Financial Intermediation
Exam Materials
Course Introduction
Financial Intermediation examines the crucial role that financial intermediaries such as banks, credit unions, and investment firms play in the allocation of capital within an economy. The course explores how these institutions facilitate the flow of funds between savers and borrowers, manage and mitigate risks, and support payments systems. Topics include the structure and function of financial markets, the regulatory environment, the management of assets and liabilities, and recent innovations in intermediation such as fintech. Emphasis is placed on understanding the economic rationale for intermediation, the impact of information asymmetries, and the responses of intermediaries to changes in technology and regulation.
Recommended Textbook
Financial Institutions Instruments and Markets 7th Edition by Christopher Viney
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Chapter 1: A Modern Financial System: An Overview
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Q1) Which of the following is NOT a feature of swaps?
A) There is a contractual arrangement to exchange cash flows
B) Interest rate swaps exchange principal at the beginning and the end
C) A fixed rate obligation may be exchanged for a variable rate obligation
D) A swap can involve interest payments and currencies
Answer: B
Q2) The movement of funds between the four sectors of a domestic economy and the rest of the world is called:
A) flow of funds.
B) sector analysis.
C) sectorial flows.
D) cross-sector flows.
Answer: A
Q3) Deficit entities purchase financial instruments that offer the lowest interest rate.
A)True
B)False
Answer: False
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Page 3
Chapter 2: Commercial Banks
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Q1) Foreign currency liabilities have increased in importance as a source of funds for Australian banks.Which of the following statements is NOT a major reason?
i.deregulation of the foreign exchange market
ii.diversification of funding sources
iii.demand from multinational corporate clients
iv.internationalisation of global financial markets
v.avoidance of the non-callable deposit prudential requirement
vi.expansion of banks' asset-base denominated in foreign currencies
A) v
B) ii
C) i
D) All of the given answers are correct.
Answer: A
Q2) Banks obtain funds from many areas.These sources of funds appear as liabilities on a bank's balance sheet.
A)True
B)False
Answer: True
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Page 4
Chapter 3: Non-Bank Financial Institutions
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Q1) The task of the investment bank in a public issue of new shares is to:
A) offer interim financing to the firm.
B) invest the funds raised in the capital markets.
C) provide advice in designing and pricing a share issue.
D) act as a trustee of the funds raised.
Answer: C
Q2) Essentially,superannuation assets provide:
A) indefinite income when employees stop working.
B) indefinite income as long as employees continue to work.
C) limited income if an employee is injured and unable to work.
D) retirement income for employees.
Answer: D
Q3) In relation to Australian managed funds,cash management trusts currently have the largest amount of funds under management.
A)True
B)False
Answer: False
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Page 5
Chapter 4: The Share Market and the Corporation
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Q1) A _______ represents a financial claim to the cash flow of a business after all other claims have been deducted.
A) bond
B) debenture
C) share
D) preference share
Q2) The document drawn up by a company stating the terms and conditions of a public share issue is called a:
A) share directory.
B) memorandum.
C) share plan.
D) prospectus.
Q3) Discuss the roles of the participants in a primary market issue of shares.
Q4) The writer of a put option expects the share price to:
A) decrease.
B) increase.
C) remain unchanged.
D) pay a dividend.
Q5) Discuss what is meant by the interest rate role of a stock exchange.
Q6) Discuss what is meant by the derivative role of a share market.
Page 6
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Chapter 5: Corporations Issuing Equity in the Share Market
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Q1) Holders of equity capital:
A) receive interest payments.
B) own the company.
C) have lent money to the company.
D) have a guaranteed right to income from the company.
Q2) Which of the following is NOT a feature of preference shares?
A) Convertible
B) Redeemable
C) Cumulative
D) An important source of company funding
Q3) For a share placement,the Australian authority ASIC or ASX listing rules require:
A) that a placement must consist of subscriptions of not less than $1 000 000.
B) there must be no more than 20 participants.
C) the discount from market price must not be above 50 per cent.
D) that for a company that has had total placements of more than 15 per cent in the last 12 months, agreement for another must be sought from shareholders at the annual general meeting.
Q4) What is capital budgeting and explain its importance for a company.
Q5) What is an equity-funded takeover?
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Chapter 6: Investors in the Share Market
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Q1) 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
Q2) A company with a _____ ratio of equity to debt is _________ dependent on external financing.
A) lower; less B) lower; not
C) higher; less D) higher; more
Q3) A company whose shares are currently trading at $3.60 proposes to have a 25% split; that is,four new shares for one existing share.At the commencement of the next business day,a dividend of 25 cents is paid on existing shares,followed immediately by the share split.What is the theoretical price of the new shares?
A) $0.72
B) $0.90
C) $2.70
D) $3.35
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Page 8
Chapter 7: Forecasting Share Price Movements
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Q1) The bottom-up approach to fundamental analysis considers the impact of forecast changes in systematic market variables.
A)True
B)False
Q2) An investor finds that for a particular group of shares,large positive price changes are always followed by large negative price changes.This finding violates:
A) the strong form of the efficient market hypothesis.
B) the semi-strong form of the efficient market hypothesis.
C) the weak form of the efficient market hypothesis.
D) none of the given choices.
Q3) In relation to share trading,buy and sell orders automatically triggered by rules entered into a computer program are called:
A) high frequency trading.
B) intraday trading.
C) program trading.
D) flash trading.
Q4) Charting is a type of technical analysis.Explain the process in relation to forecasting share price movements.
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Chapter 8: Mathematics of Finance: An Introduction to Basic Concepts
and Calculations
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Sample Questions
Q1) Calculate the effective annual interest rate if your bank quotes you 10% per annum,compounded quarterly.
A) 14.01%
B) 10.38%
C) 10%
D) 2.50%
Q2) What is the simple annualised interest rate on a company transaction to raise $100 000 financing by drawing a bank bill with a face value of $104 000,payable in 120 days?
A) 4%
B) 12%
C) 12.17%
D) 12.67%
Q3) What is the future value in six years of $10 000 invested today,compounding at 6.87% per annum?
A) $14 122.00
B) $14 898.24
C) $15 128.26
D) $23 051.04
Q4) Distinguish between simple interest and compound interest.
10
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Chapter 9: Short-Term Debt
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Q1) A major advantage of a bill financing facility is that it:
A) lowers the acceptor's fees for a bank bill.
B) lowers the drawer's cost in drawing up the bill.
C) allows businesses to access financing at a lower cost than overdrafts.
D) lowers the discounter's fee for taking on risks associated with the bill.
Q2) The return on a commercial bill for a holder at its maturity is the difference between its discounted purchase price and the face value of the bill.
A)True
B)False
Q3) 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.
Q4) A negotiable certificate of deposit:
A) is a term deposit because it has a specified maturity date.
B) can be issued by banks to meet their operational liquidity.
C) is a short-term discount security.
D) is all of the given answers.
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Chapter 10: Medium-To-Long-Term Debt
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Q1) Which of the following is NOT usually an example of restrictive debt covenants?
A) Limitations on additional borrowing
B) Constraints on disposal of non-current assets
C) Minimum levels of cash flow
D) Supplying the creditors with annual, audited financial statements
Q2) When a loan agreement contains actions for a borrowing company to comply with,such as supplying financial statements,these are called:
A) accounting ratios.
B) negative covenants.
C) positive covenants.
D) loan options.
Q3) When a company defaults on interest payments for a debenture,the floating charge is said to ______ a fixed charge.
A) transform into
B) crystallise into
C) originate as
D) adjust to
Q4) Define and discuss a reference interest rate in relation to lending.
Q5) Discuss the use of a prospectus in relation to the issue of debt securities.
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Chapter 11: International Debt Markets
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Sample Questions
Q1) One of the advantages of attaching a provision with a loan for it to be converted into a transferable loan certificate is that:
A) the original lender receives interest payments from the new holder.
B) the loan is off the balance sheet of the original lender.
C) the certificate can be sold to third parties who receive interest payments from the original lender.
D) the loan remains on the books of the original lender.
Q2) When a bank sets up a euronote issuance facility for a large company,it gives the company the benefit of:
A) borrowing larger amounts compared with a straight loan.
B) having a shorter term facility compared with a straight loan.
C) having higher interest costs.
D) having a more liquid asset.
Q3) Borrowers who wish to access the euromarkets require a credit rating of:
A) AA or above.
B) BB or above.
C) BBB or above.
D) B or above.
Q4) Discuss the features of a eurobond issue.
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Chapter 12: Government Debt, monetary Policy and the Payments System
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Q1) 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.
Q2) Financial institutions hold government securities because of:
A) liquidity requirements.
B) interest rate expectations.
C) funding requirements.
D) all of the given answers.
Q3) 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.
B) monetary policy channel.
C) foreign exchange channel.
D) wealth channel.
Page 14
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Chapter 13: An Introduction to Interest Rate Determination and Forecasting
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Q1) During periods of economic recession,it is probable that the risk premium gaps for different corporate borrowers will:
A) decrease.
B) increase.
C) remain unchanged.
D) widen.
Q2) 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.
Q3) Unsecured notes are generally:
A) more risky than debentures.
B) less risky than Treasury bonds.
C) less risky than Treasury notes.
D) less risky than commercial paper.
Q4) In the context of the loanable funds theory,discuss the sectors that supply funds in relation to demand and supply curves.
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Chapter 14: Interest Rate Risk
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Q1) Interest rate risk occurs when:
A) investors buy bond portfolios.
B) a firm has a short-term floating rate loan.
C) a company has issued a fixed interest bond.
D) all of the given answers are correct.
Q2) Which of the following is NOT an external method of interest rate risk management?
A) Using an interest rate swap
B) Using financial futures
C) Using an off-balance-sheet strategy, such as a forward rate agreement
D) Having fixed-interest assets financed by fixed-interest liabilities and equity
Q3) Which of the following is a technique that an institution with rate-sensitive assets could perform in order to reduce interest rate risk?
A) Buy short-term Treasury bills
B) Issuing long-term certificates of deposit
C) Purchasing longer term assets
D) None of the given choices
Q4) Discuss duration in combination with the relationship between bond prices versus changes in yields.
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Chapter 15: Foreign Exchange: The Structure and Operation
of the Fx Market
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Q1) For spot transactions,the FX contract value date is:
A) that day.
B) one business day from the day of the transaction.
C) two business days from the day of the transaction.
D) three business days from the day of the transaction.
Q2) When a currency is quoted against the USD and the USD is the base currency,this is direct quoting.
A)True
B)False
Q3) Given the following rates,what arbitrage profit may be made with respect to the Australian dollar?
USD 1 = AUD 1.70
USD 1 = SGD 1.70
AUD 1 = SGD 0.96
A) 0.1753 cents
B) 0.5882 cents
C) 1.7526 cents
D) 5.882 cents
Q4) Discuss the current exchange rate regimes of the major currencies.
Q5) Distinguish between forward transactions and tom value transactions.
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Chapter 16: Foreign Exchange: Factors That Influence the Exchange Rate
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Q1) If the Japanese buy more Australian goods,they _____ more yen and _____ more dollars in the foreign exchange market.
A) demand, supply
B) demand, demand
C) supply, supply
D) supply, demand
Q2) If Australia's national income begins to grow quite rapidly and Australia's demand for German imports grows,then there would be:
A) a decrease of supply of AUD.
B) an increase of supply of AUD.
C) a decrease in demand for euros.
D) no change in demand for AUD.
Q3) A change in the Australian dollar value of the British pound from $2.60 to $2.80 means:
A) there has been a decrease in the pound price of British goods.
B) the pound has appreciated relative to the Australian dollar.
C) the Australian dollar has depreciated relative to the pound.
D) an increase in the dollar price of British goods.
Q4) Discuss how relative inflation rates may influence exchange rates.
