture.

lOMoARcPSD|10180112
15
platforms.
A. Herstatt risk.
B. default risk.
C. settlement risk.
D. market risk.
A. basis risk.
B. clearing risk.
C. settlement risk.
2001 (Cwlth) is to:
market.

lOMoARcPSD|10180112
16

A. RBA and ASX.
B. ASIC and ASX.
C. APRA and ASX.
D. EFIC and ASIC.

reports to the ASX.
A. APRA
C. ASIC
A. bank funding.
D. equity funding.

lOMoARcPSD|10180112
17

B. a rights issue.

B. five; CHESS
D. three; CHESS
A. Rights
B. Convertible bond
D. Corporate bond


A. tax preference.
B. liquidity.


lOMoARcPSD|10180112
18
annual dividends.
True False
True False
True False
True False
True False
funds.
True False
be delisted.
True False
the shareholders.
True False
True False

lOMoARcPSD|10180112
Chapter 05 Testbank

a/an:

A. daily financing.
D. working capital.

lOMoARcPSD|10180112


financing:


lOMoARcPSD|10180112
financial risk.

economic forecasts?
ii. Industry norms
A. i, iii, v, vi
B. ii, iii, v, vi
C. ii, iii, iv, v
D. iii, iv, v, vi
A. covenants.
B. limits.
C. arrangements.
D. contracts.


lOMoARcPSD|10180112

D. no other holder.



exchange.
exchange.
exchange.

company.

lOMoARcPSD|10180112
flotation?
B. prospectus
B. prospectus.

A. cheaper.
B. preferred.
D. much cheaper.
exchange.

lOMoARcPSD|10180112

lOMoARcPSD|10180112

D. a major bank.

A. an underwriter.
B. a proxy.
D. a substitute.

A. public float.
C. stock exchange.

lOMoARcPSD|10180112


A. a rights issue.
B. a placement.
D. pro-rata right.


lOMoARcPSD|10180112



cut-off date.


lOMoARcPSD|10180112
10

permitted.
B. a placement.
D. share transfer.

costs.
reinvestment plan.

lOMoARcPSD|10180112
11

C. Stakeholders
D. Creditors
A. participating
B. cumulative
C. non-cumulative
D. secured
A. options
B. rights
C. ordinary shares

lOMoARcPSD|10180112
12
dividend rate.
A. participating
B. cumulative
C. non-cumulative
D. secured

A. Convertible
B. Redeemable
C. Cumulative

liquidation.
issue?
A. i, ii, iii, iv
B. i, ii, iv, v
C. ii, iii, iv, v

A. debentures.
B. bonds.

lOMoARcPSD|10180112
13
C. shares.
D. warrants.


shares.
shares.


note.
A. higher than
B. equal to
C. lower than
D. unrelated to

lOMoARcPSD|10180112
14
A. well below
B. close to
C. well above
D. not related to

lOMoARcPSD|10180112
15

C. If the holder of the option exercises the right to buy the shares offered then the company raises
additional equity funds.

B. A put option
D. A debenture
shares.

lOMoARcPSD|10180112
16
held.

price.
corporate bond.
on the ASX?
$2000.

lOMoARcPSD|10180112
17
company is called:
A. agency theory.




lOMoARcPSD|10180112
18


creditors.
year.
or invest in.
True False
True False
company.
True False
True False
be delisted.
True False

lOMoARcPSD|10180112
19
True False
company shares.
True False
True False

True False
investors.
True False

______________________________________________________________________________
decisions.
______________________________________________________________________________

______________________________________________________________________________

______________________________________________________________________________
______________________________________________________________________________

lOMoARcPSD|10180112
Chapter 09 - Test Bank

B. short-term debt.
D. long-term debt.
A. of a month.
C. up to a year.
A. factoring.
C. trade credit.
D. supplier credit.
5. A facility offered by many suppliers of goods that provide for the purchase of goods with a specified period
before the account must be paid for is called:
A. supplier credit.
B. bank overdraft.
C. trade credit.

