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Financial Institutions Instruments And Markets 9th Edition By Christopher Viney -Test Bank

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Chapter 02 Testbank

 

1. The changes to the regulations for the banking industry under deregulation in the mid-1980s have resulted in _______ the growth of Australian banking sector.
2. decreasing
3. increasing
4. not altering
5. dramatically decreasing

 

2. Which of the following statements concerning banks is NOT correct?
3. In Australia, banks currently account for the largest share of assets of all financial institutions.
4. Bank loans and commitments must be supported by a minimum specified amount of capital.
5. At least 50 per cent of the capital requirement must be in the form of Tier 1 capital under Basel II.
6. The Reserve Bank of Australia monitors capital adequacy requirements for banks.

 

3. Unlike most other businesses, a bank’s balance sheet is made up mainly of:
4. real assets and financial liabilities.
5. real liabilities and financial liabilities.
6. real assets and real liabilities.
7. financial assets and liabilities.

 

4. The level of banks’ share of assets of all Australian financial institutions since the implementation of deregulation in the 1980s:
5. increased.
6. decreased.
7. remained stable.
8. cannot be determined.

 

5. 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?
6. Foreign banks dominate in number and share of total assets.
7. Major Australian banks no longer hold the largest share of total assets.
8. Total assets are fairly evenly distributed between the major, regional and foreign banks.
9. Major banks maintain the highest percentage of branches and share of total assets.

 

6. The major roles of banks include:
7. channelling funds to finance productive investment.
8. accepting deposits and providing loans of different types including mortgage loans, personal loans and commercial loans.
9. offering a form of liquidity services to depositors.
10. all of the given answers.

 

7. Which of the following features is a role of a bank?
8. Attracting funds from the capital markets to facilitate borrowing by the household sector
9. Facilitating the flow of funds from borrowers to lenders
10. Facilitating the flow of funds from savers to borrowers
11. Managing the level of interest rates

 

8. There are four primary roles of a bank:
9. asset management, liability management, capital adequacy management and liquidity management.
10. asset management, foreign exchange management, funds management and determining the interest rates.
11. asset management, retirement and saving planning, stocks broking and controlling the inflation.
12. both A and B are correct.

 

9. Banks have gradually moved to liability management in the management of their balance sheets since the period of deregulation introduced in 1980s. Which statement best describes liability management?
10. The loan portfolio is tailored to match the available deposit base.
11. The deposit base and other funding sources are managed in order to fund loan and other commitments.
12. The ratio of debt to equity is managed to meet capital adequacy requirements.
13. The liability to assets ratio is maintained within central bank standards.

 

10. For banks, asset management refers to:
11. managing the assets of the banks; that is, their deposits.
12. managing the real assets, the bank buildings.
13. managing the loans portfolio based on available deposit base.
14. protecting the deposits by using derivatives.

 

11. When a bank raises funds in the international financial markets to fund new lending growth, it is involved in:
12. asset management.
13. off-balance-sheet business.
14. liability management.
15. derivative management.

 

12. The following statements are true for banks’ off-balance sheet transactions:
13. assets and liability are yet to be recorded in the balance sheet.
14. they represent an important source of banks’ income.
15. they are a significant part of a bank’s business (estimated to be about five to six times more than balance sheet business)
16. all of the given answers.

 

13. Off-balance-sheet business for a bank refers to:
14. a bank’s income.
15. a bank’s contingent liabilities.
16. assets that will appear on the forthcoming balance sheet.
17. transactions recorded on the previous balance sheet.

 

14. Off-balance sheet transactions do NOT include:
15. direct credit substitute.
16. commitments.
17. extension of loans to existing customers
18. all of the given answers.

 

15. Which of the following statements about a bank’s activities is NOT correct?
16. A bank’s loans are its assets.
17. Off-balance-sheet business items are contingent liabilities.
18. Liability management is the management of a bank’s loans.
19. All big four banks offer some form of fund management service.

 

16. The assets on a bank’s balance sheet are:
17. the sources of funds.
18. the uses of funds.
19. the different types of deposits the bank offers.
20. equal to the liabilities of the banks.

 

17. The liabilities on a bank’s balance sheet are:
18. the sources of funds.
19. the uses of funds.
20. the different types of loans the bank offers.
21. equal to the assets of the banks.

 

18. Each of the following balance sheet portfolio items are liabilities of a bank, except:
19. term deposits.
20. bill acceptance facilities.
21. certificates of deposit.
22. overdrafts.

 

19. Each of the following balance sheet portfolio items are sources of funds for a bank, except:
20. term deposits.
21. bill acceptance facilities.
22. certificates of deposit.
23. overdrafts.

 

20. Which of the following is a bank liability?
21. Consumer loans
22. Lease finance
23. Bills receivable
24. Certificates of deposit

 

21. Which of the following statements about deposits is correct?
22. Call accounts represent a fluctuating source of funds for banks.
23. Term deposits are funds lodged with a bank for longer than two weeks.
24. As current accounts are highly liquid, they form an unstable source of funds for a bank.
25. A cheque account may pay mostly negligible interest.

 

22. The following statements are true about a bank’s current accounts except
23. it is generally used for commercial purposes.
24. Current accounts today pay interest but it is generally insignificant.
25. There are no limit of transaction on current accounts
26. A Bank’s current account is similar with a country’s current account.

 

23. Which of the following statements is NOT true of term deposits?
24. They are less liquid than a current deposit.
25. They usually offer a higher return than a current deposit.
26. They are attractive to investors who expect interest rates to fall.
27. They are generally negotiable instruments.

 

24. As a depositor shifts funds from current deposits to term deposits in a bank, generally the depositor’s:
25. liquidity increases and credit risk increases.
26. liquidity decreases and interest income increases.
27. liquidity decreases and interest income decreases.
28. implicit interest increases and explicit interest decreases.

 

25. If a bank required more short-term funding, it would issue:
26. a certificate of deposit.
27. a debenture.
28. an unsecured note.
29. preference shares.

 

26. Which of the following is generally a highly liquid instrument?
27. A bank bill
28. A certificate of deposit
29. Neither a bank bill nor a certificate of deposit
30. Both bank bills and certificates of deposit are liquid instruments

 

27. The negotiable certificate of deposits are issued by:
28. large banks.
29. large business corporations.
30. private equity firms
31. stock exchanges.

 

28. The term ‘negotiable’ in relation to a security means:
29. its price can be bargained for when sold.
30. it can be sold and transferred easily in the secondary market.
31. its buyer can negotiate its price when buying.
32. it is reasonably illiquid and will drop in price when sold.

 

29. Which statement is NOT true for negotiable certificates of deposits?
30. They are a discount security issued by large banks into the money market.
31. They are a long-term financial instrument often traded at the stock exchange.
32. They can be bought and sold in the secondary market before the maturity.
33. The negotiable status of the security makes them highly liquid.

 

30. Which of the following statements regarding certificates of deposit (CDs) is correct?
31. CDs pay daily interest instead of monthly as for ordinary deposits.
32. CDs generally pay higher interest because they are not liquid.
33. The rate of interest on a CD can be adjusted quickly.
34. CDs with a face value of more than $100 000 are non-negotiable.

 

31. The advantage/s of a certificate of deposit (CD) to a bank is/are:
32. its rate of interest may be adjusted quickly.
33. it can be sold quickly in the money market for cash.
34. it is a negotiable instrument.
35. all of the given choices.

 

32. A major difference between a bank’s term deposit and a certificate of deposit is:
33. a term deposit represents an asset for a bank, while a certificate of deposit is a liability.
34. a certificate of deposit does not pay interest until maturity.
35. a certificate of deposit is illiquid when compared with a term deposit.
36. a certificate of deposit is a high-credit-risk instrument when compared with a term deposit.

 

33. Which of the following statements about certificates of deposit (CDs) is NOT correct?
34. CDs are issued directly into the money markets.
35. CDs don’t include interest until maturity.
36. CDs are called discount securities.
37. CDs are issued by large, creditworthy companies.

 

34. With regard to bank bills, the bill is sold at a discount:
35. because the bank needs to replace a buyer.
36. to encourage buyers.
37. because the difference between the initial price and the final sale price is the return to the holder.
38. because the bank pays the face value of the funds to the borrower at maturity.

 

35. With regard to bank bills, the expression ‘the issuer sells the bill at the best discount’ means the issuer:
36. is providing the funding.
37. is acting as mediator between the borrower and the bank.
38. is selling the bill into the market at the lowest yield.
39. pays the lowest face value of the funds to the holder at maturity.

 

36. With regard to bank bills, the actual role of the acceptor is to:
37. provide the initial funding.
38. act as mediator between the borrower and bank.
39. issue the bank bill.
40. Banks take primary responsibility to pay the face value of the funds to the holder at maturity.

 

37. Which of the following statements is NOT correct in relation to bill financing?
38. The drawer is the party seeking the funds.
39. If a bank accepts the bill this enhances its credit quality.
40. An issuer will seek to sell the bill in the market at the highest yield.
41. Bills are sold at a discount to face value.

 

38. For a bank, an advantage of bill financing is:
39. the bank earns income from accepting bills.
40. the bank doesn’t necessarily have to use its own funds.
41. interest rates on bill funding can be adjusted rapidly.
42. all of the given answers.

 

39. Which of the following statements about bill acceptance facilities is NOT correct?
40. When a bank discounts a bill for the issuer, it buys it.
41. When a bank holds a bill, the bank will most likely sell it into the money market.
42. When a bank acts as an acceptor, it will pay the face value of the bill to the holder at maturity.
43. If interest rates change before a bank bill matures, the bank can change the interest rate on it.

 

40. Commercial banks take part in the money markets as:
41. lenders of funds only.
42. borrowers of funds only.
43. both lenders and borrowers of funds.
44. underwriters only.

 

41. Foreign currency liabilities have increased in importance as a source of funds for Australian banks. Which of the following statements is NOT a major reason?
    i. deregulation of the foreign exchange market
    ii. diversification of funding sources
    iii. demand from multinational corporate clients
    iv. internationalisation of global financial markets
    v. avoidance of the non-callable deposit prudential requirement
    vi. expansion of banks’ asset-base denominated in foreign currencies
42. v
43. ii
44. i
45. All of the given answers.

 

42. Alternatives to the usual source of long-term bank funds that have the characteristics of both debt and equity are called:
43. secured debentures.
44. transferable certificates of deposit.
45. promissory notes.
46. subordinated notes.

 

43. The following balance sheet portfolio items are all assets of a bank, except:
44. overdrafts.
45. lease finance.
46. certificates of deposit.
47. credit card draw-downs.

 

44. A short-term discount security issued by a drawer at a discount, with the promise to repay the face value at maturity, is called:
45. a commercial paper.
46. a commercial bill.
47. a certificate of deposit.
48. all of the given answers.

 

45. Which of the following statements regarding the foreign currency liabilities of a bank is NOT correct?
46. The large international markets are important sources of funds for commercial banks.
47. Australian banks occasionally issue debt securities into the international financial markets to raise sums ranging from $20 million to $50 million.
48. Foreign currency liabilities issued into the euromarkets are typically denominated in US dollars.
49. After deregulation of the banking industry, commercial banks were able to expand their international funding sources.

 

46. All of the following financial securities are considered ‘uses of funds’ by banks except:
47. commercial bills.
48. credit cards.
49. certificates of deposit.
50. overdrafts.

 

47. Which one of the following statements is/are true about the impact of deregulation on housing lending in 1980s?
48. There had been increased home equity loans, which allowed households to borrow against existing equity.
49. Household borrowing had been supported by increases in house prices.
50. The banking industry faced intense competition from lowering the lending standard in early 1990s.
51. All of the given answers describe the impact of deregulation on housing lending.

 

48. If you take out a mortgage from a bank, the mortgage is a/an:
49. liability to the bank and an asset to you.
50. liability to you and an asset to the bank.
51. liability to both you and the bank.
52. asset to both you and the bank.

 

49. The bank bill swap rate (BBSW) refers to:
50. the reference rate for medium-term funding.
51. a rate calculated each day from the offer rate of the last daily sale in the bank bill market.
52. the average mid-point of the bid and offer rates in the bank bill market.
53. the bank bill security rate.

 

50. Banks invest in government securities because:
51. they offer high yield owing to their risk.
52. they offer a low yield owing to their illiquidity.
53. all government bonds offer protection against inflation risk.
54. they can be used as security against banks’ borrowing.

 

51. Which of the following statements about commercial lending is NOT correct?
52. The term loan is the main type of lending provided by banks to firms.
53. Typically, term loans are for maturities ranging from 5 to 15 years.
54. To extend commercial bill financing a bank may provide the firm with a rollover facility.
55. Banks can provide flexible funding called an overdraft to firms.

 

52. Which of the following statements about bank lending to government is NOT correct?
53. Securities issued by governments are usually regarded as low risk.
54. Banks invest in government securities because they are a source of liquidity.
55. Banks invest in T-notes because they provide short-term income streams.
56. Government securities enable a bank to manage the maturity structure of its balance sheet.

 

53. Off-balance-sheet business for a bank refers to:
54. deposits and loans longer than one year.
55. transactions that are currently only a contingent liability.
56. call deposits that may be withdrawn on demand.
57. consumer loans that are in default.

 

54. All of the following are off-balance-sheet transactions of a bank except:
55. documentary letters of credit.
56. performance guarantees.
57. underwriting facilities.
58. bills receivable.

 

55. In recent times, there has been a substantial expansion in fee-related income for banks. What is the principal reason for this?
56. Increased confidence in banks by individual investors
57. Increased off-sheet business (OBS) for banks
58. Reduced guidelines by Australian bank supervisor APRA
59. Increased deposits in banks

 

56. Which of the following statements is true for off-balance-sheet business for banks?
57. Off-balance-sheet business is a small part of a bank’s income.
58. Off-balance-sheet business is recorded on a bank’s statement of income and expense.
59. Off-balance-sheet business represents fee-based income.
60. Off-balance-sheet business records deposits that do not fit on the balance sheet.

 

57. Which of the following statements about market-rate-related items such as forward-rate agreements (FRAs), foreign exchange contracts and interest rate swaps is NOT correct?
58. They are generally called off-balance-sheet items.
59. They are liabilities that may require an outflow of funds for a bank.
60. They are included in the BIS capital-adequacy guidelines.
61. They form a small part of banks’ off-balance sheet business.

 

58. Which of the following categories represents the most significant proportion of total off-balance-sheet business of the banks?
59. Direct credit substitutes
60. Trade and performance-related items
61. Commitments
62. Market-rate-related transactions

 

59. Which of the following categories represents the most significant proportion of total market-rate-related off-balance-sheet business of the banks?
60. Currency swap agreements
61. Foreign exchange contracts
62. Interest rate swaps
63. Interest rate futures

 

60. An example of an ‘off-sheet business’ transaction that banks are generally involved in is:
61. providing a ‘standby letter of credit’.
62. providing a note issuance facility.
63. providing a short-term, self-liquidating trade contingency.
64. all of the given answers.

 

61. Which of the following statements about direct credit substitutes provided by a commercial bank is NOT correct?
62. They are provided to support a client’s financial obligations.
63. An example of a direct credit substitute is a bank guarantee.
64. The bank provides funding to a third party instead of the client providing the funding.
65. With a direct credit substitute a bank’s client can raise funds directly from the financial markets.

 

62. Off-balance-sheet business is usually divided into four major categories:
63. direct credit substitutes, trade and performance-related items, commitments and trade guarantees.
64. direct credit substitutes, trade and performance-related items, commitments and market-related transactions.
65. direct credit substitutes, trade and performance-related items, commitments and underwriting facilities.
66. direct credit substitutes, ‘standby letters of credit’, commitments and market-related transactions.

 

63. A ‘commitment’ by a bank is:
64. a form of swap.
65. a promise by a large depositor to provide extra funds to the bank.
66. the unused balance on a bank credit card.
67. an undertaking to advance funds or to acquire an asset in the future.

 

64. Which of the following is NOT a commitment by a bank?
65. Outright forward purchase agreement
66. Underwriting facilities
67. Credit card limit approvals unused by cardholder
68. Currency swap

 

65. Which of the following is NOT associated with the purpose of regulating financial institutions?
66. Providing stability of the money supply
67. Directing flow of funds to priority areas
68. Maintaining the soundness and stability of the financial system
69. Lowering the cost of funds

 

66. The Australian institution APRA is responsible for the regulatory supervision of financial institutions such as banks and credit unions. APRA stands for:
67. Australian Practice and Regulatory Association.
68. Australian Prudential Regulation Authority.
69. Australian Prudential Rule Authority.
70. Australian Practice and Regulatory Authority.

 

67. Which of the following institutions are supervised by APRA?
68. Building societies
69. Commercial banks
70. Credit unions
71. All of the given answers

 

68. Within the context of the Corporations Law in Australia, the supervision of financial market integrity and consumer protection is done by:
69. Australian Prudential Regulation Authority (APRA).
70. Australian Securities and Investments Commission (ASIC).
71. Reserve Bank of Australia (RBA).
72. Australian Competition and Consumer Commission (ACCC).