Page 18
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Chapter 17: Foreign Exchange: Risk Identification and Management
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Q1) The currency risk of an exporter can be reduced by:
A) hedging, using the foreign exchange futures.
B) transacting only in the currency of the exporter's own country.
C) buying a forward contract for the exporter's currency.
D) all of the given choices.
Q2) An Australian company that imports goods from a German supplier on credit can protect itself against transaction exposure risk by:
A) entering into a contract in the forward exchange market.
B) borrowing Australian dollars and investing in the German money market.
C) borrowing euros and investing in the Australian money market.
D) entering into a contract in the forward exchange market AND/OR borrowing Australian dollars and investing in the German money market.
Q3) The policy document that governs FX management should specify how communication should occur across the organisation structure.Discuss this statement.
Q4) A commonly used strategy by Australian exporters for managing FX risk exposure is the practice of invoicing in the home currency.
A)True
B)False
Page 19
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Chapter 18: An Introduction to Risk Management and Derivatives
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Q1) An analysis of the costs associated with establishing and maintaining a particular risk management strategy versus the risk management benefits to be obtained is called a SMART analysis.
A)True
B)False
Q2) In the futures markets,if a futures contract is marked-to-market,this refers to the:
A) interaction of the demand and supply forces in the market to determine the price of the options contract.
B) interaction of the demand and supply forces in the market to determine the price of the futures contract.
C) settlement of gains and losses on futures contracts on a daily basis.
D) settlement of gains and losses on forward contracts on a daily basis.
Q3) In a put option,the:
A) writer is locked into handing over the underlying asset at a specified time.
B) buyer has the option to sell the specified asset at a specified time.
C) buyer is locked into receiving the underlying asset at a specified time.
D) seller must hand over the specified asset at a specified time.
Q4) What is financial risk in relation to an organisation?
Page 20
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Chapter 19: Future Contracts and Forward Rate Agreements
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Q1) An orange grower who wishes to protect his future orange crop from price fluctuations can hedge by taking a/an:
A) arbitrage position on an orange futures contract.
B) long position on an orange futures contract.
C) short position on an orange futures contract.
D) marked-to-market position on an orange futures contract.
Q2) 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.
Q3) A lender,worried that the value of their loan might fall during the term of the loan,can hedge this fall by:
A) buying futures contracts on Treasury bonds.
B) selling futures contracts on Treasury bonds.
C) buying Treasury bonds on the spot market.
D) increasing now the amount of money that has been lent.
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Chapter 20: Options
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Q1) A lender,concerned that its cost of funds might rise during the term of a loan it has made,can hedge this rise without forgoing the chance to profit by a decline in the cost of funds.This is done by:
A) selling futures contracts on Treasury bills.
B) buying futures contracts on Treasury bills.
C) buying call options on Treasury bills.
D) buying put options on Treasury bills.
Q2) On the expiration date for a put option with strike price of $10.00,premium $1.50 and the current spot price of $8.00,the holder will:
A) buy the shares in the market place.
B) let the option contract lapse.
C) exercise the option.
D) make a profit of $1.50
Q3) What type of option will an option buyer purchase if they believe a share price will rise?
A) Call
B) Put
C) Warrant
D) Swaption
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Page 22
Chapter 21: Interest Rate Swaps, Cross-Currency Swaps
and Credit Default
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Q1) When two parties do a cross-currency swap involving floating rate interest payments in one currency and fixed interest rate payments denominated in another currency,the cash flows involved vary as the exchange rate changes.
A)True
B)False
Q2) In relation to an interest rate swap transaction when the two parties are each entering into a swap to manage a particular interest rate risk exposure,this is called a:
A) bank swap.
B) direct swap.
C) intermediated swap.
D) credit swap.
Q3) As a foreign exchange hedge,cross-currency swaps have all of the following features,except:
A) each party pays the other's interest payment.
B) principal amounts are reversed at a pre-specified rate at maturity.
C) an initial exchange of the two principal amounts by the two parties in the two different currencies.
D) principal amounts are reversed at the spot rate at maturity.
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