lOMoARcPSD|10180112
A. a 2% cash discount may be taken if paid in 15 days; if no cash discount is taken, the balance is due in 30
days after the middle of the month.
B. a 2% cash discount may be taken if paid in 15 days; if no cash discount is taken, the balance is due 30
days after the invoice date.
C. a 2% cash discount may be taken if paid in 15 days; if no cash discount is taken, the balance is due 30
days after the end of the month.
D. a 2% cash discount may be taken on 15% of the purchase if the account is paid within 30 days after the
end of the month.
7. The annual cost of forgoing a cash discount under the terms of sale 2/30 n/90, assuming a 365-day year is:
A. 8.0%
B. 12.2%
C. 12.4%
D. 24.0%
8. A company is offered credit terms of 2/10 n/40, but decides to forgo the cash discount and pay on the 45th
day. What is the company's cost of forgoing the cash discount?
A. 18.6%
B. 21.28%
C. 24.83%



lOMoARcPSD|10180112
A. a debt facility.

B. Generally, the agreed interest rate on an overdraft is calculated by the bank on the balance at the end of
the month.
A. prime rate
C. Treasury rate
D. overdraft rate

15. The basic feature of a/an ________ required by some banks is that it effectively raises the interest cost to
the borrower for an overdraft facility.

C. commitment fee
D. annual cleanup

lOMoARcPSD|10180112
16. If a company has a good credit standing with a bank, it will be charged ______ interest rate margin than/as
a company without an established record.
A. a higher
B. a lower
C. a much higher
D. the same
A. BBSW
B. LIBOR
C. USCP
D. SIBOR
B. A bank bill
C. A trade bill

lOMoARcPSD|10180112

A. acceptor
B. discounter
C. drawer
D. endorser



C. effective rate.

lOMoARcPSD|10180112


B. Once a bank becomes an acceptor for a bill other financial institutions can buy and accept the same bank
bill.
A. that the acceptor and endorser make an agreement as to who is liable for the repayment of the face value
to the final holder of the bill.
obligations.

lOMoARcPSD|10180112
A. drawer
B. acceptor
C. endorser
D. discounter
A. 30 days
B. 90 days
C. 180 days
D. 360 days


B. The yield at which the bill is discounted depends partly on the credit rating of the party that incurs the
liability.
C. The bank agrees to discount bills up to the agreed amounts with a fixed yield over the life of the rollover
facility.

lOMoARcPSD|10180112

D. The issuer of a bank-endorsed bill has to pay regular interest payments to the holder, unlike with a bank-
accepted bill.
A. $84 130.46
B. $92 350.21
C. $98 123.39
D. $98 148.62
42. 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

lOMoARcPSD|10180112
buy equipment. If the bank has agreed to discount the bill at a yield of 7.65% per annum, what will be the
face value of the bill?
A. $230 875
B. $250 000
C. $256 287.67
D. $312 876.71
44. A company wants to invest some surplus short-term funds and plans to buy a 180-day bank bill with a face
value of $100 000. What is the yield on the bill if its price is currently $94 234?
A. 11.69%
B. 12.41%
C. 13.23%
D. 13.32%
45. What is the discount rate of a 120-day bank bill with a face value of $100 000 and currently selling for $95
234, with a full 120 days to run?
A. 13.93%
B. 14.50%
C. 15.22%
D. 16.58%

B. a promissory note is a short-term instrument, whereas a bill of exchange is not necessarily short-term.
C. there is generally an issuer and an acceptor for a bill of exchange, whereas there is no acceptor involved
for a promissory note.
A. they are liquid.


lOMoARcPSD|10180112
48. ________ is a short-term, unsecured discount note issued by corporate borrowers of high credit standing.
The major banks generally issue these notes on their behalf.
A. A line of credit
B. Commercial paper

A. Bank bills
B. CDs
C. Promissory notes
D. Unsecured notes
A. $1000 or more
B. $10 000 or more
C. $100 000 or more
D. $1 000 000 or more
A. the prime rate.

B. its face value.
C. its cost.
D. Treasury notes.

lOMoARcPSD|10180112
B. Both commercial bills and promissory notes are sold with contingent liability in the secondary market.
C. Commercial bills are sold with contingent liability in the secondary market, whereas promissory notes
are sold without contingent liability.
market.




lOMoARcPSD|10180112

A. 10% per annum.

B. 1% per annum.
C. 0.1% per annum.
D. 0.01% per annum.
A. tap issuance.
B. tender.
C. offer.
D. proposition.
discounted.
A. sold by tender.
B. underwritten.
C. sold by tap.

lOMoARcPSD|10180112

65. One of the advantages to the corporation of an underwriting syndicate for the issue of promissory notes is:

D. the underwriting commitment gives the corporation access to a line of credit extending beyond the life
of the promissory note.
A. $83 096.19
B. $91 750.00
C. $97 965.75
D. $98 006.31
67. As an alternative to issuing a commercial bill for short-term financing, corporations with an excellent credit
standing may:



lOMoARcPSD|10180112
A. an underwriter.

A. lower than
B. the same as
C. higher than
D. unrelated to

obligation to buy.
A. Bank bill
B. Commercial paper
D. Promissory note

lOMoARcPSD|10180112
A. bank bills.
B. CDs.
C. CP.
D. P-notes.






lOMoARcPSD|10180112
81. A source of short-term funds available to smaller firms (for example, finance provided to a car dealership
for car funding) is:

B. factoring.
A. non-recourse
B. notification
C. recourse
D. non-notification


C. The discount charged by the factoring company is approximately equal to the rate charged on a secured
overdraft loan.


lOMoARcPSD|10180112
_____ arrangement
A. factoring.
C. trade credit.
called:
A. factoring.
C. trade credit.
89. A bank that provides an overdraft facility to business customers expects the overdraft to have a fluctuating
balance and doesn't require the customer to have the account in credit at any stage.
True False
90. One of the advantages of an overdraft facility, from the viewpoint of a borrower, is it can be used to smooth
out any seasonal mismatch between its cash inflows and outflows.
True False
True False
True False

lOMoARcPSD|10180112
93. With a bank-accepted bill the drawer has a secondary liability after the acceptor to pay the holder of the bill
the face value of the bill at the maturity date.
True False
True False
True False
True False
97. A major advantage of bill financing over other forms of short-term debt such as overdrafts is that the cost is
usually lower.
True False
True False
99. In establishing an overdraft facility with a company, what are some of the firm-related factors a bank will
consider?

lOMoARcPSD|10180112
Chapter 10 Testbank

purpose.
agreed limit.
A. amortised loan.
A. overdraft.
B. bank bill.
B. term loan.

lOMoARcPSD|10180112

C. over 1 year.

reduction.
term.
B. amortised loans.
are called:
A. commitment fees.
C. line fees.
D. service fees.
in advance are:
A. commitment fees.
C. line fees.
D. service fees.

lOMoARcPSD|10180112


C. corporate bonds.
D. term loans.
A. Debentures
B. Mortgage bonds
C. Term loans
D. Capital leases
15. A term loan is:

down.
B. service fee
C. commitment fee
D. term fee
called a/an:
B. commitment fee.
C. line fee.
D. service fee.
A. default risk.
B. the maturity.

lOMoARcPSD|10180112

A. BBSW
B. LIBOR
C. USCP
D. SIBOR
A. higher.
B. lower.
C. the same.
D. not related.
affected by:
A. loan agreements.
B. loan covenants.
C. loan terms.
D. loan actions.

lOMoARcPSD|10180112
D. loan options.


to:

lOMoARcPSD|10180112

than one year.
A. debenture
B. mortgage bond
C. term loan
D. zero-coupon bond
A. amortised.
B. a debit foncier.
D. interest-only.
A. mortgagor.
B. mortgagee.
C. mortgager.
D. mortgage.
A. mortgagor.
B. mortgagee.

lOMoARcPSD|10180112
C. mortgager.
D. mortgage.
A. $12 657.43.
B. $16 275.00.
C. $19 032.43.
repayment will be:
A. $12 657.43.
B. $16 275.00.
C. $19 032.43.
A. $65 657.43
B. $62 342.57
C. $19 032.43
A. $1861.11
B. $2143.15
C. $7274.21
D. $26 386.61
A. conversion.

lOMoARcPSD|10180112
B. liquidisation.
C. securitisation.
D. transformation.

C. maturity value.
A. market value
B. book value
C. face value
D. surrender value
by_________.
A. Treasury bonds

B. bonds.
C. shares.
D. preferred stock.
49. Bonds are:


lOMoARcPSD|10180112


A. debenture.
B. income bond.
C. mortgage bond.
A. term loans.
B. debentures.
D. bonds.
A. public issue.
B. family issue.

B. Unsecured notes

lOMoARcPSD|10180112
10
D. Debenture
A. transform into
B. crystallise into
C. originate as
D. adjust to
A. a debenture
called a:
B. put option.
D. warrant.
A. Mortgage bonds
B. Unsecured notes
follows that:

lOMoARcPSD|10180112
11


at _______.
A. increases to 8%.
B. increases to 9%.
C. remains at 7%.
interest rates.
A. constant
B. linear
C. varying
D. inverse
A. discount.

lOMoARcPSD|10180112
12
C. premium.
D. face value.
A. discount.
C. premium.
D. face value.
at:
A. discount.
C. premium.
D. book value.
changes by 5%:
10%:

A. $920.15

lOMoARcPSD|10180112
13
B. $1000
C. $1084.25
A. $915.39
B. $1000
C. $1089.72
A. coupon rate.
B. face value.
C. price.
A. $1000
B. $1045.84
C. $1046.44
D. $1079.45


lOMoARcPSD|10180112
14

A. $320 149.12
B. $401 613.48
C. $410 644.78
D. $688 638.80
A. financial
B. operating lease
C. direct
D. leveraged
A. direct lease.
B. financial lease.
C. operating lease.
D. leveraged lease.

lOMoARcPSD|10180112
15
A. direct lease.
C. operating lease.
D. leveraged lease.
A. An equity lease

A. operating lease.
D. leveraged lease.
A. 100% financing
remainder?
A. A capital lease
B. An equity lease

lOMoARcPSD|10180112
16
A. $20 000.
B. $40 000.
C. $30 000.
D. $60 000.
A. $426 399
B. $437 902
C. $500 000
D. $458 090
A. $426 399
B. $437 902
C. $452 811
D. $458 090
A. $1 808 011
B. $2 205 851
C. $2 208 671
D. $2 224 881
B. Unsecured note
C. Junk bond
D. Debenture
A. $13 875

lOMoARcPSD|10180112
17
B. $20 663
C. $35 493
D. $165 001

True False
True False
True False

lOMoARcPSD|10180112
18
True False
True False
True False
True False
working capital.
True False
too much debt.
True False
True False
True False
True False

______________________________________________________________________________

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Certificate of deposit

Chapter 01 Testbank Key

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

3. The role of money as a store of value refers to:

6. Buyers of financial claims lend their excess funds because they:

8. A savings-surplus unit is an entity:

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

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

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

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

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

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

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

27. Which of the following is NOT a feature of swaps?

29. Financial markets:

30. The most important function of a financial market is to:

32. A primary financial market is one that:

33. A secondary financial market is one that:

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

38. Buying bonds in the capital markets is an example of:

39. The market where existing securities are sold is the:

41. Secondary markets:

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

44. Which of the following is NOT true? A well-functioning financial market:

45. Financial markets:

46. Direct financing allows a borrower to:

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

48. An issue of debentures is an example of:

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

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

51. Financial intermediaries:

52. The flow of funds between lenders and borrowers is channelled:

54. The main role of financial intermediaries is to:

55. Financial intermediaries pool the funds of:

59. ‘Liquidity’ in financial terms is:

63. An example of a financial intermediary is:

66. Generally, in the long term, a government:

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

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

79. The term ‘liquidity’ refers to:

81. Compared with Treasury bonds, Treasury notes generally:

82. If you purchase an Australian government bond, that bond is:

89. The flow of funds between the sectors of a nation-state:

92. A financial market would be judged as value-creating (or efficient) when:

93. Which factor appeared to be fundamental to the Asian financial crisis?

94. Securitisation occurs when:

95. Direct finance has this characteristic:

109. Explain the advantages of financial intermediation.

2. Which of the following statements concerning banks is NOT correct?

6. The major roles of banks include:

8. There are four primary roles of a bank:

10. For banks, asset management refers to:

13. Off-balance-sheet business for a bank refers to:

14. Off-balance sheet transactions do NOT include:

16. The assets on a bank's balance sheet are:

17. The liabilities on a bank's balance sheet are:

20. Which of the following is a bank liability?

21. Which of the following statements about deposits is correct?

23. Which of the following statements is NOT true of term deposits?

26. Which of the following is generally a highly liquid instrument?

27. The negotiable certificate of deposits are issued by:

29. Which statement is NOT true for negotiable certificates of deposits?

31. The advantage/s of a certificate of deposit (CD) to a bank is/are: