Course Introduction
Corporate Finance
Exam Practice Tests
Corporate Finance explores the fundamental concepts and principles involved in financial management within corporations. The course covers topics such as capital budgeting, financial analysis and planning, working capital management, capital structure decisions, cost of capital, and the evaluation of investment opportunities. Students will learn how corporations raise and allocate financial resources, assess financial risks, and make decisions aimed at maximizing firm value. Case studies and practical exercises reinforce understanding of theories and tools used by financial managers in real-world business environments.
Recommended Textbook
Financial Institutions and Markets 7th Edition by Ben Hunt
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14 Chapters
1469 Verified Questions
1469 Flashcards
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Page 2
Chapter 1: Overview of the Financial System
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95 Verified Questions
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Sample Questions
Q1) Choose the best definition of 'money' from the following:
A)the arrangements that can be used to settle commercial transactions
B)cash
C)the instruments that can be used as a means of exchange
D)the supply of funds from surplus units for use by deficit units.
E)None of these.
Answer: C
Q2) The term 'flow of funds' refers to the exchange of value required to settle commercial transactions.
A)True
B)False
Answer: False
Q3) According to Merton (1995), financial systems perform six functions.The function that employs the use of derivatives is:
A)the settlement function
B)the flow of funds function
C)the risk-transfer function
D)to resolve incentive problem
E)to promote the pooling of funds.
Answer: C
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Chapter 2: The Payments System
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102 Verified Questions
102 Flashcards
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Sample Questions
Q1) Explain how a bank's payment for a wholesale parcel of bonds is settled and how the settlement process differs from the settlement of a retail payment order.
Answer: A bond transaction is settled three days after the trade date.When the payment is due, it is made as a real-time gross settlement transfer of exchange settlement funds.On the due date, the payment will be queued within the RTGS system for individual processing throughout the day.When it reaches the top of the queue, it is cleared by checking the payer has sufficient ES funds, and if so, the payment is immediately settled.Retail payment orders, on the other hand, are settled on a net deferred (i.e.overnight)basis.This involves firstly clearing the payments.At the end of the day ADIs agree on the net amounts required to settle the payment orders of their depositors.Settlement occurs at 9 a.m.the next day with a payment of the net amounts using ESAs.
Q2) A cheque deposited into your ADI account will not earn interest until it is verified. A)True B)False
Answer: False
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Chapter 3: Introduction to the Flow of Funds
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98 Flashcards
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Sample Questions
Q1) A 'bear market' describes periods where the value of shares rise strongly.
A)True
B)False Answer: False
Q2) Deficit units value liquidity and so have a preference for short and/or flexible financial contracts.
A)True
B)False Answer: False
Q3) Price bubbles should not occur in efficient markets because they reflect prices that do not represent fair value.
A)True
B)False Answer: True
Q4) Automated trading systems mean that investors no longer require a broker in order to trade shares.
A)True
B)False Answer: False
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Chapter 4: Funds Management
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113 Flashcards
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Sample Questions
Q1) Describe the process of funds management.
Q2) The asset class described as 'alternative investments' includes property and overseas assets.
A)True
B)False
Q3) Term life policies are the dominant life insurance product.
A)True
B)False
Q4) A long/short strategy is the strategy of taking long positions in anticipation of falling prices and taking short positions in anticipation of rising prices.
A)True
B)False
Q5) Say your funds were invested with an active fund manager who performed relatively poorly last year.What factors would you need to consider before switching to another active manager?
Q6) Management expense ratios (MERs)for passive funds are less than for active funds. A)True
B)False
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Chapter 5: Authorised Deposit-Taking Institutions
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116 Verified Questions
116 Flashcards
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Sample Questions
Q1) The mortgage origination process finances housing loans with funds borrowed from investment banks.
A)True
B)False
Q2) Briefly describe the three main types of retail deposit accounts offered by ADIs.
