Financial Institutions Instruments and Markets 8th Edition Viney Test Bank

Financial Institutions Instruments and
Markets 8th Edition Viney Test Bank

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Chapter 12 Testbank
Student: ___________________________________________________________________________
1. 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.
2. The management of the revenues and expenditure of a government is called:
A. monetary policy.
B. fiscal policy.
C. debt management.
D. economic policy.
3. Which of the following statements in relation to the Australian Commonwealth government's borrowing
programs is incorrect?
A. The early 1990s saw an increase in debt issues to fund the budget deficits at that time.
B. The government tends to fund short-term liquidity requirements with the issue of Treasury notes.
C. When government income exceeds forecast expenditures, the resulting deficit tends to be funded by
short-term debt.
D. Fiscal constraint by successive Australian governments for the second part of the 1990s brought the
government budgets back into surplus until recently.
4. Which of the following statements in relation to the Commonwealth Government's borrowing programs is
incorrect?
A. The government must issue longer term paper to fund its budget surplus
B. Treasury notes can be issued to manage intra-year liquidity
C. Debt issues are used to finance seasonal deficit/surplus patterns
D. The past few years have seen a decrease in debt issuance to fund the budget
5. If a government's income from tax receipts exceeds its expenditure, the government is running a:
A. deficit, and is a net borrower of funds.

B. surplus, and is a net borrower of funds.
C. deficit, and is a net saver of funds.
D. surplus, and is a net saver of funds.
6. When a government undertakes a significant reduction in government recurrent expenditure this is known
as:
A. fiscal recession.
B. fiscal constraint.
C. matching principle.
D. capital expenditure shortfalls.
7. When a government's budget is in _____, it is required to issue new government securities, and when the
budget is in _______, it may retire maturing debt and redeem some debt prior to maturity.
A. surplus; surplus
B. deficit; surplus
C. deficit; deficit
D. surplus; deficit
8. If a government's budget is in surplus, it may:
A. issue more securities.

B. retire maturing securities.
C. issue more long-term securities.
D. allow the institutions to hold less government debt.
9. Participants in the financial markets seek to hold government paper because:
A. Investors can sell the paper quickly to raise funds.

B. Government securities pay a steady rate of return.
C. banks are required to hold government securities as part of liquidity management.
D. all of the given answers are correct.
10. When the Australian government faces month-by-month mismatches between inflow of funds and cash
outflows it may issue:
A. Treasury bonds.
B. Treasury bills.
C. Treasury notes.
D. Treasury paper.
11. When the government demand for funding reduces the available funds within a nation-state this is known
as:
A. fiscal constraint.
B. illiquidity effect.
C. crowding-out effect.
D. capital expenditure effect.
12. The crowding-out effect refers to:
A. corporate borrowing exceeding government borrowing.

B. government borrowing reducing the available funds for borrowing.
C. heavy long-term borrowing by government.
D. corporations issuing securities of long maturity.
13. Other things being equal, an increase in the government budget deficit:
A. can increase business prospects.

B. can force interest rates down.
C. can force interest rates up.
D. may not have any effect on interest rates.
14. Which of the following is NOT a feature of types of Treasury bonds that are currently issued by the
Commonwealth Government?
A. A fixed-interest security that pays half-yearly coupon payments

B. Issued with a face value which is repayable at maturity
C. Existing Treasury bond issues are exposed to price risk
D. Issued as either a bearer bond or as inscribed stock
15. The advantages associated with the issue of inscribed stock for bond issues are:
A. it is less costly to maintain a register of bond holders than print and distribute physical bonds.
B. inscribed stock protects holders from risk of theft.
C. coupon payments are easily made electronically to the registered holders.
D. all of the given answers.
16. The inscribed stock system for selling Treasury bonds was introduced in:
A. 1979
B. 1980
C. 1982
D. 1984
17. Which of the following about the primary market issue of Treasury bonds is correct?
A. Treasury bonds are issued by a tender system.

B. Treasury bonds are issued by the ‘tap' system of selling.
C. The issue of Treasury bonds is currently managed by the RBA.
D. The minimum bid for treasury bonds must be for a face value of $1000 000.
18. Which of the following procedures for bidding for Australian Treasury bonds is NOT correct?
A. Bids must be submitted electronically by registered bidders.

B. The minimum bid must be for a face value of $1 million and multiples thereafter.
C. Bids are made in terms of prices up to three decimal places.
D. Bids are accepted in ascending order.
19. Which of the following about the primary market issue of Treasury bonds is NOT correct?
A. The issues are currently managed by AOFM.

B. Tenders will be lodged to buy the bonds in terms of yield to maturity.
C. The minimum bid must be for a face value of $1 million.
D. Bids are accepted in descending order: that is highest-yield first.
20. Which of the following statements regarding the Treasury bond tender system is correct?
A. The timing of Treasury bond tenders is set each year in the government's budget papers.
B. Buyers of bonds effectively nominate the price at which they purchase the bond.
C. The tender system removes the need for a secondary market in Treasury bonds.
D. The maturities and quantities of bond tenders are determined by the Loan Council.
21. Which of the following statements is correct for the current system of bidding for government bond
tenders?
A. Bids must be in terms of price.

B. Bids are accepted in terms that correspond to the highest price.
C. The minimum bid must be for a face value of $500 000.
D. The maximum limit for a total amount is $100 million.
22. The selling of Government bonds is currently handled by:
A. APRA.
B. ARB.
C. AOFM.
D. Austraclear.
23. A Treasury bond holder who wishes to redeem a bond early may sell it:
A. back to Treasury.
B. back to the central bank.
C. in the secondary market.
D. back to the broker.
24. If market interest rates move upwards after an investor buys a government bond, the investor may:
A. sell the bond back to Treasury.

B. sell the bond in the secondary markets for a capital loss.
C. sell the bond in the secondary markets for a capital gain.
D. hold the bond until the market rates return to their original level and then have a capital gain.
25. Government securities generally:
A. are highly liquid instruments, especially the short-term ones.

B. have an active secondary market.
C. are regarded as fault-free.
D. meet all of the given answers.
26. Government securities are generally:
A. illiquid.
B. issued when a government's budget is in surplus.
C. highly negotiable.
D. coupon-paying debt securities.
27. Until _______, purchasers of new-issue Treasury bonds could hold them either as bearer bonds or inscribed
stock.
A. 1979
B. 1984
C. 1987
D. 1992
28. Which of the following procedures is NOT true for bidding for Treasury bonds under the tender system?
A. Only bids submitted electronically by registered bidders through AOFM tender system are accepted.
B. Minimum bid must be for $1 000 000 and multiples of $1 000 000 thereafter.
C. Bids are made in terms of yield to maturity up to three decimal places.
D. Bids are accepted in descending order; that is, the lowest price is allotted first.
29. Which of the following is NOT an advantage associated with the issue of inscribed stock?
A. It is expensive to print and distribute the physical instrument.

