Securities Markets
Exam Materials
Course Introduction
Securities Markets explores the structure, function, and regulation of financial markets where securities such as stocks, bonds, and derivatives are traded. The course examines the roles played by key market participants, exchanges, and over-the-counter markets, and delves into the mechanisms of price determination, market efficiency, and liquidity provision. It covers primary and secondary market processes, as well as the regulatory frameworks that govern market activities to ensure fairness, transparency, and investor protection. Students gain insights into trading strategies, risk management, and the impact of global economic forces on securities markets.
Recommended Textbook
Financial Institutions Instruments and Markets 7th Edition by Christopher Viney
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21 Chapters
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2086 Flashcards
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Page 2
Chapter 1: A Modern Financial System: An Overview
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Sample Questions
Q1) 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
Q2) Financial intermediaries pool the funds of:
A) many small savers and make loans to a few large borrowers.
B) a few savers and make loans to many borrowers.
C) many small savers and make loans to many borrowers.
D) a few large savers and make loans to a few large borrowers.
Answer: C
Q3) Four main attributes of an asset are return,risk,volatility and time-pattern of cash flows.
A)True
B)False Answer: False
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Chapter 2: Commercial Banks
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Sample Questions
Q1) The advantage of a CD to a bank is/are:
A) its rate of interest may be adjusted quickly.
B) it can be sold quickly in the money market for cash.
C) it is a negotiable instrument.
D) all of the given choices.
Answer: D
Q2) In relation to a bank,liquidity management means:
A) the bank's ability to quickly convert deposits into loans.
B) the bank's ability to onsell its loans.
C) the bank's ability to have funds available when depositors' funds mature.
D) the bank's policies and practices in identifying and managing its loans portfolios.
Answer: A
Q3) Foreign currency liabilities are debt instruments issued into another country but not denominated in the currency of that country.
A)True
B)False
Answer: False
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Page 4
Chapter 3: Non-Bank Financial Institutions
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Sample Questions
Q1) An insurance company is not a depository financial institution.
A)True
B)False
Answer: True
Q2) When an employee makes regular contributions equal to 7% of their salary and their employer also contributes the equivalent of 14% of salary to a superannuation fund that is an accumulation scheme:
A) the final payout benefit is stated when the member joins the fund.
B) the final payout depends upon the investment performance of the fund.
C) payment is specified under the superannuation guarantee legislation.
D) the benefit is paid in the form of a life annuity.
Answer: B
Q3) In Australia,the prudential supervisor of life insurance offices is:
A) ASIC.
B) APRA.
C) the Reserve Bank of Australia.
D) PSLI.
Answer: B
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Chapter 4: The Share Market and the Corporation
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Sample Questions
Q1) Discuss what is meant by the derivative role of a share market.
Q2) 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
Q3) Discuss what is meant by the interest rate role of a stock exchange.
Q4) The selling of new shares to a selected number of institutional investors is called a/an:
A) share release.
B) share placement.
C) share float.
D) initial offering.
Q5) Discuss the roles of the participants in a primary market issue of shares.
Q6) Agency theory is concerned with:
A) a conflict between owners and managers.
B) the agents who act on behalf of the company.
C) the relationship between employees.
D) the conflict of interests between outside agents and the company.
Page 6
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Chapter 5: Corporations Issuing Equity in the Share Market
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Sample Questions
Q1) Which of the following is NOT a feature of convertible notes?
A) Convertible notes are usually issued at a price close to the market price of the share.
B) The expectation of the note holder is that the share price will increase over the term of the note.
C) Convertible notes offer a higher interest rate than straight debt instruments.
D) A convertible note may be made by direct placement to shareholders.
Q2) What is the function of a proxy statement for a shareholder?
A) It gives them the right of a vote for each share they own.
B) It gives them the right to transfer their share to another party.
C) It gives them the entitlement to new shares when issued.
D) It gives them the right to sell their shares at a premium.
Q3) Limited liability shares are generally sold to investors on a fully paid basis.
A)True
B)False
Q4) What is capital budgeting and explain its importance for a company.
Q5) Discuss the attractions of a private placement for a company.
Q6) What is an equity-funded takeover?
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Page 7
Chapter 6: Investors in the Share Market
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Sample Questions
Q1) The financial ratio that measures operating profit after tax to shareholders funds is:
A) EBIT to long-term funds.
B) Return on equity.
C) EBIT to total funds.
D) interest cover.
Q2) Which ratio is a measure of liquidity that excludes inventories?
A) Current
B) Liquid
C) Debt to gross cash flow
D) Interest cover
Q3) The risk that impacts specifically on the share price of a particular company is called:
A) economic risk.
B) business risk.
C) systematic risk.
D) unsystematic risk.
Q4) Define and explain what a share split involves.
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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Sample Questions
Q1) The portion of the overall economy defined by the nature of a company's operations is called the:
A) economic component.
B) company component.
C) industry sector.
D) country sector.
Q2) An investor who buys a large number of shares from different companies and from many different industries will:
A) abolish systematic risk.
B) minimise unsystematic risk.
C) minimise credit risk.
D) minimise price risk.
Q3) The greater the degree of systematic risk,the:
A) higher the expected share price.
B) higher the expected rate of return.
C) lower the expected return on a share.
D) closer a share's beta will be to 1.
Q4) What is program trading in relation to the share market?
Discuss any impact on 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) Distinguish between an ordinary annuity and an annuity due.Give examples.
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 present value of $1 million payable in 90 days at 8.00% per annum simple interest?
A) $835 240.27
B) $974 372.66
C) $980 655.56
D) $1 002 747.25
Q4) 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
Page 10
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Chapter 9: Short-Term Debt
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Sample Questions
Q1) Which financial security is known as one-name paper?
A) Bank bills
B) CDs
C) Promissory notes
D) Unsecured notes
Q2) The process of discounting a commercial bill means:
A) a buyer for the bill will provide the financing.
B) a seller for the bill will provide the financing.
C) the borrower has a specified time in which to repay the loan.
D) the acceptor agrees to pay the face value of the bill to the holder at maturity.
Q3) When a company finances its short-term assets with short-term debt,this is known as the:
A) identical principle.
B) equalisation theory.
C) corresponding principle.
D) matching principle.
Q4) What are some advantages of promissory notes financing for a large company?
Q5) What are some of the advantages of bill financing for a company over other forms of short-term debt?
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Chapter 10: Medium-To-Long-Term Debt
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Sample Questions
Q1) A debenture is a/an:
A) unsecured bond that only best-name corporate borrowers can issue.
B) legal document stating the restrictive covenants on the loan.
C) bond secured by a charge over the assets of the issuer.
D) corporate bond with a credit enhancement.
Q2) 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
Q3) A/An _______ lease is a short-term arrangement where the lessee agrees to make periodic payments to the lessor for the right to use the asset.This arrangement usually contains only minor or no penalties for cancellation of the lease.
A) financial
B) operating lease
C) direct
D) leveraged
Q4) Discuss the features of mortgage agreements for commercial loans.
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Chapter 11: International Debt Markets
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Sample Questions
Q1) Which of the following statement is NOT an example of overseas borrowing by the Australian company Telstra?
A) Telstra organises a loan through a major bank in Germany.
B) Telstra purchases debentures from a European company.
C) Telstra sells eurocommercial paper in overseas markets.
D) Telstra sells debentures denominated in Yen to overseas investors.
Q2) Discuss the features of short-term bank advances in the eurocurrency markets.How does it differ from that obtained through a domestic bank?
Q3) Which of the following is a benefit of a eurocommercial paper (ECP)issue?
A) An ECP issue is a fixed-interest security with annual coupon payments.
B) An ECP issue can deliver cheaper funds for best-name borrowers.
C) Generally, only a lead manager is required for an ECP issue.
D) An ECP issue is a medium-term facility with maturities generally longer than ten years.
Q4) US commercial paper is an important short-term security for both US and foreign borrowers.Outline the features that have led to its importance.
Q5) What are the features of a floating rate note?
Outline some possible factors that may have led to their development.
Q6) Discuss the features of a eurobond issue.
Page 13
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Chapter 12: Government Debt, monetary Policy and the Payments System
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Sample Questions
Q1) 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.
Q2) 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.
Q3) If the Australian Reserve Bank,through its monetary policy market operations,buys government securities,this will lead to an easing of interest rates.
A)True
B)False
Q4) 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.
Q5) Discuss what factors influence financial system liquidity in Australia.
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Chapter 13: An Introduction to Interest Rate Determination and Forecasting
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Sample Questions
Q1) 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.
Q2) All other things being equal,a decrease in the demand for loanable funds:
A) drives the interest rate up.
B) drives the interest rate down.
C) results from an increase in business circumstances and a decrease in the level of savings.
D) might not have any effect on the interest rate.
Q3) A lower level of income in all sectors of the economy causes the demand for funds to _______ and the interest rate to _____.
A) increase; rise
B) decrease; fall
C) increase; fall
D) decrease; rise
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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Sample Questions
Q1) If a bank increases interest rates on its loans for its customers and then they seek new loans from other banks this interest rate exposure is called _____ interest rate risk.
A) direct
B) indirect
C) basis
D) reinvestment
Q2) If a bank expects interest rates to fall,then it will want to:
A) achieve a positive ARBL.
B) achieve a negative ARBL.
C) lower the rate on its loans before it lowers the rates on its deposits.
D) increase the rates on its loans before it lowers the rates on its deposits.
Q3) An interest-sensitive asset or liability must:
A) have a maturity of less than 90 days.
B) have a rate that shifts in the opposite direction to market changes.
C) have a rate that changes as market conditions alter during the organisation's specified planning period.
D) always be an asset issued for a short-term period.
Q4) Within the context of financial risk management,discuss internal and external methods for interest rate risk.
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Chapter 15: Foreign Exchange: The Structure and Operation
of the Fx Market
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Sample
Questions
Q1) If a FX dealer buys USD from a client and holds USD on its own account on the expectation of the USD rising in value in the near future,it is taking a:
A) a hold position in the USD.
B) a long position in the USD.
C) a short position in the USD.
D) forward position in the USD.
Q2) The largest FX market is based in New York.
A)True
B)False
Q3) The second currency named in an FX quote is called the:
A) basis currency.
B) base currency.
C) unit currency.
D) terms currency.
Q4) For a FX quote of AUD/GBP0.6250-53 has a spread of:
A) 250 points.
B) 50 points.
C) 53 points.
D) 3 points.
Page 17
Q5) Discuss how the way a currency is quoted affects how cross rates are calculated.
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Chapter 16: Foreign Exchange: Factors That Influence the Exchange Rate
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Q1) If the interest rate in Australia falls,overseas investors:
A) increase their demand for Australian dollars and the Australian exchange rate falls.
B) increase their demand for Australian dollars and the Australian exchange rate increases.
C) decrease their demand for Australian dollars and the Australian exchange rate rises.
D) decrease their demand for Australian dollars and the Australian exchange rate falls.
Q2) If currency traders are anticipating a currency's foreign exchange value to fall,the:
A) current foreign exchange value of the currency will increase.
B) current foreign exchange value of the currency will decrease.
C) demand for the currency will rise in anticipation.
D) country's nominal interest rate will rise.
Q3) If the currency AUD/USD moves from 0.9870-75 to 0.9364,there has been:
A) an appreciation of the USD.
B) appreciation of the AUD.
C) a depreciation of the AUD.
D) a change in the bid-offer spread.
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Page 18
Chapter 17: Foreign Exchange: Risk Identification and Management
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Sample Questions
Q1) If a company takes out a forward exchange contract,which of the following is correct?
A) At the maturity date, the company can pay either the forward rate that was contracted or the then-current rate.
B) Taking out a forward exchange contract is always cheaper than waiting to pay spot rates.
C) Paying the spot price is safer than taking out a forward exchange cover.
D) The company's cost is locked in from the beginning of the contract, regardless of market changes.
Q2) An Australian company that is exposed to FX risk as the result of having a USD foreign currency payable due in 3 months can enter into:
A) a 3 month forward exchange contract to sell USD forward.
B) a 3 month forward exchange contract to sell AUD forward.
C) a 3 month futures contract to sell USD.
D) a 3 month currency swap to sell USD and buy AUD.
Q3) Discuss the importance of the recording of the expected cash inflows and outflows in estimating transaction exposure.
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Page 19
Chapter 18: An Introduction to Risk Management and Derivatives
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Sample Questions
Q1) The maintenance margin call refers to the difference between the futures market price and the futures contract.
A)True
B)False
Q2) Derivatives are the financial instruments that are:
A) financial assets, such as shares and bonds that derive their value from the value of the company that issues them.
B) financial assets whose rates of return must be derived from information published in financial pages.
C) financial assets that derive their value from underlying assets.
D) derived by investment banks, which then trade them.
Q3) In the derivative markets a swap is:
A) another name for a call option.
B) another name for a put option.
C) an agreement between two or more persons to exchange cash flows over some future period.
D) the name for the exchange of a futures contract for an option contract.
Q4) What is operational risk in relation to an organisation?
Q5) 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,profits from speculation primarily arise because of the:
A) spread between the bid and ask prices on bonds.
B) illiquidity of markets for derivative securities.
C) high information costs in markets for derivative instruments.
D) difference in expectations among market participants about future prices of a commodity or financial asset.
Q2) Which of the following best describes the risks associated with futures contracts?
A) The possibility of making an unexpected profit on a futures contract
B) The probability of making a loss, or a fall in the value of a futures contract
C) The variability of changing prices and costs associated with buying and selling futures contracts
D) The possibility of loss associated with the default by the holder of the opposite position in the contract
Q3) A bond trader who buys a Treasury bond futures contract at a yield of 6.25% per annum and then sells it at 5.5% per annum makes a profit on the contract.
A)True
B)False
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Page 21
Chapter 20: Options
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Q1) In the Australian options markets a LEPO is:
A) low-expiration price option.
B) low-exercise price option.
C) large exercise price option.
D) long-exercise price option.
Q2) In options markets,options that give the option buyer the right to exercise the option only on the maturity date are:
A) call options.
B) put options.
C) European-type options.
D) American-type options.
Q3) If a buyer of a particular share purchased a call option on it at a strike price of $15 and the share is selling for $12 on the expiration date,the call option is worth $0.
A)True
B)False
Q4) The intrinsic value of an option is the amount the option is expected to be worth on its expiration date.
A)True
B)False
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Chapter 21: Interest Rate Swaps, Cross-Currency Swaps
and Credit Default
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Q1) If a company that had a floating-rate liability wanted to enter into a swap to achieve a fixed-rate cost of funds,it would pay a:
A) fixed rate to the counterparty and receive a floating rate in return from the counterparty.
B) floating rate to the counterparty and pay a floating rate to the fixed-rate lender.
C) floating rate to the counterparty and pay a fixed-rate to the fixed-rate lender.
D) floating rate to the counterparty and receive a fixed-rate in return from the counterparty.
Q2) For an ordinary interest rate swap already in place,if counterparty A's obligation for one year is $100 000 and counterparty B's obligation is $120 000:
A) counterparty A will pay counterparty B $20 000
B) counterparty A will pay counterparty B $100 000
C) counterparty B will pay counterparty A $20 000
D) counterparty B will pay counterparty A $120 000
Q3) For the majority of interest rate swaps,an intermediary is involved. A)True B)False
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Page 23