Q3) A bank issues 90-day bank-accepted bills on behalf of a borrower for a fee of 50 basis points.Given a market yield of 4.5% and a face value of $1 million, what fee will the bank earn?
A)$5000.00
B)$1204.50
C)$4945.13
D)$4939.11
E)None of these.
Q4) Identify and discuss the impact of the GFC on the activities of Australian banks.
Q5) The activities of loan originators in Australia were disrupted by the GFC.
A)True
B)False
Q6) Describe Australia's housing loan market.
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Chapter 6: The Stability of Deposit-Taking Institutions
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Sample Questions
Q1) ADIs conduct stress tests to ensure they can maintain liquidity should extreme events occur.
A)True
B)False
Q2) The essential characteristic of capital (under the CAR)is that payments to depositors take priority over payments to the suppliers of capital.
A)True
B)False
Q3) Explain the purpose of the capital adequacy requirement (CAR).
Q4) The quality of bank loans is of fundamental importance to the health of the banking system.
A)True
B)False
Q5) The share market and ratings agencies provide an assessment as to the condition and prospects of financial institutions.
A)True
B)False
Q6) Explain how ADIs have changed their management of funding risk post GFC.
Q7) Describe two general forms of interest rate risk faced by banks.
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Chapter 7: The Money Market
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Sample Questions
Q1) An investment in money-market securities when the yield is 5 per cent has an expected return of 5 per cent.
A)True
B)False
Q2) Identify the correct statement below.
A)Money-market securities are a form of secured loan arrangement.
B)Most companies can raise funds by issuing commercial paper.
C)The return on promissory notes can be considered a 'risk-free' rate.
D)Money-market securities can trade at a premium to their face value.
E)Generally, the interest rate paid by issuers of BABs will exceed the rate earned by investors in BABs.
Q3) The LIBOR is the reference rate in Australia's money market.
A)True
B)False
Q4) What is the BBSW and how is it 'discovered'?
Q5) The money market assists banks with their liquidity management.
A)True
B)False
Q6) What are the objectives of monetary policy?
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Q7) What are the main differences between bills of exchange and promissory notes?
Chapter 8: The Bond Market
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Sample Questions
Q1) In the Fisher equation, risk premiums are embedded in the expected inflation rate.
A)True
B)False
Q2) Treasury bonds:
A)have a number of series
B)have a range of terms (i.e.maturities)
C)are (approximately)par bonds when a new bond series is first issued
D)have a range of coupon rates
E)All of these.
Q3) Given a two-year investment in 10-year bonds, the selling price is calculated for an eight-year bond and the investment yield is calculated over two years.
A)True
B)False
Q4) Describe the issuers of non-government bonds.
Q5) Trading in Treasury bonds reveals the interest rate that applies on long-term loans.
A)True
B)False
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Page 10
Chapter 9: Shares
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Sample Questions
Q1) The marketing process of a large IPO would NOT normally include:
A)pre-marketing to prepare investors for the issue
B)the commissioning of independent and unbiased analyst's reports
C)a road show
D)a bookbuild
E)the pricing and allocation of shares to investors.
Q2) P/E ratios are used in combination with expected earnings to provide estimates of share price changes.
A)True
B)False
Q3) Most rights issues are non-renounceable.
A)True
B)False
Q4) Even if all the parameters used to estimate a share's value using the Gordon model are unchanged, its price would still rise and fall in a saw-tooth pattern over time.
A)True
B)False
Q5) What is underpricing? Why does it persist?
Q6) Describe the process of conducting an IPO.
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Chapter 10: The Share Market
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Sample Questions
Q1) Companies no longer have to maintain their share registry because CHESS holds this information.
A)True
B)False
Q2) Give an overview of the ASX's admission and listing rules.Refer to the ASX website for additional information.
Q3) The ASX's continuous disclosure policy requires companies to advise the ASX of any new price-sensitive information in a timely fashion.
