Practical - Chapter 1-3 Questions Practical - Chapter 1-3 Questions

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Practical - chapter 1-3 questions
Capital Markets and Institutions (University of New South Wales)
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6. Financial markets have developed to facilitate the exchange of money between savers and borrowers.
Which of the following is NOT a function of money?
Chapter 01 - Test Bank
A. A store of value
Multiple Choice Questions B. A medium of exchange for settling economic transactions
C. A claim to future cash flows
D. Short-term protection against inflation
1. The exchange of goods and services is made more efficient by:
7. Buyers of financial claims lend their excess funds because they:
A. barters.
B. money. A. expect to borrow extra funds in the future.
C. governments. B. want surplus funds in the future.
D. some combination of government transfer and barter. C. want to invest in the future.
D. want to increase their costs relative to their incomes.
2. Short selling is:
8. Sellers of financial claims promise to pay back borrowed funds:
A. the sale of a financial product at a discount to its current market value.

B. the sale of a financial product in small quantities. A. by borrowing extra funds in the future.
C. the sale of a financial product that the seller does not own. B. based on their expectation of having surplus funds in the future.
D. the sale of a financial product where the seller agrees to buy it back at a predetermined price. C. by selling other assets.
D. by reducing their costs relative to their incomes.
3. The term ‘medium of exchange' for money refers to its use as:
9. A savings-surplus unit is an entity:
A. coinage.
B. currency. A. that needs to borrow funds from a surplus unit.
C. something that is widely accepted as payment for goods and services. B. which has an income that exceeds its spending.
D. any standard of value that prices can be expressed in. C. whose spending exceeds its income.
D. called a company.
4. The role of money as a store of value refers to:
10. The process of facilitating the flow of funds between borrowers and lenders performed by the financial
system:
A. the value of money falling only when the money supply falls.
B. the value of money falling only when the money supply increases.
C. the fact that money allows worth to be stored readily. A. is hindered by the problem of ‘double coincidence of wants'.
D. the fact that money never loses its value compared with other assets. B. greatly reduces the probability of inflation.
C. increases the rate of economic growth of a country.
5. Money increases economic growth by assisting transfers from: D. occurs only through financial intermediaries.
A. consumers to investors.
B. savers to borrowers.
C. businesses to consumers.
D. borrowers to investors.

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11. Both real and financial assets have four principal attributes that are significant factors in the investment 16. Financial institutions whose liabilities specify that, in return for the payment of periodic funds to the
decision process. These are: institution, the institution will make payments in the future (if and when a specified event occurs) are:
I. liquidity
II. capital gain
III. risk A. money market corporations.
IV. return or yield B. unit trusts.
V. time pattern of future cash flows C. contractual savings institutions.
VI. price and cash flow volatility D. depository financial institutions.
17. Financial institutions that raise the majority of their funds by selling securities in the money markets are:
A. I, II, III, IV
B. I, III, IV, V
C. I, III, IV, VI A. commercial banks.
D. II, III, IV, V B. building societies.
C. finance companies.
12. Which of the following is NOT associated with characteristics of shares? D. life insurance offices.
18. Financial institutions that are formed under a trust deed and attract funds by inviting the public to buy units
A. Part ownership of a company are:
B. Capital gains
C. A fixed interest payment
D. Dividends A. finance companies
B. building societies.
13. A financial institution that obtains most of its funds from deposits is a/an: C. unit trusts.
D. life insurance offices.
A. investment bank. 19. Which of the following is NOT a term associated with shares?
B. unit trust.
C. commercial bank.
D. general insurer. A. Residual
B. Ownership
14. Institutions that specialise in off-balance-sheet advisory services are called: C. Voting rights
D. Contractual claim
A. depository financial institutions. 20. Which of the following is NOT a characteristic commonly associated with preference shares?
B. contractual institutions.
C. finance companies.
D. investment banks. A. A specified, fixed return
B. No voting rights
15. A financial intermediary that receives premium payments which are used to purchase assets to cover future C. Higher ranking than bond holders on claims on assets
possible payments is a: D. No entitlement to take possession of assets if the borrower defaults on payment
21. Long-term debt financing instruments used by companies are called:

A. building society.
B. credit union.
C. savings bank. A. bills.
D. life insurance office. B. debentures.
C. shares.
D. equities.

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22. When a borrower issues a debt instrument with collateral specified in its contract this debt instrument is 28. Which of the following is NOT a feature of swaps?
called:
A. There is a contractual arrangement to exchange cash flows

A. unsecured. B. Interest rate swaps exchange principal at the beginning and the end
B. secured. C. A fixed rate obligation may be exchanged for a variable rate obligation
C. defined. D. A swap can involve interest payments and currencies
D. negotiable.
29. The key reason for the existence of markets of financial assets is:
23. Debt instruments that can be easily sold and transferred in the financial markets are called:
A. that holders of shares generally want to exchange them for bonds and other financial instruments.
A. negotiable. B. the high expenditure for many individuals and businesses.
B. secured. C. that the lack of money in an economy makes trade in financial assets necessary.
C. unsecured. D. the refusal of most modern governments to print money on demand.
D. discounted.
30. Financial markets:
24. Which of the following is NOT a feature of a debt instrument?
A. facilitate the exchange of financial assets.

A. A contractual claim against the borrower B. provide information about prices of financial assets.
B. Periodic interest payments C. provide a channel for funds to flow between the providers and users of funds.
C. Higher claim on assets of borrower than equity holders D. all of the given choices.
D. Their prices do not fluctuate as much as shares
31. The most important function of a financial market is to:
25. Which of the following is NOT a feature of futures contracts?
A. provide information about shares.

A. Futures contracts involve an obligation to buy or sell a specified amount B. provide a market for shares.
B. Trading of contracts occurs on an exchange C. facilitate the flow of funds between lenders and borrowers.
C. The contract price is settled at the end of the contract D. provide employment for brokers and agents.
D. Trading an opposite contract usually closes out the contract
32. Financial markets:
26. Which of the following is NOT a feature of forward contracts?
A. act as intermediaries by holding a collection of assets and issuing claims based on them to savers.
A. Forward contracts are not standardised B. issue claims on future cash flows of individual borrowers directly to lenders.
B. Forward contracts do not trade on organised exchanges C. transmit funds indirectly between lenders and borrowers.
C. The contract price may be settled at the end of the contract D. usually provide lenders with lower returns than other financial intermediaries.
D. Forward contracts are closed out by trading an opposite contract
33. A primary financial market is one that:
27. Which of the following is NOT a feature of option contracts?
A. offers financial assets with the highest expected return.

A. The buyer does not have an obligation to proceed with the contract B. offers the greatest number of financial assets.
B. The writer of the contract receives a fee C. involves the sale of financial assets for the first time.
C. The price of the designated asset is determined at the beginning of the contract D. offers financial assets with the highest historical return.
D. The right to buy is called a put option

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34. A secondary financial market is one that: 40. The market where existing securities are sold is the:
A. offers financial assets with the highest expected return. A. economic market.
B. offers the greatest number of financial assets. B. primary market.
C. involves the sale of existing financial assets. C. secondary market.
D. offers financial assets with the highest historical return. D. financial market.
35. Purchasing shares on the Australian Securities Exchange is an example of: 41. When a large company issues a financial instrument into the financial markets:
A. a primary market transaction. A. funds flow indirectly from saver to borrower.

B. companies raising finance from another financial intermediary. B. the cost of funds is generally higher owing to the risk involved.
C. companies raising new finance. C. it buys a financial claim.
D. a secondary market transaction. D. it sells a financial claim.
36. When a security is sold in the financial markets for the first time: 42. Secondary markets:
A. funds flow from the saver to the issuer. A. allow borrowers to raise long-term funds.
B. funds flow from the borrower to the saver. B. facilitate capital-raising in the primary market.
C. it represents a secondary transaction to the underwriter. C. do not raise new funds but offer liquidity.
D. it is an asset for the borrower. D. all of the given answers.
37. Which of the following is NOT an example of primary market transactions? 43. The flow of funds through financial markets increases the volume of savings and investment by:
A. A company issue of shares to raise funds for an investment project A. maintaining low interest rates.
B. A government issue of bonds B. storing large quantities of cash.
C. A mortgage bond C. providing savers with a variety of ways to lend to borrowers.
D. A mortgage loan to buy a house D. offering lower interest rates than could be obtained directly from borrowers.
38. A ‘primary market' is a market: 44. Which of the following statements is NOT a feature of financial markets?
A. only for equity issues by major or ‘primary' companies. A. Financial markets generally provide borrowers with lower cost funds than through a financial
B. where borrowers sell new financial instruments to buyers. intermediary.
C. where savers sell new financial claims to borrowers. B. Funds are channelled directly from savers to borrowers.
D. where government securities are bought and sold. C. Contractual agreements are issued between savers and borrowers.
D. Financial markets generally deal only with the purchase and sale of government securities.
39. Buying bonds in the capital markets is an example of:
45. Which of the following is NOT true—a well-functioning financial market:
A. a secondary market transaction.

B. a primary market transaction. A. has a steadily increasing liquidity for most assets.
C. companies raising new funds. B. offers increased ease of restructuring portfolios of assets.
D. companies raising funds from a secondary source. C. has a quick assimilation of information into asset prices.
D. has a selection of financial assets with similar timings of cash flow.

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46. Financial markets: 52. Financial intermediaries:
A. act as intermediaries between borrowers and savers. A. act as a third party by holding a portfolio of assets and issuing claims based on them to savers.
B. directly issue claims on savers to borrowers. B. issue claims on future cash flows of individual borrowers directly to lenders.
C. involve the buying and selling of existing financial securities only. C. transmit funds directly between lenders and borrowers.
D. involve both primary and secondary transactions. D. usually provide lenders with lower returns than other financial institutions.
47. Direct financing allows a borrower to: 53. The flow of funds between lenders and borrowers is channelled:
A. easily assess a lender's level of default risk. A. indirectly through financial markets.
B. match amounts and maturity of investments with borrowers. B. directly through financial intermediaries.
C. lower search and transaction costs. C. indirectly through financial intermediaries.
D. diversify their funding sources. D. mainly through government agencies.
48. Which of the following is NOT a possible disadvantage of direct financing? 54. ‘Intermediaries, by managing the deposits they receive, are able to make long-term loans while satisfying
savers' preferences for liquid claims.' This statement is referring to which important attribute of financial
intermediation?
A. Matching amounts of funds to be borrowed with those to be lent
B. Assessment of the risk of the borrower
C. Cost of preparing legal contracts, taxation and accounting advice A. Asset transformation
D. Cost of the financial intermediary involved B. Maturity transformation
C. Credit risk transformation
49. An issue of debentures is an example of: D. Denomination transformation
55. The main role of financial intermediaries is to:

A. a secondary market transaction.
B. fundraising through financial intermediaries.
C. a direct form of funding. A. borrow funds from surplus units and lend them to borrowers.
D. an indirect form of funding. B. provide advice to consumers on their finances.
C. provide funds for the government to cover budget deficits.
50. An example of an indirect form of funding is a/an: D. help ensure there are enough funds in circulation in a country.
56. Financial intermediaries pool the funds of:

A. issue of debentures.
B. issue of unsecured notes.
C. term loan. A. many small savers and make loans to a few large borrowers.
D. issue of shares. B. a few savers and make loans to many borrowers.
C. many small savers and make loans to many borrowers.
51. Which of the following is NOT a major advantage of direct finance? D. a few large savers and make loans to a few large borrowers.
57. Small savers prefer to use financial intermediaries rather than lending directly to borrowers because:
A. Direct finance reduces financial institution' fees.
B. Direct finance allows borrowers to diversify sources of funds.
C. Direct finance allows greater flexibility in funding types. A. financial intermediaries offer the savers a wide portfolio of financial instruments.
D. Direct finance reduces search and transactions costs. B. financial intermediaries offer much higher interest rates than can be obtained directly from borrowers.
C. borrowers dislike dealing with savers.
D. savers have a claim with the ultimate borrower via the financial intermediary.

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58. Financial intermediaries can engage in credit risk transformation because they: 64. An example of a financial intermediary is:
A. obtain cost advantages owing to their size and business volumes transacted. A. a stockbroker.
B. can quickly convert financial assets into cash, close to the current market price. B. the Australian Securities Exchange.
C. develop expertise in lending and diversifying loans. C. the Australian Securities Commission.
D. can pool savers' short-term deposits and make long-term loans. D. an insurance company.
59. When a financial intermediary collects together deposits and lends them out as loans to companies, it is 65. The main participants in the financial system are individuals, corporations and governments. Individuals
engaging in: are generally ______ of funds and corporations are net ________ of funds.
A. liability management. A. borrowers; suppliers

B. liquidity management. B. users; providers
C. credit transformation. C. suppliers; users
D. asset transformation. D. demanders; providers
60. ‘Liquidity’ in financial terms is 66. Which of the following borrowers would pay the lowest interest rate on debts of equal maturity?
A. a feature of money only. A. The National Bank of Australia

B. the ease with which an asset can be sold at the published market price. B. Telstra
C. the best measure of risk of a financial asset. C. The City of Sydney
D. to lower the rate of return for an asset. D. The Commonwealth Government
61. When an individual has immediate access to their funds from an account with a financial intermediary, the 67. Generally, in the long term, a government:
intermediary is engaging in:
A. is a net borrower of funds.

A. asset transformation. B. is a net supplier of funds.
B. liability management. C. borrows funds directly from households.
C. liquidity management. D. borrows funds directly from the financial market.
D. credit transformation.
68. The _______ is created by a financial connection between providers and users of short-term funds.
62. When a financial intermediary can repeatedly use standardised documents, it is engaging in:
A. share market
A. liability management. B. capital market
B. liquidity management. C. money market
C. credit transformation. D. financial market
D. economies of scale.
69. Which of the following is NOT usually a short-term discount security?
63. According to the textbook, all of the following are financial intermediaries except a/an:
A. Negotiable certificates of deposit

A. bank. B. Commercial paper
B. insurance company. C. Bank bills
C. superannuation fund. D. Unsecured notes
D. share broking firm.

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70. Which of the following is NOT a feature of the money market? 76. A source of short-term liquidity funding for banks is the issue of:
A. It is a mainly wholesale market A. bank bills.

B. It deals with short-term financial claims B. debentures.
C. It is important in financing the working-capital needs of businesses and governments C. certificates of deposit.
D. It only operates as a market in which new security issues are created and marketed D. commercial paper.
71. The market that involves the buying and selling of short-term securities is the: 77. The market that includes individuals, companies and governments in the buying and selling of long-term
debt and equity securities is the:
A. securities market.
B. money market. A. currency market.
C. share market. B. debt market.
D. capital market. C. capital market.
D. financial market.
72. A large company with a temporary surplus of funds is most likely to buy:
78. When a company issues a long-term debt instrument with no security attached it is selling _____ to
investors.
A. bank bills.
B. convertible notes.
C. debentures. A. shares
D. shares. B. debentures
C. unsecured notes
73. A company that issues promissory notes into the short-term debt markets is conducting a transaction in the: D. term loans
79. From the viewpoint of a corporation, which source of long-term funding does not have to be repaid?
A. commercial paper market.
B. inter-bank market.
C. bills market. A. Equity
D. official short-term money market. B. Commercial paper
C. Corporate bonds
74. A company with a high credit rating can issue _____ directly into the money markets. D. Bank bills
80. For additional funding, a company decides to issue $15 million in corporate bonds. The securities will be
A. CDs issued into the:
B. Commercial paper
C. unsecured notes
D. debentures A. retail markets.
B. secondary markets.
75. The market that generally involves the buying and selling of discount securities is the: C. money markets.
D. capital markets.
A. securities market. 81. The major financial assets traded in the capital market are:
B. money market.
C. share market.
D. capital market. A. bank bills and commercial paper.
B. Treasury notes and certificates of deposits.
C. bonds and convertible securities.
D. shares and bonds.

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82. Compared with Treasury bonds, Treasury notes generally: 87. Generally, financial instruments are divided into three broad categories of equity, debt and derivatives.
Which of the following are usually issued by a company to raise new funds?
i. Unsecured notes
A. have a longer maturity. ii. Ordinary shares
B. pay interest annually. iii. Debentures
C. are issued in the capital markets. iv. Bills of exchange
D. are discount securities. v. Futures contracts
vi. Preference shares
83. If you purchase an Australian government bond, that bond is:
A. ii, iii, iv, v

A. an asset to you but a liability for the Australian government. B. ii, iv, v, vi
B. an asset to you as well as an asset for the Australian government. C. i, ii, iii, iv
C. a liability to you but an asset for the Australian government. D. i, ii, iv, v
D. a liability to you as well as a liability for the Australian government.
88. The movement of funds between the four sectors of a domestic economy and the rest of the world is
84. When government borrowing reduces the amount of funds available for lending to businesses, this is called:
called:
A. flow of funds.
A. credit rationing. B. sector analysis.
B. crowding out. C. sectorial flows.
C. capital rationing. D. cross-sector flows.
D. government quotas.
89. As a broad generalisation, in the sectorial flow of funds households are typically:
85. All of the following are key financial services provided by the financial system except:
A. a deficit sector.
A. liquidity. B. a surplus sector.
B. risk transfer. C. fluctuates between a deficit sector and a neutral sector.
C. profitability. D. borrowers.
D. information.
90. The flow of funds between the sectors of a nation-state:
86. Which of the following would be most likely to use financial markets to borrow?
A. varies from year to year.

A. A household with a small amount saved B. depends on the business cycle.
B. A small business wanting to borrow to buy some machinery C. depends on the levels of economic activity.
C. A government authority wanting to borrow to finance highway construction D. relates to all of the given answers.
D. A company with a poor credit rating
True / False Questions
91. Money allows economic and financial transactions to be carried out more efficiently than bartering.
True False

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92. Four main attributes of an asset are return, risk, volatility and time-pattern of cash flows. 102. Explain how the properties of money facilitated the evolution of a modern financial system.
True False
93. Deficit entities purchase financial instruments that offer the lowest interest rate.
True False
94. Individuals may be categorised as risk averse, risk neutral or risk takers. Risk averse individuals will accept
a lower rate of return so as to reduce their risk exposure.
True False 103. What is monetary policy and who is responsible for its implementation?
95. A well-functioning financial system enables participants to readily change the composition of their
financial assets portfolio.
True False
96. Monetary policy relates to actions of a central bank to control the amount of money for transactions in an
economy.
L.O. 1.1 Explain the functions of a modern financial system.
True False
104. Explain what a debt security is. What are some common types of debt securities?
97. The government organisation responsible for the conduct of monetary policy is the prudential supervisor of
a country's banks.
True False
98. Investment banks are contractual organisations that make up contracts for their corporate clients and
governments.
True False
99. In recent years, depository financial institutions have obtained a large proportion of their funds from the 105. Identify and explain briefly the types of derivatives in a financial system.
financial markets directly.
True False
100. A stock is a debt security that promises to make specified interest payments.
True False
101. Margin trading is the sale of a financial product that the seller does not own and who intends to buy back at
a lower price later.
True False
Short Answer Questions

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106. The capital markets provide the opportunity for large corporations to manage their long-term cash flows.
Discuss this statement using the example of a surplus entity and a deficit entity. Chapter 01 - Test Bank Key
Multiple Choice Questions
1. The exchange of goods and services is made more efficient by:
A. barters.
B. money.
C. governments.
D. some combination of government transfer and barter.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 01-01 Explain the functions of a modern financial system.
Section: Introduction
2. Short selling is:
A. the sale of a financial product at a discount to its current market value.