B. Without a register, there is a potential for non-disclosure of income.
C. It protects the holder from the risk of capital loss.
D. It protects the holder from the risks of theft or misplacement.
30. With a/an ______ stock issue, ownership is registered electronically and a receipt is issued.
A. bearer
B. submitted
C. inscribed
D. tendered
31. When bonds are traded in either the primary or secondary markets in Australia, they are quoted in terms of
their:
A. current yield.
B. current price.
C. redemption yield.
D. annual interest, divided by the face value.
32. The total return of interest and capital gains received by an investor when a security is held to maturity is
called:
A. current yield.
B. maturity yield.
C. historical yield.
D. redemption yield.
33. Which of the following statements regarding the secondary market for Australian government securities is
incorrect?
A. The volume of on-exchange trades of government securities is very high.

B. Treasury notes and bonds may be listed on the Australian Securities Exchange (ASX).
C. Banks buy and sell government securities to manage their operational liquidity.
D. All wholesale electronic transactions involving Commonwealth government securities are settled
through Austraclear.
34. For government securities listed on the ASX, there is a higher volume of off-exchange trades compared
with on-exchange transactions because:
A. of difficulties in payment.
B. greater profits may be made.
C. of brokers that can act as an agent between two parties.
D. of the high fees involved.
35. Which of the following financial institutions currently has the largest holdings of Commonwealth
Government securities?
A. A state government public authority

B. The Reserve Bank of Australia
C. General insurance offices
D. Life assurance offices
36. Financial institutions hold government securities because of:
A. liquidity requirements.
B. interest rate expectations.
C. funding requirements.
37. If interest rates move lower after a Treasury note is issued, a holder selling it into the secondary markets:
A. receives a capital gain.

B. receives a capital loss.
C. receives the original price, as short-term markets are not so affected by interest rate movements.
D. receives a higher yield owing to the time elapsed.
38. When an institution buys government securities, it settles the transaction by:
A. sending the seller of the security a cheque.

B. sending the funds to the broker.
C. using the clearing house Austraclear.
D. sending funds electronically to the seller via a bank.
39. Which of the following about Treasury bonds is NOT correct?
A. Banks invest excess short-term funds in Treasury bonds as they are liquid.
B. A financial institution with a need for funds can quickly sell some its government securities.
C. Treasury bonds can be held to manage the maturity profile of a bond portfolio.
D. Commercial banks are required by the prudential supervisor to hold a prescribed number of Treasury
bonds.
40. When the current market interest rates rise, the price of bonds:
A. goes up.
B. goes down.
C. is unchanged.
D. may go up or down or be unchanged, depending on conditions.
A. The volume of over-the-counter transactions for Treasury bonds is far larger than the volume of on-
exchange trades.
B. Banks hold Treasury bonds for liquidity management.
C. If fund managers expect interest rates to fall they may decrease their holdings of long-term Treasury
bonds.
D. The Reserve Bank of Australia holds government securities as part of monetary policy.
42. Australian government securities that are short-term are:
A. Treasury bills.
B. Treasury notes.
C. Treasury paper.
D. Treasury bonds.
43. Which of the following about Australian Treasury notes is incorrect?
A. Australian Treasury notes are discount securities.

B. The minimum bid must be for a face value of $1 million.
C. Bids are accepted in ascending order; that is lowest-yield.
D. Bids are made in terms of yield to maturity up to three decimal places.
44. In Australia a Treasury bond differs from a Treasury note in that it:
A. is issued for a period less than a year.

B. pays interest quarterly, unlike the monthly interest payments for a Treasury note.
C. is a discount instrument.
D. is a longer term coupon security.
45. Which of the following is NOT a feature or function of Treasury notes (T-notes)?
A. T-notes are issued with short-term maturities.

B. T-notes are discount securities; that is, they are sold at a price below face value.
C. Coupon payment, plus the face value, is paid at maturity.
D. T-notes are used to manage the liquidity for the government.
46. Compared with a Treasury bond, a Treasury note:
A. pays a higher interest rate.

B. is sold at a price below its face value.
C. is sold in terms of price to the highest bidder.
D. has a higher yield.
47. Which of the following is NOT a feature of the tendering of Treasury notes (T-notes) in Australia?
A. T-notes are issued by tender.

B. The registered bidders of the AFOM submit their bids electronically.
C. Successful bidders settle their purchases through Austraclear.
D. Each bid must be for a minimum parcel of $100 000.
48. A bank puts in a bid for $500 000 of 182-day Treasury notes at a yield of 5.8% per annum. What price will
the bank pay if the tender is successful?
A. $448 028.67
B. $485 756.54
C. $485 946.17
D. $486 101.73
49. A bank is considering purchasing a Treasury note with a face value of $500 000 that is currently selling for
$487 324, with 180 days to maturity. What is the note currently yielding?
A. 4.90%
B. 5.14%
C. 5.27%
D. 5.41%
50. On Tuesday, the Reserve Bank announces details of a 26-week T-note tender, with competitive bids to
close on Wednesday. A bank lodged a successful bid for $5 000 000 in T-notes at a yield of 6.57% per
annum. Settlement is required on Thursday through RITS. What amount will the bank need to pay on
settlement?
A. $4 841 395.87
B. $4 843 084.08
C. $4 988 327.31
D. $4 998 362.54
51. A funds manager is revaluing his/her investment portfolio, which includes a $2 000 000 holding of
Treasury bonds. The bonds pay a coupon of 10% per annum, payable half-yearly. A coupon payment has
just been made, and the bonds have exactly five years to maturity. Similar bonds are currently yielding 12%
per annum in the market. What is the value of the fund manager's Treasury bond portfolio?
A. $1 495 331.33
B. $1 620 921.33
C. $1 852 798.26
D. $2 000 000.00
52. Which of the following is NOT an advantage for a state's central borrowing authority?
A. By grouping issues as a single one, lower economies of scale can be obtained.

B. Potential conflict between different debt issuers may be overcome.
C. The timing of debt issues can be controlled so they are brought to the market at the most opportune time.
D. The central borrowing authority can do a public issue more effectively than a private placement.
53. The Commonwealth Government currently issues Treasury notes with varying terms to maturity:
A. twice a year.
B. three times a year.
C. four times a year.
D. to match the government's main revenue receipt dates.
54. The Reserve Bank of Australia's monetary policy is directed to influence first:
A. money market rates.

B. Treasury notes interest rates.
C. the overnight cash rate.
D. the base bank interest rates.
55. The transmission channel related to changing the money supply, followed by changes in short-term rates
and pressure on interest rates to change the cost of funds, and consequently to influence economic activity,
is known as a:
A. credit channel.
B. monetary policy channel.
C. foreign exchange channel.
D. wealth channel.
56. The transmission channel related to changing the money supply to change the pattern of bank lending and
the availability of funds, to influence economic activity, is known as a:
A. credit channel.
D. wealth channel.
57. When actions by the Australian Reserve Bank affect bank lending and consequently borrowers find it more
difficult to find funding, this effect is called the:
A. monetary channel.
B. credit channel.
C. wealth channel.
D. foreign exchange channel.
58. The transmission channel that affects the value of assets and liabilities within the domestic economy, and
thus influences economic activity, is known as a:
A. credit channel.
D. wealth channel.
59. The transmission channel that eventually affects the demand for Australian exports and imports by
affecting their relative costs, and thus influences economic activity, is known as a:
A. credit channel.
D. wealth channel.
60. Open market operations by the Australian Reserve Bank refer to:
A. the method by which the Australian Reserve Bank allows banks to raise short-term funds up to a year.
B. the method by which the Australian Reserve Bank implements monetary policy.
C. the market for short-term securities.
D. the method by which the Australian Reserve Bank monitors the financial sector.
61. Monetary policy in Australia is implemented by the Reserve Bank, and is currently principally directed
towards:
A. affecting the level of short-term interest rates.

B. effecting a reduction in the current account deficit.
C. affecting the level of growth in the money supply.
D. affecting the value of the AUD, and the exchange rate.
62. The Reserve Bank focuses much of its attention on the level of underlying inflation in the Australian
economy. What are the important implications of a low level of underlying inflation for the markets?
A. A low level of underlying inflation restricts the potential for future economic growth and business
investment.
B. The Reserve Bank needs to maintain tight monetary policy to ensure inflation remains low.
C. A low level of underlying inflation leads to increased business confidence and capital investment.
D. A low level of underlying inflation adds to expectations of significant future interest rate increases.
63. The main method the Australian Reserve Bank uses to manage the money market cash position is:
A. conducting FX transactions.
B. issuing Treasury bonds.
C. managing the amount of Commonwealth securities in the market.
D. issuing Treasury notes.
64. Price stability is desirable because:
A. everyone is better off when prices are stable.

B. inflation creates uncertainty about future planning.
C. it guarantees full unemployment.
D. it increases the efficiency of the Australian Reserve Bank.
65. The Reserve Bank conducts market operations in order to effect its monetary policy objectives. Which of
the following best describes the Reserve Bank's market operations?
A. Market operations may be conducted to neutralise official FX transactions.

B. Reserve Bank market operations target the overnight cash rate.
C. Market operations affect day-to-day system liquidity.
D. All of the given answers are correct.
66. The use of open-market operations as a monetary tool has the advantage that:
A. they can be implemented rapidly, without administrative delays.

B. they are flexible and precise.
C. they can be easily reversed if errors are made.
67. When the Australian Reserve Bank sells Commonwealth government securities, it:
A. injects extra cash into the financial markets.

B. loosens monetary policy.
C. puts downward pressure on interest rates.
D. tightens monetary policy.
68. If the Australian Reserve Bank wants to decrease the money supply in the long term, it will:
A. buy repurchase agreements.

B. buy Commonwealth government securities.
C. lower the cash rate.
D. sell Commonwealth government securities.
69. Which of the following is NOT true of tightening of monetary policy?
A. Banks' supplies of funds are depleted through open-market operations

B. Interest rates fall
C. The dollar may increase in value
D. Bank lending is reduced
70. When an easing of monetary policy is accomplished by open-market operations:
A. interest rates rise.

B. banks' supplies of funds are increased.
C. the dollar appreciates.
D. bank lending generally decreases.
71. If the Australian Reserve Bank wants to expand the money supply, it will:
A. buy Commonwealth government securities.

B. increase the cash rate.
C. sell Commonwealth government securities.
D. sell repurchase agreements.
72. When the Australian Reserve Bank wants to ease the monetary policy, it will:
A. sell Commonwealth government securities.

B. increase the overnight cash rate.
C. buy Commonwealth government securities.
73. The main types of Commonwealth government transactions that influence the daily cash positions are:
A. taxation receipts.
B. government receipts.
C. budget expenditures.
74. The short-term interest rate that is almost immediately affected by changes in the Reserve Bank's monetary
policy is the:
A. real interest rate.

B. overnight interbank rate.
C. 30-day bank bill rate.
D. intercompany lending rate.
75. In relation to impacts on the Australian financial system liquidity, if payments from the official sector to
the private sector exceed the flow of funds to the official sector then there will be:
A. a system down.
B. a system surplus.
C. a system deficit.
D. a system square.
76. In relation to impacts on the Australian financial system liquidity, if payments to the official sector exceed
official payments to the private sector then there will be:
A. a system down.
D. a system square.
77. Through its impact on cash rates, the Reserve Bank can affect rates further out on the maturity spectrum.
What is usually the order of transmission?
A. Cash rates; commercial bill yields; banks' deposit rates; banks' prime lending rates
B. Cash rates; commercial bill yields; banks' prime lending rates; banks' deposit rates
C. Cash rates; banks' deposit rates; commercial bill yields; banks' prime lending rates
D. Cash rates; banks' prime lending rates; commercial bill yields; banks' deposit rates
78. Banks are required to maintain exchange settlement accounts with the Reserve Bank. Settlement of
exchange settlement account transactions requires the use of same-day funds. Which of the following is
NOT generally a source of same-day funds?
A. Repurchase arrangements with the Reserve Bank

B. Reserve Bank payments in its market operations
C. Commonwealth government securities held for liquidity purposes
D. Surplus balances in banks' exchange settlement accounts
79. In relation to the payments system the huge number of low-value transactions is:
A. cleared by real-time gross settlement.

B. netted and settled at the end of each day.
C. settled immediately by banks' settlement accounts at the Reserve Bank of Australia.
D. netted and settled through banks dealing with Austraclear.
80. The payment clearing system that settles trades in Commonwealth Government securities is:
A. APCA.
B. MasterCard.
C. Austraclear.
D. CHESS.
81. The greatest monetary value of payments in the Australian financial system occurs for:
A. cash.
B. non-cash payments.
C. debt securities.
D. equity securities.
82. The special account that providers of payment services have at the Reserve Bank is called a/an:
A. balance of payments account.

B. exchange settlement account.
C. payment services account.
D. Reserve Bank payment account.
83. The Reserve Bank provides an end-of-day repurchase arrangement for banks to enable them to manage
their exchange settlement account liquidity position. Which of the following terms and conditions is
attached to repurchase arrangements?
A. T-notes with maturities of less than 91 days may be discounted.

B. A penalty margin of 0.25% is applied to all repurchase transactions.
C. The Reserve Bank publishes its rediscount rate daily.
D. All of the given answers.
84. Banks frequently engage in repurchase agreements to:
A. manage liquidity.
B. take advantage of anticipated changes in interest rates.
C. lend or borrow for a day or two with what is basically a collaterised loan.
D. do all of the given answers.
85. Repurchase agreements are:
A. usually collaterised with Commonwealth Government securities.

B. usually low-interest rate loans.
C. usually loans that have real assets as collateral.
D. none of the given answers.
86. For a debt payment system, the processing of the payment begins at the:
A. payer's financial institution.