A)True
B)False
Q4) Explain how share markets contribute to good corporate governance.
Q5) Chi-X provides Australian retail and wholesale investors with an alternative trading venue to the ASX.
A)True B)False
Q6) A share price index level considered in isolation conveys no useful information. A)True B)False
Q7) Identify and briefly explain the competitive pressures faced by the ASX.
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Chapter 11: Foreign Exchange and Global Capital Markets
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126 Flashcards
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Sample Questions
Q1) Importers prefer a low exchange rate (i.e.a low value for the domestic currency).
A)True
B)False
Q2) Japanese investors are assured of higher returns when they invest in Australian Treasury bonds because these bonds pay a much higher coupon rate than Japanese government bonds.
A)True
B)False
Q3) The dealer's source of income on forward trades is the spread between their forward rates and their spot rates.
A)True
B)False
Q4) Which services are NOT provided by eurocurrency markets?
A)Indirect financing
B)Direct financing through short-term securities
C)Direct financing through long-term securities
D)Payment services.
E)All of these are available in eurocurrency markets.
Q5) During 2013 the AUD traded at a forward discount to the USD.Why?
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Chapter 13: Financial Futures
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Sample Questions
Q1) Why do most futures contracts require mandatory cash settlement? What does this entail?
Q2) Futures contracts can be used for:
A)hedging exposures to volatile financial variables
B)speculating on the increase in the value of the contract item
C)speculating on the decrease in the value of the contract item
D)hedging the risk of an adverse movement in the future spot price.
E)All of these.
Q3) What is a futures contract? How do they differ from forward contracts? Explain the positions that can be established in a futures contract and how they are used by traders.
Q4) An advantage of futures contracts over FRAs is that:
A)futures contracts are not standardised
B)futures contracts have a secondary market
C)futures contracts have a lower up-front cost
D)futures contracts are always deliverable
E)futures contracts are more likely to provide a 'perfect hedge'.
Q5) When will a futures trader be required to pay additional funds into their margin account?
Q6) Explain the role played by the clearinghouse in a futures market.
Page 14
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Chapter 14: Swaps
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Sample Questions
Q1) What is a 'plain vanilla' swap? Clearly explain how they can be used to modify the pattern of a borrower's interest payments.
Q2) Compare the operation of a one-year swap with that of a strip of BAB futures and explain the effective interest rates that these approaches would establish for a floating-rate borrower.
Q3) All swaps are used to manage interest-rate risk posed by financing.
A)True
B)False
Q4) One reason that comparative advantage may occur in debt markets is that fixed-rate investors could be less sensitive to credit risk than floating rate lenders and acceptors.
A)True
B)False
Q5) Swaps have little exposure to default risk.
A)True
B)False
Q6) Given an inverse yield curve, would the fixed-rate payer in a plain vanilla swap expect to pay or receive the first net swap payment.Why?
Q7) Explain how an FX swap differs from a cross-currency swap.
Page 15
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Chapter 15: Exchange-Traded Options
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140 Verified Questions
140 Flashcards
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Sample Questions
Q1) Describe the main features of option contracts.What are the payoff functions of the four basic option positions that can be taken by traders? Explain the circumstances that would motivate trade in each position.
Q2) An investor intends to sell their holding of 5000 ANZ shares next month and is concerned the share price may fall.Which of the following would be most suitable to hedge this transaction?
A)Long calls
B)Short calls
C)Long puts
D)Short puts
E)Long SPI futures
Q3) An exchange-traded option contract is:
A)a method by which companies can raise additional equity financing
B)a perpetual contract, like a share
C)the right, but not the obligation, to settle the contract
D)a derivative contract that can be acquired for free
E)a derivative contract that is traded OTC.
Q4) How is a bull spread constructed and when would its use be considered?
Q5) Distinguish between the exercise price, the strike price and the option premium.
Q6) What is an option's 'implied volatility'?
Page 16
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