B. the sale of a financial product in small quantities.
C. the sale of a financial product that the seller does not own.
D. the sale of a financial product where the seller agrees to buy it back at a predetermined price.
Difficulty: Medium
Est time: <1 minute
3. The term ‘medium of exchange' for money refers to its use as:
A. coinage.
B. currency.
C. something that is widely accepted as payment for goods and services.
D. any standard of value that prices can be expressed in.
Difficulty: Easy
Est time: <1 minute
4. The role of money as a store of value refers to:
A. the value of money falling only when the money supply falls.
B. the value of money falling only when the money supply increases.
C. the fact that money allows worth to be stored readily.
D. the fact that money never loses its value compared with other assets.
Difficulty: Medium
Est time: <1 minute

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9. A savings-surplus unit is an entity:
5. Money increases economic growth by assisting transfers from:
A. that needs to borrow funds from a surplus unit.
A. consumers to investors. B. which has an income that exceeds its spending.
B. savers to borrowers. C. whose spending exceeds its income.
C. businesses to consumers. D. called a company.
D. borrowers to investors. Difficulty: Easy
Est time: <1 minute
Difficulty: Medium Learning Objective: 01-01 Explain the functions of a modern financial system.
Est time: <1 minute Section: Introduction
10. The process of facilitating the flow of funds between borrowers and lenders performed by the financial
6. Financial markets have developed to facilitate the exchange of money between savers and borrowers. system:
Which of the following is NOT a function of money?
A. is hindered by the problem of ‘double coincidence of wants'.
A. A store of value B. greatly reduces the probability of inflation.
B. A medium of exchange for settling economic transactions C. increases the rate of economic growth of a country.
C. A claim to future cash flows D. occurs only through financial intermediaries.
D. Short-term protection against inflation Difficulty: Medium
Est time: <1 minute
Est time: <1 minute Section: Introduction
11. Both real and financial assets have four principal attributes that are significant factors in the investment
7. Buyers of financial claims lend their excess funds because they: decision process. These are:
I. liquidity
II. capital gain
A. expect to borrow extra funds in the future. III. risk
B. want surplus funds in the future. IV. return or yield
C. want to invest in the future. V. time pattern of future cash flows
VI. price and cash flow volatility
D. want to increase their costs relative to their incomes.
Difficulty: Medium
Est time: <1 minute A. I, II, III, IV
Section: Introduction B. I, III, IV, V
C. I, III, IV, VI
8. Sellers of financial claims promise to pay back borrowed funds:
D. II, III, IV, V
Difficulty: Medium
A. by borrowing extra funds in the future. Est time: <1 minute
B. based on their expectation of having surplus funds in the future. Section: 1.1 Functions of a financial system
C. by selling other assets.
12. Which of the following is NOT associated with characteristics of shares?
D. by reducing their costs relative to their incomes.
Difficulty: Easy
Est time: <1 minute A. Part ownership of a company
Section: Introduction B. Capital gains
C. A fixed interest payment
D. Dividends
Difficulty: Easy
Est time: <1 minute
Learning Objective: 01-03 Define the main classes of financial instruments that are issued into the financial system; that is, equity, debt, hybrids and derivatives.

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Section: 1.1 Functions of a financial system

17. Financial institutions that raise the majority of their funds by selling securities in the money markets
13. A financial institution that obtains most of its funds from deposits is a/an: are:
A. investment bank. A. commercial banks.

B. unit trust. B. building societies.
C. commercial bank. C. finance companies.
D. general insurer. D. life insurance offices.
Difficulty: Easy
Difficulty: Easy
Est time: <1 minute
Est time: <1 minute
Learning Objective: 01-02 Categorise the main types of financial institutions, being depository financial institutions, investment banks and merchant banks, contractual
savings institutions, finance companies and unit trusts.
Section: 1.2 Financial institutions
14. Institutions that specialise in off-balance-sheet advisory services are called: 18. Financial institutions that are formed under a trust deed and attract funds by inviting the public to buy
units are:
A. depository financial institutions.

B. contractual institutions. A. finance companies
C. finance companies. B. building societies.
D. investment banks. C. unit trusts.
D. life insurance offices.
Difficulty: Easy
Est time: <1 minute Difficulty: Easy
Learning Objective: 01-02 Categorise the main types of financial institutions, being depository financial institutions, investment banks and merchant banks, contractual Est time: <1 minute
savings institutions, finance companies and unit trusts. Learning Objective: 01-02 Categorise the main types of financial institutions, being depository financial institutions, investment banks and merchant banks, contractual
Section: 1.2 Financial institutions savings institutions, finance companies and unit trusts.
15. A financial intermediary that receives premium payments which are used to purchase assets to cover
future possible payments is a: 19. Which of the following is NOT a term associated with shares?
A. building society. A. Residual

B. credit union. B. Ownership
C. savings bank. C. Voting rights
D. life insurance office. D. Contractual claim
Difficulty: Easy
Difficulty: Easy
Est time: <1 minute
Est time: <1 minute
Section: 1.3 Financial instruments
20. Which of the following is NOT a characteristic commonly associated with preference shares?
16. Financial institutions whose liabilities specify that, in return for the payment of periodic funds to the
institution, the institution will make payments in the future (if and when a specified event occurs) are:
A. A specified, fixed return
B. No voting rights
A. money market corporations. C. Higher ranking than bond holders on claims on assets
B. unit trusts. D. No entitlement to take possession of assets if the borrower defaults on payment
C. contractual savings institutions.
Difficulty: Easy
D. depository financial institutions. Est time: <1 minute
Difficulty: Easy Section: 1.3 Financial instruments
Est time: <1 minute

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21. Long-term debt financing instruments used by companies are called: 25. Which of the following is NOT a feature of futures contracts?
A. bills. A. Futures contracts involve an obligation to buy or sell a specified amount

B. debentures. B. Trading of contracts occurs on an exchange
C. shares. C. The contract price is settled at the end of the contract
D. equities. D. Trading an opposite contract usually closes out the contract
Difficulty: Easy Difficulty: Medium
Est time: <1 minute Est time: <1 minute
Learning Objective: 01-03 Define the main classes of financial instruments that are issued into the financial system; that is, equity, debt, hybrids and derivatives. Learning Objective: 01-03 Define the main classes of financial instruments that are issued into the financial system; that is, equity, debt, hybrids and derivatives.
Section: 1.3 Financial instruments Section: 1.3 Financial instruments
22. When a borrower issues a debt instrument with collateral specified in its contract this debt instrument is 26. Which of the following is NOT a feature of forward contracts?
called:
A. Forward contracts are not standardised

A. unsecured. B. Forward contracts do not trade on organised exchanges
B. secured. C. The contract price may be settled at the end of the contract
C. defined. D. Forward contracts are closed out by trading an opposite contract
D. negotiable.
Difficulty: Easy
Est time: <1 minute
Difficulty: Easy
Est time: <1 minute
27. Which of the following is NOT a feature of option contracts?
23. Debt instruments that can be easily sold and transferred in the financial markets are called:
A. The buyer does not have an obligation to proceed with the contract
A. negotiable. B. The writer of the contract receives a fee
B. secured. C. The price of the designated asset is determined at the beginning of the contract
C. unsecured. D. The right to buy is called a put option
D. discounted.
Difficulty: Medium
Est time: <1 minute
Difficulty: Easy
Est time: <1 minute
28. Which of the following is NOT a feature of swaps?
24. Which of the following is NOT a feature of a debt instrument?
A. There is a contractual arrangement to exchange cash flows

A. A contractual claim against the borrower B. Interest rate swaps exchange principal at the beginning and the end
B. Periodic interest payments C. A fixed rate obligation may be exchanged for a variable rate obligation
C. Higher claim on assets of borrower than equity holders D. A swap can involve interest payments and currencies
D. Their prices do not fluctuate as much as shares
Difficulty: Medium
Est time: <1 minute
Difficulty: Medium
Est time: <1 minute

lOMoARcPSD|4408380
29. The key reason for the existence of markets of financial assets is: 33. A primary financial market is one that:
A. that holders of shares generally want to exchange them for bonds and other financial instruments. A. offers financial assets with the highest expected return.
B. the high expenditure for many individuals and businesses. B. offers the greatest number of financial assets.
C. that the lack of money in an economy makes trade in financial assets necessary. C. involves the sale of financial assets for the first time.
D. the refusal of most modern governments to print money on demand. D. offers financial assets with the highest historical return.
Difficulty: Medium Difficulty: Easy
Learning Objective: 01-04 Discuss the nature of the flow of funds between savers and borrowers, including primary markets, secondary markets, direct finance and Learning Objective: 01-04 Discuss the nature of the flow of funds between savers and borrowers, including primary markets, secondary markets, direct finance and
intermediated finance. intermediated finance.
Section: 1.4 Financial markets Section: 1.4 Financial markets
30. Financial markets: 34. A secondary financial market is one that:
A. facilitate the exchange of financial assets. A. offers financial assets with the highest expected return.
B. provide information about prices of financial assets. B. offers the greatest number of financial assets.
C. provide a channel for funds to flow between the providers and users of funds. C. involves the sale of existing financial assets.
D. all of the given choices. D. offers financial assets with the highest historical return.
Difficulty: Easy Difficulty: Easy
31. The most important function of a financial market is to: 35. Purchasing shares on the Australian Securities Exchange is an example of:
A. provide information about shares. A. a primary market transaction.

B. provide a market for shares. B. companies raising finance from another financial intermediary.
C. facilitate the flow of funds between lenders and borrowers. C. companies raising new finance.
D. provide employment for brokers and agents. D. a secondary market transaction.
32. Financial markets: 36. When a security is sold in the financial markets for the first time:
A. act as intermediaries by holding a collection of assets and issuing claims based on them to savers. A. funds flow from the saver to the issuer.
B. issue claims on future cash flows of individual borrowers directly to lenders. B. funds flow from the borrower to the saver.
C. transmit funds indirectly between lenders and borrowers. C. it represents a secondary transaction to the underwriter.
D. usually provide lenders with lower returns than other financial intermediaries. D. it is an asset for the borrower.
Difficulty: Hard Difficulty: Medium

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37. Which of the following is NOT an example of primary market transactions? 41. When a large company issues a financial instrument into the financial markets:
A. A company issue of shares to raise funds for an investment project A. funds flow indirectly from saver to borrower.
B. A government issue of bonds B. the cost of funds is generally higher owing to the risk involved.
C. A mortgage bond C. it buys a financial claim.
D. A mortgage loan to buy a house D. it sells a financial claim.
38. A ‘primary market' is a market: 42. Secondary markets:
A. only for equity issues by major or ‘primary' companies. A. allow borrowers to raise long-term funds.
B. where borrowers sell new financial instruments to buyers. B. facilitate capital-raising in the primary market.
C. where savers sell new financial claims to borrowers. C. do not raise new funds but offer liquidity.
D. where government securities are bought and sold. D. all of the given answers.
Difficulty: Medium Difficulty: Medium
39. Buying bonds in the capital markets is an example of: 43. The flow of funds through financial markets increases the volume of savings and investment by:
A. a secondary market transaction. A. maintaining low interest rates.

B. a primary market transaction. B. storing large quantities of cash.
C. companies raising new funds. C. providing savers with a variety of ways to lend to borrowers.
D. companies raising funds from a secondary source. D. offering lower interest rates than could be obtained directly from borrowers.
40. The market where existing securities are sold is the: 44. Which of the following statements is NOT a feature of financial markets?
A. economic market. A. Financial markets generally provide borrowers with lower cost funds than through a financial
B. primary market. intermediary.
C. secondary market. B. Funds are channelled directly from savers to borrowers.
D. financial market. C. Contractual agreements are issued between savers and borrowers.
D. Financial markets generally deal only with the purchase and sale of government securities.
Difficulty: Easy
Est time: <1 minute
Difficulty: Medium
Learning Objective: 01-04 Discuss the nature of the flow of funds between savers and borrowers, including primary markets, secondary markets, direct finance and
Est time: <1 minute
intermediated finance.
Section: 1.4 Financial markets

lOMoARcPSD|4408380
45. Which of the following is NOT true—a well-functioning financial market: 49. An issue of debentures is an example of:
A. has a steadily increasing liquidity for most assets. A. a secondary market transaction.
B. offers increased ease of restructuring portfolios of assets. B. fundraising through financial intermediaries.
C. has a quick assimilation of information into asset prices. C. a direct form of funding.
D. has a selection of financial assets with similar timings of cash flow. D. an indirect form of funding.
Difficulty: Hard Difficulty: Medium
46. Financial markets: 50. An example of an indirect form of funding is a/an:
A. act as intermediaries between borrowers and savers. A. issue of debentures.

B. directly issue claims on savers to borrowers. B. issue of unsecured notes.
C. involve the buying and selling of existing financial securities only. C. term loan.
D. involve both primary and secondary transactions. D. issue of shares.
47. Direct financing allows a borrower to: 51. Which of the following is NOT a major advantage of direct finance?
A. easily assess a lender's level of default risk. A. Direct finance reduces financial institution' fees.
B. match amounts and maturity of investments with borrowers. B. Direct finance allows borrowers to diversify sources of funds.
C. lower search and transaction costs. C. Direct finance allows greater flexibility in funding types.
D. diversify their funding sources. D. Direct finance reduces search and transactions costs.
48. Which of the following is NOT a possible disadvantage of direct financing? 52. Financial intermediaries:
A. Matching amounts of funds to be borrowed with those to be lent A. act as a third party by holding a portfolio of assets and issuing claims based on them to savers.
B. Assessment of the risk of the borrower B. issue claims on future cash flows of individual borrowers directly to lenders.
C. Cost of preparing legal contracts, taxation and accounting advice C. transmit funds directly between lenders and borrowers.
D. Cost of the financial intermediary involved D. usually provide lenders with lower returns than other financial institutions.
Difficulty: Medium Difficulty: Hard

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53. The flow of funds between lenders and borrowers is channelled: 57. Small savers prefer to use financial intermediaries rather than lending directly to borrowers because:
A. indirectly through financial markets. A. financial intermediaries offer the savers a wide portfolio of financial instruments.
B. directly through financial intermediaries. B. financial intermediaries offer much higher interest rates than can be obtained directly from
C. indirectly through financial intermediaries. borrowers.
D. mainly through government agencies. C. borrowers dislike dealing with savers.
D. savers have a claim with the ultimate borrower via the financial intermediary.
Difficulty: Easy
Est time: <1 minute
Difficulty: Easy
Est time: <1 minute
54. ‘Intermediaries, by managing the deposits they receive, are able to make long-term loans while
satisfying savers' preferences for liquid claims.' This statement is referring to which important attribute 58. Financial intermediaries can engage in credit risk transformation because they:
of financial intermediation?
A. obtain cost advantages owing to their size and business volumes transacted.
A. Asset transformation B. can quickly convert financial assets into cash, close to the current market price.
B. Maturity transformation C. develop expertise in lending and diversifying loans.
C. Credit risk transformation D. can pool savers' short-term deposits and make long-term loans.
D. Denomination transformation
Difficulty: Hard
Est time: <1 minute
Difficulty: Medium
Est time: <1 minute
59. When a financial intermediary collects together deposits and lends them out as loans to companies, it is
55. The main role of financial intermediaries is to: engaging in:
A. borrow funds from surplus units and lend them to borrowers. A. liability management.
B. provide advice to consumers on their finances. B. liquidity management.
C. provide funds for the government to cover budget deficits. C. credit transformation.
D. help ensure there are enough funds in circulation in a country. D. asset transformation.
56. Financial intermediaries pool the funds of: 60. ‘Liquidity’ in financial terms is
A. many small savers and make loans to a few large borrowers. A. a feature of money only.
B. a few savers and make loans to many borrowers. B. the ease with which an asset can be sold at the published market price.
C. many small savers and make loans to many borrowers. C. the best measure of risk of a financial asset.
D. a few large savers and make loans to a few large borrowers. D. to lower the rate of return for an asset.

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61. When an individual has immediate access to their funds from an account with a financial intermediary, 65. The main participants in the financial system are individuals, corporations and governments. Individuals
the intermediary is engaging in: are generally ______ of funds and corporations are net ________ of funds.
A. asset transformation. A. borrowers; suppliers

B. liability management. B. users; providers
C. liquidity management. C. suppliers; users
D. credit transformation. D. demanders; providers
Learning Objective: 01-04 Discuss the nature of the flow of funds between savers and borrowers, including primary markets, secondary markets, direct finance and Learning Objective: 01-01 Explain the functions of a modern financial system.
intermediated finance. Section: 1.5 Flow of funds, market relationships and stability
66. Which of the following borrowers would pay the lowest interest rate on debts of equal maturity?
62. When a financial intermediary can repeatedly use standardised documents, it is engaging in:
A. The National Bank of Australia

A. liability management. B. Telstra
B. liquidity management. C. The City of Sydney
C. credit transformation. D. The Commonwealth Government
D. economies of scale.
Difficulty: Easy
Difficulty: Easy Est time: <1 minute
Est time: <1 minute Learning Objective: 01-01 Explain the functions of a modern financial system.
Learning Objective: 01-04 Discuss the nature of the flow of funds between savers and borrowers, including primary markets, secondary markets, direct finance and Section: 1.1 Functions of a financial system
67. Generally, in the long term, a government:
63. According to the textbook, all of the following are financial intermediaries except a/an:
A. is a net borrower of funds.
A. bank. B. is a net supplier of funds.
B. insurance company. C. borrows funds directly from households.
C. superannuation fund. D. borrows funds directly from the financial market.
D. share broking firm. Difficulty: Easy
Est time: <1 minute
Difficulty: Easy Learning Objective: 01-01 Explain the functions of a modern financial system.
Est time: <1 minute Section: 1.5 Flow of funds, market relationships and stability
68. The _______ is created by a financial connection between providers and users of short-term funds.
64. An example of a financial intermediary is:

A. share market
B. capital market
A. a stockbroker. C. money market
B. the Australian Securities Exchange. D. financial market
C. the Australian Securities Commission.
Difficulty: Easy
D. an insurance company. Est time: <1 minute
Difficulty: Easy intermediated finance.
Est time: <1 minute Section: 1.4 Financial markets

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69. Which of the following is NOT usually a short-term discount security? 73. A company that issues promissory notes into the short-term debt markets is conducting a transaction in
the:
A. Negotiable certificates of deposit

B. Commercial paper A. commercial paper market.
C. Bank bills B. inter-bank market.
D. Unsecured notes C. bills market.
D. official short-term money market.
Difficulty: Medium
Est time: <1 minute
Difficulty: Easy
Est time: <1 minute
70. Which of the following is NOT a feature of the money market?
74. A company with a high credit rating can issue _____ directly into the money markets.
A. It is a mainly wholesale market

B. It deals with short-term financial claims A. CDs
C. It is important in financing the working-capital needs of businesses and governments B. Commercial paper
D. It only operates as a market in which new security issues are created and marketed C. unsecured notes
D. debentures
Difficulty: Medium
Est time: <1 minute
Difficulty: Medium
Est time: <1 minute
71. The market that involves the buying and selling of short-term securities is the:
75. The market that generally involves the buying and selling of discount securities is the:
A. securities market.
B. money market. A. securities market.
C. share market. B. money market.
D. capital market. C. share market.
D. capital market.
Difficulty: Easy
Est time: <1 minute
Difficulty: Easy
Est time: <1 minute
72. A large company with a temporary surplus of funds is most likely to buy:
76. A source of short-term liquidity funding for banks is the issue of:
A. bank bills.
B. convertible notes. A. bank bills.
C. debentures. B. debentures.
D. shares. C. certificates of deposit.
D. commercial paper.
Difficulty: Easy
Est time: <1 minute
Difficulty: Medium
Est time: <1 minute

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77. The market that includes individuals, companies and governments in the buying and selling of long- 81. The major financial assets traded in the capital market are:
term debt and equity securities is the:
A. bank bills and commercial paper.