B. payee's financial institution.
C. Australian Reserve Bank.
D. exchange settlement account of the payer.
87. For a credit payment system, the processing of the payment begins at the:

D. exchange settlement account of the payee.
88. Which of the following statements regarding real-time gross settlement (RTGS) is incorrect?
A. High-value payment transactions that are settled immediately require transfer of the monies held in
settlement accounts of the respective banks at the Reserve Bank.
B. The aim of RTGS is to minimise potential systematic risk.
C. High-value transactions are those involving more than $100 000.
D. RITS and Austraclear are the two providers recognised by the Australian Reserve Bank as providers of
RTGS.
89. When there is a significant reduction in recurrent government expenditures, the process is known as fiscal
limitation.
True False
90. An investor might hold government securities as part of a portfolio to lower its risk.
True False
91. There is often a crowding-out effect when a government deficit is high and the government issues large
amounts of long-term bonds.
True False
92. Treasury bonds are not bearer securities and so coupon payments are made electronically to holders.
True False
93. The AOFM on behalf of the federal treasurer has the power to decide on the timing, maturities and
quantities of Treasury bonds but their price is decided by tender.
True False
94. If a bond issue is announced carrying a coupon of 5 per cent per annum and an investor requires a greater
rate of return, they will put in a bid price below the face value in order to try to get the higher yield they
require.
True False
95. For bond issues through the AOFM, bids are made in terms of price up to three decimal places.
True False
96. Since each state government is responsible for providing a wide range of services, every state has its own
borrowing authority to issue debt securities.
True False
97. If the Australian Reserve Bank, through its monetary policy market operations, buys government securities,
this will lead to an easing of interest rates.
True False
98. Discuss the characteristics of short-term government securities in relation to a government's liquidity
position.
99. Discuss the role and features of secondary market transactions for Treasury bonds.
100. Discuss the current features of how Australian state governments manage their borrowings.
101. Discuss what factors influence financial system liquidity in Australia.
102. Discuss how the Australian financial system manages settlement risk for its market participants.
Chapter 12 Testbank Key
1. 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.
AACSB: Communication
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 12.1 Consider the reasons for the existence of government debt markets and the government borrowing requirement.
Section: Introduction
2. The management of the revenues and expenditure of a government is called:
A. monetary policy.
B. fiscal policy.
C. debt management.
D. economic policy.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
3. Which of the following statements in relation to the Australian Commonwealth government's borrowing
programs is incorrect?
A. The early 1990s saw an increase in debt issues to fund the budget deficits at that time.
B. The government tends to fund short-term liquidity requirements with the issue of Treasury notes.
C. When government income exceeds forecast expenditures, the resulting deficit tends to be funded by
short-term debt.
D. Fiscal constraint by successive Australian governments for the second part of the 1990s brought the
government budgets back into surplus until recently.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Section: 12.1 The Commonwealth Government borrowing requirement
4. Which of the following statements in relation to the Commonwealth Government's borrowing programs
is incorrect?
A. The government must issue longer term paper to fund its budget surplus
B. Treasury notes can be issued to manage intra-year liquidity
C. Debt issues are used to finance seasonal deficit/surplus patterns
D. The past few years have seen a decrease in debt issuance to fund the budget
Bloom's: Comprehension
Difficulty: Medium
Est time: <1 minute
5. If a government's income from tax receipts exceeds its expenditure, the government is running a:
A. deficit, and is a net borrower of funds.

B. surplus, and is a net borrower of funds.
C. deficit, and is a net saver of funds.
D. surplus, and is a net saver of funds.
Difficulty: Easy
Est time: <1 minute
6. When a government undertakes a significant reduction in government recurrent expenditure this is

known as:
A. fiscal recession.
B. fiscal constraint.
C. matching principle.
D. capital expenditure shortfalls.
Difficulty: Easy
Est time: <1 minute
7. When a government's budget is in _____, it is required to issue new government securities, and when
the budget is in _______, it may retire maturing debt and redeem some debt prior to maturity.
A. surplus; surplus
B. deficit; surplus
C. deficit; deficit
D. surplus; deficit
Difficulty: Easy
Est time: <1 minute
8. If a government's budget is in surplus, it may:
A. issue more securities.

B. retire maturing securities.
C. issue more long-term securities.
D. allow the institutions to hold less government debt.
Difficulty: Medium
Est time: <1 minute
9. Participants in the financial markets seek to hold government paper because:
A. Investors can sell the paper quickly to raise funds.

B. Government securities pay a steady rate of return.
C. banks are required to hold government securities as part of liquidity management.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
10. When the Australian government faces month-by-month mismatches between inflow of funds and cash
outflows it may issue:
A. Treasury bonds.
B. Treasury bills.
C. Treasury notes.
D. Treasury paper.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
11. When the government demand for funding reduces the available funds within a nation-state this is
known as:
A. fiscal constraint.
B. illiquidity effect.
C. crowding-out effect.
D. capital expenditure effect.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
12. The crowding-out effect refers to:
A. corporate borrowing exceeding government borrowing.

B. government borrowing reducing the available funds for borrowing.
C. heavy long-term borrowing by government.
D. corporations issuing securities of long maturity.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
13. Other things being equal, an increase in the government budget deficit:
A. can increase business prospects.

B. can force interest rates down.
C. can force interest rates up.
D. may not have any effect on interest rates.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
14. Which of the following is NOT a feature of types of Treasury bonds that are currently issued by the
Commonwealth Government?
A. A fixed-interest security that pays half-yearly coupon payments

B. Issued with a face value which is repayable at maturity
C. Existing Treasury bond issues are exposed to price risk
D. Issued as either a bearer bond or as inscribed stock
Difficulty: Medium
Est time: <1 minute
Learning Objective: 12.2 Outline features of the main debt instruments issued by the Commonwealth Government, that is, the Treasury bond and the Treasury note, and
describe the issuance process, participants and complete relevant calculations.
Section: 12.2 Commonwealth Government securities
15. The advantages associated with the issue of inscribed stock for bond issues are:
A. it is less costly to maintain a register of bond holders than print and distribute physical bonds.
B. inscribed stock protects holders from risk of theft.
C. coupon payments are easily made electronically to the registered holders.
Difficulty: Medium
Est time: <1 minute
16. The inscribed stock system for selling Treasury bonds was introduced in:
A. 1979
B. 1980
C. 1982
D. 1984
Bloom's: Knowledge
Difficulty: Hard
Est time: <1 minute
17. Which of the following about the primary market issue of Treasury bonds is correct?
A. Treasury bonds are issued by a tender system.

B. Treasury bonds are issued by the ‘tap' system of selling.
C. The issue of Treasury bonds is currently managed by the RBA.
D. The minimum bid for treasury bonds must be for a face value of $1000 000.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
18. Which of the following procedures for bidding for Australian Treasury bonds is NOT correct?
A. Bids must be submitted electronically by registered bidders.

B. The minimum bid must be for a face value of $1 million and multiples thereafter.
C. Bids are made in terms of prices up to three decimal places.
D. Bids are accepted in ascending order.
Difficulty: Medium
Est time: <1 minute
19. Which of the following about the primary market issue of Treasury bonds is NOT correct?
A. The issues are currently managed by AOFM.

B. Tenders will be lodged to buy the bonds in terms of yield to maturity.
C. The minimum bid must be for a face value of $1 million.
D. Bids are accepted in descending order: that is highest-yield first.
Difficulty: Medium
Est time: <1 minute
20. Which of the following statements regarding the Treasury bond tender system is correct?
A. The timing of Treasury bond tenders is set each year in the government's budget papers.
B. Buyers of bonds effectively nominate the price at which they purchase the bond.
C. The tender system removes the need for a secondary market in Treasury bonds.
D. The maturities and quantities of bond tenders are determined by the Loan Council.
Difficulty: Medium
Est time: <1 minute
21. Which of the following statements is correct for the current system of bidding for government bond
tenders?
A. Bids must be in terms of price.

B. Bids are accepted in terms that correspond to the highest price.
C. The minimum bid must be for a face value of $500 000.
D. The maximum limit for a total amount is $100 million.
Difficulty: Medium
Est time: <1 minute
22. The selling of Government bonds is currently handled by:
A. APRA.
B. ARB.
C. AOFM.
D. Austraclear.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
23. A Treasury bond holder who wishes to redeem a bond early may sell it:
A. back to Treasury.
B. back to the central bank.
C. in the secondary market.
D. back to the broker.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
24. If market interest rates move upwards after an investor buys a government bond, the investor may:
A. sell the bond back to Treasury.

B. sell the bond in the secondary markets for a capital loss.
C. sell the bond in the secondary markets for a capital gain.
D. hold the bond until the market rates return to their original level and then have a capital gain.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
25. Government securities generally:
A. are highly liquid instruments, especially the short-term ones.

B. have an active secondary market.
C. are regarded as fault-free.
D. meet all of the given answers.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
26. Government securities are generally:
A. illiquid.
B. issued when a government's budget is in surplus.
C. highly negotiable.
D. coupon-paying debt securities.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
27. Until _______, purchasers of new-issue Treasury bonds could hold them either as bearer bonds or
inscribed stock.
A. 1979
B. 1984
C. 1987
D. 1992
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
28. Which of the following procedures is NOT true for bidding for Treasury bonds under the tender
system?
A. Only bids submitted electronically by registered bidders through AOFM tender system are accepted.
B. Minimum bid must be for $1 000 000 and multiples of $1 000 000 thereafter.
C. Bids are made in terms of yield to maturity up to three decimal places.
D. Bids are accepted in descending order; that is, the lowest price is allotted first.
Difficulty: Medium
Est time: <1 minute
29. Which of the following is NOT an advantage associated with the issue of inscribed stock?
A. It is expensive to print and distribute the physical instrument.

B. Without a register, there is a potential for non-disclosure of income.
C. It protects the holder from the risk of capital loss.
D. It protects the holder from the risks of theft or misplacement.
Difficulty: Medium
Est time: <1 minute
30. With a/an ______ stock issue, ownership is registered electronically and a receipt is issued.
A. bearer
B. submitted
C. inscribed
D. tendered
Difficulty: Medium
Est time: <1 minute
31. When bonds are traded in either the primary or secondary markets in Australia, they are quoted in terms
of their:
A. current yield.
B. current price.
C. redemption yield.
D. annual interest, divided by the face value.
Difficulty: Easy
Est time: <1 minute
32. The total return of interest and capital gains received by an investor when a security is held to maturity
is called:
A. current yield.
B. maturity yield.
C. historical yield.
D. redemption yield.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
33. Which of the following statements regarding the secondary market for Australian government securities
is incorrect?
A. The volume of on-exchange trades of government securities is very high.

B. Treasury notes and bonds may be listed on the Australian Securities Exchange (ASX).
C. Banks buy and sell government securities to manage their operational liquidity.
D. All wholesale electronic transactions involving Commonwealth government securities are settled
through Austraclear.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
34. For government securities listed on the ASX, there is a higher volume of off-exchange trades compared
with on-exchange transactions because:
A. of difficulties in payment.
B. greater profits may be made.
C. of brokers that can act as an agent between two parties.
D. of the high fees involved.
Difficulty: Medium
Est time: <1 minute
35. Which of the following financial institutions currently has the largest holdings of Commonwealth
Government securities?
A. A state government public authority

B. The Reserve Bank of Australia
C. General insurance offices
D. Life assurance offices
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
36. Financial institutions hold government securities because of:
A. liquidity requirements.
B. interest rate expectations.
C. funding requirements.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
37. If interest rates move lower after a Treasury note is issued, a holder selling it into the secondary
markets:
A. receives a capital gain.

B. receives a capital loss.
C. receives the original price, as short-term markets are not so affected by interest rate movements.
D. receives a higher yield owing to the time elapsed.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
38. When an institution buys government securities, it settles the transaction by:
A. sending the seller of the security a cheque.

B. sending the funds to the broker.
C. using the clearing house Austraclear.
D. sending funds electronically to the seller via a bank.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
A. Banks invest excess short-term funds in Treasury bonds as they are liquid.
B. A financial institution with a need for funds can quickly sell some its government securities.
C. Treasury bonds can be held to manage the maturity profile of a bond portfolio.
D. Commercial banks are required by the prudential supervisor to hold a prescribed number of Treasury
bonds.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
40. When the current market interest rates rise, the price of bonds:
A. goes up.
B. goes down.
C. is unchanged.
D. may go up or down or be unchanged, depending on conditions.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
A. The volume of over-the-counter transactions for Treasury bonds is far larger than the volume of on-
exchange trades.
B. Banks hold Treasury bonds for liquidity management.
C. If fund managers expect interest rates to fall they may decrease their holdings of long-term Treasury
bonds.
D. The Reserve Bank of Australia holds government securities as part of monetary policy.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
42. Australian government securities that are short-term are:
A. Treasury bills.
B. Treasury notes.
C. Treasury paper.
D. Treasury bonds.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
43. Which of the following about Australian Treasury notes is incorrect?
A. Australian Treasury notes are discount securities.

B. The minimum bid must be for a face value of $1 million.
C. Bids are accepted in ascending order; that is lowest-yield.
D. Bids are made in terms of yield to maturity up to three decimal places.
Bloom's: Knowledge
Difficulty: Hard
Est time: <1 minute
44. In Australia a Treasury bond differs from a Treasury note in that it:
A. is issued for a period less than a year.

B. pays interest quarterly, unlike the monthly interest payments for a Treasury note.
C. is a discount instrument.
D. is a longer term coupon security.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
45. Which of the following is NOT a feature or function of Treasury notes (T-notes)?
A. T-notes are issued with short-term maturities.

B. T-notes are discount securities; that is, they are sold at a price below face value.
C. Coupon payment, plus the face value, is paid at maturity.
D. T-notes are used to manage the liquidity for the government.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
46. Compared with a Treasury bond, a Treasury note:
A. pays a higher interest rate.

B. is sold at a price below its face value.
C. is sold in terms of price to the highest bidder.
D. has a higher yield.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
47. Which of the following is NOT a feature of the tendering of Treasury notes (T-notes) in Australia?
A. T-notes are issued by tender.

B. The registered bidders of the AFOM submit their bids electronically.
C. Successful bidders settle their purchases through Austraclear.
D. Each bid must be for a minimum parcel of $100 000.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
48. A bank puts in a bid for $500 000 of 182-day Treasury notes at a yield of 5.8% per annum. What price
will the bank pay if the tender is successful?
A. $448 028.67
B. $485 756.54
C. $485 946.17
D. $486 101.73
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
49. A bank is considering purchasing a Treasury note with a face value of $500 000 that is currently selling
for $487 324, with 180 days to maturity. What is the note currently yielding?
A. 4.90%
B. 5.14%
C. 5.27%
D. 5.41%
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
50. On Tuesday, the Reserve Bank announces details of a 26-week T-note tender, with competitive bids to
close on Wednesday. A bank lodged a successful bid for $5 000 000 in T-notes at a yield of 6.57% per
annum. Settlement is required on Thursday through RITS. What amount will the bank need to pay on
settlement?
A. $4 841 395.87
B. $4 843 084.08
C. $4 988 327.31
D. $4 998 362.54
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
51. A funds manager is revaluing his/her investment portfolio, which includes a $2 000 000 holding of
Treasury bonds. The bonds pay a coupon of 10% per annum, payable half-yearly. A coupon payment
has just been made, and the bonds have exactly five years to maturity. Similar bonds are currently
yielding 12% per annum in the market. What is the value of the fund manager's Treasury bond
portfolio?
A. $1 495 331.33
B. $1 620 921.33
C. $1 852 798.26
D. $2 000 000.00
AACSB: Analytic
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute
52. Which of the following is NOT an advantage for a state's central borrowing authority?
A. By grouping issues as a single one, lower economies of scale can be obtained.

B. Potential conflict between different debt issuers may be overcome.
C. The timing of debt issues can be controlled so they are brought to the market at the most opportune
time.
D. The central borrowing authority can do a public issue more effectively than a private placement.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 12.3 Describe the purpose and structure of state government central borrowing authorities.
Section: 12.3 State Government securities
53. The Commonwealth Government currently issues Treasury notes with varying terms to maturity:
A. twice a year.
B. three times a year.
C. four times a year.
D. to match the government's main revenue receipt dates.
Difficulty: Medium
Est time: <1 minute
54. The Reserve Bank of Australia's monetary policy is directed to influence first:
A. money market rates.

B. Treasury notes interest rates.
C. the overnight cash rate.
D. the base bank interest rates.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 12.4 Outline the monetary policy techniques currently employed by the Reserve Bank through which it influences the level of interest rates in
Australia, including open market operations and the impacts on system liquidity.
Section: 12.4 Monetary policy
55. The transmission channel related to changing the money supply, followed by changes in short-term
rates and pressure on interest rates to change the cost of funds, and consequently to influence economic
activity, is known as a:
A. credit channel.
D. wealth channel.
Difficulty: Easy
Est time: <1 minute
56. The transmission channel related to changing the money supply to change the pattern of bank lending
and the availability of funds, to influence economic activity, is known as a:
A. credit channel.
D. wealth channel.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
57. When actions by the Australian Reserve Bank affect bank lending and consequently borrowers find it
more difficult to find funding, this effect is called the:
A. monetary channel.
B. credit channel.
C. wealth channel.
D. foreign exchange channel.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
58. The transmission channel that affects the value of assets and liabilities within the domestic economy,
and thus influences economic activity, is known as a:
A. credit channel.
D. wealth channel.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
59. The transmission channel that eventually affects the demand for Australian exports and imports by
affecting their relative costs, and thus influences economic activity, is known as a:
A. credit channel.
D. wealth channel.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
60. Open market operations by the Australian Reserve Bank refer to:
A. the method by which the Australian Reserve Bank allows banks to raise short-term funds up to a
year.
B. the method by which the Australian Reserve Bank implements monetary policy.
C. the market for short-term securities.
D. the method by which the Australian Reserve Bank monitors the financial sector.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
61. Monetary policy in Australia is implemented by the Reserve Bank, and is currently principally directed
towards:
A. affecting the level of short-term interest rates.

B. effecting a reduction in the current account deficit.
C. affecting the level of growth in the money supply.
D. affecting the value of the AUD, and the exchange rate.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
62. The Reserve Bank focuses much of its attention on the level of underlying inflation in the Australian
economy. What are the important implications of a low level of underlying inflation for the markets?
A. A low level of underlying inflation restricts the potential for future economic growth and business
investment.
B. The Reserve Bank needs to maintain tight monetary policy to ensure inflation remains low.
C. A low level of underlying inflation leads to increased business confidence and capital investment.
D. A low level of underlying inflation adds to expectations of significant future interest rate increases.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
63. The main method the Australian Reserve Bank uses to manage the money market cash position is:
A. conducting FX transactions.
B. issuing Treasury bonds.
C. managing the amount of Commonwealth securities in the market.
D. issuing Treasury notes.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
64. Price stability is desirable because:
A. everyone is better off when prices are stable.

B. inflation creates uncertainty about future planning.
C. it guarantees full unemployment.
D. it increases the efficiency of the Australian Reserve Bank.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
65. The Reserve Bank conducts market operations in order to effect its monetary policy objectives. Which
of the following best describes the Reserve Bank's market operations?
A. Market operations may be conducted to neutralise official FX transactions.

B. Reserve Bank market operations target the overnight cash rate.
C. Market operations affect day-to-day system liquidity.
D. All of the given answers are correct.
Difficulty: Medium
Est time: <1 minute
66. The use of open-market operations as a monetary tool has the advantage that:
A. they can be implemented rapidly, without administrative delays.

B. they are flexible and precise.
C. they can be easily reversed if errors are made.
Difficulty: Easy
Est time: <1 minute
67. When the Australian Reserve Bank sells Commonwealth government securities, it:
A. injects extra cash into the financial markets.

B. loosens monetary policy.
C. puts downward pressure on interest rates.
D. tightens monetary policy.
Difficulty: Medium
Est time: <1 minute
68. If the Australian Reserve Bank wants to decrease the money supply in the long term, it will:
A. buy repurchase agreements.

B. buy Commonwealth government securities.
C. lower the cash rate.
D. sell Commonwealth government securities.
Difficulty: Medium
Est time: <1 minute
69. Which of the following is NOT true of tightening of monetary policy?
A. Banks' supplies of funds are depleted through open-market operations

B. Interest rates fall
C. The dollar may increase in value
D. Bank lending is reduced
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
70. When an easing of monetary policy is accomplished by open-market operations:
A. interest rates rise.

