Financial Markets and Institutions
Test Bank
Course Introduction
This course explores the structure, functions, and operations of financial markets and institutions, focusing on their roles within the global economy. Students will examine money markets, capital markets, and derivative markets, as well as the key differences between various financial institutions such as commercial banks, investment banks, insurance companies, and pension funds. The course also covers topics including risk management, regulatory environments, monetary policy, interest rate determination, and recent trends impacting the financial sector. By analyzing real-world cases and current events, students develop a comprehensive understanding of how financial intermediaries contribute to the allocation of resources and the stability of financial systems.
Recommended Textbook
Financial Institutions and Markets 7th Edition by Ben Hunt
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Page 2
Chapter 1: Overview of the Financial System
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Sample Questions
Q1) Discuss the relative risks of debt and equity from the perspective of (i)an investor supplying funds to a firm, and (ii)the firm itself.
Answer: (i)Supplying funds as debt is less risky than supplying funds as equity because the firm is required to pay interest on debt before it is able to make dividend payments to shareholders.Likewise, should the firm be liquidated it is required to repay its debts before making any distributions to owners.Hence it is more risky to supply equity because of its residual claim and thus the required returns on equity will exceed those of debt.(ii)The more debt the firm uses, the higher is its risk of insolvency, whereas the use of equity reduces the financial risk of the firm.
Q2) The risk borrowers face of not being able to maintain the level of their debt is known as:
A)credit risk
B)funding risk
C)default risk
D)capital risk
E)market risk.
Answer: B
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Page 3
Chapter 2: The Payments System
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Sample Questions
Q1) Barter is a system of exchange in which items (or services)are exchanged for each other.
A)True
B)False
Answer: True
Q2) Describe the daily timetable for RTGS settlements.
Answer: The daily RTGS sessions are:
An early morning session (7.30 to 8.45 a.m.)where ADIs can make inter-bank transfers and enter into intraday repos with the RBA.The purpose of this session is to ensure ADIs have sufficient ESA funds to manage their RTGS payments throughout the day. DNS payment obligations are settled at 9 a.m.
Throughout the day RTGS payments are cleared and settled individually. At the end of the day, ADIs can transfer ES funds to establish their desired overnight balance.
An after-hours session settles the AUD leg of foreign exchange transactions (simultaneously with the foreign currency leg in the UK and Europe).
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Chapter 3: Introduction to the Flow of Funds
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Sample Questions
Q1) A market's clearinghouse:
A)issues certificates representing securities to investors
B)keeps an electronic record of securities and their owners
C)is only involved in primary market trades
D)provides an expert opinion about the expected performance of securities.
E)All of these.
Answer: B
Q2) In reference to the flow-of-funds, deficit units generally prefer:
A)a high cost of funds
B)low risk
C)large amounts
D)flexible and short contracts.
E)All of these.
Answer: C
Q3) Investments that display more volatility have less potential for higher returns.
A)True
B)False
Answer: False
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5
Chapter 4: Funds Management
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Sample
Questions
Q1) Define active investment management.How do active managers make investment decisions?
Q2) If aggregate superannuation fund assets experienced a significant increase over a period of a year the most likely explanation would be:
A)increased payments from contributors
B)strong positive returns on investments
C)decreased payments from funds to retirees
D)reduced fees charged by managers
E)changes to superannuation tax rules by government.
Q3) The rate of return on superannuation funds is volatile and so contributors to accumulation schemes face investment risk.
A)True
B)False
Q4) Active funds management is consistent with the efficient market hypothesis.
A)True
B)False
Q5) Distinguish between listed and unlisted public unit trusts.
Q6) What type of assets do fund managers invest in?
Q7) Why may an index fund portfolio not exactly replicate the index?
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Chapter 5: Authorised Deposit-Taking Institutions
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Sample Questions
Q1) A bill facility is a form of floating-rate finance.
A)True
B)False
Q2) Problems underlying the US sub-prime loans that triggered the GFC included which of the following?
A)Borrowers often had a poor employment record.
B)Borrowers often had a history of loan defaults.
C)LVR's were commonly 100 per cent.
D)It was assumed property prices would always rise.
E)All of these.
Q3) Briefly describe the three main types of retail deposit accounts offered by ADIs.
Q4) Briefly describe the sources of funds for banks and their relative importance in terms of the amounts raised.
Q5) Securitisation is the process of selling assets to investors in asset-backed securities
A)True
B)False
Q6) Explain how wholesale deposits are normally arranged.How is the depositor's desire for liquidity met?
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Chapter 6: The Stability of Deposit-Taking Institutions
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Sample Questions
Q1) Maturity mismatch implies that Australia's banks have a serious liquidity management problem.
A)True
B)False
Q2) The maturity mismatch between an ADI's liabilities and assets gives rise to:
A)iquidity and funding risks
B)credit risk
C)market risk
D)interest rate risk
E)operating risk.
Q3) Basel III introduces new liquidity requirements on banks.
A)True
B)False
Q4) The RBA examines a number of key indicators for the purpose of reviewing financial stability.
A)True
B)False
Q5) Describe maturity mismatch and identify and explain the risks it raises for ADIs.
Q6) Comment on the general performance of loans made by Australian banks.
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Chapter 7: The Money Market
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Sample Questions
Q1) Explain the motive for a tight monetary policy and how it is implemented.
Q2) How does the RBA implement monetary policy?
Q3) The money market assists banks with their liquidity management. A)True B)False
Q4) The money market facilitates direct financing in wholesale amounts. A)True B)False
Q5) Discuss the purposes of the Reserve Bank's trading activities in the money market.
Q6) The risk premium in the BBSW increased during the GFC and has remained at this higher level since.
A)True B)False
Q7) Suppose that the 90-day yield BBSW just rose from 3.8% p.a.to 4.10% p.a.What does this imply for (i)prospective investors and (ii)investors holding money market securities?
Q8) Treasury notes are issued through a dealer panel. A)True B)False
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Chapter 8: The Bond Market
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Sample Questions
Q1) In terms of the amount of bonds outstanding, which is the largest bond category by issuer?
A)Treasury bonds
B)Semi-government bonds
C)Foreign issuer bonds
D)Non-government bonds
E)Local-government bonds
Q2) Calculate the settlement price (per $100 of face value)of the 5.75% 15 June 2016 Treasury bond on 2 May 2015, given a market yield of 5.40% p.a.(f = 44, d = 182)
Q3) The turnover in Treasury bonds dominates the secondary bond market.
A)True
B)False
Q4) The ratings provided by ratings agencies are NOT:
A)a trading recommendation
B)useful to investors in bond securities
C)reflected in the market yield for securities
D)based on a qualitative and quantitative analysis of the issuer
E)reviewed after the securities are first issued.
Q5) What do you think is implied by a rise in the 10-year bond yield?
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Chapter 9: Shares
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Sample Questions
Q1) The financing decision is a firm's decision about which assets or projects it will invest in.
A)True
B)False
Q2) A P/E ratio for a firm that is higher than the industry average may indicate:
A)the firm's growth prospects are seen as being below its competitors
B)the share is probably underpriced and so you would give a 'buy' recommendation
C)the share is probably underpriced so you would give a 'sell' recommendation
D)the share is relatively expensive
E)None of these.
Q3) Most Australian IPOs have been large government-owned enterprises, such as Telstra.
A)True
B)False
Q4) What is underpricing? Why does it persist?
Q5) Discuss how a listed firm can raise additional equity capital.Explain the circumstances in which a firm would choose a rights issue, explain how this process is conducted and refer to the risks involved.
Q6) Provide an overview of the methods used by Virgin Blue to raise equity.
Q7) 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) The functions of the share market do NOT include:
A)performing price discovery by revealing the value of shares
B)endowing listed securities with liquidity
C)setting the price for IPOs
D)disciplining the behaviour of a company's top management.
E)developing a pool of investors.
Q3) Describe the trading and settlement arrangements used in the Australian share market.
Q4) There is evidence that the entry of Chi-X to Australia has increased efficiency by lowering transaction costs.
A)True
B)False
Q5) The ASX uses an automatic trading system that matches buy and sell orders.
A)True
B)False
Q6) Identify and briefly explain the competitive pressures faced by the ASX.
Page 12
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Chapter 11: Foreign Exchange and Global Capital Markets
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Sample Questions
Q1) Explain the income earned by FX dealers on their forward FX trading activities.
Q2) Expectations about future spot exchange rates do not determine forward exchange rates.
A)True
B)False
Q3) The RBA:
A)trades FX to keep the AUD within its target range
B)trades FX for 'smoothing and testing' purposes
C)believes the FX market is prone to excessive cyclical movements
D)believes the FX market behaves in a manner that is consistent with the efficient market hypothesis
E)trades to reduce short-term volatility.
Q4) In a foreign exchange market:
A)exporters are exposed to the risk of an appreciation of the domestic currency
B)domestic companies can borrow in a foreign currency
C)importers sell foreign currency
D)investors in foreign assets are exposed to the risk of an appreciation in the foreign currency
E)investors can buy foreign securities.
Q5) During 2013 the AUD traded at a forward discount to the USD.Why?
Page 13
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Chapter 13: Financial Futures
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Sample Questions
Q1) Explain why it is unlikely that a hedger will achieve an effective borrowing or lending rate equal to the rate locked-in at the inception of a BAB futures hedge when the position is unwound early.
Q2) Explain the contributions the futures market makes to the financial system.
Q3) Futures contracts specify:
A)the contract item
B)the settlement date
C)how the contract can be settled
D)the settlement price.
E)All of these.
Q4) Microhard Corp.borrowed via a bank bill facility and has fully hedged its exposure using BAB futures contracts.The effective borrowing rate for the funds is:
A)determined by the market interest rates on rollover dates
B)the forward yields on the BAB futures contracts
C)the current market interest rate
D)the agreed yield.
E)None of these are correct.
Q5) How do traders establish a 'long' or 'short' futures position? Explain how these positions can be subsequently 'closed-out'.
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Chapter 14: Swaps
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Sample Questions
Q1) Cross-currency swaps do NOT involve:
A)The exchange of principal at the start of the loan.
B)The exchange of fixed local currency interest payments for floating foreign currency interest payments.
C)A fixed exchange rate for the swap's term.
D)The exchange of floating local currency interest payments for floating foreign currency interest payments.
E)The exchange of principal at the end of the loan.
Q2) Explain how an FX swap differs from a cross-currency swap.
Q3) The fixed-rate payer's position in a swap would become valuable if interest rates decreased unexpectedly.
A)True
B)False
Q4) Explain the activities of swap dealers and the risks they face.How does a swap dealer establish their swap rates?
Q5) Swap contracts have an active secondary market.
A)True
B)False
Q6) Explain how opportunities for comparative advantage may arise.
Page 15
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Chapter 15: Exchange-Traded Options
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Sample Questions
Q1) While ever an option is out of the money, time works gradually in the favour of the seller.
A)True
B)False
Q2) The Black-Scholes is the best known option-pricing formula.
A)True
B)False
Q3) Suppose a call option over ANZ shares with an exercise price of $34 can be purchased for $0.56.(i)Draw the option's intrinsic value line, indicating when the option is in-, at- and out-of-the-money.(ii)Draw the option's payoff line and indicate the 'break-even' point.
Q4) Which of the following is NOT true regarding options?
A)As time passes, the option's price line approaches its intrinsic value.
B)The premium on an 'at-the-money' option is all time value.
C)All else being equal, you would prefer a call option with a lower exercise price.
D)The seller of an option must post a margin deposit.
E)Options must be held to expiration.
Q5) What is an option's 'implied volatility'?
Q6) Discuss the features of ASX share options.
Page 16
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