A. currency market. B. Treasury notes and certificates of deposits.
B. debt market. C. bonds and convertible securities.
C. capital market. D. shares and bonds.
D. financial market.
Difficulty: Easy
Est time: <1 minute
Difficulty: Easy
Est time: <1 minute
82. Compared with Treasury bonds, Treasury notes generally:
78. When a company issues a long-term debt instrument with no security attached it is selling _____ to
investors.
A. have a longer maturity.
B. pay interest annually.
A. shares C. are issued in the capital markets.
B. debentures D. are discount securities.
C. unsecured notes
Difficulty: Medium
D. term loans Est time: <1 minute
Difficulty: Easy intermediated finance.
Est time: <1 minute Section: 1.4 Financial markets
83. If you purchase an Australian government bond, that bond is:
79. From the viewpoint of a corporation, which source of long-term funding does not have to be repaid?
A. an asset to you but a liability for the Australian government.
B. an asset to you as well as an asset for the Australian government.
A. Equity C. a liability to you but an asset for the Australian government.
B. Commercial paper D. a liability to you as well as a liability for the Australian government.
C. Corporate bonds
Difficulty: Hard
D. Bank bills Est time: <1 minute
Difficulty: Medium Section: 1.4 Financial markets
Est time: <1 minute
84. When government borrowing reduces the amount of funds available for lending to businesses, this is
Section: 1.4 Financial markets called:
80. For additional funding, a company decides to issue $15 million in corporate bonds. The securities will
be issued into the: A. credit rationing.
B. crowding out.
C. capital rationing.
A. retail markets.
D. government quotas.
B. secondary markets.
C. money markets. Difficulty: Medium
Est time: <1 minute
D. capital markets. Learning Objective: 01-06 Analyse the flow of funds through the financial system and the economy and briefly discuss the importance of ‘stability’ in relation to the
flow of funds.
Difficulty: Medium Section: 1.4 Financial markets
Est time: <1 minute

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Learning Objective: 01-06 Analyse the flow of funds through the financial system and the economy and briefly discuss the importance of ‘stability’ in relation to the
85. All of the following are key financial services provided by the financial system except: flow of funds.
Section: 1.5 Flow of funds, market relationships and stability
A. liquidity. 89. As a broad generalisation, in the sectorial flow of funds households are typically:
B. risk transfer.
C. profitability.
A. a deficit sector.
D. information.
B. a surplus sector.
Difficulty: Easy C. fluctuates between a deficit sector and a neutral sector.
Est time: <1 minute
Learning Objective: 01-01 Explain the functions of a modern financial system. D. borrowers.
Difficulty: Medium
Est time: <1 minute
86. Which of the following would be most likely to use financial markets to borrow? Learning Objective: 01-06 Analyse the flow of funds through the financial system and the economy and briefly discuss the importance of ‘stability’ in relation to the
flow of funds.
A. A household with a small amount saved 90. The flow of funds between the sectors of a nation-state:
B. A small business wanting to borrow to buy some machinery
C. A government authority wanting to borrow to finance highway construction
D. A company with a poor credit rating A. varies from year to year.
Difficulty: Easy
B. depends on the business cycle.
Est time: <1 minute C. depends on the levels of economic activity.
intermediated finance. D. relates to all of the given answers.
Difficulty: Easy
Est time: <1 minute
87. Generally, financial instruments are divided into three broad categories of equity, debt and derivatives. Learning Objective: 01-06 Analyse the flow of funds through the financial system and the economy and briefly discuss the importance of ‘stability’ in relation to the
Which of the following are usually issued by a company to raise new funds? flow of funds.
i. Unsecured notes
ii. Ordinary shares
iii. Debentures
iv. Bills of exchange
v. Futures contracts True / False Questions
vi. Preference shares
91. Money allows economic and financial transactions to be carried out more efficiently than bartering.
A. ii, iii, iv, v
B. ii, iv, v, vi TRUE
C. i, ii, iii, iv
D. i, ii, iv, v Bartering generally involves high search costs.
Difficulty: Medium
Learning Objective: 01-03 Define the main classes of financial instruments that are issued into the financial system; that is, equity, debt, hybrids and derivatives. Est time: <1 minute
Section: 1.4 Financial markets Learning Objective: 01-01 Explain the functions of a modern financial system.
88. The movement of funds between the four sectors of a domestic economy and the rest of the world is
called: 92. Four main attributes of an asset are return, risk, volatility and time-pattern of cash flows.
FALSE
A. flow of funds.
B. sector analysis. The attributes are return, risk, liquidity and time-pattern.
C. sectorial flows.
D. cross-sector flows. Difficulty: Easy
Est time: <1 minute
Est time: <1 minute

lOMoARcPSD|4408380

97. The government organisation responsible for the conduct of monetary policy is the prudential
93. Deficit entities purchase financial instruments that offer the lowest interest rate. supervisor of a country's banks.
FALSE FALSE
Deficit entities sell financial instruments. Generally, the task of monetary policy is assigned to a central bank.
Difficulty: Easy
Difficulty: Easy
Est time: <1 minute
Est time: <1 minute
98. Investment banks are contractual organisations that make up contracts for their corporate clients and
94. Individuals may be categorised as risk averse, risk neutral or risk takers. Risk averse individuals will governments.
accept a lower rate of return so as to reduce their risk exposure.
FALSE
TRUE
Investment banks generally focus on provision of advisory services for corporate and government
An investor who prefers an investment with less risk to another with more risk, provided they offer the clients.
same expected return, is risk averse.
Difficulty: Easy
Est time: <1 minute
Difficulty: Easy
Est time: <1 minute
95. A well-functioning financial system enables participants to readily change the composition of their 99. In recent years, depository financial institutions have obtained a large proportion of their funds from the
financial assets portfolio. financial markets directly.
TRUE FALSE
With liquid markets and financial intermediaries, investors are able to change their portfolios. For the major financial intermediaries (the banks) the bulk of their funds are still obtained from
deposits.
Difficulty: Easy
Learning Objective: 01-01 Explain the functions of a modern financial system. Est time: <1 minute
Section: Introduction Learning Objective: 01-02 Categorise the main types of financial institutions, being depository financial institutions, investment banks and merchant banks, contractual
96. Monetary policy relates to actions of a central bank to control the amount of money for transactions in
an economy. 100. A stock is a debt security that promises to make specified interest payments.
L.O. 1.1 Explain the functions of a modern financial system.
FALSE
FALSE
A stock is a share that promises to pay dividends.
From the early days of banking it was recognised that there needed to be control over the money supply.
A country's central bank was usually assigned this task.
Difficulty: Easy
Est time: <1 minute
Difficulty: Easy
Est time: <1 minute

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101. Margin trading is the sale of a financial product that the seller does not own and who intends to buy 104. Explain what a debt security is. What are some common types of debt securities?
back at a lower price later.
FALSE
A debt security represents a contractual claim against the issuer of the instrument who has borrowed the
Short selling is the sale of a financial product that the seller does not own. funds. The borrower agrees to abide by the terms of the contract such as meeting covenants. A major
part of the contract is the terms of payment to the lender. Corporations issue debt securities such as
debentures, term loans, commercial bills, promissory notes and unsecured notes.
Difficulty: Medium
Est time: <1 minute
Section: Introduction Difficulty: Medium
Est time: 1-3 minutes
Short Answer Questions 105. Identify and explain briefly the types of derivatives in a financial system.
102. Explain how the properties of money facilitated the evolution of a modern financial system.
There are four basic types of derivative contracts.
1. A futures contract is a contract to buy (or sell) a specified amount of a commodity or financial
instrument at a price determined today for delivery or payment at a future specified date.
As a medium of exchange, money makes markets in goods and services more efficient. If goods and 2. A forward contract has features similar to a futures contract but is generally more flexible as it is
services are exchanged only for other goods and services as in the case of barter, there are considerable negotiated with a bank or investment bank.
transaction costs. When transaction costs are low, individuals can find it easier to specialise in the 3. An option gives the buyer the right but not the obligation to buy (or sell) a certain asset before or at a
production of goods and services. This can lead to a more active and productive economy. As a store of specified date at a predetermined price.
value, money makes it easier for individuals to save their surplus earnings. It is also more readily 4. A swap contract is an arrangement to exchange specified future cash flows. With an interest rate
divisible than physical goods so that it can be appropriately apportioned according to the size of the swap, there is an exchange of future cash flows, such as one based on a floating interest rate and the
transaction. Consequently, an efficient flow of funds between savers and users of funds is a part of a other on a fixed interest rate on a notional principal.
modern financial system.
Difficulty: Hard
Difficulty: Hard Learning Objective: 01-03 Define the main classes of financial instruments that are issued into the financial system; that is, equity, debt, hybrids and derivatives.
Est time: 1-3 minutes Section: 1.3 Financial instruments
106. The capital markets provide the opportunity for large corporations to manage their long-term cash
103. What is monetary policy and who is responsible for its implementation? flows. Discuss this statement using the example of a surplus entity and a deficit entity.
Monetary policy is the use of interest rates to control inflation, usually in a specified range, and to The debt part of capital markets consists of a range of instruments. Large creditworthy companies
promote economic growth. A central bank is usually responsible for carrying out monetary policy. seeking funds can issue long-term securities such as bonds or unsecured notes directly into capital
markets. Organisations such as superannuation funds or insurance companies with funds to invest can
buy these instruments for part of their portfolio.
Difficulty: Medium
Difficulty: Easy
Learning Objective: 01-05 Distinguish between various financial market structures, including wholesale markets and retail markets, and money markets and capital
markets.

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Chapter 01 - Test Bank Summary
Category # of Ques
tions
Difficulty: Easy 63
Difficulty: Hard 7
Difficulty: Medium 37
Est time: <1 minute 103
Est time: 1-3 minutes 5
Learning Objective: 01-01 Explain the functions of a modern financial system. 23
Learning Objective: 01- 9
02 Categorise the main types of financial institutions, being depository financial institutions, investment banks and merchant banks, contra
ctual savings institutions, finance companies and unit trusts.
03 Define the main classes of financial instruments that are issued into the financial system; that is, equity, debt, hybrids and derivatives.
04 Discuss the nature of the flow of funds between savers and borrowers, including primary markets, secondary markets, direct finance an
d intermediated finance.
05 Distinguish between various financial market structures, including wholesale markets and retail markets, and money markets and capita
l markets.
06 Analyse the flow of funds through the financial system and the economy and briefly discuss the importance of ‘stability’ in relation to t
he flow of funds.
Section: 1.1 Functions of a financial system 8
Section: 1.2 Financial institutions 9
Section: 1.3 Financial instruments 12
Section: 1.4 Financial markets 59
Section: 1.5 Flow of funds, market relationships and stability 5
Section: Introduction 15

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6. The market structure of the banking sector has changed since deregulation of the financial system during
the 1980s. Which statement most closely reflects the current structure of the banking sector in Australia?
A. Foreign banks dominate in number and share of total assets.

Multiple Choice Questions B. Major Australian banks no longer hold the largest share of total assets.
C. Total assets are fairly evenly distributed between the major, regional and foreign banks.
D. Major banks maintain the highest percentage of branches and share of total assets.
1. Deregulation of the banking sector throughout the late 1970s and the 1980s sought to:
7. Which of the following features is a role of a bank?
A. reduce the reliance of major Australian companies on international capital markets.

B. reduce the excess profits of banks. A. Attracting funds from the capital markets to facilitate borrowing by the household sector
C. reduce the discrimination against banks owing to direct controls on them only. B. Facilitating the flow of funds from borrowers to lenders
D. provide reduced control on the money supply. C. Facilitating the flow of funds from savers to borrowers
D. Managing the level of interest rates
2. The changes to the regulations for the banking industry under deregulation in the mid 1980s have resulted
in _______ the growth of bank sector. 8. Banks have gradually moved to liability management in the management of their balance sheets. Which
statement best describes liability management?
A. decreasing
B. increasing A. The loan portfolio is tailored to match the available deposit base.
C. not altering B. The deposit base and other funding sources are managed in order to fund loan and other commitments.
D. dramatically decreasing C. The ratio of debt to equity is managed to meet capital adequacy requirements.
D. The liability to assets ratio is maintained within central bank standards.
3. Which of the following statements concerning banks is incorrect?
9. For banks, asset management refers to:
A. In Australia, banks currently account for the largest share of assets of all financial institutions.
B. Bank loans and commitments must be supported by a minimum specified amount of capital. A. managing the assets of the banks; that is, their deposits.
C. At least 50% of the capital requirement must be in the form of Tier 1 capital. B. managing the real assets, the bank buildings.
D. The Australian Reserve Bank monitors capital adequacy requirements for banks. C. managing the loans portfolio.
D. protecting the deposits by using derivatives.
4. Unlike most other businesses, a bank's balance sheet is made up mainly of:
10. For banks, liability management refers to:
A. real assets and financial liabilities.

B. real liabilities and financial liabilities. A. managing the liabilities of the banks; that is, the loans.
C. real assets and real liabilities. B. banks ensuring they have sufficient funds by managing their deposit base.
D. financial assets and liabilities. C. managing the real assets, the bank buildings.
D. protecting the loans and other commitments by using derivatives.
5. The level of banks' share of assets of all Australian financial institutions from the 1950s onwards first
_______, then in the 1980s _______ and recently has _______ owing to banks forming consolidated 11. When a bank raises funds in the international markets to fund new lending growth, it is involved in:
corporate entities.
A. asset management.
A. increased; decreased; increased B. off-balance-sheet business.
B. increased; decreased; remained stable C. liability management.
C. decreased; increased; decreased D. derivative management.
D. decreased; increased; remained stable

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12. Off-balance-sheet business for a bank refers to: 18. Which of the following is a bank liability?
A. a bank's income. A. Consumer loans

B. a bank's contingent liabilities. B. Lease finance
C. assets that will appear on the forthcoming balance sheet. C. Bills receivable
D. transactions recorded on the previous balance sheet. D. Certificates of deposit
13. Which of the following about a bank's activities is incorrect? 19. Which of the following statements about deposits is correct?
A. A bank's loans are its assets. A. Call accounts represent a fluctuating source of funds for banks.
B. Off-balance-sheet business items are contingent liabilities. B. Term deposits are funds lodged with a bank for longer than two weeks.
C. Liability management is the management of a bank's loans. C. As current accounts are highly liquid, they form an unstable source of funds for a bank.
D. Banks typically have high credit ratings. D. A cheque account may pay interest.
14. The assets on a bank's balance sheet are: 20. Which of the following statements about banks' current accounts is incorrect?
A. the sources of funds. A. Current accounts today generally pay interest.

B. the uses of funds. B. Current accounts are a relatively stable source of bank funds.
C. the different types of deposits the bank offers. C. Deregulation had a major impact on current accounts.
D. equal to the liabilities of the banks. D. Current accounts form an increasingly important type of asset for banks.
15. The liabilities on a bank's balance sheet are: 21. Which of the following statements is NOT true of term deposits?
A. the sources of funds. A. They are less liquid than a current deposit.
B. the uses of funds. B. They usually offer a higher return than a current deposit.
C. the different types of loans the bank offers. C. They are attractive to investors who expect interest rates to fall.
D. equal to the assets of the banks. D. They are generally negotiable instruments.
16. Each of the following balance sheet portfolio items are liabilities of a bank, except: 22. As a depositor shifts funds from current deposits to term deposits in a bank, generally the depositor’s:
A. term deposits. A. liquidity increases and credit risk increases.

B. bill acceptance facilities. B. liquidity decreases and interest income increases.
C. certificates of deposit. C. liquidity decreases and interest income decreases.
D. overdrafts. D. implicit interest increases and explicit interest decreases.
17. Each of the following balance sheet portfolio items are sources of funds for a bank, except: 23. If a bank required more short-term funding, it would issue:
A. term deposits. A. a certificate of deposit.

B. bill acceptance facilities. B. a debenture.
C. certificates of deposit. C. an unsecured note.
D. overdrafts. D. preference shares.

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24. Which of the following is generally a highly liquid instrument? 30. With regard to bank bills, the bill is sold at a discount:
A. A bank bill A. because the bank needs to find a buyer.

B. A certificate of deposit B. to encourage buyers.
C. Neither a bank bill nor a certificate of deposit C. because the difference between the initial price and the final sale price is the return to the holder.
D. Both bank bills and certificates of deposit are liquid instruments D. because the bank pays the face value of the funds to the borrower at maturity.
25. The term ‘negotiable' in relation to a security means: 31. With regard to bank bills, the expression ‘the issuer sells the bill at the best discount’ means the issuer:
A. its price can be bargained for when sold. A. is providing the funding.
B. it can be sold easily. B. is acting as mediator between the borrower and the bank.
C. its buyer can negotiate its price when buying. C. is selling the bill into the market at the lowest yield.
D. it is reasonably illiquid and will drop in price when sold. D. pays the lowest face value of the funds to the holder at maturity.
26. Which of the following regarding certificates of deposit (CDs) is correct? 32. With regard to bank bills, the actual role of the acceptor is to:
A. CDs pay daily interest instead of monthly as for ordinary deposits. A. provide the initial funding.
B. CDs generally pay higher interest because they are not liquid. B. act as mediator between the borrower and bank.
C. The rate of interest on a CD can be adjusted quickly. C. issue the bank bill.
D. CDs with a face value of more than $100 000 are non-negotiable. D. pay the face value of the funds to the holder at maturity.
27. The advantage of a CD to a bank is/are: 33. Which of the following is incorrect in relation to bill financing?
A. its rate of interest may be adjusted quickly. A. The drawer is the party seeking the funds.
B. it can be sold quickly in the money market for cash. B. If a bank accepts the bill this enhances its credit quality.
C. it is a negotiable instrument. C. An issuer will seek to sell the bill in the market at the highest yield.
D. all of the given choices. D. Bills are sold at a discount to face value.
28. A major difference between a bank's term deposit and a certificate of deposit is: 34. For a bank, an advantage of bill financing is:
A. a term deposit represents an asset for a bank, while a certificate of deposit is a liability. A. the bank earns income from accepting bills.
B. a certificate of deposit does not pay interest until maturity. B. the bank doesn't necessarily have to use its own funds.
C. a certificate of deposit is illiquid when compared with a term deposit. C. interest rates on bill funding can be adjusted rapidly.
D. a certificate of deposit is a high-credit-risk instrument when compared with a term deposit. D. all of the given answers.
29. Which of the following about CDs is incorrect? 35. Which of the following statements about bill acceptance facilities is incorrect?
A. CDs are issued directly into the money markets. A. When a bank discounts a bill for the issuer, it buys it.
B. CDs don't include interest until maturity. B. When a bank that holds a bill rediscounts it the bank onsells it.
C. CDs are called discount securities. C. When a bank acts as an acceptor it will pay the face value of the bill to the holder at maturity.
D. CDs are issued by large, creditworthy companies. D. If interest rates change before a bank bill matures, the bank can change the interest rate on it.

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36. Commercial banks take part in the money markets as: 41. Which of the following statements regarding the foreign currency liabilities of a bank is incorrect?
A. lenders of funds only. A. The large international markets are important sources of funds for commercial banks.
B. borrowers of funds only. B. Australian banks occasionally issue debt securities into the international markets to raise sums ranging
C. both lenders and borrowers of funds. from $20 million to $50 million.
D. underwriters only. C. Foreign currency liabilities issued into the euromarkets are typically denominated in US dollars.
D. After deregulation commercial banks were able to expand their international funding sources.
37. 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? 42. All of the following financial securities are considered ‘uses of funds' by banks except:
i. deregulation of the foreign exchange market
ii. diversification of funding sources
iii. demand from multinational corporate clients A. commercial bills.
iv. internationalisation of global financial markets B. credit cards.
v. avoidance of the non-callable deposit prudential requirement C. certificates of deposit.
vi. expansion of banks' asset-base denominated in foreign currencies D. overdrafts.
43. If you take out a mortgage from a bank, the mortgage is a/an:
A. v
B. ii
C. i A. liability to the bank and an asset to you.
D. All of the given answers are correct. B. liability to you and an asset to the bank.
C. liability to both you and the bank.
38. Alternatives to the usual source of long-term bank funds that have the characteristics of both debt and D. asset to both you and the bank.
equity are called:
44. The interest rate BBSW refers to:
A. secured debentures.
B. transferable certificates of deposit. A. the reference rate for medium-term funding.
C. promissory notes. B. a rate calculated each day from the offer rate of the last daily sale in the bank bill market.
D. subordinated notes. C. the average mid-point of the bid and offer rates in the bank bill market.
D. the bank bill security rate.
39. The following balance sheet portfolio items are all assets of a bank, except:
45. Banks invest in government securities because:
A. overdrafts.
B. lease finance. A. they offer high yield owing to their risk.
C. certificates of deposit. B. they offer a low yield owing to their illiquidity.
D. credit card draw-downs. C. all government bonds offer protection against inflation risk.
D. they can be used as security against banks' borrowing.
40. A short-term discount security issued by a drawer at a discount, with the promise to repay the face value at
maturity, is called: 46. Which of the following statements about commercial lending is incorrect?
A. a commercial paper. A. The term loan is the main type of lending provided by banks to firms.
B. a commercial bill. B. Typically, term loans are for maturities ranging from 5 to 15 years.
C. a certificate of deposit. C. To extend commercial bill financing a bank may provide the firm with a rollover facility.
D. all of the given answers. D. Banks can provide flexible funding called an overdraft to firms.

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47. Which of the following about bank lending to government is incorrect? 53. Which of the following categories represents the most significant proportion of total off-balance-sheet
business of the banks?
A. Securities issued by governments are usually regarded as low risk.

B. Banks invest in government securities because they are a source of liquidity. A. Direct credit substitutes
C. Banks invest in T-notes because they provide short-term income streams. B. Trade and performance-related items
D. Government securities enable a bank to manage the maturity structure of its balance sheet. C. Commitments
D. Market-rate-related transactions
48. Off-balance-sheet business for a bank refers to:
54. Which of the following categories represents the most significant proportion of total market-rate-related
off-balance-sheet business of the banks?
A. deposits and loans longer than one year.
B. transactions that are currently only a contingent liability.
C. call deposits that may be withdrawn on demand. A. Currency swap agreements
D. consumer loans that are in default. B. Foreign exchange contracts
C. Interest rate swaps
49. All of the following are off-balance-sheet transactions of a bank except: D. Interest rate futures
55. An example of an ‘off-sheet business' transaction that banks are generally involved in is:
A. documentary letters of credit.
B. performance guarantees.
C. underwriting facilities. A. providing a ‘standby letter of credit'.
D. bills receivable. B. providing a note issuance facility.
C. providing a short-term, self-liquidating trade contingency.
50. In recent times, there had been a substantial expansion in fee-related income for banks. What is the D. all of the given answers.
principal reason for this?
56. Which of the following statements about direct credit substitutes provided by a commercial bank is
incorrect?
A. Increased confidence in banks by individual investors
B. Increased off-sheet business (OBS) for banks
C. Reduced guidelines by Australian bank supervisor APRA A. They are provided to support a client's financial obligations.
D. Increased deposits in banks B. An example of a direct credit substitute is a bank guarantee.
C. The bank provides funding to a third party instead of the client providing the funding.
51. Which of the following statements is true for off-balance-sheet business for banks? D. With a direct credit substitute a bank's client can raise funds directly from the financial markets.
57. Off-balance-sheet business is usually divided into four major categories:

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. A. Direct credit substitutes, trade and performance-related items, commitments and trade guarantees.
D. Off-balance-sheet business records deposits that do not fit on the balance sheet. B. Direct credit substitutes, trade and performance-related items, commitments and market-related
transactions.
52. Which of the following statements about market-rate-related items such as forward-rate agreements is C. Direct credit substitutes, trade and performance-related items, commitments and underwriting facilities.
incorrect? D. Direct credit substitutes, ‘standby letters of credit', commitments and market-related transactions.
58. A ‘commitment’ by a bank is:

A. They are generally called off-balance-sheet items.
B. They are liabilities that may require an outflow of funds for a bank.
C. They are included in the BIS capital-adequacy guidelines. A. a form of swap.
D. They form a small part of banks' OBS business. B. a promise by a large depositor to provide extra funds to the bank.
C. the unused balance on a bank credit card.
D. an undertaking to advance funds or to acquire an asset in the future.