B. banks' supplies of funds are increased.
C. the dollar appreciates.
D. bank lending generally decreases.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
71. If the Australian Reserve Bank wants to expand the money supply, it will:
A. buy Commonwealth government securities.

B. increase the cash rate.
C. sell Commonwealth government securities.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
72. When the Australian Reserve Bank wants to ease the monetary policy, it will:
A. sell Commonwealth government securities.

B. increase the overnight cash rate.
C. buy Commonwealth government securities.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
73. The main types of Commonwealth government transactions that influence the daily cash positions are:
A. taxation receipts.
B. government receipts.
C. budget expenditures.
Difficulty: Easy
Est time: <1 minute
74. The short-term interest rate that is almost immediately affected by changes in the Reserve Bank's
monetary policy is the:
A. real interest rate.

B. overnight interbank rate.
C. 30-day bank bill rate.
D. intercompany lending rate.
Difficulty: Easy
Est time: <1 minute
75. In relation to impacts on the Australian financial system liquidity, if payments from the official sector to
the private sector exceed the flow of funds to the official sector then there will be:
A. a system down.
D. a system square.
Difficulty: Medium
Est time: <1 minute
76. In relation to impacts on the Australian financial system liquidity, if payments to the official sector
exceed official payments to the private sector then there will be:
A. a system down.
D. a system square.
Difficulty: Medium
Est time: <1 minute
77. Through its impact on cash rates, the Reserve Bank can affect rates further out on the maturity
spectrum. What is usually the order of transmission?
A. Cash rates; commercial bill yields; banks' deposit rates; banks' prime lending rates
B. Cash rates; commercial bill yields; banks' prime lending rates; banks' deposit rates
C. Cash rates; banks' deposit rates; commercial bill yields; banks' prime lending rates
D. Cash rates; banks' prime lending rates; commercial bill yields; banks' deposit rates
AACSB: Reflective Thinking

Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
78. Banks are required to maintain exchange settlement accounts with the Reserve Bank. Settlement of
exchange settlement account transactions requires the use of same-day funds. Which of the following is
NOT generally a source of same-day funds?
A. Repurchase arrangements with the Reserve Bank

B. Reserve Bank payments in its market operations
C. Commonwealth government securities held for liquidity purposes
D. Surplus balances in banks' exchange settlement accounts

Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
Learning Objective: 12.5 Describe the purpose and operation of the payments system, including exchange settlement accounts, real-time gross settlement and
repurchase agreements.
Section: 12.5 The payments system
79. In relation to the payments system the huge number of low-value transactions is:
A. cleared by real-time gross settlement.

B. netted and settled at the end of each day.
C. settled immediately by banks' settlement accounts at the Reserve Bank of Australia.
D. netted and settled through banks dealing with Austraclear.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
80. The payment clearing system that settles trades in Commonwealth Government securities is:
A. APCA.
B. MasterCard.
C. Austraclear.
D. CHESS.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
81. The greatest monetary value of payments in the Australian financial system occurs for:
A. cash.
B. non-cash payments.
C. debt securities.
D. equity securities.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
82. The special account that providers of payment services have at the Reserve Bank is called a/an:
A. balance of payments account.

B. exchange settlement account.
C. payment services account.
D. Reserve Bank payment account.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
83. The Reserve Bank provides an end-of-day repurchase arrangement for banks to enable them to manage
their exchange settlement account liquidity position. Which of the following terms and conditions is
attached to repurchase arrangements?
A. T-notes with maturities of less than 91 days may be discounted.

B. A penalty margin of 0.25% is applied to all repurchase transactions.
C. The Reserve Bank publishes its rediscount rate daily.
D. All of the given answers.
Difficulty: Medium
Est time: <1 minute
84. Banks frequently engage in repurchase agreements to:
A. manage liquidity.
B. take advantage of anticipated changes in interest rates.
C. lend or borrow for a day or two with what is basically a collaterised loan.
D. do all of the given answers.
Difficulty: Medium
Est time: <1 minute
85. Repurchase agreements are:
A. usually collaterised with Commonwealth Government securities.

B. usually low-interest rate loans.
C. usually loans that have real assets as collateral.
D. none of the given answers.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
86. For a debt payment system, the processing of the payment begins at the:

D. exchange settlement account of the payer.
Difficulty: Medium
Est time: <1 minute
87. For a credit payment system, the processing of the payment begins at the:

D. exchange settlement account of the payee.
Difficulty: Medium
Est time: <1 minute
88. Which of the following statements regarding real-time gross settlement (RTGS) is incorrect?
A. High-value payment transactions that are settled immediately require transfer of the monies held in
settlement accounts of the respective banks at the Reserve Bank.
B. The aim of RTGS is to minimise potential systematic risk.
C. High-value transactions are those involving more than $100 000.
D. RITS and Austraclear are the two providers recognised by the Australian Reserve Bank as providers
of RTGS.
AACSB: Analytic
Difficulty: Medium
Est time: <1 minute
89. When there is a significant reduction in recurrent government expenditures, the process is known as
fiscal limitation.
FALSE
The process is known as fiscal restraint when there is a significant reduction in recurrent government
expenditure.
Difficulty: Medium
Est time: <1 minute
90. An investor might hold government securities as part of a portfolio to lower its risk.
TRUE
Government securities are considered to be risk free as under normal circumstances a government does
not default on its debt.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
91. There is often a crowding-out effect when a government deficit is high and the government issues large
amounts of long-term bonds.
TRUE
When a government needs to borrow as a result of a deficit, its demand for funds will reduce the amount
of funds in the overall economy.
Difficulty: Medium
Est time: <1 minute
92. Treasury bonds are not bearer securities and so coupon payments are made electronically to holders.
TRUE
There is an electronic registry to keep track of Treasury bond holders.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
93. The AOFM on behalf of the federal treasurer has the power to decide on the timing, maturities and
quantities of Treasury bonds but their price is decided by tender.
TRUE
The primary market for Treasury bonds is based on a tender system where investors bid on price.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
94. If a bond issue is announced carrying a coupon of 5 per cent per annum and an investor requires a
greater rate of return, they will put in a bid price below the face value in order to try to get the higher
yield they require.
TRUE
If current market interest rates have changed, an investor will put in a lower bid so that the existing
coupon plus the capital gain on maturity gives a higher yield.

Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
95. For bond issues through the AOFM, bids are made in terms of price up to three decimal places.
FALSE
Bids are made in terms of yield to maturity up to three decimal places.

Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
96. Since each state government is responsible for providing a wide range of services, every state has its
own borrowing authority to issue debt securities.
TRUE
Each Australian state has formed a central borrowing authority to undertake borrowings on behalf of the
state government and its instrumentalities.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
97. If the Australian Reserve Bank, through its monetary policy market operations, buys government
securities, this will lead to an easing of interest rates.
TRUE
When the Reserve Bank of Australia buys government securities, the sellers of the securities receive
funds and, in the case of banks, have more funds for lending out, leading to a drop in interest rates.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
98. Discuss the characteristics of short-term government securities in relation to a government's liquidity
position.
The matching principle applies to any shortfall in short-term liquidity requirements that arise out of
within-year timing mismatches between a government's revenues and expenditure cash flows. In the
case of the Australian government, short-term securities called short-term T-notes are issued. Up till
recently the strong cash position of the Commonwealth government has not seen any issue of T-notes
since 2003. It is possible at some future date when the economy slows that the issue of T-notes may
resume.
Bloom's: Knowledge
Est time: 1-3 minutes
99. Discuss the role and features of secondary market transactions for Treasury bonds.
Treasury bonds can be bought and sold as on-exchange transactions or over-the-counter transactions. In
Australia treasury bonds are listed on the ASX but the volume of trades is traditionally low compared
with the volume of over-the-counter transactions. When they are traded they are quoted in terms of their
redemption yield or yield to maturity.
100. Discuss the current features of how Australian state governments manage their borrowings.
Each Australian state has formed a central borrowing authority to undertake borrowings on behalf of the
state government and its instrumentalities. States require funds for a variety of services such as roads
and hospitals. Some of the advantages of a central borrowing authority are economies of scale, timing of
issues, reduced potential for competition between states, more effective tender and dealer panels and
potentially larger size of debt issue.
101. Discuss what factors influence financial system liquidity in Australia.
Three major factors affect financial system liquidity. They are Commonwealth Government budget
surpluses, official foreign exchange transactions, and net sales of government bonds (CGS) and
repurchase agreements. Taxation receipts, budget recurrent and capital expenditures and interest and
payments on T-notes and Treasury bonds all influence the daily cash position. The Reserve Bank of
Australia can enter the FX market to conduct transactions on behalf of the Commonwealth Government
or occasionally support the value of the AUD. When the government buys overseas goods the RBA
arranges purchase of the FX currency to do so and, in the process, creates an increase of liquidity in the
financial system. To offset this, the central bank will neutralise its FX transactions through its market
operations.
102. Discuss how the Australian financial system manages settlement risk for its market participants.
The clearing of value payments system transactions in Australia is coordinated by the Australian
Payments Clearing Association (APCA). APCA is a limited liability company formed by banks,
building societies, credit unions and the Reserve Bank. It manages clearing for cheques, direct entry
payments, ATM and debit card transactions and high-value payments. The adoption of real-time gross
settlement (RTGS) also lessens settlement risk. Banks and other authorised providers of payments
services maintain a special account with the Reserve Bank of Australia to facilitate settlement.
AACSB: Analytic
Chapter 12 Testbank Summary
Category # of Qu
estions
AACSB: Analytic 6
AACSB: Communication 92
AACSB: Reflective Thinking 4
Bloom's: Analysis 4
Bloom's: Comprehension 39
Bloom's: Knowledge 55
Bloom's: Synthesis 4
Difficulty: Easy 40
Difficulty: Hard 4
Difficulty: Medium 53
Est time: <1 minute 97
Est time: 1-3 minutes 5
Learning Objective: 12.1 Consider the reasons for the existence of government debt markets and the government borrowing requirement. 17
Learning Objective: 12.2 Outline features of the main debt instruments issued by the Commonwealth Government, that is, the Treasury bon 44
d and the Treasury note, and describe the issuance process, participants and complete relevant calculations.
Learning Objective: 12.3 Describe the purpose and structure of state government central borrowing authorities. 1
Learning Objective: 12.4 Outline the monetary policy techniques currently employed by the Reserve Bank through which it influences the le 26
vel of interest rates in Australia, including open market operations and the impacts on system liquidity.
Learning Objective: 12.5 Describe the purpose and operation of the payments system, including exchange settlement accounts, real- 14
time gross settlement and repurchase agreements.
Section: 12.1 The Commonwealth Government borrowing requirement 12
Section: 12.2 Commonwealth Government securities 44
Section: 12.3 State Government securities 1
Section: 12.4 Monetary policy 26
Section: 12.5 The payments system 14
Section: Introduction 5

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Financial Institutions Instruments and

Markets 8th Edition Viney Test Bank

2. The management of the revenues and expenditure of a government is called:

A. deficit, and is a net borrower of funds.

8. If a government's budget is in surplus, it may:

A. issue more securities.

9. Participants in the financial markets seek to hold government paper because:

A. Investors can sell the paper quickly to raise funds.

12. The crowding-out effect refers to:

A. corporate borrowing exceeding government borrowing.

A. can increase business prospects.

A. A fixed-interest security that pays half-yearly coupon payments

A. Treasury bonds are issued by a tender system.

A. Bids must be submitted electronically by registered bidders.

A. The issues are currently managed by AOFM.

A. Bids must be in terms of price.

22. The selling of Government bonds is currently handled by:

A. sell the bond back to Treasury.

A. are highly liquid instruments, especially the short-term ones.

26. Government securities are generally:

A. It is expensive to print and distribute the physical instrument.

A. The volume of on-exchange trades of government securities is very high.

A. A state government public authority

36. Financial institutions hold government securities because of:

A. receives a capital gain.

A. sending the seller of the security a cheque.

39. Which of the following about Treasury bonds is NOT correct?

41. Which of the following about Treasury bonds is NOT correct?

42. Australian government securities that are short-term are:

43. Which of the following about Australian Treasury notes is incorrect?

A. Australian Treasury notes are discount securities.

A. is issued for a period less than a year.

A. T-notes are issued with short-term maturities.

46. Compared with a Treasury bond, a Treasury note:

A. pays a higher interest rate.

A. T-notes are issued by tender.

A. By grouping issues as a single one, lower economies of scale can be obtained.

A. money market rates.

A. affecting the level of short-term interest rates.

A. everyone is better off when prices are stable.

A. Market operations may be conducted to neutralise official FX transactions.

A. they can be implemented rapidly, without administrative delays.

A. injects extra cash into the financial markets.

A. buy repurchase agreements.

A. Banks' supplies of funds are depleted through open-market operations

70. When an easing of monetary policy is accomplished by open-market operations:

A. interest rates rise.

A. buy Commonwealth government securities.

A. sell Commonwealth government securities.

A. real interest rate.

A. Repurchase arrangements with the Reserve Bank

A. cleared by real-time gross settlement.

A. balance of payments account.

A. T-notes with maturities of less than 91 days may be discounted.

84. Banks frequently engage in repurchase agreements to:

85. Repurchase agreements are:

A. usually collaterised with Commonwealth Government securities.

A. payer's financial institution.

A. payer's financial institution.

2. The management of the revenues and expenditure of a government is called:

A. deficit, and is a net borrower of funds.

6. When a government undertakes a significant reduction in government recurrent expenditure this is

8. If a government's budget is in surplus, it may: