Financial Markets and Institutions
Midterm Exam
Course Introduction
This course provides a comprehensive overview of financial markets and institutions, exploring their critical roles within the broader economy. Students will examine the structure, functions, and operations of various financial markets including money, capital, and derivatives markets and the institutions that participate in them, such as banks, insurance companies, investment firms, and regulatory bodies. Emphasis is placed on how these markets facilitate the flow of funds, price financial assets, manage risk, and support economic growth. The course also covers topics such as interest rate determination, financial instruments, recent financial innovations, and the impact of regulation and monetary policy on market functioning.
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 associated with characteristics of shares?
A) Part ownership of a company
B) Capital gains
C) A fixed interest payment
D) Dividends
Answer: C
Q2) Which of the following is NOT a feature of option contracts?
A) The buyer does not have an obligation to proceed with the contract
B) The writer of the contract receives a fee
C) The price of the designated asset is determined at the beginning of the contract
D) The right to buy is called a put option
Answer: D
Q3) What is monetary policy and who is responsible for its implementation?
Answer: Monetary policy is the use of interest rates to control inflation,usually in a specified range,and to promote economic growth.A central bank is usually responsible for carrying out monetary policy.
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Chapter 2: Commercial Banks
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Q1) Each of the following balance sheet portfolio items are liabilities of a bank,except:
A) term deposits.
B) bill acceptance facilities.
C) certificates of deposit.
D) overdrafts.
Answer: D
Q2) Which of the following statements is true for off-balance-sheet business for banks?
A) Off-balance-sheet business is a small part of a bank's income.
B) Off-balance-sheet business is recorded on a bank's statement of income and expense.
C) Off-balance-sheet business represents fee-based income.
D) Off-balance-sheet business records deposits that do not fit on the balance sheet.
Answer: C
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Chapter 3: Non-Bank Financial Institutions
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Q1) Which of the following statements with regard to life insurance companies is true?
A) Life insurance companies are more likely to acquire short-term assets than long-term securities, for liquidity reasons.
B) Life insurance companies are more likely to acquire long-term assets because their liabilities are long-term in nature.
C) Life insurance companies tend to acquire short-term assets because they have relatively predictable inflows and outflows.
D) The Reserve Bank of Australia regulates life insurance companies.
Answer: B
Q2) An important source of funds for credit unions is:
A) cheque accounts.
B) loan interest.
C) interest from government securities.
D) financial support from the organisations that employ its members.
Answer: B
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Chapter 4: The Share Market and the Corporation
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Q1) The corporate entity means that if a major shareholder is declared bankrupt it does not necessarily impact on the firm's operations.
A)True
B)False
Q2) All of the following are advantages of a corporation except:
A) freely transferable ownership.
B) limited liability.
C) access to capital markets.
D) low management costs.
Q3) The writer of a put option expects the share price to:
A) decrease.
B) increase.
C) remain unchanged.
D) pay a dividend.
Q4) To protect their portfolio of shares from a possible share price fall,an investor could buy a:
A) call option.
B) put option.
C) warrant on a matching share index.
D) matching share index future.
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Chapter 5: Corporations Issuing Equity in the Share Market
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Q1) Business risk is determined in part by a corporation's choice of business activity and the manner in which it has financed those activities.
A)True
B)False
Q2) Problems associated with calculating an internal rate of return include:
A) negative cash flows during the project's lifetime.
B) choosing one project from two or more projects.
C) timing of cash flows.
D) All of the given answers.
Q3) When a company undertakes an initial public offering (IPO)it may:
A) issue and list debentures in the capital markets.
B) offer shares to a few public institutional investors.
C) issue and list shares in the primary share market.
D) directly list corporate bonds in the capital markets.
Q4) If the calculated IRR on an investment proposal is greater than the required rate of return,the company should proceed with the project.
A)True
B)False
Q5) What is an equity-funded takeover?
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Chapter 6: Investors in the Share Market
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Q1) Estimating systematic risk involves comparing the price history of a particular share relative to movements on_____ stock listed on an exchange.
A) an average
B) the median weighted
C) the most volatile
D) the least volatile
Q2) Define and explain what a share split involves.
Q3) The _______ is an indicator of investors' evaluation of a company's future earnings potential.
A) debt to equity ratio
B) price/earnings ratio
C) interest cover ratio
D) return on shareholders' funds
Q4) If investors alter the mix of shares in their portfolios as the share market suddenly falls they are using a strategic asset allocation approach to investing.
A)True
B)False
Q5) Explain the concept of a diversified portfolio.
Q6) Explain how an index fund might benefit an investor.
Page 8
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Chapter 7: Forecasting Share Price Movements
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Q1) Which of the following is NOT a problem that may be associated with rapid,unsustainable growth in an economy?
A) An upward pressure on wages
B) An increase in inflationary pressures
C) An improvement in the current account of the balance of payments
D) A rise in interest rates
Q2) In relation to technical analysis,a support level is:
A) a level beyond which the market is unlikely to rise.
B) a level below which the market is unlikely to fall.
C) an equilibrium price level supported by earnings and cash flows.
D) the complete cycle of a market wave.
Q3) If a share price falls on four consecutive days of trading,share prices:
A) cannot be following a random walk
B) can still be following a random walk
C) are almost certain to decrease the next day
D) are almost certain to increase the next day
Q4) The bottom-up approach to fundamental analysis considers the impact of forecast changes in systematic market variables.
A)True
B)False
Page 9
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Chapter 8: Mathematics of Finance: An Introduction to Basic Concepts
and Calculations
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Sample Questions
Q1) A bank bill with a face value of $500 000 and 90 days to maturity is purchased with a yield to maturity of 6.92% per annum.After the bill has been held for 28 days,it is sold at a yield of 6.78% per annum.What is the holding period yield for the holder of the note?
A) 3.23% per annum
B) 7.11% per annum
C) 7.15% per annum
D) 7.51% per annum
Q2) If your deposit of $30 000 becomes $30 919 at the end of 120 days,what is the annual yield earned?
A) 9.04%
B) 9.19%
C) 9.23%
D) 9.32%
Q3) The amount that an investor puts up initially for a commercial bill is called the principal.
A)True
B)False
Q4) In relation to interest rates,explain what a yield is.
Q5) Distinguish between an ordinary annuity and an annuity due.Give examples.
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Chapter 9: Short-Term Debt
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Q1) Which one of the following statements regarding factoring is correct?
A) Some banks and bank subsidiaries may provide factoring.
B) Under with-recourse factoring, when a customer makes a payment the factoring company passes the money on to the company minus a handling fee.
C) The discount charged by the factoring company is approximately equal to the rate charged on a secured overdraft loan.
D) With non-recourse factoring, the company cannot sell additional accounts receivable to the factoring company after the initial amount.
Q2) The _______ is the party that lends the funds in a commercial bill transaction.
A) acceptor
B) discounter
C) drawer
D) endorser
Q3) Which of the following is NOT an advantage of factoring?
A) Known cash flows are generated
B) Accounts receivable is turned into cash without delay
C) The credit and collection department of a company may be eliminated
D) The cost of financing is relatively high
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Chapter 10: Medium-To-Long-Term Debt
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Q1) The type of loan where a company pays periodic interest payments over its term and the principal at maturity to a lender is called:
A) amortised.
B) a debit foncier.
C) deferred payment.
D) interest-only.
Q2) Which of the following is NOT an example of negative debt covenants?
A) Specifying what activities the business can enter into
B) Restrictions on amalgamation with other companies
C) Supplying creditors with annual audited reports
D) Limiting annual dividend payments to shareholders
Q3) What is the current price of a debenture with a $500 000 face value,a coupon rate of 9.5% paid semi-annually,six years remaining to maturity and market interest rates increased to 14%?
A) $320 149.12
B) $401 613.48
C) $410 644.78
D) $688 638.80
Q4) Discuss major features of a term loan.
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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Q1) Consider the following five statements. i.A eurobond is a bond issued by a foreign borrower in a currency that is not the currency of the country in which the bond is issued. ii.Eurobonds tend to be bought mainly by banks and institutional investors,rather than by individuals.
iii.Straight eurobonds are fixed-interest securities with periodic coupon payments. iv.FRNs are coupon instruments; however,the coupon is reset periodically throughout the term of the note.
v.Convertible notes give the holder the option to convert the bond,on predetermined terms,into another form of instrument such as equity.
Which of the following are correct?
A) i, ii, iii and iv are true.
B) i, ii, iv and v are true.
C) i, ii, and iv are true.
D) i, iii, iv and v are true.
Q2) Discuss the features of short-term bank advances in the eurocurrency markets.How does it differ from that obtained through a domestic bank?
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Chapter 12: Government Debt, monetary Policy and the Payments System
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Q1) 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%
Q2) Discuss what factors influence financial system liquidity in Australia.
Q3) 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.
Q4) Australian government securities that are short-term are:
A) Treasury bills.
B) Treasury notes.
C) Treasury paper.
D) Treasury bonds.
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Chapter 13: An Introduction to Interest Rate Determination and Forecasting
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Q1) In the loanable funds approach to interest rate determination,if the business sector _____ its demand for funds,then the demand curve would shift to the _____:
A) increase; to the left
B) increase; to the right
C) decrease; to the right
D) decrease; up
Q2) Interest rates will fall when the demand curve for loanable funds:
A) shifts up.
B) shifts to the right.
C) is affected by poor growth prospects in the economy.
D) shifts sideways.
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) Discuss when a central bank will generally increase interest rates.
Q5) Define and discuss briefly the three common types of economic indicators.
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Chapter 14: Interest Rate Risk
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Q1) Everything else being equal,the _______ the time to maturity on a fixed-interest security,the _______ sensitive it is to changes in interest rates.
A) longer; less
B) longer; more
C) shorter; more
D) shorter; extra
Q2) If an organisation has _______ interest-sensitive assets than liabilities,a/an _______ in interest rates will increase the organisation's profits.
A) more; reduction
B) more; increase
C) less; increase
D) both [more; reduction] and [less; increase] are correct
Q3) If an organisation has more interest-sensitive assets than liabilities,a _______ in interest rates will _______ the organisation's profits.
A) rise; increase
B) rise; decrease
C) fall; increase
D) fall; not affect
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Chapter 15: Foreign Exchange: The Structure and Operation
of the Fx Market
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Q1) The central bank resources made up of foreign currencies,gold and international drawing rights are called:
A) central bank capital.
B) official reserve assets.
C) central bank floats.
D) official bank assets.
Q2) All of the following are primary centres of foreign exchange trading except:
A) London.
B) New York.
C) Munich.
D) Tokyo.
Q3) The holding of foreign currency in the hope of a future sale is called a/an:
A) arbitrage position.
B) long position.
C) short position.
D) selling position.
Q4) The FX market is organised as an over-the-counter market in which deposits denominated in foreign currencies are bought and sold.
A)True
B)False
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Chapter 16: Foreign Exchange: Factors That Influence the Exchange Rate
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Q1) In the long run,if purchasing power parity (PPP)is maintained,a rise in a country's price level (relative to the foreign price level)should cause its currency to _______,while a fall in the country's relative price should cause its currency to _______.
A) appreciate; appreciate
B) appreciate; depreciate
C) depreciate; appreciate
D) depreciate; depreciate
Q2) In the long run,foreign exchange rates are determined by:
A) an agreement between governments of the major industrial countries.
B) economic fundamentals, such as productivity levels or price levels in different countries.
C) the difference between the short-term and long-term interest rates in each country.
D) the rate at which each country's currency can be exchanged for gold.
Q3) When a country's exchange rate depreciates,the price of:
A) that country's goods abroad decreases.
B) that country's goods abroad increases.
C) foreign goods sold in that country increases.
D) that country's goods produced and sold locally increases.
Page 18
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Chapter 17: Foreign Exchange: Risk Identification and Management
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Q1) The purpose of hedging by a company is to:
A) maximise cash flows and profits.
B) minimise the variability of expected cash flows.
C) decrease the uncertainty of reported cash flows.
D) increase the expected cash flows.
Q2) An Australian exporter has despatched a consignment to the USA and expects to receive payment of USD 250 000 in three months' time.The company wishes to hedge part of its exposure to the USD,and enters into a forward exchange contract with its bank,based on the amount USD 125 000.Based on today's data (below),what amount in AUD will the company receive in three months' time?
Spot rate:
AUD/USD 0.7345-50
Three-month forward rate:
AUD/USD 0.7430-35
A) AUD 340 136.05
B) AUD 340 367.60
C) AUD 336 473.76
D) AUD 336 247.48
Q3) Discuss transaction exposure for a firm with only one or two international transactions.
Page 19
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Chapter 18: An Introduction to Risk Management and Derivatives
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Q1) In the option markets,the price specified in the contract at which the buyer of the option can buy or sell the specified commodity or financial instrument is called the:
A) call price.
B) exercise price.
C) settlement price.
D) spot price.
Q2) A futures contract is an agreement that specifies the delivery of a commodity or financial security at a:
A) predetermined future date, with a price to be negotiated at the time of delivery.
B) predetermined future date, with a currently agreed-on price.
C) currently agreed-on price, with a delivery date to be negotiated later.
D) predetermined future date, with a price and delivery to be negotiated later.
Q3) An American put option is worth more than a European put option as it can be advantageous to exercise an American put option before expiry.
A)True
B)False
Q4) What is financial risk in relation to an organisation?
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Chapter 19: Future Contracts and Forward Rate Agreements
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Q1) In the futures markets,speculators who strongly believe that prices of treasury bonds will fall are likely to:
A) buy futures contracts on Treasury bonds.
B) sell futures contracts on Treasury bonds.
C) sell Treasury bonds on the spot market.
D) decrease the amount of money that they currently lend.
Q2) Which of the following is a derivative product?
A) Commercial paper
B) Mortgage
C) Futures
D) Treasury note
Q3) An orange grower who is concerned that the price of oranges will fall before harvest and sale can:
A) buy an orange futures contract today.
B) sell an orange futures contract today.
C) carry out in the futures market the opposite of what he plans to do in the physical market when his crop is ready for sale.
D) take a long position in orange futures.
Q4) Explain simply what is meant by hedging and how the basic rule is implemented.
Page 21
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Chapter 20: Options
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Q1) In the Australian options markets,a warrant that is made up of a selection of shares from the mining industry is an example of a/an:
A) basket warrant.
B) index warrant.
C) capped warrant.
D) instalment warrant.
Q2) An investor holds long call options that may be exercised at any time over the next month.The spot price of the underlying asset is $12.75; the strike price of the option is $15.10; and the premium paid was $2.35.What is the value of the option to the holder?
A) -$2.35
B) zero
C) $10.40
D) $15.10
Q3) A short-call party to a call option with an exercise price of $10.00 and a premium of $1.00,if the current price of the underlying asset is $8.00 on the exercise date,would make a loss of $1.00
A)True
B)False
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Chapter 21: Interest Rate Swaps, Cross-Currency Swaps
and Credit Default
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Q1) A key motive for companies and financial institutions to participate in an interest rate swap is:
A) the low information costs of swaps, compared with other financial derivatives.
B) to transfer interest-rate risk to parties more willing to bear it.
C) the greater liquidity of swaps, compared with other financial derivatives.
D) the favourable tax implications of swaps, compared with other financial derivatives.
Q2) The main type of interest rate:
A) is a direct swap between two parties.
B) involves accompany entering into a swap with a financial intermediary whereby the company swaps fixed for floating payments.
C) is a basis swap.
D) involves a swap of floating for floating interest payments.
Q3) One hundred basis points equal:
A) 100%
B) 10%
C) 1%
D) 0.1%
Q4) Explain in the context of interest rate swaps what a matched swap is.
Page 23
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