FINS5512 Weekly Assignment

WEEK 1

1. Advantages of financial intermediation include:

I. Asset Transformation resulting in the range of products to satisfy
customers portfolio preferences
II. Liability Management indicating the active management of uses of funds by banks
III. Credit Risk Transformation
IV. Liquidity Transformation measured by the ability of savers to convert
financial instruments into cash
V. Maturity Transformation leading to the ability of intermediaries to offer
the range of products with different maturities
VI. Economies of scale
I. Asset Transformation resulting in the range of products with different maturities
II. Liability Management indicating the active management of borrower's credit risk
III. Complete Mitigation of Credit Risk
IV. Liquidity Transformation measured by the ability of a borrower to obtain more
cash in the situation of financial distress
V. Maturity Transformation leading to the ability of savers to hold deposits with banks
for extremely long periods of time (e.g. 30 years)
VI. Diseconomies of scale
A: I, III, IV, V, and VI are correct

2. There are _ sectors in the economy available for flow of funds between deficit and
surplus units.
A: 5

3. With regard to asset transformation, financial intermediaries are able to provide

deficit units with diverse loan products and at the same time satisfy the varying
preferences of investors offering them a range of deposit products.
A: True

4. Targeting inflation is the main objective of fiscal policy and the direct responsibility
of the RBA.
A: False

5. Which of the following are NOT usually an example of a short-term discount

security?
I Term deposits
II Commercial paper
III Bank bills
IV Term loans
V Debentures
VI Unsecured notes
VII Negotiable certificates of deposit
A: only I, IV, V, and VI
IV, V, and VI belong to Corporate Debt Market. Term deposits may be short-term, but
they are not securities.

6. Which of the following is NOT true—a well-functioning financial market:

A: has a selection of financial assets with similar timings of cash flow.

7. The following factors could contribute to the GFC:

I. Overheating of the economy because of extremely low interest rates
II. Deregulation of the financial system
III. Irrationality and greed of market participants
IV. Innovative financial products like CDO and CDS
V. Forged credit ratings
A: All of the answers are correct

8. Financial intermediaries are able to perform maturity transformation because: 1) it

is highly unlikely that all surplus units will demand deposits at the same time; 2) and
because financial intermediaries rely on active assets management.
A: False

9. In 2009, Mark Zuckerberg arranged for Gary V. to buy a substantial quantity of

shares in Facebook from one of Mark’s family members. Three years later, in 2012,
Facebook listed shares on the NASDAQ stock exchange through an initial public
offering (IPO). The private purchase of shares by Gary V. in 2009 was a
__________________ transaction because ______________________.
A: “secondary market”; “the transaction did not involve the original issue
of securities”

10. Which of the following are the most likely examples of a retail market
transaction?
I HSBC (a bank) issues new ordinary shares in order to improve its capital base
II Intel Corporation sells long-term bonds so that it can acquire Advanced Micro
Devices (AMD)
III The Reserve Bank of Australia intervenes in the currency market to improve the
value of the Australian dollar
IV A convenience store borrows from Commonwealth Bank of Australia in
order to buy new fridges / A restaurant borrows from a bank in order to
buy new kitchen equipment
A: Only IV is correct.
Correct answer. The amount of funds a restaurant would need to borrow in order to
purchase new kitchen equipment would most likely be small enough that the
restaurant would be forced to borrow at retail market interest rates.

11. Direct financial flows can be characterised by:

I. Greater flexibility
II. Brokers and dealers involved in transactions
III. Diversification of funding sources of a borrower
IV. Increased international profile
V. Low search and transaction costs
A: Only I, II, III and IV are correct

12. It is impossible in the financial system to sell existing financial instruments to

generate new flows of funds.
A: False

13. Surplus units generally cannot save money when engaging in contracts with
financial intermediaries because the latter have to spend a lot on assessing the
creditworthiness of deficit units.
A: False

14. A unit trust is a type of a financial institution that:

I mostly assists with off-balance sheet advisory services
II obtains most of its funds by selling money market securities
III used to be more commonly known as a "merchent bank" but after deregulation
extended the range of services and became a Financial Company
IV receives periodic payments and then makes payments in return when a
specified event occurs
V obtains most of its funds from the public and generally specialises
in certain investments specified in a seperate document
A: V is correct.

15. Which of the following are NOT classified as financial assets?

I. Bonds
II. Patents
III. Production equipment
IV. Stocks
V. Term deposits
VI. Negotiable certificates of deposit
VII. Inventory and spare parts
VIII. Preference shares
IX. Treasury Notes
A: II, III, VII.
Patents and production equipment lack characteristics of financial assets as they do
not derive their value from contractual claims (or they are not contractual
entitlements to future cash flows).

16. In capital markets it is only possible to trade in existing securities, which are
firstly issued in money markets.
A: False

17. The GFC stands for:

A: Global Financial Crisis

18. Maturity transformation allows to satisfy demand of surplus units in greater

liquidity and, at the same time, to offer products with shorter maturities to
borrowers.
A: False. Maturity transformation allows to satisfy demand of surplus units
in greater liquidity and, at the same time, to offer products with longer
maturities to borrowers.

19. Intermediated financial flows can be characterised by:

I. Greater flexibility
II. Intermediaries involved in transactions
III. Diversification of funding sources of a borrower
IV. Increased international profile
V. Low search and transaction costs
A: Only II and V

20. With regard to the Australian economy, the following sectors tend to be deficit
ones:
I. Business corporations
II. Financial Corporations
III. Government sector
IV. Household sector
A: I, II and III are correct

21. In the case of borrowers default financial intermediaries are able to cease their
obligations in relation to savers.
A: False

22. Targeting inflation is the main objective of monetary policy and the direct
responsibility of the RBA.
A: True
23. Any financial asset can be defined as the combination of the following attributes:
I. Risk
II. Frequency of Cash Flows
III. Yield
IV. Liquidity
V. Collateral
A: Only I, II, III and IV

24. Financial markets:

I Facilitate the exchange of financial assets
II Reveal information about the prices of financial assets
III Allow for the flow of funds between surplus entities and deficit
entities
A: I, II, III are correct

25. After the GFC regulators around the world made banks hold 100% reserves in
order to escape bank "runs" in future.
A: False

26. Liquidity position of a bank can be measured by your ability to withdraw money
without a notice from your demand account with the bank. [not the ability to open an
account]
A: True

27. The Reserve Bank of Australia (RBA) sells $500 million worth of its holdings of
Australian Commonwealth Government Securities (AGS) to a foreign central bank.
The AGS being sold are short-term, discount Treasury Notes that mature 2 months
from now. This sale is BOTH a _______________ transaction AND a __________________
transaction.
A: “secondary market”; “money market”

28. Which of the following are the most likely examples of a retail market
transaction?
I A government issues bonds to buy military equipment
II A college student buys Japanese Yen to use on a two-week
snowboarding holiday to Japan
III A firm issues new shares so that it can acquire another firm
IV An electronics retailer sells commercial paper so it can buy inventory for its
stores nationwide
A: Only II is correct.

29. Asset transformation is an example of benefits of direct finance.

A: False

30. Pooling small amounts of savings from many investors and offering them as loan
products to surplus units is an example of Asset Transformation.
A: False

31. An investment bank is a type of a financial institution that:

I mostly assists with off-balance sheet advisory services
II has mostly ceased to exist due to financial deregulation
III obtains most of its funds by selling money market securities
IV obtains most of its funds from the savings of individuals and small businesses
V receives periodic payments and then makes payments in return when a
specified event occurs
A: I is correct.
32. Government can directly impact the funds available to the private sector through
the transactions with government securities.
A: True

33. The GFC consisted of two parts:

A: Liquidation of assets by Wall Street banks and Sovereign debt crisis

34. Which of the following are the most likely examples of a wholesale market
transaction?
I A bank issues new ordinary shares in order to improve its capital base

II A firm sells long-term bonds in order to acquire another firm

III A central bank buys its domestic currency to try to improve its value
IV A restaurant borrows from a bank in order to buy new kitchen equipment
A: Only I, II and III

35. A finance company is a type of a financial institution that:

I mostly assists with off-balance sheet advisory services
II obtains most of its funds by selling money market securities
III used to be more commonly known as a "merchent bank" but after
deregulation extended the range of services and became a financial company
IV receives periodic payments and then makes payments in return when a
specified event occurs
V obtains most of its funds from the savings of individuals and small businesses
A: II is correct

36. Which of the following statements are true?

I Money allows economic and financial transactions to be carried out
more efficiently than bartering
II Bartering suffers from the problem of the “double-coincidence of
wants”
III Money increases economic growth by assisting transfers from borrowers to
investors
A: I and II are correct.

37. Why were banks subject to "runs" during the GFC?

I. Banks did not hold 100% reserves
II. The FRS lost confidence in the US banks
III. Liquidity transformation caused difficulties for banks to convert assets into cash
IV. Increased level of uncertainty in the financial system
A: Only I and IV are correct

38. Direct financing allows a borrower to:

lower search and transaction costs
Incorrect
match amounts and maturity of investments with lenders
diversify their funding sources
easily assess a lender’s level of default risk

39. In the case of borrowers default financial intermediaries are able to cease their
obligations in relation to savers.
A: False

40. A contractual savings institution is a type of a financial institution that:

I obtains most of its funds from the savings of individuals and small businesses
II mostly assists with off-balance sheet advisory services
III obtains most of its funds by selling money market securities
IV receives periodic payments and then makes payouts in return when a
specified in the contract event occurs
V has mostly ceased to exist due to financial deregulation

41. Budget of the government, official FOREX transactions and net sales of corporate
securities have a profound impact on the daily liquidity of the financial system.
A: False

42. Financial intermediaries are able to perform maturity transformation because: 1)

it is highly unlikely that all borrowers will demand loans with the same maturity at
the same time; 2) and because financial intermediaries rely on liability management.
A: False. 1) it is highly unlikely that all surplus units will demand deposits at the
same time; 2) and because financial intermediaries rely on liability management.
WEEK 2

1. Which of the following is NOT associated with the purpose of regulating financial
institutions?
Lowering the cost of funds
Providing stability of the money supply
Directing flow of funds to priority areas
Maintaining the soundness and stability of the financial system

2. The interest 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.

3. Which of the following categories represents the most significant proportion of

total off-balance-sheet business of the banks?
a. Direct credit substitutes
b. Market-rate-related transactions
c. Trade and performance-related items
d. Commitments

4. The risk-weighted amount of an off-balance-sheet transaction is calculated by:

I. Multiplication of a risk weight by loan-to-valuation ratio.
II. Multiplication of credit equivalent amount by the risk weight referring to
the counterparty or type of asset.
III. Conversion of the notional amount of the off-balance-sheet transaction
into a credit equivalent.

5. SwanBank has assets of $24.62 billion. The bank estimates total risk-weighted
assets of $5.97 billion.
Assuming Basel III requirements, how much ($millions) must be minimum CET1
capital with additional buffers out of SwanBank's total Tier 1 capital requirement?
Answer: 477.6
The minimum CET1 ratio with buffers under Basel III is 8% of risk-weighted assets
(not total assets). So the required amount of CET1 capital is $5.97 billion x 8% =
$477.6 million.

How much ($million) must be CET1 capital out of Bank's total Tier 1 capital
requirement ($million) if you assume Basel III requirements? 4.5%

6. FanBank has assets of $20.24 billion. After applying the regulator-stipulated risk
weightings, the institution estimates total risk-weighted assets of $14.74 billion.
Assuming Basel III requirements, what is the total capital (T1 + T2) requirement for
FanBank ($million)?
A: $1179.20 million (8%)

7. 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 Correct
d. solely to provide insurance for Australian suppliers of goods and services against
non-payment
8. Investment banks are conservative organisations that only adopt financial
innovations once they have been tried and tested.
A: False

9. Which one of the following statements is false?

a. If there is a co-insurance clause, an over insured the policy will cover
only proportional value
b. Comprehensive insurance covers damage to the insured vehicle, plus third-party
vehicle or property damage
c. Third party policy covers only third-party vehicle or property damage
d. Public liability insurance covers negligent injury to third parties.

10. From the point of view of the unit holder, units in a listed property trust tend to
be more liquid than units in an unlisted property trust.
A: True

11. Which of the following is NOT associated with Australian regulatory structure?
I. Regulation of market integrity and consumer protection by ASIC
II. Supervision of competition policy by Australian Competition and
Consumer Committee (ACCC)
III. Maintaining the soundness and stability of the financial system by RBA
IV. Prudential regulation of authorised deposit taking institutions by APRA
and emergency liquidity support of the overall financial system together
with ensuring solvency of individual financial institutions by RBA
A: Only II and IV

12. 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

13. ASIC requires banks to maintain a minimum holding of 9 per cent of its liabilities
in highly liquid assets such as cash and money market securities approved by APRA.
A: False

14. General reserves are typically included into Tier 1 Capital according to Basel II.
A: False. General Reserves for credit losses are included into Upper Tier 2 Capital.
15.
16.

17. Export finance corporations assist corporations to import foreign goods from the
international markets at a favourable exchange rate.
A: False

18. Which of the following statements about project-finance on a non-recourse basis

is true?
I. Project financing is typically provided by a single lender due to the small scale of
most projects relative to traditional lending. [to a consortium of lenders due to the
vast scale of many projects (....and NOT by just a single lender).]
II. Project finance loans are provided to the project sponsors who then fund the
project under development. [to a separate legal entity that is established for the
purpose of the project (...and NOT to the project's sponsors).]
III. Project finance loans are secured by the assets and operations of the
project. (...and NOT the assets/operations of project's sponsors).

19. Which of the following statements about superannuation funds is false?

A. A defined benefit superannuation fund involves the calculation of its payout
amount through a formula based at the time that the payee entered the fund.
B. An accumulation superannuation fund maintains constant
superannuation payouts irrespective of the strength of the performance of
the plan’s investments. An accumulation superannuation fund varies its
superannuation income depending on the strength of the performance of the plan’s
investments.
C. A defined benefit fund obliges the employer to make good on any shortfall in
the fund when the benefit is to be paid out.
D. Rather than having their superannuation entitlements taxed as ordinary
income, an early retiree has the ability to hold their eligible superannuation funds in
a rollover scheme that keeps their funds in a taxation environment that is more
favourable.
E. None of the other four statements regarding superannuation is false.

20. Cash management trusts provide retail savers with an investment opportunity
that returns a yield that is derived mainly from yields in the wholesale money
markets.
A: True
A mutual fund managed by a financial intermediary that specialises in investing in
short-term debt instruments
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.

21. Which of the following about a bank's activities is incorrect?

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. Banks typically have high credit ratings.

22. 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.

23. Which of the following statements about market-rate-related items such as

forward-rate agreements is incorrect?
a. They are generally called off-balance-sheet items
b. They are liabilities that may require an outflow of funds for a bank Incorrect
c. They are included in the BIS capital-adequacy guidelines
d. They form a small part of banks' OBS business

24. 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.

25. Which of the following statements about building societies is false?

a. Building societies are authorised deposit-taking institutions that are regulated by
APRA.
b. Building societies can accept deposits from customers
c. Building society sector contracted significantly as the banking sector was
deregulated
d. None of the above
e. All of the above

26. 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

27. 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.

28. The financial institution that pools funds for individuals and then invests them in
both the money and capital markets is a:
a. savings bank.
b. credit union.
c. investment bank.
d. managed fund. A financial institution that pools funds for individuals and then
invests them in both the money and capital markets

29. When a bank raises funds in the international markets to fund new lending
growth and hedges the exposure of the raised debt to interest rate risk with the help
of derivatives, it is involved in:
a. asset management
b. off-balance-sheet management
c. liability management
d. derived management

30. Which of the following balance sheet portfolio items is NOT a bank liability?
I Overdrafts
II Lease finance
III Call deposits
IV Share capital
V Consumer loans
VI Certificates of deposits
VII Term deposits
I, II, IV and V Correct answer.
Overdrafts, lease finance, and consumer loans are bank assets. Share capital is a
source of funds for a bank, however it is equity and not a liability.
The rest of the items are bank liabilities.
31. A standby letter of credit provided by the bank on behalf of a U.S.-based firm
purchasing a gas turbine from a Swiss manufacturer, with the bank making payment
only in the event that the U.S. firm fails to. → Direct credit substitutes
A performance bond provided by the bank to UNSW on behalf of a construction firm
bidding to upgrade student learning spaces around the Quadrangle. → Trade and
performance related items
An underwriting agreement obliging a bank to buy unsubscribed shares of the
company at the IPO. → Commitments
A credit derivative provided by the bank to a hedge fund, whereby the bank will
make a compensation payment to the holder if the Greek government defaults on
their debt. → Foreign exchange
interest rate and other market rate related contracts, A credit card limit provided by
the bank that has been fully drawn down and used by the card holder. → Not a
contingent liability

32. A standard eligible mortgage is defined as a residential mortgage where an

authorised deposit taking institution has:
I. prior to loan approval and as part of the loan origination and approval
process, documented, assessed and verified the ability of the borrowers to
meet their repayment obligation
II. valued any residential property offered as security
III. established that any property offered as security for the loan is readily marketable
A: I and II

33. Which of the following best describes a finance company?

a. A mutual fund managed by a financial intermediary that specialises in investing in
short-term debt instruments
b. A financial institution that pools funds for individuals and then invests them in
both the money and capital markets This better describes a managed fund.
c. A financial institution whose function is to provide cash income for employees of
corporations or governments after they retire
d. A financial institution that aims to achieve high investment returns on its invested
funds by using exotic financial products
e. A financial institution that sells unsecured notes and uses the funds to
make loans to household borrowers and companies

34. The main difference between project finance on a non-recourse basis and other
forms of lending is:
a. the project company, which is set up as a separate legal entity, relies heavily on
lenders for equity funding
b. the sponsor provides majority funding in the project
c. the lenders have a claim on the assets of the project as well as on the sponsors
d. a project company is usually established as a separate legal entity and
lenders rely heavily on expected future cash flow.

35. An investor wants to make an investment to a fund. The investor thinks that he
has to sell it very easily so he has some liquidity concerns. Moreover, he looks for a
fund which is investing to instruments that has coupon payments. This fund is:
I)Property trust
II)Mortgage trust
III)Fixed-Interest trust
IV)Listed trust
V)Unlisted trust

36. Which of the following institutions are supervised by APRA?

I. Building societies
II. Commercial banks
III. Credit unions

37. With regard to bank bills, the bill is sold at a discount:

a. because the bank needs to find a buyer.
b. to encourage buyers.
c. because the difference between the initial price and the final sale price
is the return to the holder.
d. because the bank pays the face value of the funds to the borrower at maturity.

38. CEO and the board should attest that the designed risk management system is
efficient in assessing identified risks.
A: True

39. 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. apply a risk weighting of 50% to the loan to determine the total capital
requirement.
b. seek funding in the euromarkets to minimise the capital adequacy requirements.
c. allocate Tier 1 and Tier 2 capital to the loan according to the riskiness of the
company.
d. assign a risk-weighting of 20% for the balance.

40. Basel III was developed in 2010 to enhance the risk coverage of the Basel II
framework by enhancing capital adequacy requirements. In view of strengthening
capital base, which one of the following does not serve the purpose:
a. Increase minimum Tier 1 capital to 6% of risk-weighted assets by 2015.
b. Increase minimum Common Equity Tier 1 capital to 4.5% of risk-weighted assets
by 2015.
c. Tighter definition of Common Equity Tier 1 capital to include only common stocks,
retained earnings, and other comprehensive income.
d. Minimum net stable fund ratio (NSFR) to ensure that assets at greater
risk of suffering a one-year stress event are matched with longer term
sources of financing.

41. Which one of the following explanations about Non Bank Financial Institutions is
TRUE?
a. As commercial banks are deregulated, building societies increased their market
share.
b. Finance companies are specialized in financial advisory services.
c. Retirement saving needs of ageing population decreased demand to
superannuation funds.
d. Building societies can accept deposits from individuals.

42. Which of the following is/are not typically associated with hedge funds?
I Use of minimal financial leverage
II Charging high management fees
III Use of a limited partnership ownership structure
IV Use of short-selling
V Use of closed-ended fund structure
VI Use of derivative instruments
VII Investment in highly illiquid assets
A: I, II, III and VII

43. 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.

44. 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.

45. Off-balance-sheet transaction can be either market or non-market-related.

A: True

46. The Basel capital accords have been developed by the Bank for International
Supplements, but it is the responsibility of each country’s prudential regulator to
implement the standard.
A: False

47. Which of the following liability types represents a main source of funding for
finance companies?
a. Fixed-term deposits
b. Debentures and unsecured notes Correct
c. Bills of exchange
d. Borrowings from non-residents (overseas)

48. Limited recourse lending provides lenders with claims against project sponsors if
project cash flows do not achieve a specified level.
A: True

49. 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

50. Which of the following balance sheet portfolio items is NOT a source of funds for
a bank?
I Overdrafts
II Lease finance
III Call deposits
IV Share capital
V Consumer loans
VI CD
VII Term deposits
A: I, II, and V

51. Which of the following categories represents the most significant proportion of
total market-rate-related off-balance-sheet business of the banks?
Interest rate swaps
Currency swap agreements
Foreign exchange contracts
Interest rate futures
52. LVR stands for leverage-to-valuation ratio and measured as the percentage of
borrowed money to the valuation of the property being mortgaged.
A: False

53. Which of the following is not one of the principal aims of Basel III:
a. Boost the banking sector's ability to absorb shocks arising from financial and
economic stress
b. Improve risk management and governance
c. Bring all off-balance sheet exposures to accounts Correct
d. Strengthen banks' transparency and disclosure.

54. Which of the following statements regarding life insurance companies is true?
a. None of the other statements about life insurance companies is true
b. As inflows of funds for life insurance offices are relatively easy to predict, they
have very little need for longer-term assets in their portfolios.
c. As outflows of funds for life insurance offices are relatively difficult to predict,
they overweight the level of short-maturity securities in their portfolios due to the
matching principle.
d. Life insurance companies invest primarily in government bonds and tend to
avoid equity-related investments.

55. Alternatives to the usual source of long-term bank funds that have the
characteristics of both debt and equity are called:

subordinated notes
promissory notes
transferable certificates of deposit
secured debentures

56. Banks are required to report only large overnight FOREX exposures.
A: False

57. Which of the following are the parts of the Pillar 2 principles:
I. Banks should have developed internal processes to assess their overall
capital adequacy
II. Supervisors should expect banks to operate above minimum regulatory
capital ratios
III. Supervisors should review banks internal capital adequacy assessments
and strategies
IV. Supervisors should seek to intervene at an early stage to prevent
capital falling below the minimum levels required
V. Supervisors should determine the minimum disclosure requirements
A: I, II, III and IV

58. A ________ is a financial intermediary that deals mainly in the flow of funds
between members. Membership is generally derived from some common bond.
a. savings bank
b. superannuation fund
c. credit union
d. merchant bank

59. In the standardised approach of estimating credit risk in Pillar 1 of Basel III,
banks:
a. estimate its own probability of default and effective maturity, while regulator-
defined estimates for other credit risk components are used.
b. assign each balance sheet assets and each off-balance sheet item a risk
weight that is derived from either an approved external ratings agency or a
weight specified by the regulator.
c. provides its own estimates for all credit risk items.
d. provides its own estimates for all interest rate risk items.

60. Project sponsors are the originators of a project; they establish a project
company into which they inject large amounts of debt, supported by collateral
security.
A: False

61. Because superannuation savings do not provide savers with a very liquid asset, it
is probable that they will become less important in the flow of funds into the capital
markets in the future.
A: False
WEEK 3

1. 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.

2. Agency problems would be less likely to exist in a:

a. sole proprietorship.
b. partnership.
c. private company.
d. public company.

3. Which of the following statements about share markets is false?

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.

4. 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.

5. 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.

6. 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

7. When a company's project results in a return and profits which exceed the cost of
its debt borrowing:
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.

8. Compared with raising debt through a bank, the raising of equity through an IPO is
generally:
a. cheaper.
b. dearer.
c. roughly the same.
d. much cheaper.

9. Individuals may find it more advantageous to purchase claims from a financial

intermediary rather than directly purchasing claims in capital markets because:
I. Intermediated investments usually offer higher rates of return than direct capital
market claims.
II. Intermediaries can exploit economies of scale in investing that individual
investors cannot.
III. Intermediaries are better diversified than most individuals.

10. 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

11. Which of the following statements regarding agency problem in a modern

corporation are true?
a. Agency problems in modern corporations could be reduced by monitoring
management behaviour.
b. Agency problems in modern corporations could be reduced by the threat of
takeovers by another firm.
c. Modern corporations are destined to fail because ‘managers’, and not the
‘owners’, run the business.
d. Any two of the three statements are true
e. None of the three statements are true

12. Which of the following about a corporation is incorrect?

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.

13. From a company's viewpoint, the existence of an active, liquid, well-organised

market in existing shares:
a. facilitates the raising of further capital in the secondary market.
b. maintains the share price above the initial issue price.
c. encourages successful primary market issues.
d. is of little or no consequence.

14. 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.

15. 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.
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.

17. A company with an (increasing) ratio of total assets to equity is _________

dependent on external financing.
a. less
b. not at all
c. more
d. rarely
e. lower; more
(lower, less)

18. Among many issues companies when going public should consider, which of the
following should not be among the key consideration:
a. Preserve your corporate culture
b. Ensure local markets for issuance
c. Obtain a fair launch price
d. Offer different issue price to different investor

19. 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

20. _______ 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

21. 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.

22. Which of the following statement is true?

a. The conflict of interests between the goals of the firm’s owners and those of its
managers is the antagonism theory.
b. With their management contracts, the managers have the incentive to act in the
best interests of the shareholders.
c. The firm’s owners will always act in the best interests of the managers
d. Two of the three statements are true
e. All three statements are false

23. 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.
24. 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.

25. 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

26. 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.

27. 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.

28. 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 incorrect?
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.

29. 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.

30. 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.

31. 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

32. 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.

33. An initial public share offering represents the share market's _____ role.
a. interest rate
b. information
c. primary
d. Secondary

34. Which one of the following is not a main principle that form the basis of a stock
exchange's listing rules?
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.

35. 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.

36. Suppose an investor is considering one of two investments that are identical in
all respects except for risk. If the investor anticipates a fair return for the risk of the
security he invests in, he can expect to _____ .
a. earn no more than the Treasury-bill rate on either security
b. pay more for the security that has higher risk.
c. pay more for the security that has lower risk.
d. earn more if interest rates are lower.

37. Common shareholders are:

a. guaranteed a periodic distribution of dividends
b. guaranteed a distribution in the wind-up of the company.
c. guaranteed both a periodic distribution of dividends and a distribution in the wind-
up of the company.
d. not guaranteed a periodic distribution or a distribution in the wind-up of
the company.

38. 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.

39. 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.

40. The owners of _______ face unlimited liability.

a. corporations only
b. unlisted corporations only
c. corporations and sole proprietorships only
d. unlisted corporations and sole proprietorships only
e. None of the above and/or below

41. If a growing organisation wanted to set itself up so it had greater access to a

wider range of capital, it would become a:
a. sole proprietorship.
b. partnership.
c. general partnership.
d. listed corporation

42. 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.

43. 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.

44. Which of the following statements about company-issued equity warrants is

incorrect?
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.

45. Prudent financial management would dictate that a company should not take on
more debt than can be serviced, under pessimistic conditions, without jeopardy to
the company's existence. Therefore, a proportion of total funding should be provided
by equity participants. Which of the following main criteria would be determinants of
the appropriate ratio of debt to equity?
I Limit imposed by lenders
II Norm in the industry
III History of the ratio for the firm
IV Company's capacity to service debt
V Maximisation of shareholder wealth
a. I, II, III, IV
b. II, III, V
c. II, III, IV, V
d. III, IV, V
46. 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.
d. All of the given answers.

47. 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.

48. 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.

49. 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

50. 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

51. Companies are interested in a good secondary market for the trading of their
shares because:
a. New funds can be raised as secondary market trading settles
b. It helps support the future issuance of securities
c. Investors are likely to sell securities if there is a good secondary market
d. It helps speculators trade up the company's share price

52. 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

53. 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.

54. 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

55. Most companies raise funds by selling their securities in a:

a. public float.
b. private placement.
c. stock exchange.
d. direct placement

56. 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.

57. 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 incorrect?
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.

58. 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.

59. 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.

60. 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.
61. The placement of ordinary shares for a company 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 no discount.
d. shares will be sold to a large number of investors

62. You bought 2,000 common shares of an Australian publicly-listed company,

OzCpy, which has 200,000,000 shares outstanding. The share price was $1 per
share. Which of the following statement(s) would apply to you?
a. Your maximum loss of buying those shares is around $2,000
b. You are one of the company's partners in a partnership
c. You are one of the actual owners of the company
d. Only two of the statements apply to you
e. All three statements apply to you

63. Because of their _____ liability, corporate stockholders are more interested in
chances of _____.
a. limited; failure than success
b. limited; success than failure
c. unlimited; success than failure
d. unlimited; failure than success

64. 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.

65. If a stock exchange provides a market for the trade of specific share market-
related derivative products, which of the following options is generally incorrect?
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.

66. Which of the followings is an objective of private equity funds?

a. Improve a company's performance in preparation for an IPO
b. Break up a company to sell components separately
c. None of them
d. Both of them

67. 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.

68. A company may raise additional equity capital through:

a. a rights issue.
b. a placement.
c. a dividend reinvestment scheme.
d. all of the given answers
69. 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.

70. 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.

71. A well-developed secondary market is likely to:

a. aid in raising extra finance.
b. help manage risk exposures of investors.
c. help with corporate agency problems.
d. include all of the given answers.

72. 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

73. 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.

74. 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.

75. 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.

76. Which of the following is generally NOT a characteristic of rights?

a. No expiration date
b. If exercised, results in the dilution of earnings for existing shareholders
c. Saleability
d. Potential listing on a stock exchange

77. 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.

78. From a company's viewpoint, the existence of an active, liquid, well-organised

market in existing shares:
a. facilitates the raising of further capital in the secondary market.
b. maintains the share price above the initial issue price.
c. encourages successful primary market issues.
d. is of little or no consequence.

Week 4

Chapter 6 – Investors in the share markets

Q1. 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

Q2. Investors buy listed shares:

A. To obtain fixed dividend payments
B. To obtain fixed capital growth
C. For the change of capital growth only
D. For the chance of dividend payments and capital growth

Q3. Compared with fixed interest securities, share 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 for higher risk

Q4. A diversified portfolio generally includes:

A. 0-5 stocks
B. 5-10
C. 10-15
D. 10-25

Q5. Share ownership of listed companies on the Australian Stock Exchange has remained
relatively constant across various sectors of the market over the past few years. Which of the
following ownership groupings is the largest investor in Australian equities?
A. Financial institutions, including insurance companies and superannuation funds
B. Households and unincorporated enterprises
C. Government: Commonwealth, State and government trading enterprises
D. Overseas – rest of the world

Q6. The risk that particularly impacts on the share price of a particular company is called:
A. Economic risk
 B. Business risk
C. Systematic risk
D. Unsystematic risk

Q7. When investors buy and sell share based on receiving new information on shares and
markets, this is known as:
A. Active investment
B. A diversified strategy
C. A market replication strategy
D. Passive investment

Q8. To tract the S&P 500, a fund manager can buy

A. All the stocks in the S&P500
B. An S&P500 index fund
C. A percentage of stocks that essentially tracks the index
D. All of the above

Q9. The correlation of pairs of securities within a portfolio is called:

A. Covariance
B. Variance
C. Co-association
D. Correspondence

Q10. The correlation between two shares:

A. Can take on positive values
B. Can take on negative values
C. Is related to the covariance of a share
D. All of the above

Q11. Portfolio risk is heavily based on:

A. A weighted average of the covariance of the stocks in the portfolio
B. A standard deviation of the stocks

Q12. When an investor alters the mix of their portfolio to reflect market changes, this is
called _____ asset allocation
A. Market timing
B. Passive
C. Non-fixed
D. Tactical

Q13. Stockbrokers act as ____ for an exchange

A. Agents
B. Dealers
C. Negotiators
D. Intermediaries

Q14. Major differences between a discount stockbroker and a full-advisory stockbroker lie
in:
A. The level of fees
 B. The amount of advice given
C. The quantity of share recommendations
D. All of the above

Q15. All of the following apply to full-advisory stockbrokers EXCEPT:

A. They provide investment advice on listed securities
B. They monitor investors’ financial plans
C. They accept buy and sell orders from clients
D. Their fees are competitive with discount brokers

Q16. When an investor purchases unit in a unit trust, this is known as _____ investing
A. Absolute
B. Direct
C. Indirect
D. Value

Q17. Calculate the tax payable by a shareholder on a fully franked dividend that is fully
imputed, given the following data:
Company profit $3 250 000
Profit distribution 100%
Company tax rate 36%
Shareholder’s tax rate 43%
A. $227 500 (tax payable)

Q18. The capital structure of a company is one of the important indicators of performance.
All of the following regarding capital structure are correct EXCEPT:
A. Debt to equity, or shareholders’ interest ratios, are both measures of capital
structure
B. Capital structure ratios are an indicator of longer-term viability and stability
C. A company with a higher equity ratio is less dependent on external funding
D. The capital ratios of companies, and industry groupings, are generally
similar

Q19. When using indicators for a company’s performance, care should be taken that:
A. Ratios for a company are compared with others in the same industry
B. A single ratio is not used to judge the company’s overall performance
C. The dates of the financial statements being compared are the same
D. All of the above

Q20. Compared to 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

Q21. The greater the proportion of debt financing compared to equity financing for a
company, the:
A. Lower the future earnings prospects for the company
 B. Greater the ability of the company to meet its interest payments
C. Greater the degree of financial risk for the company
D. Lower the expected earnings per share

Q22. A company with a ____ ratio of equity to debt is ____ dependent on external financing
A. Higher; less

Q23. The ___ ratio measures the proportion of total assets provided by the company’s
owners
A. Total asset turnover
B. Equity turnover
C. Shareholder’s interest
D. Debt

Q24. The indicator ratio that should be used to assess a company’s ability to meet its short-
term obligations is:
A. Liquidity
B. Debt
C. Profitability
D. Capital structure

Q25. Which ratio is a measure of liquidity that excludes inventories?

A. Current
B. Liquid
C. Debt to gross cash flow
D. Interest cover

Q26. An example of liquidity for a company is

A. A fixed asset turnover
B. Current ratio
C. EPS
D. Share price to net tangible assets

Q27. 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

Q28. If a company has a current ratio of 2, which of the following measures will increase the
current ratio?
A. Buying inventory on short-term credit
B. Buying inventory with cash
C. A customer paying an overdue account
D. Paying off a short-term bank advance with long-term debt

Q29. If a company has a current ratio of 0.9, then to improve its liquidity ratio it might:
 A. Increase its current assets by increasing its inventory, and so improve its current
ratio
B. Use more long-term debt to decrease current liabilities, and so increase the
current ratio
C. Decrease its large amounts of account receivable to improve its cash position, and
so improve its current ratio
D. Decrease its large amount of accounts to pay to decrease its current liabilities, and
so improve its current ratio

Q30. 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

Q31. Which financial ratio provides information essential for assessing the long- run
operation of the company?
A. Debt
B. Liquidity
C. Profitability
D. Share price

Q32. A ratio that indicates the number of years required for a company to repay its total
debt is:
A. Debt to equity
B. Debt to depreciation
C. Debt to gross cash flow
D. Debt to net cash flow

Q33. Compared to 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

Q34. Which of the following groups of ratios provide information on the short-run operation
of the company?
A. capital structure and debt servicing
B. Capital structure and profitability
C. Debt servicing and profitability
D. Liquidity and profitability

Q35. Which 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
Q36. Which ratio is used to measure a company’s ability to meet its short-term financing?
A. Debt
B. Liquidity
C. capital structure
D. profitability

Q37. Which financial ratio measures a company’s ability to service its interest
commitments?
A. Debt
B. equity to debt
C. profitability
D. interest cover

Q38. The higher the value of the _______ ratio, the better able the firm is to meet its short-
term financial obligations.
A. debt to equity
B. liquid
C. earnings per share
D. EBIT to long-term funds

Q39. 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

Q40. The following is a simplified financial position statement for a

company.
Assets $
Cash 250 000
Trading securities 350 000
Accounts receivable 1 360 000
Inventory 2 470 000
Property 3 350 000
Equipment 450 000
Liabilities $
Accounts payable 1 480 000
Accrued expenses payable 420 000
Taxes payable 140 000
Long-term debt 3 850 000
Shareholders’ funds 2 340 000

Calculate the liquid ratio.

A. 0.96
Q41. All of the following statements regarding the debt servicing capacity of a company are
correct, EXCEPT:
A. the debt to gross cash flow ratio is an indicator of debt servicing capacity
B. the debt to gross cash flow ratio indicates years required for cash flows to repay
total debt
C. the interest cover ratio is an indicator of a company’s capacity to service debt
D. The lower the interest cover ratio, the greater the ability to cover interest
commitments
Q42. If a share currently sells for $20 and has annual earnings per share of 8.0, the
price/earnings ratio is:
A. 2.5

Q43. 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

Q44. Systematic risk is also referred to as:

A. economic risk
B. diversifiable risk
C. market risk
D. financial risk

Q45. The risk that affects the whole market is called:

A. total risk
B. systematic risk
C. diversifiable risk
D. financial risk

Q46. In modern portfolio theory, investment risk is divided into two components: systematic
risk and unsystematic risk. Which of the following risks is an example of systematic risk?
A. increase in the corporate tax rate
B. productivity and cost of labour
C. the effectiveness of management of the company
D. gearing and the impact of interest rate changes

Q47. Increased competition, increased costs of labour, lawsuits, and unfavourable exchange
rates are all examples of
A. diversifiable risk
B. systematic risk
C. total risk
D. economic risk

Q48. All of the following are examples of unsystematic risk EXCEPT

A. the company announces a merger with a competitor
B. the chief financial officer resigns
C. the company loses competitiveness relative to other companies
D. changes occur in the level of company tax rates

Q49. What should be the price of a share that constantly pays $2.50 annually in dividends, if
the growth rate is zero and the required rate of return is 8% per annum?
A. $31.25

Q50. What should be the price of a share if it paid $1.75 in dividends in the last financial
year, its dividend growth rate is 4%, and the required rate of return is 11%?
A. $26
Q51. 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

Q52. In modern portfolio theory, an investor should not be concerned with unsystematic risk
when calculating expected rates of return, because
A. there is no way to measure unsystematic risk
B. unsystematic risks are assumed to be removed by diversification
C. unsystematic risks are generally insignificant
D. beta includes a portion to compensate for unsystematic risk

Q53. 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

Q54. If a dividend is declared on November 1, has a cum-dividend date of November 19, and
a record date of November 26, which of the following shareholders will NOT receive the
dividend?
A. a buyer of the share on October 31
B. a buyer of the share on November 11
C. a buyer of the share on November 26
D. a buyer of the share on November 29

Q55. What should happen to the price of a share on the day that it goes ex- dividend? The
price should theoretically
A. increase by the extent of the dividend
B. decrease by the extent of the dividend
C. decrease by a small fraction of the dividend
D. remain constant

Q56. 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. $5.09

Q57. A rights issue differs from a bonus issue of shares in that:

A. after a bonus issue there is greater number of shares in existence, unlike rights
B. shares that are cum-bonus are renounceable
C. the purpose of a bonus issue for a company is not to raise more funding
D. only listed companies have rights issues

Q58. If a company offers a one–for-five bonus issue and the current share price cum-bonus is
$7.50, then the theoretical value of each share ex-bonus is:
A. $6.25
Q59. 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.

Q60. A company whose shares are currently trading at $3.60 proposes to have a 25% split;
that is, four new shares for one existing share. At the commencement of the next business
day, a dividend of 25 cents is paid on existing shares, followed immediately by the share
split. What is the theoretical price of the new shares?
A. $0.9

Q61. 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

Q62. 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. $250

Q63. 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. $2.98

Q64. 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

Q65. 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

Q66. 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

Q67. 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

Q68. Consider the following five statements:

1. The expected return of a portfolio of shares is the weighted average of the expected
returns for each share.
2. The ‘rest of the world’ is the largest single category of owners of Australian shares
and of units in trusts in Australia.
3. One of the effects of dividend imputation is the removal of ‘double taxation’ of
company profits that are distributed as dividends.
4. 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.
5. The taxation of contributions and earnings of an employee’s compulsory
superannuation fund may be offset by imputation credits received by the fund from its
share investments.
How many of the above statements are true and how many are false?
A. 3 statements are true and 2 are false
B. 2 statements are true and 3 are false
C. 4 statements are true and 1 is false
D. 1 statement is true and 4 are false

Q69. Which of the following statements about investments are false?

i. Full service advisory brokers beyond executing trading orders offer additional services for
their clients;
ii. Capital gains of shareholders are caused by dividends payments;
iii. A sudden market downturn can cause tactical asset allocation;
iv. Dividend imputation system allows to transfer dividends directly from corporations
to shareholders escaping government regulation and therefore increases the
attractiveness of stock investments in Australia.

Q70. An investor owns 29.05 million shares in Risky Business at the start of this year. The
company is an Australian firm currently trading on the ASX and it is about to announce a 3-
for-1 stock split. Two days after the stock split, the stock price was $23.13/share and it was
$81.26/share at the start of this year. The value of Risky Business shares owned by the
investor two days after the stock split would be $______ million.
A. $2015.78 = 29.05*3*23.13

Q72. There are many techniques used by financial analysts to seek out superior investments.
An analysis known as technical analysis is the investment approach that focuses on the past
and current trading volumes of a company share.

Q73. 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.

Q74. 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.

Q75. Which of the following statements about investments are true?

i. Systemic risks usually affect large number of corporations and can be easily diversified
away by holding portfolio of more than 100 stocks across different industries;
ii. Beta-coefficient measures how sensitive one stock is to unsystematic risks;
iii. Passive investment is based on the replication of the portfolio according to a specific
index;
iv. Longer investment horizons in share investments on general provide with higher
returns than lower investment horizons.
v. Indirect investment can be characterised by the investment strategy of replicating a
particular index;
vi. Discount brokers specialise in trading discount securities for their clients

Q76. An Australian company, OzCPY has made a renounceable rights issue offer to their
existing shareholders. The share price when announcing the rights was $24.88 and the firm’s
current ordinary share price is $25.88 and the 2-for-10 pro-rata issue has an offer price of
$24.44.
What is the theoretical ex-rights share price of the firm?
A. 25.64 = (25.88*5+24.44)/6

Q78. An important belief underlying the use of technical analysis techniques is that:
A. security prices react rapidly to new information.
B. security prices react gradually to new information.
C. there are sufficient investors in the market to provide enough liquidity to keep
price changes relatively small.
D. all investors have immediate and relatively low-cost access to information.

Q79. 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

Q80. The suggestions of the efficient market hypothesis (EMH) include:

A. The suggestion that passive portfolio management strategies are the most
appropriate investment strategies
B. The suggestion that stock prices are stable (random)
C. The suggestion that technical analysis cannot be used to uncover trends and is
quite useless
D. Only two of the suggestions above and/or below are suggestions of EMH

Q81. Random price movements indicate ________.

 A. Irrational markets
B. that prices cannot equal fundamental values
C. that technical analysis to uncover trends can be quite useful
D. that markets are functioning efficiently

Q82. Which of the following statements is true

A. Bull market indicates downward movement in financial markets
B. Market Capitalisation of a company is calculated by multiplying number of shares
issued by their book value
C. Stock liquidity is calculated by dividing current assets by current liabilities
D. Accumulation indices take into account not only changes of share price but
the effect of reinvesting company dividends as well

Q83. 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

Q84. 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. a pennant.

Q86. 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.

Q87. A minimum interest cover ratio of 2 is considered to be appropriate and it means that
lease and interest charges of business are covered 2 times by its net income.
A. False

Q88. There are many techniques used by financial analysts to seek out superior investments.
An analysis known as fundamental analysis is the investment approach that focuses on the
underlying determinants of future profitability of a company.

Q89. 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 incorrect?
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.

Q91. 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.

Q92. 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.

Q93. The weak form of the efficient market hypothesis asserts that:
A. the change in future share prices cannot be predicted from past share prices.
B. share prices adjust rapidly to new information contained in past prices or past
data.
C. technical analysts cannot be expected to outperform the market.
D. all of the given answers are correct.

Q94. Research indicates that the correlation coefficient between successive days' share price
changes is:
A. quite close to +1.
B. quite close to zero.
C. directly related to the share's beta

Chapter 7 – Forecasting share price movements

Q1. If investors _______ a company’s shares, the _______ supply is likely to lead to a
_______ in the share price.
A. Sell; increased; fall

Q2. The approach that seeks to identify factors that are likely to influence the growth rate and
future profits of a company is called:
When an investor makes their investment decision based on a company’s accounting ratios,
they are using:

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. economic analysis
B. factor analysis
C. fundamental analysis
D. technical analysis

Q3. All of the following are problems associated with rapid, unsustainable economic growth
EXCEPT:
A. GDP growth between 1 and 2%
B. current account of the balance of payments worsens
C. pressure on wage growth falls
D. inflationary pressures increase

Q4. The portion of the overall economy defined by the nature of a company’s operations is
called:
A. economic component
B. company component
C. industry sector
D. country sector

Q5. The net record of a country’s international earnings less its international payments is its:
A. capital account
B. current account
C. Gross Domestic Product
D. gross national income

Q6. The more a country imports, and the worse the current account becomes, then:
A. the more the currency increases
B. the lower interest rates fall
C. the lower foreign debt becomes
D. the higher foreign debt becomes

Q7. If a country’s current account deteriorates, then a government is likely to:

A. loosen monetary policy
B. increase government expenditure
C. tighten interest rates
D. lower taxes

Q8. Foreign exchange risk is best described as:

A. the variability in the current account balance of the balance of payments
B. the cost of one currency in terms of another
C. the risk that the price of one currency relative to another currency will
change
D. the variability of domestic and international interest rates
Q9. Writing-down the value of a capital asset, reported as an expense, is called:
A. down-grading
B. depreciation
C. documentation
D. reduction

Q10. 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
Top-down approach: identifies future economic factors that may impact industry sector
performance

Q11. Some of the factors that are used by analysts using the top-down approach in the
analysis of fundamentals affecting share prices are:
A. exchange rates
B. interest rates.
C. rate of growth in international economies.
D. all of the given answers.

Q12. Question 16: All of the following are problems that may be associated with rapid,
unsustainable growth in an economy, EXCEPT:
A. an upward pressure on wages
B. an increase in inflationary pressures
C. an improvement in the current account of the balance of payments
D. a rise in interest rates

Q13. The greater the degree of systematic risk, the:

A. higher the expected share price
B. higher the expected rate of return
C. closer a share’s beta will be to 1

Q14. The lower the degree of unsystematic risk, the:

A. lower a share’s beta coefficient
B. higher the diversification of a share portfolio
C. higher a share’s beta coefficient
D. lower the diversification of a share portfolio

Q15. An investor who buys a large number of shares of different companies will:
A. abolish systematic risk
B. minimise unsystematic risk
C. minimise credit risk
D. minimise price risk

Q16. According to modern portfolio theory, the _______ the degree of systematic risk, the
_______ should be the expected return.
A. greater; greater
Q17. Which of the following statements about fundamental analysis and technical analysis is
correct?
A. Technical analysis focuses on identifying trends in market indices rather than in
the prices of individual shares.
B. Technical analysis is regarded as a passive investment approach.
C. Technical analysis relies heavily on analysis of share price data whereas
fundamental analysis relies on a broader set of information.
D. Fundamental analysis relies solely on analysis of a company's financial
statements.

Q18. Compared to technical analysis, fundamental analysis considers:

A. the fundamentals of price movements only
B. the fundamentals of companies only
C. the factors that influence a company only
D. the factors that influence a company and the overall market

Q19. An important belief underlying the use of technical analysis techniques is that:
A. security prices react rapidly to new information
B. security prices react gradually to new information
C. there are sufficient investors in the market to provide enough liquidity to keep
price changes relatively small
D. all investors have immediate and relatively low-cost access to information

Q20. 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

Q21. An alternative approach to forecasting the behaviour of share prices is technical

analysis. All of the following statements are correct in relation to the approach taken by
technical analysts, EXCEPT:
A. as a price pattern emerges, it is assumed that the historic pattern will re-emerge in
full
B. the stock markets are, at times, dominated by mass psychology
C. historic price patterns are of little use in forecasting future price movements
D. analysts typically adopt either a ‘technical’ or a ‘fundamental’ approach

Q22. _______ is a mathematical technique used by technical analysts to clearly reveal all the
trends in a price series.

A graph of average price series constructed over time is called a:

A. Averaging
B. Moving average
C. Price averaging
D. Series averaging
Q23. In technical analysis, when the lower points of a rising price series are connected this is:
A. downward trend line
B. moving average
C. upward trend line
D. weighted moving average

Q24. 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
Below; buy the share

Q25. 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

Q26. 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 observation

Q27. 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

Q28. In technical analysis, a price level below which the market price is temporarily unlikely
to fall is:
A. a trend channel
B. a resistance line
C. A support line
D. a trend line

Q29. In technical analysis, a price level below which the market price is temporarily unlikely
to rise is:
A. a trend channel
B. a resistance line
C. a support line
 D. a trend line

Q30. A support/resistance pattern, plotted by chartists in the stock markets, is the rectangle,
which consists of sideways price fluctuations contained within horizontal support and
resistance levels. All of the following statements are correct in relation to indicators given by
support and resistance rectangles, EXCEPT:
A. rectangles tend to be characterised by increasing volumes, except for a few
days before the breakout when there are strong decreases in volumes of trade
in the share(s)
B. if the last bottom does not touch the support level (beginning the formation of an
ascending triangle), and if prices then rise rapidly, on increasing volume, it is
likely that there will be a topside breakout
C. if the tops fail to reach resistance levels (beginning the formation of a descending
triangle), then a downside breakout is likely
D. when a break occurs from a rectangle, the extent of the breakout is likely to equal
the height of the price rectangle.

Q31. Question 43: In relation to charting, an upward trend line connects the _______ points
of a _______ price series, while a downward trend connects the _______ points of a _______
price series.
A. lower; rising; higher; falling

Q32. The Elliot wave theory maintains that the bullish behaviour of the share market can be
explained as:
A. a series of medium-term and long-term waves
B. a series of long-term waves upward, and short-term waves downward
C. a series of three major waves upwards, followed by two major waves
downwards
D. None of the above.

Q33. One of the theories on the determination of, and change in the value of, shares and other
securities, is the random walk hypothesis. Which one of the following statements in relation
to the random walk hypothesis is correct?
A. The trend of new information into the market may be consistently good or
consistently bad over time
B. 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.

Q34. If a share price falls on four consecutive days of trading, then share prices:
A. cannot be following a random walk
B. can still be following a random walk
C. are almost certain to decrease the next day
D. are almost certain to increase the next day

Q35. Which one of the following statements regarding an efficient capital market is correct?
A. All securities that investors would like are listed.
 B. All transactions are closed out and settled within two days
C. Current prices reflect all current information
D. The lowest interest rates are offered.

Q36. In an efficient market

A. security prices are seldom far above or below their justified level
B. share prices react quickly to new information
C. investors will not make superior returns consistently
D. All of the above.

Q37. The weak form of the efficient market hypothesis asserts that:
A. the change in future share prices cannot be predicted from past share prices
B. share prices adjust rapidly to new information contained in past prices or past data
C. technical analysts cannot be expected to outperform the market
D. All of the above.

Q38. If the weak form of the efficient market hypothesis holds, then:
A. share prices follow a random walk
B. share prices reflect all information contained in past prices
C. technical analysis is useless
D. All of the above.

Q39. The weak form of the efficient market hypothesis denies:

A. the use of technical analysis, but supports fundamental analysis as valid
B. the use of fundamental analysis, but supports technical analysis as valid
C. the use of both technical analysis and fundamental analysis
D. the use of technical analysis, but is silent on the possibility of successful
fundamental analysis

Q40. At which of the levels of market efficiency does the efficient market hypothesis support
the technical analysis approach to future share price determination?
A. weak-form efficiency
B. semi-strong form efficiency
C. strong-form efficiency
D. None of the above.

Q41. The semi-strong form of the efficient market hypothesis states that:
A. future share prices are predictable
B. all available information is reflected in the price of securities
C. security prices reflect all publicly available information
D. None of the above.

Q42. 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

Q43. 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

Q44. 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.

Q45. An investor finds that for a particular group of shares, large positive price changes are
always followed by large negative price changes. This finding violates the:
A. strong form of the efficient market hypothesis
B. semi-strong form of the efficient market hypothesis
C. weak form of the efficient market hypothesis
D. None of the above

Q46. If you believe that share prices reflect all information that can be derived from
examining the market trading data, such as the history of past share prices, which form of
efficient market hypothesis do you believe in?
A. Weak
B. semi-strong
C. strong
D. informational

Q47. If you believe that share prices reflect all relevant information, including publicly
available information, which form of efficient market hypothesis do you believe in?
A. weak
B. semi-strong
C. strong
D. informational

Q48. If you believe that share prices reflect all relevant information, including information
that is available only to insiders, which form of efficient market hypothesis do you believe
in?
A. weak
B. semi-strong
C. strong
D. informational

Q49. Proponents of the efficient market hypothesis assert that technical analysts:
A. should focus on resistance levels
B. should focus on relative strength
C. should focus on support levels
D. are wasting their time

Q50. 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

Q51. It may be argued that share prices on the Australian Stock Exchange reflect all publicly
available, relevant information regarding listed companies, and therefore superior profits
cannot be made by an investor using publicly available information.
Based on the above contention, which of the following statements best describes the
informational efficiency of the Australian Stock Exchange?
A. Strong-form efficiency
B. Semi-strong form efficiency
C. Weak-form efficiency
D. Random walk efficiency

Q52. In relation to stock exchanges, the term ‘circuit breaker’ refers to:
A. interventions designed to restore orderly markets
B. fines levied on inside traders
C. fines levied on speculators
D. the minimum amount of capital brokers must have before trading

Q53. Program trading:

A. is the most likely reason there was a stock market crash in October 1987
B. occurs only in over-the-counter markets
C. refers to computer generated orders to buy or sell many shares at the same
time
D. has been abolished by order of the Australian Stock Exchange

Q54. If share prices appear to follow a random walk, then:

A. selecting shares for portfolios is irrelevant
B. investment analysts are unimportant
C. successive share price changes are unpredictable
D. it is impossible to know when to buy shares

Q55. Research of actively managed portfolios, managed by professional portfolio managers:

A. indicates that one should not randomly select managed portfolios, managed by
professional portfolio managers
B. indicates that historical performance is not necessarily indicative of future
performance
C. indicates that professional management provides investors with superior market
returns
D. both A and B

Q56. Which one of the following is correct?

A. If the share market follows a random walk, price changes should be highly
correlated
B. A random walk for share price changes is inconsistent with observed patterns in
price changes.
C. If the share market is weak-form efficient, the share prices follow a random
walk
D. All of the above.
Q57. Consider the following five statements:
1. Technical analysts rely on very sophisticated technical models of the macroeconomic
environment.
2. Since all chartists are confronted with identical share price data, they should identify
very similar patterns and generate identical buy and sell signals from the data.
3. A chartist will draw resistance levels at higher share price levels where an increase in
supply halts price increases.
4. Chartists will draw support lines at lower price levels where an increase in demand
halts a price fall.
5. The random walk hypothesis, as applied to share price movements, implies that the
examination of past price movements yields no useful information on the course of
future price movements.
How many of these statements are true and how many are false?
A. 4 statements are true and 1 is false
B. 3 statements are true and 2 are false
C. 2 statements are true and 3 are false
D. 1 statement is true and 4 are false

Week 5 – Debt market

1. 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
d. All of the given answers

2. 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.

3. 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.

4. A bond's ___________ value is also called its par value. Bonds that trade at a price
greater than their par value are said to sell at a ___________ , whereas those that
trade at a price less than their par value sell at a ___________ .
face; premium; discount

5. Which of the following statements is correct?

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.

6. Commercial bills issued by corporations are sold at __________, and the ___________
is the party that issues the bill. The ________ for the bill will provide the financing.
a. Discount to face value; drawer; buyer

7. An investor invested AUD$35,000,000 in 63-day Australian bank-accepted bills

discounted at a yield of 1.86% per annum, 63 days ago. The investor has decided to
roll over the value of that entire portfolio at maturity (which is today) into 93-day
Australian bank-accepted bills discounted at a yield of 2.92% per annum. The total
market value of the 93-day bills invested today will be $_____________ 20 days from
today. In 20 days from today, those 93-day bills invested today will be 73-day bills.
Assume there are 365 days in one calendar year and discount yields remain
unchanged over the next 20 days. (Answer must be correct to the nearest cent, but
you may leave your answer with more than 2 decimal places.) [Hint: Calculate the
total face value of the of 63-day bills first.]
35168218

8. 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.

9. 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

10. If $ 4.2 is borrowed for 830 days, 4.4 per cent compounded annually interest is
charged, the total amount paid on the loan will be

4.63 FV= PV*(1+i)^(n/365)

11. 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

12. The fees charged by banks onto the total amount of the loan facility and are
normally payable in advance are:
a. commitment fees.
b. establishment fees.
c. line fees.
d. service fees.

13. Many years ago, banks:

a. could make mortgage loans to households but not to businesses.
b. could make loans to businesses but not make mortgage loans.
c. held most loans on their books until they were paid off.
d. repackaged and sold most loans to investors.

14. 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.

15. A coupon bond issued by an Australian company in Sydney pays annual interest,
has a par value of $1,000, matures in 21 years, has a coupon rate of 4.62% per
annum, and has a yield to maturity of 11.82% per annum. The current intrinsic value
of the bond should be $449.18136741549. Bond Price=Coupon x (1-(1+y)-T)y-1 +
1000 x (1+y)-T .

16. If a company wishes to finance a printing press with a two-year life, it would be
advisable to finance it
a. through its bill rollover facility
b. with the issue of commercial paper
c. by issuing a bank bill
d. with an overdraft

17. An investor invested AUD$52,000,000 in 64-day Australian bank-accepted bills

discounted at a yield of 1.69% per annum, 64 days ago. The investor has decided to
roll over the value of that entire portfolio at maturity (which is today) into 123-day
Australian bank-accepted bills discounted at a yield of 1.70% per annum. The total
market value of the 123-day bills invested today will be $_____________ 20 days from
today. In 20 days from today, those 123-day bills invested today will be 103-day bills.
Assume there are 365 days in one calendar year and discount yields remain
unchanged over the next 20 days. [Hint: Calculate the total face value of the of 64-
day bills first.]
d. 52202441

18. 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.

19. 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.

20. If $ 9.7 is invested in a bank for 904 days, and simple interest of 6.2 per cent per
annum is charged, the total amount of interest received on the deposit will be
a. 1.49
b. 11.19
c. 11.26
d. 1.56

21. 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
22. Compared with an amortised loan, a deferred repayment loan involves:
a. periodic interest and principal repayments.
b. periodic interest and principal repayments when positive cash flows
begin.
c. periodic interest payments and principal repaid at maturity.
d. periodic principal payments and interest repaid at maturity.

23. 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

24. 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%:
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.

25. 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

26. A commercial paper issue where dealers bid competitively for the paper is a/an:
a. tap issuance.
b. tender.
c. offer.
d. proposition.

27. 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.
+ fully drawn advance

28. 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

29. The _______ is the party that lends the funds in a commercial
bill transaction.
A. acceptor
B. discounter
C. drawer
D. endorser

30. 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

31. 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.

32. 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. $98 148.62

33. 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-days bills are currently yielding 6.8% per
annum, what price will be obtained?
A. $98 984.55

34. Promissory notes have 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 banks

Week 6 – Interest rate determination

1. An economic indicator that tends to follow changes in the business

cycle is
a. coincident indicator.
b. lagging indicator.
c. leading indicator.
d. secondary indicator.

2. 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.

3. 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.

4. 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.

5. 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.

6. According to the expectations theory of term structure, if investors

believed that the average of the expected future short-term yields was
greater than the long-term yield for a holding period, they would act so as
to:
a. drive down the price of the short-term security and drive up the price of
the long-term security.
b. drive up the price of the short-term security and drive down
the price of the long-term security.
c. drive up the prices of both the short-term and long-term securities.
d. drive down the prices of both the short-term and long-term securities.

7. 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.

8. A yield curve where the market participants expect higher future rates
of interest is:
a. downward-sloping.
b. upward-sloping.
c. flat.
d. inverse.

9. Consider the following statements:

Treasury-bills in the United States are financial instruments initially sold by
the commercial banks in the United States to raise funds.
For a limited liability company, the liability is restricted to the
shareholders of the company and not the bond holders.
A common measure of a share's market liquidity is the ratio of turnover to
market capitalisation.
Money market instruments are short-term instruments with marketability
and pay liquidity premiums

How many of these statements are true and how many are false?
a. 1 statement is true and 3 are false
b. 2 statements are true and 2 are false
c. 3 statements are true and 1 is false
d. All 4 statements are true
e. All 4 statements are false

10. 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

11. 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.

12. The policy where a central bank influences the level of short-term
interest rates in order to affect inflation is:
a. fiscal policy.
b. economic policy.
c. monetary policy.
d. inflation rate policy

13. 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.

14. 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
15. 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.

16. 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.

17. 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:
(0i1) 8.46% per annum
(E1i1) 8.55% per annum

a. 8.51% per annum

b. 8.63% per annum
c. 8.80% per annum
d. 8.88% per annum

Week 7 – Foreign Exchange

1. 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

2. If you the broker tell you the quote "Dollar Aussie is one forty-one eleven-thirteen",
what would be the transposed one?
a. AUD/USD 0.7086-87
b. AUD/USD 1.4111-13
c. AUD/USD 0.7085-87
d. AUD/USD 0.7086-88
e. USD/AUD 0.7086-87
 3. 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

4. Which of the following statements is correct:

I. Crawling peg regime allows the currency to depreciate gradually over time within a
limited range;
II. Free float can be characterised by complete independence of FOREX market from the
government interference;
III. Managed float regime used to be popular in the past but recently the major
economies have established the floating exchange rate regime;
IV. Exchange rate regimes are established by Bank for international Settlements for all
participating countries;
V. According to the fixed exchange rate regime, one currency is directly linked to
another currency.

5. Which of the following statements are false:

I. Central banks interfere into FX markets only to support their domestic currency;
II. Speculators are usually involved in risk-free transactions because of sophisticated
arbitrage strategies;
III. FX dealers usually seek for better prices from brokers and take the average between
the bid and ask for getting the quote for the client;
IV. All cross-border trade transactions take place in USD because it is the currency
established for these purposes by BIS.