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59. Which of the following is not a commitment by a bank? 65. The requirement and observation of standards designed to ensure the stability and soundness of a financial
system is called:
A. Outright forward purchase agreement

B. Underwriting facilities A. fiscal policy.
C. Credit card limit approvals unused by cardholder B. monetary policy.
D. Currency swap C. prudential supervision.
D. the Basel accord.
60. Which of the following is NOT an argument for some form of government regulation of the banking
system? 66. The Basel capital adequacy requirements apply to:
A. The money-creation role of banks A. all financial institutions.

B. A major source of funds to the banks comes from households who need their savings protected B. banks, investment banks and merchant banks only.
C. The excess return on assets that banks have been making in recent years C. all financial institutions supervised by ASIC.
D. Maintaining confidence in the financial system D. all banks registered with APRA and some other financial institutions.
61. Which of the following is NOT associated with the purpose of regulating financial institutions? 67. Some of the elements in assessing capital adequacy requirements for banks under the Basel II capital
accord are:
A. Providing stability of the money supply

B. Directing flow of funds to priority areas A. credit risk, liquidity risk and interest rate risk.
C. Maintaining the soundness and stability of the financial system B. credit risk, market risk and type of capital held.
D. Lowering the cost of funds C. default risk, interest rate risk and market risk.
D. default risk, liquidity risk and type of capital held.
62. The Australian institution APRA is responsible for the regulatory supervision of financial institutions such
as banks and credit unions. APRA stands for: 68. According to the textbook, the Basel II approach to capital adequacy for banks involves ____ main
elements.
A. Australian Practice and Regulatory Association.

B. Australian Prudential Regulation Authority. A. three
C. Australian Prudential Rule Authority. B. four
D. Australian Practice and Regulatory Authority. C. five
D. six
63. Which of the following institutions are supervised by APRA?
69. Which of the following does NOT apply to Tier 1 capital?
A. Building societies
B. Commercial banks A. Tier 1 capital is described as ‘core capital'.
C. Credit unions B. Tier 1 capital must constitute at least 50% of a bank's capital base.
D. All of the given answers C. Paid-up ordinary shares can be included in Tier 1 capital.
D. Cumulative irredeemable APRA-approved preference shares can be included in Tier 1 capital.
64. Within the context of the Corporations Law in Australia, the supervision of financial market integrity and
consumer protection is done by: 70. Under Basel II prudential standards, an institution is required to maintain a risk-based capital ratio of _____
of total-risk-weighted assets.
A. APRA.
B. ASIC. A. 2.00 percent
C. RBA. B. 4.00 percent
D. ACCC. C. 8.00 percent
D. 10.00 percent

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71. Which of the following statements about regulatory capital is false? 76. The Basel II risk weighting factor for a bank loan to an Australian company with a Moody's Investors
Service rating of C is:
A. Tier 1 capital includes paid-up ordinary shares, retained earnings, non-cumulative irredeemable
preference shares and general reserves. A. 20%.
B. Tier 2 capital includes general provision for doubtful debts, revaluation reserves of premises, mandatory B. 50%.
convertible notes and approved perpetual subordinated debt. C. 100%.
C. Tier 1 capital is core capital, including paid-up ordinary shares, non-cumulative irredeemable preference D. 150%.
shares and general reserves.
D. Tier 2 capital includes general reserves for doubtful debts, asset revaluation reserves of premises, other 77. Under Pillar 1 of the Basel II framework, the risk weight for a residential housing loan is determined by
preference shares, mandatory convertible notes, cumulative redeemable preference shares and perpetual the:
subordinated debt.
72. The Pillar 1 approach of Basel II capital adequacy incorporates the following three risk components: A. amount borrowed.
B. level of mortgage insurance.
C. house valuation.
A. credit risk, interest-rate risk and market risk. D. all of the given answers.
B. default risk, interest-rate risk and operational risk.
C. credit risk, market risk and operational risk. 78. A bank provides a loan of $1 million to a company that has an A rating. Calculate the dollar value of
D. default risk, foreign exchange risk and operational risk. capital required under the capital adequacy requirements to support the facility.
73. Which of the following statements regarding capital adequacy requirements is incorrect?
A. $16 000
B. $40 000
A. Existing credit-risk guidelines are extended to include market risk arising from a bank's trading C. $80 000
activities. D. $120 000
B. Regulators focus on credit risk, market risks, operational risk and type of capital held.
C. Eligible Tier 1 capital must constitute at least 70% of a bank's capital base. 79. A bank provides documentary letters of credit for a company that has a credit rating of A+. The face value
D. Tier 2 capital is divided into upper and lower Tier 2 parts. of contracts outstanding is $2 million. Calculate the dollar value of capital required under the capital
adequacy requirements to support these facilities, given that the bank supervisor's credit conversion factor
74. Under the capital adequacy requirement for banks, in order to fund a $100 000 loan for a multinational is 20%.
corporate client with a Standard & Poor's rating of AA, a bank will:
A. $6 400
A. assign a risk-weighting of 20% for the balance. B. $16 000
B. allocate Tier 1 and Tier 2 capital to the loan according to the riskiness of the company. C. $160 000
C. seek funding in the euromarkets to minimise the capital adequacy requirements. D. $240 000
D. apply a risk weighting of 50% to the loan to determine the total capital requirement.
80. A large commercial bank operating in the international markets will generally apply to the banks'
75. In the Basel II standardised approach to external rating grades, the asset counterparty weights for capital supervisor to use the _____ to credit risk.
adequacy guidelines are:
A. advanced internal ratings-based approach

A. 10%, 20%, 50% and 100%. B. foundation external ratings-based approach
B. 10%, 50%, 100% and 150%. C. standardised approach
C. 20%, 50%, 100% and 150%. D. standardised approach with external ratings
D. 20%, 50%, 100% and 200%.

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81. Under Basel II capital accord, the approach to credit risk that requires a bank to assign risk weights given 86. For a commercial bank's market discipline, the capital adequacy guidelines for its disclosure and
by the prudential supervisor is called: transparency requirements fall under:
A. an advanced approach. A. Pillar 1.

B. a foundation approach. B. Pillar 2.
C. a standardised approach. C. Pillar 3.
D. advanced-internal ratings. D. Pillar 4.
82. The risk that arises from chance of loss as a result of inadequate internal bank processes is called: 87. Under _____ of Basel II, bank supervisors should review and evaluate banks' internal capital adequacy
assessments.
A. default risk.
B. interest rate risk. A. Pillar 4
C. market risk. B. Pillar 3
D. operational risk. C. Pillar 1
D. Pillar 2
83. Which of the following statements about recently adopted guidelines covering capital requirements for
market risk that banks are required to perform is false? 88. Part of a bank's liquidity management is to hold a portfolio of:
A. Banks use a risk measurement model based on a VaR approach. A. term loans.
B. Banks estimate the sensitivity of portfolio components to small changes in prices. B. mortgages.
C. Banks must hold capital against risk of loss from changes in interest rates. C. Commonwealth government securities.
D. Banks hold a fixed allocation of funds between various balance sheet assets and off-balance-sheet D. credit card loans.
business.
89. In relation to a bank, liquidity management means:
84. For a commercial bank operating in foreign exchange, interest rate and equity markets, the capital adequacy
guidelines for the market risk it is exposed to fall under:
A. the bank's ability to quickly convert deposits into loans.
B. the bank's ability to onsell its loans.
A. Pillar 1. C. the bank's ability to have funds available when depositors' funds mature.
B. Pillar 2. D. the bank's policies and practices in identifying and managing its loans portfolios.
C. Pillar 3.
D. Pillar 4.
85. For a commercial bank's normal day-to-day business, the capital adequacy guidelines for the operational True / False Questions
risk it is exposed to fall under:
90. Commercial banks are the main type of financial institution in a financial system because they hold the
A. Pillar 1. largest amounts of financial assets.
B. Pillar 2.
C. Pillar 3. True False
D. Pillar 4.
91. The greater the dominance of commercial banks in an economy, the less regulation required.
True False
92. Banks obtain funds from many areas. These sources of funds appear as liabilities on a bank's balance sheet.
True False

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93. Liability management is where banks actively manage their liabilities in order to meet future loan demand. 101. Describe how a bill acceptance facility works.
True False
94. Call deposits are funds lodged in a bank account for a specified short-term period.
True False
95. A bank may either issue a negotiable certificate of deposit directly into the money markets or place it
directly with another bank with surplus funds.
True False 102. Discuss the main features of housing finance.

96. One of the important attributes of certificates of deposit for a bank is the ability to adjust the yields on new
issues.
True False
97. As the majority of banks' assets are short-term loans, they are active in the money markets in order to fund
part of their lending.
True False
98. A bank may seek to obtain funds by issuing unsecured notes with a collaterised floating charge over its 103. Discuss the main features of a bank's commercial lending.
deposits.
True False
99. Foreign currency liabilities are debt instruments issued into another country but not denominated in the
currency of that country.
True False
104. Within the context of off-balance-sheet business, explain direct credit substitutes, trade- and performance-
Short Answer Questions related items and any differences between these items.
100. Briefly discuss the sources of funds for a commercial bank.

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Est time: <1 minute

Chapter 02 - Test Bank Key Learning Objective: 02-01 Evaluate the functions and activities of commercial banks within the financial system.
5. The level of banks' share of assets of all Australian financial institutions from the 1950s onwards first
_______, then in the 1980s _______ and recently has _______ owing to banks forming consolidated
corporate entities.
A. increased; decreased; increased

1. Deregulation of the banking sector throughout the late 1970s and the 1980s sought to:
B. increased; decreased; remained stable
C. decreased; increased; decreased
A. reduce the reliance of major Australian companies on international capital markets. D. decreased; increased; remained stable
B. reduce the excess profits of banks. Difficulty: Hard
C. reduce the discrimination against banks owing to direct controls on them only. Est time: <1 minute
Learning Objective: 02-01 Evaluate the functions and activities of commercial banks within the financial system.
D. provide reduced control on the money supply. Section: Introduction
Difficulty: Medium
Est time: <1 minute
6. The market structure of the banking sector has changed since deregulation of the financial system
Learning Objective: 02-01 Evaluate the functions and activities of commercial banks within the financial system. during the 1980s. Which statement most closely reflects the current structure of the banking sector in
Australia?
2. The changes to the regulations for the banking industry under deregulation in the mid 1980s have
resulted in _______ the growth of bank sector.
A. Foreign banks dominate in number and share of total assets.
B. Major Australian banks no longer hold the largest share of total assets.
A. decreasing C. Total assets are fairly evenly distributed between the major, regional and foreign banks.
B. increasing D. Major banks maintain the highest percentage of branches and share of total assets.
C. not altering Difficulty: Easy
D. dramatically decreasing Est time: <1 minute
Difficulty: Easy
Est time: <1 minute
Learning Objective: 02-01 Evaluate the functions and activities of commercial banks within the financial system. 7. Which of the following features is a role of a bank?
3. Which of the following statements concerning banks is incorrect?

A. Attracting funds from the capital markets to facilitate borrowing by the household sector
B. Facilitating the flow of funds from borrowers to lenders
A. In Australia, banks currently account for the largest share of assets of all financial institutions. C. Facilitating the flow of funds from savers to borrowers
B. Bank loans and commitments must be supported by a minimum specified amount of capital. D. Managing the level of interest rates
C. At least 50% of the capital requirement must be in the form of Tier 1 capital. Difficulty: Easy
D. The Australian Reserve Bank monitors capital adequacy requirements for banks. Est time: <1 minute
Difficulty: Easy
Est time: <1 minute
Learning Objective: 02-01 Evaluate the functions and activities of commercial banks within the financial system. 8. Banks have gradually moved to liability management in the management of their balance sheets. Which
statement best describes liability management?
4. Unlike most other businesses, a bank's balance sheet is made up mainly of:
A. The loan portfolio is tailored to match the available deposit base.
A. real assets and financial liabilities. B. The deposit base and other funding sources are managed in order to fund loan and other
B. real liabilities and financial liabilities. commitments.
C. real assets and real liabilities. C. The ratio of debt to equity is managed to meet capital adequacy requirements.
D. financial assets and liabilities. D. The liability to assets ratio is maintained within central bank standards.
Difficulty: Medium
Difficulty: Easy Est time: <1 minute

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Section: 2.1 The main activities of commercial banking
13. Which of the following about a bank's activities is incorrect?
9. For banks, asset management refers to:

A. A bank's loans are its assets.
B. Off-balance-sheet business items are contingent liabilities.
A. managing the assets of the banks; that is, their deposits. C. Liability management is the management of a bank's loans.
B. managing the real assets, the bank buildings. D. Banks typically have high credit ratings.
C. managing the loans portfolio.
Difficulty: Medium
D. protecting the deposits by using derivatives. Est time: <1 minute
Difficulty: Easy Section: 2.1 The main activities of commercial banking
Est time: <1 minute
14. The assets on a bank's balance sheet are:
10. For banks, liability management refers to:

A. the sources of funds.
B. the uses of funds.
A. managing the liabilities of the banks; that is, the loans. C. the different types of deposits the bank offers.
B. banks ensuring they have sufficient funds by managing their deposit base. D. equal to the liabilities of the banks.
C. managing the real assets, the bank buildings.
Difficulty: Medium
D. protecting the loans and other commitments by using derivatives. Est time: <1 minute
Learning Objective: 02-02 Identify the main sources of funds of commercial banks, including current deposits, demand deposits, term deposits, negotiable certificates
Difficulty: Easy of deposit, bill acceptance liabilities, debt liabilities, foreign currency liabilities and loan capital.
Est time: <1 minute Section: 2.2 Sources of funds
15. The liabilities on a bank's balance sheet are:
11. When a bank raises funds in the international markets to fund new lending growth, it is involved in:
A. the sources of funds.
A. asset management. B. the uses of funds.
B. off-balance-sheet business. C. the different types of loans the bank offers.
C. liability management. D. equal to the assets of the banks.
D. derivative management. Difficulty: Medium
Est time: <1 minute
Difficulty: Medium Learning Objective: 02-02 Identify the main sources of funds of commercial banks, including current deposits, demand deposits, term deposits, negotiable certificates
Est time: <1 minute of deposit, bill acceptance liabilities, debt liabilities, foreign currency liabilities and loan capital.
Learning Objective: 02-01 Evaluate the functions and activities of commercial banks within the financial system. Section: 2.2 Sources of funds
16. Each of the following balance sheet portfolio items are liabilities of a bank, except:
12. Off-balance-sheet business for a bank refers to:
A. term deposits.
A. a bank's income. B. bill acceptance facilities.
B. a bank's contingent liabilities. C. certificates of deposit.
C. assets that will appear on the forthcoming balance sheet. D. overdrafts.
D. transactions recorded on the previous balance sheet.
Difficulty: Medium
Difficulty: Medium Est time: <1 minute
Est time: <1 minute Learning Objective: 02-02 Identify the main sources of funds of commercial banks, including current deposits, demand deposits, term deposits, negotiable certificates
Learning Objective: 02-01 Evaluate the functions and activities of commercial banks within the financial system. of deposit, bill acceptance liabilities, debt liabilities, foreign currency liabilities and loan capital.
Section: 2.1 The main activities of commercial banking Section: 2.2 Sources of funds

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17. Each of the following balance sheet portfolio items are sources of funds for a bank, except: 21. Which of the following statements is NOT true of term deposits?
A. term deposits. A. They are less liquid than a current deposit.

B. bill acceptance facilities. B. They usually offer a higher return than a current deposit.
C. certificates of deposit. C. They are attractive to investors who expect interest rates to fall.
D. overdrafts. D. They are generally negotiable instruments.
Learning Objective: 02-02 Identify the main sources of funds of commercial banks, including current deposits, demand deposits, term deposits, negotiable certificates Learning Objective: 02-02 Identify the main sources of funds of commercial banks, including current deposits, demand deposits, term deposits, negotiable certificates
of deposit, bill acceptance liabilities, debt liabilities, foreign currency liabilities and loan capital. of deposit, bill acceptance liabilities, debt liabilities, foreign currency liabilities and loan capital.
Section: 2.2 Sources of funds Section: 2.2 Sources of funds
18. Which of the following is a bank liability? 22. As a depositor shifts funds from current deposits to term deposits in a bank, generally the depositor’s:
A. Consumer loans A. liquidity increases and credit risk increases.

B. Lease finance B. liquidity decreases and interest income increases.
C. Bills receivable C. liquidity decreases and interest income decreases.
D. Certificates of deposit D. implicit interest increases and explicit interest decreases.
19. Which of the following statements about deposits is correct? 23. If a bank required more short-term funding, it would issue:
A. Call accounts represent a fluctuating source of funds for banks. A. a certificate of deposit.
B. Term deposits are funds lodged with a bank for longer than two weeks. B. a debenture.
C. As current accounts are highly liquid, they form an unstable source of funds for a bank. C. an unsecured note.
D. A cheque account may pay interest. D. preference shares.
20. Which of the following statements about banks' current accounts is incorrect? 24. Which of the following is generally a highly liquid instrument?
A. Current accounts today generally pay interest. A. A bank bill

B. Current accounts are a relatively stable source of bank funds. B. A certificate of deposit
C. Deregulation had a major impact on current accounts. C. Neither a bank bill nor a certificate of deposit
D. Current accounts form an increasingly important type of asset for banks. D. Both bank bills and certificates of deposit are liquid instruments

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25. The term ‘negotiable' in relation to a security means: 29. Which of the following about CDs is incorrect?
A. its price can be bargained for when sold. A. CDs are issued directly into the money markets.
B. it can be sold easily. B. CDs don't include interest until maturity.
C. its buyer can negotiate its price when buying. C. CDs are called discount securities.
D. it is reasonably illiquid and will drop in price when sold. D. CDs are issued by large, creditworthy companies.
26. Which of the following regarding certificates of deposit (CDs) is correct? 30. With regard to bank bills, the bill is sold at a discount:
A. CDs pay daily interest instead of monthly as for ordinary deposits. A. because the bank needs to find a buyer.
B. CDs generally pay higher interest because they are not liquid. B. to encourage buyers.
C. The rate of interest on a CD can be adjusted quickly. C. because the difference between the initial price and the final sale price is the return to the holder.
D. CDs with a face value of more than $100 000 are non-negotiable. D. because the bank pays the face value of the funds to the borrower at maturity.
27. The advantage of a CD to a bank is/are: 31. With regard to bank bills, the expression ‘the issuer sells the bill at the best discount’ means the issuer:
A. its rate of interest may be adjusted quickly. A. is providing the funding.

B. it can be sold quickly in the money market for cash. B. is acting as mediator between the borrower and the bank.
C. it is a negotiable instrument. C. is selling the bill into the market at the lowest yield.
D. all of the given choices. D. pays the lowest face value of the funds to the holder at maturity.
28. A major difference between a bank's term deposit and a certificate of deposit is: 32. With regard to bank bills, the actual role of the acceptor is to:
A. a term deposit represents an asset for a bank, while a certificate of deposit is a liability. A. provide the initial funding.
B. a certificate of deposit does not pay interest until maturity. B. act as mediator between the borrower and bank.
C. a certificate of deposit is illiquid when compared with a term deposit. C. issue the bank bill.
D. a certificate of deposit is a high-credit-risk instrument when compared with a term deposit. D. pay the face value of the funds to the holder at maturity.

lOMoARcPSD|4408380
33. Which of the following is incorrect in relation to bill financing? 37. 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
A. The drawer is the party seeking the funds. ii. diversification of funding sources
B. If a bank accepts the bill this enhances its credit quality. iii. demand from multinational corporate clients
C. An issuer will seek to sell the bill in the market at the highest yield. iv. internationalisation of global financial markets
D. Bills are sold at a discount to face value. v. avoidance of the non-callable deposit prudential requirement
vi. expansion of banks' asset-base denominated in foreign currencies
Difficulty: Hard
Est time: <1 minute
of deposit, bill acceptance liabilities, debt liabilities, foreign currency liabilities and loan capital. A. v
Section: 2.2 Sources of funds
B. ii
34. For a bank, an advantage of bill financing is: C. i
D. All of the given answers are correct.
A. the bank earns income from accepting bills. Difficulty: Hard
Est time: <1 minute
B. the bank doesn't necessarily have to use its own funds. Learning Objective: 02-02 Identify the main sources of funds of commercial banks, including current deposits, demand deposits, term deposits, negotiable certificates
of deposit, bill acceptance liabilities, debt liabilities, foreign currency liabilities and loan capital.
C. interest rates on bill funding can be adjusted rapidly. Section: 2.2 Sources of funds
D. all of the given answers.
38. Alternatives to the usual source of long-term bank funds that have the characteristics of both debt and
Difficulty: Medium
Est time: <1 minute
equity are called:
A. secured debentures.
35. Which of the following statements about bill acceptance facilities is incorrect? B. transferable certificates of deposit.
C. promissory notes.
D. subordinated notes.
A. When a bank discounts a bill for the issuer, it buys it.
Difficulty: Medium
B. When a bank that holds a bill rediscounts it the bank onsells it. Est time: <1 minute
C. When a bank acts as an acceptor it will pay the face value of the bill to the holder at maturity. Learning Objective: 02-02 Identify the main sources of funds of commercial banks, including current deposits, demand deposits, term deposits, negotiable certificates
D. If interest rates change before a bank bill matures, the bank can change the interest rate on it. Section: 2.2 Sources of funds
Difficulty: Medium
Est time: <1 minute
39. The following balance sheet portfolio items are all assets of a bank, except:
36. Commercial banks take part in the money markets as: A. overdrafts.
B. lease finance.
C. certificates of deposit.
A. lenders of funds only. D. credit card draw-downs.
B. borrowers of funds only. Difficulty: Medium
C. both lenders and borrowers of funds. Est time: <1 minute
D. underwriters only. of deposit, bill acceptance liabilities, debt liabilities, foreign currency liabilities and loan capital.
Difficulty: Medium
Est time: <1 minute

lOMoARcPSD|4408380
40. A short-term discount security issued by a drawer at a discount, with the promise to repay the face value 44. The interest rate BBSW refers to:
at maturity, is called:
A. the reference rate for medium-term funding.

A. a commercial paper. B. a rate calculated each day from the offer rate of the last daily sale in the bank bill market.
B. a commercial bill. C. the average mid-point of the bid and offer rates in the bank bill market.
C. a certificate of deposit. D. the bank bill security rate.
Difficulty: Medium
Est time: <1 minute
Difficulty: Medium
Learning Objective: 02-03 Identify the main uses of funds by commercial banks, including personal and housing lending, commercial lending, lending to government,
Est time: <1 minute
and other bank assets.
Section: 2.3 Uses of funds
45. Banks invest in government securities because:
41. Which of the following statements regarding the foreign currency liabilities of a bank is incorrect?
A. they offer high yield owing to their risk.

A. The large international markets are important sources of funds for commercial banks. B. they offer a low yield owing to their illiquidity.
B. Australian banks occasionally issue debt securities into the international markets to raise sums C. all government bonds offer protection against inflation risk.
ranging from $20 million to $50 million. D. they can be used as security against banks' borrowing.
C. Foreign currency liabilities issued into the euromarkets are typically denominated in US dollars.
Difficulty: Medium
D. After deregulation commercial banks were able to expand their international funding sources. Est time: <1 minute
Difficulty: Medium and other bank assets.
Est time: <1 minute Section: 2.3 Uses of funds
46. Which of the following statements about commercial lending is incorrect?
42. All of the following financial securities are considered ‘uses of funds' by banks except:
A. The term loan is the main type of lending provided by banks to firms.
B. Typically, term loans are for maturities ranging from 5 to 15 years.
A. commercial bills. C. To extend commercial bill financing a bank may provide the firm with a rollover facility.
B. credit cards. D. Banks can provide flexible funding called an overdraft to firms.
C. certificates of deposit.
Difficulty: Medium
D. overdrafts. Est time: <1 minute
47. Which of the following about bank lending to government is incorrect?
43. If you take out a mortgage from a bank, the mortgage is a/an:
A. Securities issued by governments are usually regarded as low risk.
B. Banks invest in government securities because they are a source of liquidity.
A. liability to the bank and an asset to you. C. Banks invest in T-notes because they provide short-term income streams.
B. liability to you and an asset to the bank. D. Government securities enable a bank to manage the maturity structure of its balance sheet.
C. liability to both you and the bank.
Difficulty: Medium
D. asset to both you and the bank. Est time: <1 minute

lOMoARcPSD|4408380
48. Off-balance-sheet business for a bank refers to: 52. Which of the following statements about market-rate-related items such as forward-rate agreements is
incorrect?
A. deposits and loans longer than one year.

B. transactions that are currently only a contingent liability. A. They are generally called off-balance-sheet items.
C. call deposits that may be withdrawn on demand. B. They are liabilities that may require an outflow of funds for a bank.
D. consumer loans that are in default. C. They are included in the BIS capital-adequacy guidelines.
D. They form a small part of banks' OBS business.
Difficulty: Medium
Est time: <1 minute
Difficulty: Hard
Learning Objective: 02-04 Outline the nature and importance of banks’ off - balance-sheet business, including direct credit substitutes, trade- and performance-related
Est time: <1 minute
items, commitments and market-rate-related contracts.
Section: 2.4 Off-balance-sheet business
49. All of the following are off-balance-sheet transactions of a bank except:
53. Which of the following categories represents the most significant proportion of total off-balance-sheet
business of the banks?
A. documentary letters of credit.
B. performance guarantees.
C. underwriting facilities. A. Direct credit substitutes
D. bills receivable. B. Trade and performance-related items
C. Commitments
Difficulty: Medium
Est time: <1 minute D. Market-rate-related transactions
items, commitments and market-rate-related contracts. Difficulty: Hard
Section: 2.4 Off-balance-sheet business Est time: <1 minute
50. In recent times, there had been a substantial expansion in fee-related income for banks. What is the Section: 2.4 Off-balance-sheet business
principal reason for this?
54. Which of the following categories represents the most significant proportion of total market-rate-related
off-balance-sheet business of the banks?
A. Increased confidence in banks by individual investors
B. Increased off-sheet business (OBS) for banks
C. Reduced guidelines by Australian bank supervisor APRA A. Currency swap agreements
D. Increased deposits in banks B. Foreign exchange contracts
C. Interest rate swaps
Difficulty: Easy
Est time: <1 minute D. Interest rate futures
items, commitments and market-rate-related contracts. Difficulty: Medium
51. Which of the following statements is true for off-balance-sheet business for banks? Section: 2.4 Off-balance-sheet business
55. An example of an ‘off-sheet business' transaction that banks are generally involved in is:
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. A. providing a ‘standby letter of credit'.
D. Off-balance-sheet business records deposits that do not fit on the balance sheet. B. providing a note issuance facility.
C. providing a short-term, self-liquidating trade contingency.
Difficulty: Medium
Est time: <1 minute D. all of the given answers.
items, commitments and market-rate-related contracts. Difficulty: Medium

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56. Which of the following statements about direct credit substitutes provided by a commercial bank is 60. Which of the following is NOT an argument for some form of government regulation of the banking
incorrect? system?
A. They are provided to support a client's financial obligations. A. The money-creation role of banks
B. An example of a direct credit substitute is a bank guarantee. B. A major source of funds to the banks comes from households who need their savings protected
C. The bank provides funding to a third party instead of the client providing the funding. C. The excess return on assets that banks have been making in recent years
D. With a direct credit substitute a bank's client can raise funds directly from the financial markets. D. Maintaining confidence in the financial system
Learning Objective: 02-04 Outline the nature and importance of banks’ off - balance-sheet business, including direct credit substitutes, trade- and performance-related Learning Objective: 02-05 Consider the regulation and prudential supervision of banks.
items, commitments and market-rate-related contracts. Section: 2.5 Regulation and prudential supervision of commercial banks
61. Which of the following is NOT associated with the purpose of regulating financial institutions?
57. Off-balance-sheet business is usually divided into four major categories:
A. Providing stability of the money supply

A. Direct credit substitutes, trade and performance-related items, commitments and trade guarantees. B. Directing flow of funds to priority areas
B. Direct credit substitutes, trade and performance-related items, commitments and market-related C. Maintaining the soundness and stability of the financial system
transactions.
D. Lowering the cost of funds
C. Direct credit substitutes, trade and performance-related items, commitments and underwriting
facilities. Difficulty: Medium
Est time: <1 minute
D. Direct credit substitutes, ‘standby letters of credit', commitments and market-related transactions. Learning Objective: 02-05 Consider the regulation and prudential supervision of banks.
Section: 2.5 Regulation and prudential supervision of commercial banks
Difficulty: Medium
Est time: <1 minute
62. The Australian institution APRA is responsible for the regulatory supervision of financial institutions
items, commitments and market-rate-related contracts. such as banks and credit unions. APRA stands for:
58. A ‘commitment’ by a bank is:

A. Australian Practice and Regulatory Association.
B. Australian Prudential Regulation Authority.
A. a form of swap. C. Australian Prudential Rule Authority.
B. a promise by a large depositor to provide extra funds to the bank. D. Australian Practice and Regulatory Authority.
C. the unused balance on a bank credit card. Difficulty: Easy
D. an undertaking to advance funds or to acquire an asset in the future. Est time: <1 minute
Learning Objective: 02-05 Consider the regulation and prudential supervision of banks.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 02-04 Outline the nature and importance of banks’ off - balance-sheet business, including direct credit substitutes, trade- and performance-related 63. Which of the following institutions are supervised by APRA?
59. Which of the following is not a commitment by a bank? A. Building societies

B. Commercial banks
C. Credit unions
A. Outright forward purchase agreement D. All of the given answers
B. Underwriting facilities
Difficulty: Easy
C. Credit card limit approvals unused by cardholder Est time: <1 minute
D. Currency swap Learning Objective: 02-05 Consider the regulation and prudential supervision of banks.
Difficulty: Medium
Est time: <1 minute

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64. Within the context of the Corporations Law in Australia, the supervision of financial market integrity 68. According to the textbook, the Basel II approach to capital adequacy for banks involves ____ main
and consumer protection is done by: elements.
A. APRA. A. three
B. ASIC. B. four
C. RBA. C. five
D. ACCC. D. six
Learning Objective: 02-05 Consider the regulation and prudential supervision of banks. Learning Objective: 02-06 Understand the background and application of the capital adequacy standards.
Section: 2.5 Regulation and prudential supervision of commercial banks Section: 2.7 Basel II capital accord
65. The requirement and observation of standards designed to ensure the stability and soundness of a 69. Which of the following does NOT apply to Tier 1 capital?
financial system is called:
A. Tier 1 capital is described as ‘core capital'.

A. fiscal policy. B. Tier 1 capital must constitute at least 50% of a bank's capital base.
B. monetary policy. C. Paid-up ordinary shares can be included in Tier 1 capital.
C. prudential supervision. D. Cumulative irredeemable APRA-approved preference shares can be included in Tier 1 capital.
D. the Basel accord.
Difficulty: Hard
Est time: <1 minute
Difficulty: Easy
Learning Objective: 02-06 Understand the background and application of the capital adequacy standards.
Est time: <1 minute
Section: 2.7 Basel II capital accord
Learning Objective: 02-05 Consider the regulation and prudential supervision of banks.
Section: 2.6 A background to the capital adequacy standards
70. Under Basel II prudential standards, an institution is required to maintain a risk-based capital ratio of
66. The Basel capital adequacy requirements apply to: _____ of total-risk-weighted assets.
A. all financial institutions. A. 2.00 percent

B. banks, investment banks and merchant banks only. B. 4.00 percent
C. all financial institutions supervised by ASIC. C. 8.00 percent
D. all banks registered with APRA and some other financial institutions. D. 10.00 percent
Learning Objective: 02-06 Understand the background and application of the capital adequacy standards. Learning Objective: 02-05 Consider the regulation and prudential supervision of banks.
Section: 2.6 A background to the capital adequacy standards Section: 2.5 Regulation and prudential supervision of commercial banks
67. Some of the elements in assessing capital adequacy requirements for banks under the Basel II capital 71. Which of the following statements about regulatory capital is false?
accord are:
A. Tier 1 capital includes paid-up ordinary shares, retained earnings, non-cumulative irredeemable
A. credit risk, liquidity risk and interest rate risk. preference shares and general reserves.
B. credit risk, market risk and type of capital held. B. Tier 2 capital includes general provision for doubtful debts, revaluation reserves of premises,
C. default risk, interest rate risk and market risk. mandatory convertible notes and approved perpetual subordinated debt.
D. default risk, liquidity risk and type of capital held. C. Tier 1 capital is core capital, including paid-up ordinary shares, non-cumulative irredeemable
preference shares and general reserves.
Difficulty: Medium
Est time: <1 minute D. Tier 2 capital includes general reserves for doubtful debts, asset revaluation reserves of premises,
Learning Objective: 02-06 Understand the background and application of the capital adequacy standards. other preference shares, mandatory convertible notes, cumulative redeemable preference shares and
perpetual subordinated debt.
Difficulty: Hard
Est time: <1 minute

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76. The Basel II risk weighting factor for a bank loan to an Australian company with a Moody's Investors
72. The Pillar 1 approach of Basel II capital adequacy incorporates the following three risk components: Service rating of C is:
A. credit risk, interest-rate risk and market risk. A. 20%.

B. default risk, interest-rate risk and operational risk. B. 50%.
C. credit risk, market risk and operational risk. C. 100%.
D. default risk, foreign exchange risk and operational risk. D. 150%.
Difficulty: Medium
Difficulty: Hard
Est time: <1 minute
Est time: <1 minute
Learning Objective: 02-08 Understand the standardised approach to credit risk and compute the capital requirements for particular transactions.
Section: Extended learning A
73. Which of the following statements regarding capital adequacy requirements is incorrect? 77. Under Pillar 1 of the Basel II framework, the risk weight for a residential housing loan is determined by
the:
A. Existing credit-risk guidelines are extended to include market risk arising from a bank's trading
activities. A. amount borrowed.
B. Regulators focus on credit risk, market risks, operational risk and type of capital held. B. level of mortgage insurance.
C. Eligible Tier 1 capital must constitute at least 70% of a bank's capital base. C. house valuation.
D. Tier 2 capital is divided into upper and lower Tier 2 parts. D. all of the given answers.
Difficulty: Medium
Difficulty: Medium
Est time: <1 minute
Est time: <1 minute
74. Under the capital adequacy requirement for banks, in order to fund a $100 000 loan for a multinational 78. A bank provides a loan of $1 million to a company that has an A rating. Calculate the dollar value of
corporate client with a Standard & Poor's rating of AA, a bank will: capital required under the capital adequacy requirements to support the facility.
A. assign a risk-weighting of 20% for the balance. A. $16 000

B. allocate Tier 1 and Tier 2 capital to the loan according to the riskiness of the company. B. $40 000
C. seek funding in the euromarkets to minimise the capital adequacy requirements. C. $80 000
D. apply a risk weighting of 50% to the loan to determine the total capital requirement. D. $120 000
Difficulty: Hard
Difficulty: Hard
Est time: <1 minute
Est time: <1 minute
75. In the Basel II standardised approach to external rating grades, the asset counterparty weights for capital 79. A bank provides documentary letters of credit for a company that has a credit rating of A+. The face
adequacy guidelines are: value of contracts outstanding is $2 million. Calculate the dollar value of capital required under the
capital adequacy requirements to support these facilities, given that the bank supervisor's credit
conversion factor is 20%.
A. 10%, 20%, 50% and 100%.
B. 10%, 50%, 100% and 150%.
C. 20%, 50%, 100% and 150%. A. $6 400
D. 20%, 50%, 100% and 200%. B. $16 000
Difficulty: Hard C. $160 000
Est time: <1 minute D. $240 000
Difficulty: Hard
Est time: <1 minute

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80. A large commercial bank operating in the international markets will generally apply to the banks' 84. For a commercial bank operating in foreign exchange, interest rate and equity markets, the capital
supervisor to use the _____ to credit risk. adequacy guidelines for the market risk it is exposed to fall under:
A. advanced internal ratings-based approach A. Pillar 1.

B. foundation external ratings-based approach B. Pillar 2.
C. standardised approach C. Pillar 3.
D. standardised approach with external ratings D. Pillar 4.
Learning Objective: 02-06 Understand the background and application of the capital adequacy standards. Learning Objective: 02-06 Understand the background and application of the capital adequacy standards.
Section: 2.7 Basel II capital accord Section: 2.7 Basel II capital accord
81. Under Basel II capital accord, the approach to credit risk that requires a bank to assign risk weights 85. For a commercial bank's normal day-to-day business, the capital adequacy guidelines for the operational
given by the prudential supervisor is called: risk it is exposed to fall under:
A. an advanced approach. A. Pillar 1.

B. a foundation approach. B. Pillar 2.
C. a standardised approach. C. Pillar 3.
D. advanced-internal ratings. D. Pillar 4.
82. The risk that arises from chance of loss as a result of inadequate internal bank processes is called: 86. For a commercial bank's market discipline, the capital adequacy guidelines for its disclosure and
transparency requirements fall under:
A. default risk.
B. interest rate risk. A. Pillar 1.
C. market risk. B. Pillar 2.
D. operational risk. C. Pillar 3.
D. Pillar 4.
Difficulty: Medium
Est time: <1 minute
Difficulty: Medium
Est time: <1 minute
83. Which of the following statements about recently adopted guidelines covering capital requirements for
market risk that banks are required to perform is false? 87. Under _____ of Basel II, bank supervisors should review and evaluate banks' internal capital adequacy
assessments.
A. Banks use a risk measurement model based on a VaR approach.

B. Banks estimate the sensitivity of portfolio components to small changes in prices. A. Pillar 4
C. Banks must hold capital against risk of loss from changes in interest rates. B. Pillar 3
D. Banks hold a fixed allocation of funds between various balance sheet assets and off-balance-sheet C. Pillar 1
business. D. Pillar 2

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88. Part of a bank's liquidity management is to hold a portfolio of: 92. Banks obtain funds from many areas. These sources of funds appear as liabilities on a bank's balance
sheet.
A. term loans. TRUE

B. mortgages.
C. Commonwealth government securities. Deposits are a major part of a bank's sources of funds and a bank needs to pay interest expenses.
D. credit card loans.
Learning Objective: 02-06 Understand the background and application of the capital adequacy standards. Learning Objective: 02-01 Evaluate the functions and activities of commercial banks within the financial system.
Section: 2.7 Basel II capital accord Section: 2.1 The main activities of commercial banking
89. In relation to a bank, liquidity management means: 93. Liability management is where banks actively manage their liabilities in order to meet future loan
demand.
A. the bank's ability to quickly convert deposits into loans. TRUE

B. the bank's ability to onsell its loans.
Difficulty: Easy
C. the bank's ability to have funds available when depositors' funds mature. Est time: <1 minute
D. the bank's policies and practices in identifying and managing its loans portfolios. Learning Objective: 02-01 Evaluate the functions and activities of commercial banks within the financial system.
Difficulty: Medium
Est time: <1 minute 94. Call deposits are funds lodged in a bank account for a specified short-term period.
Learning Objective: 02-07 Examine liquidity management and other supervisory controls applied by APRA.
Section: 2.8 Liquidity management and other supervisory controls
FALSE
Difficulty: Easy
Est time: <1 minute
True / False Questions Section: 2.1 The main activities of commercial banking
95. A bank may either issue a negotiable certificate of deposit directly into the money markets or place it
90. Commercial banks are the main type of financial institution in a financial system because they hold the directly with another bank with surplus funds.
largest amounts of financial assets.
FALSE
TRUE Difficulty: Medium
Est time: <1 minute
Banks have long been the dominant type of financial institution, although in recent years managed funds Section: 2.1 The main activities of commercial banking
have close to having the same amount of financial assets under management.
96. One of the important attributes of certificates of deposit for a bank is the ability to adjust the yields on
new issues.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 02-01 Evaluate the functions and activities of commercial banks within the financial system. TRUE
91. The greater the dominance of commercial banks in an economy, the less regulation required. The yield on a CD cannot be adjusted until it reaches maturity and a new CD is issued.
FALSE Difficulty: Easy

Est time: <1 minute
Because of the dominance of banks and the correlation between their business and a country's economy, Section: 2.1 The main activities of commercial banking
there are strong arguments for regulation to constrain a bank's business.
Difficulty: Easy
Est time: <1 minute

lOMoARcPSD|4408380
97. As the majority of banks' assets are short-term loans, they are active in the money markets in order to 101. Describe how a bill acceptance facility works.
fund part of their lending.
FALSE
If a company with a good credit record is looking to raise funds through the issue of a bill of exchange
A normal bank acquires most of its funding from deposits. into the money markets, a bank may have the role of acceptor for the bill where the bank agrees to pay
the face value of the bill to the holder at maturity and will have a separate arrangement to recover the
funds from the issuer. The bank will earn fees for providing this service. Alternatively, the bank may
Difficulty: Easy provide the funds directly for the bill by agreeing to discount the bill and buy it from the issuer, and
Est time: <1 minute
Learning Objective: 02-02 Identify the main sources of funds of commercial banks, including current deposits, demand deposits, term deposits, negotiable certificates usually rediscount the bill subsequently. Consequently, the bank could provide both a bill acceptance
of deposit, bill acceptance liabilities, debt liabilities, foreign currency liabilities and loan capital. facility and a bill discount facility.
98. A bank may seek to obtain funds by issuing unsecured notes with a collaterised floating charge over its
deposits. Learning Objective: 02-02 Identify the main sources of funds of commercial banks, including current deposits, demand deposits, term deposits, negotiable certificates
FALSE
102. Discuss the main features of housing finance.
Unsecured notes do not have any security attached.
Difficulty: Easy
Est time: <1 minute This involves the lending of long-term funds to individuals so that they can buy residential property. As
Learning Objective: 02-02 Identify the main sources of funds of commercial banks, including current deposits, demand deposits, term deposits, negotiable certificates security for the loan, the bank lender registers a mortgage over the property. In recent years commercial
Section: 2.2 Sources of funds banks and specialist mortgage lenders have used securitisation to refinance their lending.
99. Foreign currency liabilities are debt instruments issued into another country but not denominated in the
currency of that country. Est time: 1-3 minutes
FALSE Section: 2.3 Uses of funds
103. Discuss the main features of a bank's commercial lending.

Foreign currency liabilities are typically denominated in foreign currencies such as US dollars, the yen
and pound sterling.
Difficulty: Easy Commercial lending is when banks lend to the business sector and other financial institutions. This is
Est time: <1 minute considered essential if economic growth is to be achieved within a country. Commercial banks offer
of deposit, bill acceptance liabilities, debt liabilities, foreign currency liabilities and loan capital. borrowers both short-term and long-term loans of various types such as overdraft facilities.

Short Answer Questions Section: 2.3 Uses of funds
100. Briefly discuss the sources of funds for a commercial bank.


lOMoARcPSD|4408380
104. Within the context of off-balance-sheet business, explain direct credit substitutes, trade- and
performance-related items and any differences between these items.
Category # of Qu
estions
Difficulty: Easy 24
Direct credit substitutes are where a bank supports a client's financial obligation such as providing a Difficulty: Hard 16
‘standby letter of credit' so that a company may raise funds directly in the market place. Trade- and Difficulty: Medium 62
performance-related items are when a bank offers guarantees to support a client's non-financial Est time: <1 minute 102
obligations. Both of these items are not recorded on a bank's balance sheet. Est time: 1-3 minutes 5
Learning Objective: 02-01 Evaluate the functions and activities of commercial banks within the financial system. 22
Learning Objective: 02-04 Outline the nature and importance of banks’ off - balance-sheet business, including direct credit substitutes, trade- and performance-related 02 Identify the main sources of funds of commercial banks, including current deposits, demand deposits, term deposits, negotiable certificat
items, commitments and market-rate-related contracts. es of deposit, bill acceptance liabilities, debt liabilities, foreign currency liabilities and loan capital.
Section: 2.4 Off-balance-sheet business Learning Objective: 02- 8
03 Identify the main uses of funds by commercial banks, including personal and housing lending, commercial lending, lending to governme
nt, and other bank assets.
Learning Objective: 02-04 Outline the nature and importance of banks’ off - balance- 14
sheet business, including direct credit substitutes, trade- and performance-related items, commitments and market-rate-related contracts.
Learning Objective: 02-05 Consider the regulation and prudential supervision of banks. 7
Learning Objective: 02-06 Understand the background and application of the capital adequacy standards. 16
Learning Objective: 02-07 Examine liquidity management and other supervisory controls applied by APRA. 1
08 Understand the standardised approach to credit risk and compute the capital requirements for particular transactions.
Section: 2.1 The main activities of commercial banking 12
Section: 2.2 Sources of funds 33
Section: 2.3 Uses of funds 8
Section: 2.4 Off-balance-sheet business 14
Section: 2.5 Regulation and prudential supervision of commercial banks 6
Section: 2.6 A background to the capital adequacy standards 2
Section: 2.7 Basel II capital accord 15
Section: 2.8 Liquidity management and other supervisory controls 1
Section: Extended learning A 6
Section: Introduction 10

lOMoARcPSD|4408380
6. According to the text, the principal source of income for investment banks is:
A. issuing bank bills.
B. off-balance-sheet business.
Multiple Choice Questions C. issuing secondary securities.
D. issuing certificates of deposit.
1. The financial institution that is a specialist provider of financial and advisory services to companies is a/an: 7. Money market corporations (merchant and investment banks) have significantly increased their off-
balance-sheet business on account of competition. All of the following are off-balance-sheet activities of
investment banks except:
A. credit union.
B. finance company.
C. building society. A. mergers and acquisitions.
D. investment bank. B. managing project finance undertakings.
C. trading in the short-term money market.
2. Money market corporations: D. strategic risk management advice.
8. Most corporations will seek advice from a/an ______ on possible mergers and acquisitions.
A. obtain all their funding by issuing bank bills.
B. are generally referred to as investment banks.
C. offer money market deposits to retail clients. A. investment broker
D. sell money market securities to retail clients. B. commercial banker
C. accounting firm
3. The task of the investment bank in a public issue of new shares is to: D. investment banker
9. The process of due diligence involves:

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. A. underwriting of new equity issues by a company.
D. act as a trustee of the funds raised. B. providing advice to companies on the raising of new equity.
C. detailed analysis of a firm's financial statements.
4. Investment banks: D. placement of securities to institutional investors.
10. The detailed analysis of a firm's financial statements as part of a possible takeover is called:
A. are supervised by APRA, since they operate in the banking sector.
B. focus their activities in the bank bill sector and money market.
C. obtain their deposits only from large corporations. A. share analysis.
D. are not required to comply with minimum capital adequacy requirements like commercial banks are B. technical analysis.
required to. C. due diligence.
D. project management.
5. A company may hire a/an ________ to advise on and underwrite its new share issue.
11. Underwriting is when a/an:
A. loans officer
B. investment banker A. broker places new share issues with selected financial institutions.
C. share analyst B. investment bank gives advice to a company about a merger.
D. treasury officer C. broker or a financial institution guarantees prices on a security issue for a company.
D. investment bank finds funding for a company.

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12. When an investment bank guarantees a certain price for a company issuing new shares, it is acting as a/an: 18. If a car manufacturer were to purchase one of the companies listed below, which purchase would be called
a vertical takeover?
A. auctioneer.
B. broker. A. An electronic components supplier
C. dealer. B. A rival car manufacturer
D. underwriter. C. A travel company
D. A finance company
13. When an investment bank helps a company sell large parcels of shares directly to institutional investors,
this is called: 19. A conglomerate takeover occurs when:
A. due diligence. A. companies from different business areas merge.

B. placement. B. both parties are similar in size.
C. securitisation. C. the merged entity is expected to have large additional value.
D. underwriting. D. the management team of the target company is combined with that of the takeover company.
14. The ________ is the company in a merger transaction that tries to merge with or acquire another company. 20. The following factors are all reasons for mergers except:
A. target company A. finances.

B. takeover company B. economies of scale.
C. conglomerate company C. business diversification.
D. hostile company D. reduction of debt.
15. Venture capital is: 21. The financial institution that pools funds for individuals and then invests them in both the money and
capital markets is a:
A. funding provided for a new start-up business by a group of investors.

B. providing advice to companies on the raising of new capital. A. savings bank.
C. short-term funding provided by banks. B. credit union.
D. placement of securities to institutional investors. C. investment bank.
D. managed fund.
16. The ________ is the company in a merger transaction that is being pursued as a takeover possibility.
22. Which of the following statements about managed funds is incorrect?
A. target company
B. takeover company A. The assets of large managed funds may be managed by several professional managers.
C. conglomerate company B. A mutual fund is required to use the services of a mutual fund custodian.
D. hostile company C. Sources of funds for a managed fund may be in the form of monthly payments.
D. For Australia, recent figures show that the statutory funds of life offices have the largest amounts of
17. If a car manufacturer were to purchase one of the companies listed below, which purchase would be called assets under management.
a horizontal takeover?
23. A managed fund that is established under a trust deed and is managed by a responsible entity is called a:
A. A steel mill
B. A rival car manufacturer A. mutual fund.
C. A tyre manufacturer B. trust fund.
D. A finance company C. trustee fund.
D. investment fund.

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24. Superannuation funds that aim at delivering a longer term income stream and capital appreciation by 30. The largest proportion of funds held by cash management funds in Australia is in:
acquiring a diversified asset portfolio across a wider risk spectrum are classified as:
A. cash and deposits.

A. managed growth funds. B. bills of exchange.
B. capital guaranteed funds. C. promissory notes and CDs.
C. balanced growth funds. D. bills of exchange and CDs.
D. capital stable funds.
31. Which of the following statements is NOT a feature of unit trusts?
25. An investor who wishes to save for their retirement in 20 years' time and who has a high propensity for
taking risk is likely to invest in a managed fund which invests in government securities and:
A. Unit trusts are companies that accept funds from investors and make investments that yield returns in the
form of income and/or capital gains.
A. cash deposits. B. The market determines the value of a listed unit trust.
B. some property. C. Unlisted unit trusts are generally highly liquid as they can accept money from investors at any time.
C. debentures. D. The number of listed property trusts is far larger than the number of listed equity trusts.
D. foreign equities.
32. Since the early 1990s, public unit trusts have seen the largest growth in assets in:
26. Managed fund managers:

A. invest funds according to their fund's trust deed. B. long-term government securities.
B. generally reinvest income and any capital gains in the fund. C. equities and units in trusts.
C. will usually maintain a diversified portfolio of assets within the asset classes. D. land and buildings.
33. The majority of securities owned by unlisted public unit trusts are:
27. Funds under management by managed funds in 2010 have a value of:
A. real physical assets.

A. $345b. B. money market securities.
B. $500b. C. capital market securities.
C. $1000b. D. fixed interest trusts.
D. $1666b.
34. Which of the following statements is NOT a feature of public unit trusts?
28. A mutual investment fund that specialises in short-term debt instruments and managed by a financial
intermediary is called a:
A. The four main classes of trusts are property, equity, mortgage and fixed interest trusts.
B. There was enormous growth in public unit trusts during the 1990s.
A. money market fund. C. The majority of mortgages held by a mortgage trust are ‘first' mortgages.
B. cash management trust. D. Property trusts are generally unlisted as they need notice to sell their physical assets.
C. certificate of deposit fund.
D. bank bill fund. 35. An investor is considering different methods of investment, including a public unit trust. Which of the
following is NOT a function of a public unit trust?
29. The main feature of cash management trusts is:
A. Acting as a vehicle for the pooling of investor funds

A. they allow individuals to access the money markets. B. Providing a level of investor protection though the appointment of a trustee
B. they provide liquidity and access to funds. C. Allowing small investors access to larger investment opportunities
C. that many are associated with stockbrokers and the electronic purchasing and selling of securities by D. Locking in a trust unit price by listing on the Australian Securities Exchange
investors.

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36. A developer is promoting a large new suburban shopping centre and decides to establish a publicly listed 42. Which of the following statements is true?
unit trust to attract investors. Which type of unit trust would likely be established?
A. Since the 1990s, assets of superannuation funds outside life insurance offices have grown much slower
A. A mortgage trust than life insurance office funds.
B. A property trust B. Assets in defined benefit schemes have experienced greater growth than assets in accumulation schemes.
C. An equity trust C. The introduction of the Superannuation Guarantee Charge (SGC) policy in 1992 resulted in rapid growth
D. A cash management trust in Australia's superannuation industry throughout the 1990s.
D. Industry superannuation funds are regulated superannuation entities with more than ten members that
37. The main advantage of a listed trust over an unlisted unit trust is that a listed trust: provide benefits for employees working in the same industry.
43. Superannuation funds, because of the ______-term nature of their liabilities, prefer to hold _____-term
A. has a trustee but an unlisted trust does not. assets.
B. can be sold at any time by the unit holder in the marketplace.
C. invests in equities, while an unlisted trust invests only in fixed interest.
D. invests in equities, while an unlisted trust invests in property. A. long, long
B. long, short
38. In Australia, listed property trusts dominate over the proportion of unlisted property unit trusts because: C. short, long
D. short, short
A. the valuations of buildings are larger than share valuations. 44. A private superannuation fund to which an individual makes recurring, predetermined payments for a given
B. mortgages on buildings are larger than companies' valuations. number of years into the plan is called a/an:
C. listed shares can be more advantageous in terms of liquidity.
D. it reflects the liquid nature of properties.
A. approved deposit scheme.
39. The function of a ________ is to provide income for employees of corporations or governments after they B. superannuation savings plan.
retire. C. standard superannuation scheme.
D. single premium scheme.
A. building society 45. If an individual retires early but wants to retain their superannuation entitlements in a favourable taxation
B. credit union environment, they can hold their eligible superannuation funds in a:
C. general insurer
D. superannuation fund
A. single-premium scheme.
40. Essentially, superannuation assets provide: B. growing annuity scheme.
C. rollover scheme.
D. termination scheme.
A. indefinite income when employees stop working.
B. indefinite income as long as employees continue to work. 46. A defined benefit plan:
C. limited income if an employee is injured and unable to work.
D. retirement income for employees.
A. is always fully funded, with no shortfall requirement.
41. Recent figures about superannuation assets in Australia show that the largest amounts of assets are in the B. may have a shortfall, but the Commonwealth government will make good the shortfall.
____: C. may have a shortfall, but the employer will make good the shortfall.
D. is where the employee bears the risk if the performance of the investment is bad.
A. corporate superannuation funds.
B. industry corporation funds.
C. retail superannuation funds.
D. self-managed superannuation funds.

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47. In an accumulation superannuation fund: 52. All of the following Acts or Bills are relevant to the operation of the Australian superannuation industry
except the:
A. the employee is promised an allocated benefit based on earnings and years of service.
B. superannuation income varies depending on how well the plan's investments have performed. A. Superannuation Industry (Supervision) Act 1993.
C. if the funds in the plan exceed the promised amount, the excess remains with the issuing firm or B. Income Tax Assessment Act 1936.
institution. C. Superannuation (Agents and Brokers) Act 1984.
D. all of the earnings' taxes are paid by the employer. D. Superannuation Guarantee Amendment Bill 2011.
48. The superannuation fund that involves the amount of benefit paid out on retirement being calculated by a 53. Which of the following is NOT an important result of the compulsory guarantee charge implemented in
formula based at the time when a person joined the fund is called: July 1992?
A. a defined benefit fund. A. The amount of superannuation funds in Australia has increased significantly.
B. an accumulation fund. B. The employer contribution SGC increased to 9% from July 2002.
C. a defined termination fund. C. The vast majority of retirement savings are invested in superannuation funds.
D. a defined payout fund. D. The SGC represents a penalty taxation charge on employers.
49. The superannuation fund where the amount of funds available at retirement consists of past contributions 54. The amount of financial assets held by insurance companies has _______ over the past 20 years.
plus earnings less taxes and expenses is called:
A. decreased
A. a defined benefit fund. B. remained stable
B. an accumulation fund. C. increased slowly
C. a defined termination fund. D. increased dramatically
D. a defined payout fund.
55. Recent figures show the largest proportion of assets held by life insurance companies is:
50. The superannuation fund where the employer must make good a shortfall in the fund when the benefit is to
be paid up is a/an:
A. Commonwealth securities.
B. loans and placements.
A. accumulation fund. C. equities and units in trusts.
B. defined benefit fund. D. land and buildings.
C. fully funded fund.
D. private fund. 56. In Australia, the prudential supervisor of life insurance offices is:
51. 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. ASIC.
B. APRA.
C. the Reserve Bank of Australia.
A. the final payout benefit is stated when the member joins the fund. D. PSLI.
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.

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57. Which of the following statements with regard to life insurance companies is true? 62. Life insurance companies attract a large proportion of their funds through regular premiums from policy
holders. In regard to the matching principle, what types of assets would an insurance company hold the
smallest proportions of?
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- A. Equity investments
term in nature. B. Debentures and notes
C. Life insurance companies tend to acquire short-term assets because they have relatively predictable C. Housing loan mortgages
inflows and outflows. D. Money market securities
D. The Reserve Bank of Australia regulates life insurance companies.
63. A life insurance company that sells a large number of ________ will need a large portion of liquid assets to
58. Which of the following statements about life insurance companies is false? match the liabilities.
A. As inflows of funds are relatively predictable, they have a very stable level of liabilities. A. whole-of-life policies
B. Life insurance companies have greatly increased their assets over the past decade. B. 20-year-term policies
C. Life insurance companies sell contracts that offer financial cover against premature death. C. annuities
D. Life insurance companies have large amounts of short-term liquid securities. D. one-year renewable term policies
59. Life insurance companies: 64. General insurance companies hold:
A. are significant investors in equities. A. a smaller number of short-term assets than life insurance companies.
B. invest mainly in debt, which is generally in the form of debentures. B. a greater number of short-term assets than life insurance companies.
C. are not important suppliers of equity funding. C. approximately the same number of short-term assets as life insurance companies.
D. do not match any of these answers. D. only long-term assets.
60. Life insurance offices are providers of superannuation products which make up ______ per cent of the 65. General insurance companies hold more liquid assets than life insurance companies because:
assets of life insurance offices' statutory funds.
A. they have a legal requirement to do so.

A. 57 B. events such as fires and earthquakes are difficult to predict.
B. 67 C. more people try to get payouts from them by fraud.
C. 77 D. there are more items covered under a general insurance policy so there are more payouts to the insured.
D. 87
66. A major difference between a whole-of-life insurance policy and a term-life policy is:
61. In Australia there has been a substantial expansion of assets in the life insurance industry. Which of the
following factors is one of the primary reasons for this?
A. a whole-of-life policy is long-term, whereas a term policy is only for a term of one year.
B. a term policy has an investment component, specified only for the term.
A. Increased confidence in life policies by individual investors C. only a whole-of-life policy has an investment part.
B. Growth in superannuation funds D. term policies only pay bonuses at the end of the term, unlike the whole–of-life policy, which pays them
C. Decreased cost of regulation by the Australian Financial Institutions Commission out immediately as they are accumulated.
D. Rationalisation through mergers of small life insurance companies
67. Which of the following does NOT apply to a whole-of-life insurance policy?
A. It includes an investment component

B. It is a long-term insurance policy
C. It may pay a bonus if surplus investment returns are generated
D. Premiums reduce over time owing to accumulated bonuses

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68. In a/an _____ insurance policy, there is no savings component. 74. A hedge fund that takes a short position in equity markets:
A. term A. will sell forward shares.

B. variable B. will buy a derivative that they expect will increase in price.
C. whole C. will buy shares.
D. endowment D. is expecting the markets to increase.
69. In relation to insurance for term-life policies with a stepped premium over time, the policy holder pays 75. Finance companies generally:
premiums:
A. issue shares and use the proceeds to buy bonds.

A. based on current market rates. B. raise funds in financial markets to lend to households and companies.
B. that increase gradually over time. C. raise funds from banks to lend to households and companies.
C. based on increases in inflation. D. issue bonds and use the proceeds to buy shares.
D. based on indexing the sum insured.
76. Which of the following statements is NOT a feature of finance companies?
70. A portfolio manager for a general insurance company who expects a downturn in the markets is likely to
shift more of the company's portfolio into:
A. Finance companies came into existence in response to regulations on interest rates.
B. Finance companies sell unsecured notes and use the funds to make loans to borrowers.
A. common stock. C. The majority of finance companies' funds are sourced from banks.
B. long-term corporate bonds. D. Today the banks own many large finance companies.
C. preference shares.
D. short-term securities. 77. Since deregulation of the financial markets in the 1980s, finance companies have seen the largest growth in
their assets in:
71. For motor vehicle insurance, a third party policy means:
A. bills of exchange.
A. the policy covers damage to the named vehicle plus any damage to any third party vehicle or party. B. local government securities.
B. the policy covers damage to both parties. C. placements and deposits.
C. the policy covers damage or loss to a third party or property only. D. loans to businesses.
D. the policy covers damage to the named vehicle plus any theft.
78. Finance companies use their funds to provide:
72. A fund that aims to achieve high investment returns by using exotic financial products is called a:
A. loans to individuals.
A. a hedge fund. B. instalment credit to finance retail sales to retail stores.
B. project fund. C. lease financing.
C. money market fund. D. all of the given answers.
D. leverage fund.
79. By the end of the 1990s, there had been a substantial contraction in the building society sector. What is the
73. A hedge fund that takes a long position in the Australian foreign exchange market is forecasting Australian principal reason for this contraction in building societies?
foreign currency will:
A. Loss of confidence in building societies by individual investors

A. decrease. B. Conversion of building societies to banks
B. increase. C. Increased cost of regulation by the Australian Prudential Regulation Authority (APRA)
C. stay the same. D. Rationalisation through the merger of small building societies
D. decrease in the long-term.

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80. Which of the following statement about building societies in Australia is incorrect? 86. The uses of funds for credit unions are mainly:
A. The main activities of building societies are to take in deposits and provide mortgage finance. A. company shares.
B. The largest building societies have tended to convert to regional banks in recent times. B. commercial paper.
C. Now currently the building society sector holds 2 per cent of the total assets of the Australian financial C. debentures and unsecured notes.
system. D. mortgages.
D. Building societies are authorised deposit-taking institutions and supervised by APRA.
87. Credit unions, while representing a very small proportion of total financial assets, have strong numerical
81. Under deregulation, building societies lost market share to other financial institutions. Their response representation throughout Australia. They derive this numerical strength:
included:
A. from a common bond of association among society members.

A. mergers with other building societies. B. through the wide dispersion of societies throughout the country.
B. expenditure on technology. C. because of the full range of financial services provided.
C. expanding their range of products. D. because of a guarantee of deposits provided by the government.
88. Which of the following holds the smallest percentage of total assets of financial institutions: finance
82. In Australia permanent building societies are supervised by: companies, credit unions, managed funds and permanent building societies?
A. ASIC. A. Building societies

B. APRA. B. Credit unions
C. the Reserve Bank of Australia. C. Finance companies
D. ASX. D. Managed funds
83. A ________ is a financial intermediary that deals mainly in the flow of funds between members. 89. Export Finance and Insurance Corporation's function is:
Membership is generally derived from some common bond.
A. solely to lend directly to small- or medium-sized businesses involved in export trade.

A. savings bank B. solely to guarantee trade finance to small- or medium- sized businesses involved in export trade.
B. superannuation fund C. to encourage export trade by providing trade insurance and financial services.
C. credit union D. solely to provide insurance for Australian suppliers of goods and services against non-payment.
D. merchant bank
90. The form of financing for large tourist resorts, property developments, heavy industry and processing plant
84. A credit union differs from most other financial institutions because: developments is called:
A. it accepts deposits mainly from members. A. euro finance.

B. its assets are mainly loans to members. B. conglomerate finance.
C. there are stringent requirements to hold prime liquid assets. C. project finance.
D. all of the given answers are correct. D. lease finance.
85. An important source of funds for credit unions is: 91. The main difference between project finance and other forms of lending is:
A. cheque accounts. A. lenders base their participation on expected future cash flows and assets of the project.
B. loan interest. B. lenders take a major equity stake in the project.
C. interest from government securities. C. the project company, which is set up as a separate legal entity, relies heavily on venture capitalists for
D. financial support from the organisations that employ its members. equity funding.
D. the lenders have a claim on the assets of the project as well as the sponsors.

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92. Which of the following features is NOT generally true of project finance in Australia? 101. Cash management trusts are restricted under their trust deed to hold only bank deposits and cash.
True False
A. Guarantees provided by sponsors to lenders usually do not cover all the risks involved in the project.
B. A project company is usually established as a separate legal entity. 102. An insurance company is not a depository financial institution.
C. Lenders rely mainly on the expected future cash flows and the assets of the project.
D. Finance is usually established on a non-recourse basis. True False
True / False Questions Short Answer Questions
93. Unlike commercial banks, investment banks only accept deposits from large corporations. 103. Explain the role and operation of one of the largest types of managed funds, superannuation funds.
True False
94. As investment banks have increased their underwriting activities in recent years, the number of financial
assets held by them has similarly increased.
True False
95. In the context of a merger, the process of due diligence involves valuing the target company shares.
True False 104. Explain the operation of cash management trusts.
96. In relation to Australian managed funds, cash management trusts currently have the largest amount of funds
under management.
True False
97. In relation to Australian managed funds, superannuation funds currently have the largest amount of funds
under management.
True False
105. Identify and discuss the types of public unit trusts according to their assets.
98. A capital guaranteed fund guarantees that contributors will receive at least the value of the contributions
and future earnings of the fund.
True False
99. A managed growth fund is designed to maximise the return from appreciation in the value of assets in its
portfolio.
True False
100. On average, the value of a balanced growth fund is subject to less market fluctuation than that of a capital
growth fund.
True False

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106. What do hedge funds do? Discuss any concerns their operations may have for the financial system.
Chapter 03 - Test Bank Key
1. The financial institution that is a specialist provider of financial and advisory services to companies is
a/an:
107. What are the principal assets of a finance company? How have these been affected in recent years?
A. credit union.
B. finance company.
C. building society.
D. investment bank.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 03-01 Describe the roles of investment banks and merchant banks, with an emphasis on the nature of their off-balance-sheet business, in particular
mergers and acquisitions.
Section: 3.1 Investment banks and merchant banks
2. Money market corporations:
A. obtain all their funding by issuing bank bills.

B. are generally referred to as investment banks.
C. offer money market deposits to retail clients.
D. sell money market securities to retail clients.
Difficulty: Medium
Est time: <1 minute
3. 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.
Difficulty: Medium
Est time: <1 minute

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4. Investment banks: 8. Most corporations will seek advice from a/an ______ on possible mergers and acquisitions.
A. are supervised by APRA, since they operate in the banking sector. A. investment broker
B. focus their activities in the bank bill sector and money market. B. commercial banker
C. obtain their deposits only from large corporations. C. accounting firm
D. are not required to comply with minimum capital adequacy requirements like commercial banks are D. investment banker
required to.
Difficulty: Easy
Est time: <1 minute
Difficulty: Medium
Est time: <1 minute
9. The process of due diligence involves:
5. A company may hire a/an ________ to advise on and underwrite its new share issue.
A. underwriting of new equity issues by a company.

A. loans officer B. providing advice to companies on the raising of new equity.
B. investment banker C. detailed analysis of a firm's financial statements.
C. share analyst D. placement of securities to institutional investors.
D. treasury officer
Difficulty: Medium
Est time: <1 minute
Difficulty: Easy
Est time: <1 minute
10. The detailed analysis of a firm's financial statements as part of a possible takeover is called:
6. According to the text, the principal source of income for investment banks is:
A. share analysis.
A. issuing bank bills. B. technical analysis.
B. off-balance-sheet business. C. due diligence.
C. issuing secondary securities. D. project management.
D. issuing certificates of deposit.
Difficulty: Medium
Est time: <1 minute
Difficulty: Medium
Est time: <1 minute
11. Underwriting is when a/an:
7. Money market corporations (merchant and investment banks) have significantly increased their off-
balance-sheet business on account of competition. All of the following are off-balance-sheet activities
of investment banks except: A. broker places new share issues with selected financial institutions.
B. investment bank gives advice to a company about a merger.
C. broker or a financial institution guarantees prices on a security issue for a company.
A. mergers and acquisitions. D. investment bank finds funding for a company.
B. managing project finance undertakings.
Difficulty: Easy
C. trading in the short-term money market. Est time: <1 minute
D. strategic risk management advice. Learning Objective: 03-01 Describe the roles of investment banks and merchant banks, with an emphasis on the nature of their off-balance-sheet business, in particular
Difficulty: Medium
Est time: <1 minute

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12. When an investment bank guarantees a certain price for a company issuing new shares, it is acting as 16. The ________ is the company in a merger transaction that is being pursued as a takeover possibility.
a/an:
A. target company
A. auctioneer. B. takeover company
B. broker. C. conglomerate company
C. dealer. D. hostile company
D. underwriter.
Difficulty: Easy
Est time: <1 minute
Difficulty: Easy
Est time: <1 minute
17. If a car manufacturer were to purchase one of the companies listed below, which purchase would be
13. When an investment bank helps a company sell large parcels of shares directly to institutional investors, called a horizontal takeover?
this is called:
A. A steel mill
A. due diligence. B. A rival car manufacturer
B. placement. C. A tyre manufacturer
C. securitisation. D. A finance company
D. underwriting.
Difficulty: Medium
Est time: <1 minute
Difficulty: Medium
Est time: <1 minute
18. If a car manufacturer were to purchase one of the companies listed below, which purchase would be
14. The ________ is the company in a merger transaction that tries to merge with or acquire another called a vertical takeover?
company.
A. An electronic components supplier

A. target company B. A rival car manufacturer
B. takeover company C. A travel company
C. conglomerate company D. A finance company
D. hostile company
Difficulty: Medium
Est time: <1 minute
Difficulty: Easy
Est time: <1 minute
19. A conglomerate takeover occurs when:
15. Venture capital is:
A. companies from different business areas merge.

A. funding provided for a new start-up business by a group of investors. B. both parties are similar in size.
B. providing advice to companies on the raising of new capital. C. the merged entity is expected to have large additional value.
C. short-term funding provided by banks. D. the management team of the target company is combined with that of the takeover company.
D. placement of securities to institutional investors.
Difficulty: Medium
Est time: <1 minute
Difficulty: Medium
Est time: <1 minute

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20. The following factors are all reasons for mergers except: 24. Superannuation funds that aim at delivering a longer term income stream and capital appreciation by
acquiring a diversified asset portfolio across a wider risk spectrum are classified as:
A. finances.
B. economies of scale. A. managed growth funds.
C. business diversification. B. capital guaranteed funds.
D. reduction of debt. C. balanced growth funds.
D. capital stable funds.
Difficulty: Easy
Est time: <1 minute
Difficulty: Medium
Est time: <1 minute
Learning Objective: 03-02 Explain the structure, roles and operation of managed funds and identify factors that have influenced their rapid growth.
Section: 3.2 Managed funds
21. The financial institution that pools funds for individuals and then invests them in both the money and 25. An investor who wishes to save for their retirement in 20 years' time and who has a high propensity for
capital markets is a: taking risk is likely to invest in a managed fund which invests in government securities and:
A. savings bank. A. cash deposits.

B. credit union. B. some property.
C. investment bank. C. debentures.
D. managed fund. D. foreign equities.
Difficulty: Easy
Difficulty: Medium
Est time: <1 minute
Est time: <1 minute
22. Which of the following statements about managed funds is incorrect? 26. Managed fund managers:
A. The assets of large managed funds may be managed by several professional managers. A. invest funds according to their fund's trust deed.
B. A mutual fund is required to use the services of a mutual fund custodian. B. generally reinvest income and any capital gains in the fund.
C. Sources of funds for a managed fund may be in the form of monthly payments. C. will usually maintain a diversified portfolio of assets within the asset classes.
D. For Australia, recent figures show that the statutory funds of life offices have the largest amounts of D. all of the given answers.
assets under management.
Difficulty: Easy
Est time: <1 minute Learning Objective: 03-02 Explain the structure, roles and operation of managed funds and identify factors that have influenced their rapid growth.
Learning Objective: 03-02 Explain the structure, roles and operation of managed funds and identify factors that have influenced their rapid growth. Section: 3.2 Managed funds
27. Funds under management by managed funds in 2010 have a value of:
23. A managed fund that is established under a trust deed and is managed by a responsible entity is called
a:
A. $345b.
B. $500b.
A. mutual fund.
C. $1000b.
B. trust fund.
D. $1666b.
C. trustee fund.
D. investment fund. Difficulty: Medium
Est time: <1 minute
Difficulty: Easy
Est time: <1 minute

lOMoARcPSD|4408380
28. A mutual investment fund that specialises in short-term debt instruments and managed by a financial 32. Since the early 1990s, public unit trusts have seen the largest growth in assets in:
intermediary is called a:

A. money market fund. B. long-term government securities.
B. cash management trust. C. equities and units in trusts.
C. certificate of deposit fund. D. land and buildings.
D. bank bill fund.
Difficulty: Medium
Est time: <1 minute
Difficulty: Easy
Learning Objective: 03-03 Discuss the purpose and operation of cash management trusts and public unit trusts.
Est time: <1 minute
Section: 3.4 Public unit trusts
Section: 3.3 Cash management trusts
33. The majority of securities owned by unlisted public unit trusts are:
29. The main feature of cash management trusts is:
A. real physical assets.

A. they allow individuals to access the money markets. B. money market securities.
B. they provide liquidity and access to funds. C. capital market securities.
C. that many are associated with stockbrokers and the electronic purchasing and selling of securities by D. fixed interest trusts.
investors.
Difficulty: Medium
D. all of the given answers. Est time: <1 minute
Difficulty: Medium Section: 3.4 Public unit trusts
Est time: <1 minute
34. Which of the following statements is NOT a feature of public unit trusts?
30. The largest proportion of funds held by cash management funds in Australia is in:
A. The four main classes of trusts are property, equity, mortgage and fixed interest trusts.
B. There was enormous growth in public unit trusts during the 1990s.
A. cash and deposits. C. The majority of mortgages held by a mortgage trust are ‘first' mortgages.
B. bills of exchange. D. Property trusts are generally unlisted as they need notice to sell their physical assets.
C. promissory notes and CDs.
Difficulty: Medium
D. bills of exchange and CDs. Est time: <1 minute
Est time: <1 minute
35. An investor is considering different methods of investment, including a public unit trust. Which of the
following is NOT a function of a public unit trust?
31. Which of the following statements is NOT a feature of unit trusts?
A. Acting as a vehicle for the pooling of investor funds

A. Unit trusts are companies that accept funds from investors and make investments that yield returns in B. Providing a level of investor protection though the appointment of a trustee
the form of income and/or capital gains. C. Allowing small investors access to larger investment opportunities
B. The market determines the value of a listed unit trust. D. Locking in a trust unit price by listing on the Australian Securities Exchange
C. Unlisted unit trusts are generally highly liquid as they can accept money from investors at any time.
Difficulty: Medium
D. The number of listed property trusts is far larger than the number of listed equity trusts. Est time: <1 minute
Est time: <1 minute

lOMoARcPSD|4408380
36. A developer is promoting a large new suburban shopping centre and decides to establish a publicly 40. Essentially, superannuation assets provide:
listed unit trust to attract investors. Which type of unit trust would likely be established?
A. indefinite income when employees stop working.

A. A mortgage trust B. indefinite income as long as employees continue to work.
B. A property trust C. limited income if an employee is injured and unable to work.
C. An equity trust D. retirement income for employees.
D. A cash management trust
Difficulty: Easy
Est time: <1 minute
Difficulty: Easy
Learning Objective: 03-04 Describe the nature and roles of superannuation funds, including the primary sources of superannuation funds and the different types of
Est time: <1 minute
fund.
Section: 3.5 Superannuation funds
37. The main advantage of a listed trust over an unlisted unit trust is that a listed trust: 41. Recent figures about superannuation assets in Australia show that the largest amounts of assets are in
the ____:
A. has a trustee but an unlisted trust does not.

B. can be sold at any time by the unit holder in the marketplace. A. corporate superannuation funds.
C. invests in equities, while an unlisted trust invests only in fixed interest. B. industry corporation funds.
D. invests in equities, while an unlisted trust invests in property. C. retail superannuation funds.
D. self-managed superannuation funds.
Difficulty: Easy
Est time: <1 minute Difficulty: Medium
Learning Objective: 03-03 Discuss the purpose and operation of cash management trusts and public unit trusts. Est time: <1 minute
Section: 3.4 Public unit trusts Learning Objective: 03-04 Describe the nature and roles of superannuation funds, including the primary sources of superannuation funds and the different types of
fund.
38. In Australia, listed property trusts dominate over the proportion of unlisted property unit trusts because:
42. Which of the following statements is true?
A. the valuations of buildings are larger than share valuations.
B. mortgages on buildings are larger than companies' valuations. A. Since the 1990s, assets of superannuation funds outside life insurance offices have grown much
C. listed shares can be more advantageous in terms of liquidity. slower than life insurance office funds.
D. it reflects the liquid nature of properties. B. Assets in defined benefit schemes have experienced greater growth than assets in accumulation
Difficulty: Easy
schemes.
Est time: <1 minute C. The introduction of the Superannuation Guarantee Charge (SGC) policy in 1992 resulted in rapid
Section: 3.4 Public unit trusts growth in Australia's superannuation industry throughout the 1990s.
D. Industry superannuation funds are regulated superannuation entities with more than ten members that
39. The function of a ________ is to provide income for employees of corporations or governments after provide benefits for employees working in the same industry.
they retire.
Difficulty: Hard
Est time: <1 minute
A. building society fund.
B. credit union
C. general insurer 43. Superannuation funds, because of the ______-term nature of their liabilities, prefer to hold _____-term
D. superannuation fund assets.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 03-04 Describe the nature and roles of superannuation funds, including the primary sources of superannuation funds and the different types of A. long, long
fund.
B. long, short
C. short, long
D. short, short
Difficulty: Easy
Est time: <1 minute

lOMoARcPSD|4408380
fund. Section: 3.5 Superannuation funds

48. The superannuation fund that involves the amount of benefit paid out on retirement being calculated by
44. A private superannuation fund to which an individual makes recurring, predetermined payments for a a formula based at the time when a person joined the fund is called:
given number of years into the plan is called a/an:
A. a defined benefit fund.

A. approved deposit scheme. B. an accumulation fund.
B. superannuation savings plan. C. a defined termination fund.
C. standard superannuation scheme. D. a defined payout fund.
D. single premium scheme.
Difficulty: Medium
Est time: <1 minute Learning Objective: 03-04 Describe the nature and roles of superannuation funds, including the primary sources of superannuation funds and the different types of
Learning Objective: 03-04 Describe the nature and roles of superannuation funds, including the primary sources of superannuation funds and the different types of fund.
49. The superannuation fund where the amount of funds available at retirement consists of past
45. If an individual retires early but wants to retain their superannuation entitlements in a favourable contributions plus earnings less taxes and expenses is called:
taxation environment, they can hold their eligible superannuation funds in a:
A. a defined benefit fund.

A. single-premium scheme. B. an accumulation fund.
B. growing annuity scheme. C. a defined termination fund.
C. rollover scheme. D. a defined payout fund.
D. termination scheme.
Difficulty: Medium
Est time: <1 minute Learning Objective: 03-04 Describe the nature and roles of superannuation funds, including the primary sources of superannuation funds and the different types of
Learning Objective: 03-04 Describe the nature and roles of superannuation funds, including the primary sources of superannuation funds and the different types of fund.
50. The superannuation fund where the employer must make good a shortfall in the fund when the benefit is
46. A defined benefit plan: to be paid up is a/an:
A. is always fully funded, with no shortfall requirement. A. accumulation fund.

B. may have a shortfall, but the Commonwealth government will make good the shortfall. B. defined benefit fund.
C. may have a shortfall, but the employer will make good the shortfall. C. fully funded fund.
D. is where the employee bears the risk if the performance of the investment is bad. D. private fund.
Difficulty: Medium
Difficulty: Medium
Est time: <1 minute
Est time: <1 minute
fund.
fund.
47. In an accumulation superannuation fund: 51. 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 employee is promised an allocated benefit based on earnings and years of service.
B. superannuation income varies depending on how well the plan's investments have performed. A. the final payout benefit is stated when the member joins the fund.
C. if the funds in the plan exceed the promised amount, the excess remains with the issuing firm or B. the final payout depends upon the investment performance of the fund.
institution. C. payment is specified under the superannuation guarantee legislation.
D. all of the earnings' taxes are paid by the employer. D. the benefit is paid in the form of a life annuity.
Difficulty: Hard
Difficulty: Medium
Est time: <1 minute
Est time: <1 minute
fund.
fund.

lOMoARcPSD|4408380

56. In Australia, the prudential supervisor of life insurance offices is:
52. All of the following Acts or Bills are relevant to the operation of the Australian superannuation industry
except the:
A. ASIC.
B. APRA.
A. Superannuation Industry (Supervision) Act 1993. C. the Reserve Bank of Australia.
B. Income Tax Assessment Act 1936. D. PSLI.
C. Superannuation (Agents and Brokers) Act 1984. Difficulty: Easy
D. Superannuation Guarantee Amendment Bill 2011. Est time: <1 minute
Learning Objective: 03-05 Define life insurance offices and general insurance offices and explain the main types of insurance policies offered by each type of insurer.
Section: 3.6 Life insurance offices
Difficulty: Hard
Est time: <1 minute
Learning Objective: 03-04 Describe the nature and roles of superannuation funds, including the primary sources of superannuation funds and the different types of 57. Which of the following statements with regard to life insurance companies is true?
fund.
53. Which of the following is NOT an important result of the compulsory guarantee charge implemented in A. Life insurance companies are more likely to acquire short-term assets than long-term securities, for
July 1992? liquidity reasons.
B. Life insurance companies are more likely to acquire long-term assets because their liabilities are
long-term in nature.
A. The amount of superannuation funds in Australia has increased significantly. C. Life insurance companies tend to acquire short-term assets because they have relatively predictable
B. The employer contribution SGC increased to 9% from July 2002. inflows and outflows.
C. The vast majority of retirement savings are invested in superannuation funds. D. The Reserve Bank of Australia regulates life insurance companies.
D. The SGC represents a penalty taxation charge on employers.
Difficulty: Medium
Est time: <1 minute
Difficulty: Medium
Est time: <1 minute
fund.
Section: 3.5 Superannuation funds 58. Which of the following statements about life insurance companies is false?
54. The amount of financial assets held by insurance companies has _______ over the past 20 years.
A. As inflows of funds are relatively predictable, they have a very stable level of liabilities.
B. Life insurance companies have greatly increased their assets over the past decade.
A. decreased
C. Life insurance companies sell contracts that offer financial cover against premature death.
B. remained stable
D. Life insurance companies have large amounts of short-term liquid securities.
C. increased slowly
D. increased dramatically Difficulty: Medium
Est time: <1 minute
Difficulty: Medium
Est time: <1 minute
Section: 3.6 Life insurance offices 59. Life insurance companies:
55. Recent figures show the largest proportion of assets held by life insurance companies is:
A. are significant investors in equities.
B. invest mainly in debt, which is generally in the form of debentures.
A. Commonwealth securities.
C. are not important suppliers of equity funding.
B. loans and placements.
D. do not match any of these answers.
C. equities and units in trusts.
D. land and buildings. Difficulty: Medium
Est time: <1 minute
Difficulty: Hard
Est time: <1 minute

lOMoARcPSD|4408380
60. Life insurance offices are providers of superannuation products which make up ______ per cent of the 64. General insurance companies hold:
assets of life insurance offices' statutory funds.
A. a smaller number of short-term assets than life insurance companies.

A. 57 B. a greater number of short-term assets than life insurance companies.
B. 67 C. approximately the same number of short-term assets as life insurance companies.
C. 77 D. only long-term assets.
D. 87
Difficulty: Easy
Est time: <1 minute
Difficulty: Medium
Est time: <1 minute
Section: 3.7 General insurance offices
65. General insurance companies hold more liquid assets than life insurance companies because:
61. In Australia there has been a substantial expansion of assets in the life insurance industry. Which of the
following factors is one of the primary reasons for this?
A. they have a legal requirement to do so.
B. events such as fires and earthquakes are difficult to predict.
A. Increased confidence in life policies by individual investors C. more people try to get payouts from them by fraud.
B. Growth in superannuation funds D. there are more items covered under a general insurance policy so there are more payouts to the
C. Decreased cost of regulation by the Australian Financial Institutions Commission insured.
D. Rationalisation through mergers of small life insurance companies
Difficulty: Easy
Est time: <1 minute
Difficulty: Medium
Est time: <1 minute
66. A major difference between a whole-of-life insurance policy and a term-life policy is:
62. Life insurance companies attract a large proportion of their funds through regular premiums from policy
holders. In regard to the matching principle, what types of assets would an insurance company hold the
smallest proportions of? A. a whole-of-life policy is long-term, whereas a term policy is only for a term of one year.
B. a term policy has an investment component, specified only for the term.
C. only a whole-of-life policy has an investment part.
A. Equity investments D. term policies only pay bonuses at the end of the term, unlike the whole–of-life policy, which pays
B. Debentures and notes them out immediately as they are accumulated.
C. Housing loan mortgages
Difficulty: Medium
D. Money market securities Est time: <1 minute
Difficulty: Medium Section: 3.6 Life insurance offices
Est time: <1 minute
67. Which of the following does NOT apply to a whole-of-life insurance policy?
63. A life insurance company that sells a large number of ________ will need a large portion of liquid
assets to match the liabilities. A. It includes an investment component
B. It is a long-term insurance policy
C. It may pay a bonus if surplus investment returns are generated
A. whole-of-life policies D. Premiums reduce over time owing to accumulated bonuses
B. 20-year-term policies
Difficulty: Medium
C. annuities Est time: <1 minute
D. one-year renewable term policies Learning Objective: 03-05 Define life insurance offices and general insurance offices and explain the main types of insurance policies offered by each type of insurer.
Difficulty: Medium
Est time: <1 minute

lOMoARcPSD|4408380
68. In a/an _____ insurance policy, there is no savings component. 72. A fund that aims to achieve high investment returns by using exotic financial products is called a:
A. term A. a hedge fund.

B. variable B. project fund.
C. whole C. money market fund.
D. endowment D. leverage fund.
Learning Objective: 03-05 Define life insurance offices and general insurance offices and explain the main types of insurance policies offered by each type of insurer. Learning Objective: 03-06 Discuss hedge funds, including their structure, investors, investment strategies and risk.
Section: 3.6 Life insurance offices Section: 3.8 Hedge funds
69. In relation to insurance for term-life policies with a stepped premium over time, the policy holder pays 73. A hedge fund that takes a long position in the Australian foreign exchange market is forecasting
premiums: Australian foreign currency will:
A. based on current market rates. A. decrease.

B. that increase gradually over time. B. increase.
C. based on increases in inflation. C. stay the same.
D. based on indexing the sum insured. D. decrease in the long-term.
Learning Objective: 03-05 Define life insurance offices and general insurance offices and explain the main types of insurance policies offered by each type of insurer. Learning Objective: 03-06 Discuss hedge funds, including their structure, investors, investment strategies and risk.
Section: 3.6 Life insurance offices Section: 3.8 Hedge funds
70. A portfolio manager for a general insurance company who expects a downturn in the markets is likely to 74. A hedge fund that takes a short position in equity markets:
shift more of the company's portfolio into:
A. will sell forward shares.

A. common stock. B. will buy a derivative that they expect will increase in price.
B. long-term corporate bonds. C. will buy shares.
C. preference shares. D. is expecting the markets to increase.
D. short-term securities.
Difficulty: Easy
Est time: <1 minute
Difficulty: Easy
Learning Objective: 03-06 Discuss hedge funds, including their structure, investors, investment strategies and risk.
Est time: <1 minute
Section: 3.8 Hedge funds
75. Finance companies generally:
71. For motor vehicle insurance, a third party policy means:
A. issue shares and use the proceeds to buy bonds.

A. the policy covers damage to the named vehicle plus any damage to any third party vehicle or party. B. raise funds in financial markets to lend to households and companies.
B. the policy covers damage to both parties. C. raise funds from banks to lend to households and companies.
C. the policy covers damage or loss to a third party or property only. D. issue bonds and use the proceeds to buy shares.
D. the policy covers damage to the named vehicle plus any theft.
Difficulty: Medium
Est time: <1 minute
Difficulty: Medium
Learning Objective: 03-07 Explain the principal functions of finance companies and general financiers and the changes that have had an impact on finance company
Est time: <1 minute
business.
Section: 3.9 Finance companies and general financiers

lOMoARcPSD|4408380
76. Which of the following statements is NOT a feature of finance companies? 80. Which of the following statement about building societies in Australia is incorrect?
A. Finance companies came into existence in response to regulations on interest rates. A. The main activities of building societies are to take in deposits and provide mortgage finance.
B. Finance companies sell unsecured notes and use the funds to make loans to borrowers. B. The largest building societies have tended to convert to regional banks in recent times.
C. The majority of finance companies' funds are sourced from banks. C. Now currently the building society sector holds 2 per cent of the total assets of the Australian
D. Today the banks own many large finance companies. financial system.
D. Building societies are authorised deposit-taking institutions and supervised by APRA.
Difficulty: Easy
Est time: <1 minute
Difficulty: Medium
Est time: <1 minute
business.
Learning Objective: 03-08 Outline the roles and relative importance of building societies and credit unions and analyse the significant changes that have occurred in
these sectors.
77. Since deregulation of the financial markets in the 1980s, finance companies have seen the largest
growth in their assets in: 81. Under deregulation, building societies lost market share to other financial institutions. Their response
included:
A. bills of exchange.
B. local government securities. A. mergers with other building societies.
C. placements and deposits. B. expenditure on technology.
D. loans to businesses. C. expanding their range of products.
Difficulty: Medium
Est time: <1 minute
Difficulty: Easy
Est time: <1 minute
business.
these sectors.
78. Finance companies use their funds to provide:
82. In Australia permanent building societies are supervised by:
A. loans to individuals.
B. instalment credit to finance retail sales to retail stores. A. ASIC.
C. lease financing. B. APRA.
D. all of the given answers. C. the Reserve Bank of Australia.
D. ASX.
Difficulty: Medium
Est time: <1 minute
Difficulty: Easy
Est time: <1 minute
business.
these sectors.
79. By the end of the 1990s, there had been a substantial contraction in the building society sector. What is
the principal reason for this contraction in building societies? 83. A ________ is a financial intermediary that deals mainly in the flow of funds between members.
Membership is generally derived from some common bond.
A. Loss of confidence in building societies by individual investors

B. Conversion of building societies to banks A. savings bank
C. Increased cost of regulation by the Australian Prudential Regulation Authority (APRA) B. superannuation fund
D. Rationalisation through the merger of small building societies C. credit union
D. merchant bank
Difficulty: Medium
Est time: <1 minute
Difficulty: Easy
Est time: <1 minute
these sectors.
these sectors.

lOMoARcPSD|4408380
84. A credit union differs from most other financial institutions because: 88. Which of the following holds the smallest percentage of total assets of financial institutions: finance
companies, credit unions, managed funds and permanent building societies?
A. it accepts deposits mainly from members.

B. its assets are mainly loans to members. A. Building societies
C. there are stringent requirements to hold prime liquid assets. B. Credit unions
D. all of the given answers are correct. C. Finance companies
D. Managed funds
Difficulty: Easy
Est time: <1 minute
Difficulty: Hard
Est time: <1 minute
these sectors.
these sectors.
85. An important source of funds for credit unions is:
89. Export Finance and Insurance Corporation's function is:
A. cheque accounts.
B. loan interest. A. solely to lend directly to small- or medium-sized businesses involved in export trade.
C. interest from government securities. B. solely to guarantee trade finance to small- or medium- sized businesses involved in export trade.
D. financial support from the organisations that employ its members. C. to encourage export trade by providing trade insurance and financial services.
D. solely to provide insurance for Australian suppliers of goods and services against non-payment.
Difficulty: Easy
Est time: <1 minute
Difficulty: Medium
Est time: <1 minute
these sectors.
Learning Objective: 03-09 Describe the unique role of export finance corporations.
86. The uses of funds for credit unions are mainly: 90. The form of financing for large tourist resorts, property developments, heavy industry and processing
plant developments is called:
A. company shares.
B. commercial paper. A. euro finance.
C. debentures and unsecured notes. B. conglomerate finance.
D. mortgages. C. project finance.
Difficulty: Easy D. lease finance.
Est time: <1 minute
Learning Objective: 03-08 Outline the roles and relative importance of building societies and credit unions and analyse the significant changes that have occurred in Difficulty: Easy
these sectors. Est time: <1 minute
Section: 3.1 Investment banks and merchant banks Learning Objective: 03-01 Describe the roles of investment banks and merchant banks, with an emphasis on the nature of their off-balance-sheet business, in particular
Section: Extended learning LO 3.10
87. Credit unions, while representing a very small proportion of total financial assets, have strong numerical
representation throughout Australia. They derive this numerical strength: 91. The main difference between project finance and other forms of lending is:
A. from a common bond of association among society members. A. lenders base their participation on expected future cash flows and assets of the project.
B. through the wide dispersion of societies throughout the country. B. lenders take a major equity stake in the project.
C. because of the full range of financial services provided. C. the project company, which is set up as a separate legal entity, relies heavily on venture capitalists
D. because of a guarantee of deposits provided by the government. for equity funding.
Difficulty: Easy D. the lenders have a claim on the assets of the project as well as the sponsors.
Est time: <1 minute
Learning Objective: 03-08 Outline the roles and relative importance of building societies and credit unions and analyse the significant changes that have occurred in Difficulty: Medium
these sectors. Est time: <1 minute
Section: 3.1 Investment banks and merchant banks Learning Objective: 03-01 Describe the roles of investment banks and merchant banks, with an emphasis on the nature of their off-balance-sheet business, in particular
Section: Extended learning LO 3.10

lOMoARcPSD|4408380
92. Which of the following features is NOT generally true of project finance in Australia?
96. In relation to Australian managed funds, cash management trusts currently have the largest amount of
funds under management.
A. Guarantees provided by sponsors to lenders usually do not cover all the risks involved in the project.
B. A project company is usually established as a separate legal entity. FALSE
C. Lenders rely mainly on the expected future cash flows and the assets of the project.
D. Finance is usually established on a non-recourse basis. Superannuation trusts have the largest amount of funds under management.
Difficulty: Medium
Learning Objective: 03-01 Describe the roles of investment banks and merchant banks, with an emphasis on the nature of their off-balance-sheet business, in particular Est time: <1 minute
mergers and acquisitions. Learning Objective: 03-03 Discuss the purpose and operation of cash management trusts and public unit trusts.
Section: Extended learning LO 3.10 Section: 3.3 Cash management trusts
97. In relation to Australian managed funds, superannuation funds currently have the largest amount of
funds under management.
True / False Questions
TRUE
93. Unlike commercial banks, investment banks only accept deposits from large corporations. Since the introduction of compulsory superannuation, superannuation funds have achieved significant
growth.
FALSE
Difficulty: Easy
Investment banks are specialist providers of financial and advisory services to corporations, high-net- Est time: <1 minute
worth individuals and governments. Learning Objective: 03-04 Describe the nature and roles of superannuation funds, including the primary sources of superannuation funds and the different types of
fund.
Difficulty: Easy 98. A capital guaranteed fund guarantees that contributors will receive at least the value of the contributions
Est time: <1 minute
Learning Objective: 03-01 Describe the roles of investment banks and merchant banks, with an emphasis on the nature of their off-balance-sheet business, in particular and future earnings of the fund.
FALSE
94. As investment banks have increased their underwriting activities in recent years, the number of financial
assets held by them has similarly increased. Only the capital is guaranteed.
FALSE
Difficulty: Easy
Est time: <1 minute
The number of financial assets held by them has decreased as they are focused on advisory services. Learning Objective: 03-02 Explain the structure, roles and operation of managed funds and identify factors that have influenced their rapid growth.
Difficulty: Easy
99. A managed growth fund is designed to maximise the return from appreciation in the value of assets in
Est time: <1 minute its portfolio.
Section: 3.1 Investment banks and merchant banks TRUE
95. In the context of a merger, the process of due diligence involves valuing the target company shares. The proportion of equity is generally larger than for a balanced growth fund and the equity part of the
fund includes a greater range of risk securities than a balanced growth fund. These offer the possibility
FALSE of potentially higher returns.
Due diligence is detailed analysis of the financial and operational condition of the target company.
Difficulty: Easy
Est time: <1 minute
Difficulty: Easy Section: 3.2 Managed funds
Est time: <1 minute

lOMoARcPSD|4408380
100. On average, the value of a balanced growth fund is subject to less market fluctuation than that of a 104. Explain the operation of cash management trusts.
capital growth fund.
TRUE
A cash management trust invests the majority of its funds in money market securities such as bills and
The proportion of equity is lower and so a balanced growth fund has generally lower volatility. commercial paper. They provide a high degree of liquidity and often a higher rate of return for the short-
term funds of smaller investors as a consequence of indirect access to the wholesale money markets.
Difficulty: Easy
Est time: <1 minute Est time: 1-3 minutes
Learning Objective: 03-02 Explain the structure, roles and operation of managed funds and identify factors that have influenced their rapid growth. Learning Objective: 03-03 Discuss the purpose and operation of cash management trusts and public unit trusts.
Section: 3.2 Managed funds Section: 3.3 Cash management trusts
101. Cash management trusts are restricted under their trust deed to hold only bank deposits and cash. 105. Identify and discuss the types of public unit trusts according to their assets.
FALSE
Cash management trusts are generally restricted to short-term money market securities. Public unit trusts may be grouped into property trusts, both listed and unlisted; equity trusts, both listed
and unlisted; mortgage trusts, and other trusts including fixed interest trusts. Two major types of trusts
according to assets under management are listed property trusts and listed equity trusts.
Difficulty: Easy
Est time: <1 minute
Section: 3.3 Cash management trusts Est time: 1-3 minutes
102. An insurance company is not a depository financial institution. Section: 3.4 Public unit trusts
106. What do hedge funds do? Discuss any concerns their operations may have for the financial system.
TRUE
Insurance companies receive funds in the form of premiums.

Hedge funds use supposedly complicated investment strategies and invest in exotic financial products to
Difficulty: Easy try to achieve higher returns. Some of the instruments they invest in are commodities, private equity,
Est time: <1 minute foreign exchange, bonds and derivatives. They tend to leverage their positions using derivative products
Section: 3.5 Superannuation funds and are vulnerable to pressure to liquidate assets quickly if they sustain significant losses. They also
operate largely outside the regulatory framework established to protect the stability of the financial
system.
Short Answer Questions

Section: 3.8 Hedge funds
103. Explain the role and operation of one of the largest types of managed funds, superannuation funds.
107. What are the principal assets of a finance company? How have these been affected in recent years?
Their sources of funds are individuals who set aside funds for their retirement so that they can maintain
The main assets are loans to individuals, instalment credit to finance retail sales, lease financing, loans
their lifestyle once they retire from the workforce. The majority of members make regular contributions
to businesses including floor plan financing, factoring and accounts receivable financing.
over their working life. The superannuation funds invest these funds in a range of assets from money
market, government securities, property and domestic and international equities.
Est time: 1-3 minutes business.
Learning Objective: 03-04 Describe the nature and roles of superannuation funds, including the primary sources of superannuation funds and the different types of Section: 3.9 Finance companies and general financiers
fund.

lOMoARcPSD|4408380
Category # of Questio
ns
Difficulty: Easy 45
Difficulty: Hard 5
Difficulty: Medium 52
Est time: <1 minute 102
Est time: 1-3 minutes 5
Learning Objective: 03-01 Describe the roles of investment banks and merchant banks, with an emphasis on the nature of their off- 26
balance-sheet business, in particular mergers and acquisitions.
02 Explain the structure, roles and operation of managed funds and identify factors that have influenced their rapid growth.
Learning Objective: 03-03 Discuss the purpose and operation of cash management trusts and public unit trusts. 15
04 Describe the nature and roles of superannuation funds, including the primary sources of superannuation funds and the different types
of fund.
05 Define life insurance offices and general insurance offices and explain the main types of insurance policies offered by each type of i
nsurer.
Learning Objective: 03-06 Discuss hedge funds, including their structure, investors, investment strategies and risk. 5
07 Explain the principal functions of finance companies and general financiers and the changes that have had an impact on finance com
pany business.
08 Outline the roles and relative importance of building societies and credit unions and analyse the significant changes that have occurr
ed in these sectors.
Learning Objective: 03-09 Describe the unique role of export finance corporations. 1
Section: 3.1 Investment banks and merchant banks 33
Section: 3.2 Managed funds 10
Section: 3.3 Cash management trusts 6
Section: 3.4 Public unit trusts 9
Section: 3.5 Superannuation funds 18
Section: 3.6 Life insurance offices 14
Section: 3.7 General insurance offices 4
Section: 3.8 Hedge funds 4
Section: 3.9 Finance companies and general financiers 5
Section: Extended learning LO 3.10 3

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Practical - chapter 1-3 questions

Capital Markets and Institutions (University of New South Wales)

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A. the sale of a financial product at a discount to its current market value.

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21. Long-term debt financing instruments used by companies are called:

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A. There is a contractual arrangement to exchange cash flows

A. facilitate the exchange of financial assets.

A. provide information about shares.

A. offers financial assets with the highest expected return.

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A. a primary market transaction. A. funds flow indirectly from saver to borrower.

A. a secondary market transaction.

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46. Financial markets: 52. Financial intermediaries:

55. The main role of financial intermediaries is to:

56. Financial intermediaries pool the funds of:

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A. liability management. A. borrowers; suppliers

A. a feature of money only. A. The National Bank of Australia

A. is a net borrower of funds.

A. Negotiable certificates of deposit

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A. It is a mainly wholesale market A. bank bills.

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A. ii, iii, iv, v

A. varies from year to year.

True / False Questions

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Short Answer Questions

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Multiple Choice Questions

1. The exchange of goods and services is made more efficient by:

2. Short selling is:

A. the sale of a financial product at a discount to its current market value.

4. The role of money as a store of value refers to:

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Section: 1.1 Functions of a financial system

A. investment bank. A. commercial banks.

A. depository financial institutions.

A. building society. A. Residual

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A. bills. A. Futures contracts involve an obligation to buy or sell a specified amount

A. Forward contracts are not standardised

A. There is a contractual arrangement to exchange cash flows

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30. Financial markets: 34. A secondary financial market is one that:

A. provide information about shares. A. a primary market transaction.

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38. A ‘primary market' is a market: 42. Secondary markets:

A. a secondary market transaction. A. maintaining low interest rates.

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46. Financial markets: 50. An example of an indirect form of funding is a/an:

A. act as intermediaries between borrowers and savers. A. issue of debentures.

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