6. Which statement is false?

a. Transactions in FX market can be carried out 24 hours a day
b. Forward transaction represents a commitment to deliver or buy currency at some future
date at the price established today
c. Forward transaction represents only the right but not the commitment
d. According to the forward transaction arrangements, exchange rate is established today
for the delivery in three business days from today
e. Tod transaction represents an FX contract with execution and delivery today

7. Which of the following statements are false:

I. In free float currency regimes central banks may intervene into FX markets only to
add up its official foreign currency reserves and to trade foreign currency for
servicing government debt;
II. If the speculator believes that the currency is under-priced, short position will be
taken in FX market;
III. Arbitrageurs exploit market inefficiencies by implementing risky-free strategies;
IV. Cross-border trade transactions take place only in USD and REM.
a. Only I, II and IV are false
 8. 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

9. What would be 3-months forward quote on USD/YEN if the spot rate is USD/YEN
114.35. Base currency interest rate per annum is 2%, whereas terms currency
interest rate is 6% per annum.
a. 115.4878

10. 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. (if declines)
c. The demand for local currency will increase.
d. There will be an increase in the quantity of local currency supplied to the market.

11. 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.

12. 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.

13. You have the following quotations:

AUD/GBP 0.5543-46
GBP/NZD 1.9605-09
What is the cross-rate AUD/NZD?
a. 1.0867-75

14. 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
 15. A percentage spread of a quote USD/RUB 65.74-65.79 is:
a. 0.076%

16. A treasurer of a company got the following quotation from an FX dealer: "The dollar
euro is sixty-two ten-fifteen, thirteen-thirty-one". Which statement is correct?
a. Base currency is at a forward discount
b. Terms currency is at a forward discount
c. Terms currency is at a forward premium
d. Interest rates in the base currency country are lower than in the terms-currency country

17. 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

18. A tax levied on imports into a country is called a:

a. quota.
b. embargo.
c. value added tax.
d. tariff.

19. 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 - Incorrect
d. Impossible to say without values

20. In the quotation USD/AUD1.4035-1.4065 exchange rates 1.4035 and 1.4065 are ask
and bid prices respectively.
a. True
b. False

21. 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.

22. 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.

23. Consider a textbook situation in which Australia and the USA are experiencing similar
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.

24. 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

25. 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

26. Consider the following five statements:

i. There is conclusive evidence that an increase in national output growth and income
will result in an immediate and sustained appreciation of the exchange rate.
ii. There is no relationship between interest rates and exchange rate, because interest
rates reflect the current yield on financial assets, whereas exchange rates are the
relative prices of different currencies.
iii. All else being constant, it is to be expected that a currency will appreciate if there is
an increase in real rates of return, relative to those in other countries.
iv. Movements in commodity prices within Australia typically provide a reasonable
indicator of AUD/USD exchange rate movements.
v. As Australia maintains a fixed exchange rate, tied to the USD, there is no need for the
Reserve Bank to intervene in the FX market
How many of these statements are true and how many are false?
a. 2 statements are true and 3 are false

27. 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 - Incorrect
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

28. 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. - Incorrect
c. current value of the yen against the Australian dollar will rise.
d. nominal rates in Japan will fall.

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.
d. All of the given answers are correct.

30. In general, the foreign exchange dealer's bid-offer spread _______ with time to
settlement.
a. is not concerned
b. increases
c. decreases
d. narrows

31. 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

Week 8 – Futures and FRA

1. All of the statements below are not true, except:

I. Changes in interest rates represent a risk for both borrowers and investors because
of diminishing investment prospects and increased cost of borrowing;
II. Failure to pay on time by customers may have a significant negative impact on the
capital base of a company;
III. Companies involved in cross-border trades are subject to liquidity risk because
decreased value of the home currency results in less funds available;
IV. It is essential for banks to assess the creditworthiness of international customers
to mitigate the FX risk;
V. Liquidity is an important consideration only for a central bank as it takes care of
the availability of funds within a financial system.
a. Only I, II and IV
b. Only I and II

2. There are several major types of derivatives including:

I. Futures;
II. Forwards;
III. Rights;
IV. Options;
V. Swaps.
a. I, II, IV, V are correct

3. Profit or Loss from a futures risk management strategy:

I. Is the difference between the current price of the futures contract and its future
price;
II. Is used to offset the profit or loss of the previous market transaction;
III. Is highly undesirable because does not allow to hedge the spot price of an
underlying asset.
a. Only I is correct

4. 2Mv7M in relation to FRA means:

a. The settlement date is in two months and interest cover is for a five-month
period.

5. Which of the following about futures contracts is incorrect?

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 contracts is settled

6. Which of the following statements about futures are true:

I. Futures is a standardised contract to buy or sell a specific commodity or financial

instrument at a specific price at a predetermined future date;
(X) II. In Australia bonds futures are usually quoted at an index figure of 100 minus the
yield so a dealer can follow a basic principle of buy low and sell high;
III. Novation is the process to renew futures contracts when they fall due;
IV. Standard delivery is more usual in futures markets.

7. In futures markets a trader:

Select one:
a. Usually represents hedge funds and trying to implement sophisticated strategies to
earn abnormal returns
b. can represent a superannuation fund and buys VIX futures anticipating high volatility
in coming months
c. can be a funds manager and tries to realise risk-free returns taking advantage of price
differentials between different markets
d. can buy and sell futures contracts multiple times during the day adding depth and
liquidity to the markets
 8. An Australian importer with FX payable in 3 months can hedge and lock in the
price of the required foreign currency by:
Select one:
a. buying AUD futures.
b. buying a currency swap.
c. selling AUD futures.
d. selling a currency swap.

9. 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:
Select one:
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.

10. If a borrower has entered into a FRA and its interest cover is specified as 3Mv9M,
this means:
Select one:
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.

11. Events that may result in unexpected changes of projected cash flows or capital
structure of an organisation are categorised as Financial Risks.
True

12. All of the following statements are false except:

I. The price of a derivative contract is derived from the price of the commodity or
financial instrument;
II. The particular risk exposure is said to be hedged when the derivative contract implies
locking the unknown price of an underlying asset in a particular day in future;
III. Derivatives can be used either for hedging or speculative operations in financial
markets;
IV. Risk management straggles based on derivatives are easily implemented, especially
within large organisations, because they have a direct access to financial markets.

13. A priori engaging in futures contract cannot result either in loss or profit, because
all futures transactions must satisfy the conditions of a zero-sum game (the net
result should be zero contracts).
False

14. Proof of sufficient liquidity is not a requirement for entering a forward rate
agreement.
True

15. 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.

16. 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
(X)c. example of a spread
d. example of a straddle

17. A wheat grower who wishes to protect his future wheat crop from price
fluctuations can:
Select one:
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.

18. The company expects to invest approximately $1 million in three months in

corporate bonds. The current rate of interest is 7.40%. To hedge the position, the
company wishes to use 3 year Treasury bond futures contracts trading at 96.000.
Calculate the profit or loss from the position in futures market if in 3 months the
contracts are trading at 97.300.
a. $38471.36

Week 9 – Options

1. 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.
c. call; put; Calls

2. Calculate the value of a long call if the exercise price is $331.8, the premium is $50.1
and the spot price is $102.8.

3. 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

4. At maturity, the intrinsic value of a put option is zero:

a. If the spot price of the underlying asset is less than the strike price
b. If the spot price of the underlying asset is too volatile during the term of the contract
c. If the spot price of the underlying asset is less than the exercise price
d. If the spot price of the underlying asset is greater than the strike price
e. Never

5. In order to measure and manage interest rate swap risk exposures, a financial
intermediary may:
a. practise marking-to market
b. seek security collateral
c. require a written performance guarantee from the counterparty's sponsor
d. do all of the given answers

6. 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. horizontal spread.
b. vertical spread.
c. short straddle.
d. long straddle

7. In a swap arrangement, both parties may be able to receive more favourable

funding rates than they would have done without the swap, and the swap
dealer receives a spread as well. Where does the cost saving originate from?
a. The bank swap dealer effectively guarantees payments of all obligations.
b. The parties involved in the swap are able to borrow where each has a relative cost
advantage.
c. The party paying floating cash flows always pays less than the party paying fixed cash
flows.
d. With the bank always acting as a swap counterparty, each party is able to reduce the
risk profile.

8. Consider the following five statements:

i. Swaps may be used to achieve a lower cost of funds for a company.
ii. In an interest rate swap, the two parties swap the principal amount plus the
ongoing associated interest obligations.
iii. An intermediated swap is said to be ‘matched' when a bank enters into
swaps with both firms involved in an interest rate swap.
iv. A ‘plain vanilla' swap is the fixed AUD to floating AUD swap.
v. If an intermediary is involved in a swap between two parties, the
intermediary will also provide the initial loan to both parties.

How many of these statements are true and how many are false?
b. 2 statements are true and 3 are false

9. Interest rate swaps and cross-currency swaps permit a counterparty to

exchange a:
a. floating interest rate payment or currency value for a lower floating payment value
over the term
b. fixed interest rate position for a currency position over the contract term
c. floating interest rate payment or currency value for a fixed payment value
over the contract term
d. fixed interest rate payment or currency value for a fixed value over the contract term

10. 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.

11.
A property