 

69. The requirement and observation of standards designed to ensure the stability and soundness of a financial system is called:
70. fiscal policy.
71. monetary policy.
72. prudential supervision.
73. the Basel accord.

 

70. The Basel capital adequacy requirements apply to:
71. all financial institutions.
72. banks, investment banks and merchant banks only.
73. all financial institutions supervised by ASIC.
74. all banks registered with APRA and some other financial institutions.

 

71. Some of the elements in assessing capital adequacy requirements for banks under the Basel II capital accord are:
72. credit risk, liquidity risk and interest rate risk.
73. credit risk, market risk and type of capital held.
74. default risk, interest rate risk and market risk.
75. default risk, liquidity risk and type of capital held.

 

72. Which of the following does NOT apply to Tier 1 capital?
73. Tier 1 capital is described as ‘core capital’.
74. Tier 1 capital must constitute at least 50 per cent of a bank’s capital base.
75. Paid-up ordinary shares can be included in Tier 1 capital.
76. Cumulative irredeemable APRA-approved preference shares can be included in Tier 1 capital.

 

73. Under Basel II prudential standards, an institution is required to maintain a risk-based capital ratio of _____ of total-risk-weighted assets.
74. 2.00 per cent
75. 4.00 per cent
76. 8.00 per cent
77. 10.00 per cent

 

74. The Pillar 1 approach of Basel II capital adequacy incorporates the following three risk components:
75. credit risk, interest-rate risk and market risk.
76. default risk, interest-rate risk and operational risk.
77. credit risk, market risk and operational risk.
78. default risk, foreign exchange risk and operational risk.

 

75. Which of the following statements regarding capital adequacy requirements is NOT correct?
76. Existing credit-risk guidelines are extended to include market risk arising from a bank’s trading activities.
77. Regulators focus on credit risk, market risks, operational risk and type of capital held.
78. Eligible Tier 1 capital must constitute at least 70 per cent of a bank’s capital base.
79. Tier 2 capital is divided into upper and lower Tier 2 parts.

 

76. Under the capital adequacy requirement for banks, in order to fund a $100 000 loan for a multinational corporate client with a Standard & Poor’s rating of AA, a bank will:
77. assign a risk-weighting of 20 per cent for the balance.
78. allocate Tier 1 and Tier 2 capital to the loan according to the riskiness of the company.
79. seek funding in the euromarkets to minimise the capital adequacy requirements.
80. apply a risk weighting of 50 per cent to the loan to determine the total capital requirement.

 

77. The Basel II risk weighting factor for a bank loan to an Australian company with a Moody’s Investors Service rating of C is:
78. 20 per cent.
79. 50 per cent.
80. 100 per cent.
81. 150 per cent.

 

78. Under Pillar 1 of the Basel II framework, the risk weight for a residential housing loan is determined by the:
79. amount borrowed.
80. level of mortgage insurance.
81. house valuation.
82. all of the given answers.

 

79. A bank provides a loan of $1 million to a company that has an A rating. Calculate the dollar value of capital required under the capital adequacy requirements to support the facility.
80. $16 000
81. $40 000
82. $80 000
83. $120 000

 

80. A bank provides documentary letters of credit for a company that has a credit rating of A+. The face 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 per cent.
81. $6 400
82. $16 000
83. $160 000
84. $240 000

 

81. If a bank’s risk-weighted assets equal $50 000 000, the bank’s common equity requirement in dollar value according to Basel III is:
82. $2 250 000
83. $5 000 000
84. $4 000 000
85. $1 000 000

 

82. A bank’s common equity requirement for the capital conservation buffer under Basel III with a risk-weighted asset of $50 000 000 is equal to:
83. $1 250 000
84. $1 000 000
85. $1 000 000
86. $1 000 000

 

83. A large commercial bank operating in the international markets will generally apply to the banks’ supervisor to use the _____ to credit risk.
84. advanced internal ratings-based approach
85. foundation external ratings-based approach
86. standardised approach
87. standardised approach with external ratings

 

84. Under Basel II capital accord, the approach to credit risk that requires a bank to assign risk weights given by the prudential supervisor is called:
85. an advanced approach.
86. a foundation approach.
87. a standardised approach.
88. advanced-internal ratings.

 

85. The risk that arises from chance of loss as a result of inadequate internal bank processes is called:
86. default risk.
87. interest rate risk.
88. market risk.
89. operational risk.

 

86. The minimum total capital required under the Basel III guideline is:
87. 8 per cent of risk-weighted assets.
88. 9 per cent of risk-weighted assets.
89. 10 per cent of risk-weighted assets.
90. 50 per cent of risk-weighted assets.

 

87. Which of the following statements about recently adopted guidelines covering capital requirements for market risk that banks are required to perform is NOT correct?
88. Banks use a risk measurement model based on a VaR approach.
89. Banks estimate the sensitivity of portfolio components to small changes in prices.
90. Banks must hold capital against risk of loss from changes in interest rates.
91. Banks hold a fixed allocation of funds between various balance sheet assets and off-balance-sheet business.

 

88. 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:
89. Pillar 1.
90. Pillar 2.
91. Pillar 3.
92. Pillar 4.

 

89. For a commercial bank’s normal day-to-day business, the capital adequacy guidelines for the operational risk it is exposed to fall under:
90. Pillar 1.
91. Pillar 2.
92. Pillar 3.
93. Pillar 4.

 

90. For a commercial bank’s market discipline, the capital adequacy guidelines for its disclosure and transparency requirements fall under:
91. Pillar 1.
92. Pillar 2.
93. Pillar 3.
94. Pillar 4.

 

91. Under _____ of Basel II, bank supervisors should review and evaluate banks’ internal capital adequacy assessments.
92. Pillar 4
93. Pillar 3
94. Pillar 1
95. Pillar 2

 

92. Part of a bank’s liquidity management is to hold a portfolio of:
93. term loans.
94. mortgages.
95. Commonwealth government securities.
96. credit card loans.

 

93. In relation to a bank, ‘liquidity management’ means:
94. the bank’s ability to quickly convert deposits into loans.
95. the bank’s ability to onsell its loans.
96. the bank’s ability to have funds available when depositors’ funds mature.
97. the bank’s policies and practices in identifying and managing its loans portfolios.

 

94. Which statement best describes and defines a bank?
95. Banks engage in financial transactions.
96. Banks accept deposits and make loans.
97. Some of a bank’s business is not shown on its balance sheet.
98. Banks compete in the global capital markets.

 

95. Sally has an account that pays interest at a stated rate for a finite period of time. Most likely this account is known as a:
96. negotiable certificate of deposit.
97. bank capital.
98. term deposit.
99. bill of exchange.

 

96. An amortised loan pays:
97. interest only.
98. principal only.
99. interest and principal so that the total paid each period is the same.
100. constant interest and decreasing principal.

 

97. The basic idea of capital is that it is:
98. equity value.
99. the long-term funds of a business.
100. a measuring device for banks.
101. an amount that cannot decrease through a firm’s operations.

 

98. The notional value of off-balance sheet activities of banks in Australia _____. The largest single activity concerns _____.
99. is about equal to the value of total bank assets; foreign exchange
100. exceeds the value of total bank assets; foreign exchange
101. is about equal to the value of total bank assets; interest rates
102. exceeds the value of total bank assets; interest rates

 

99. Value-at-risk models:
100. estimate possible losses on a bank’s portfolio and show a bank how it can avoid the riskiest markets.
101. are predicated on the assumption that the future will resemble an historical period.
102. compute the expected loss for the next two to five years.
103. stress test a portfolio for the most likely outcome in various markets.

 

100. The fundamental characteristics of high-quality assets described in the liquidity coverage ratios meet the following criteria except:
101. assets should be liquid in markets during a time of stress.
102. assets are considered to be high-quality liquid assets if they can be easily and immediately converted into cash at little or no loss of value.
103. assets are exposed to low credit and market risk.
104. it can be easily traded in the financial markets with a huge discount.

 

101. A bank’s need for liquidity arises from the fact that its sources of funds are _____ and its earning assets are typically _____. In assessing liquidity we should include _____.
102. short-term; long-term; bank capital
103. short-term; long-term; assets that trade in active secondary markets
104. long-term; short-term; assets that trade in active secondary markets
105. long-term; short-term; bank capital

 

102. To be listed on the ASX, firms must:
103. adhere to the Corporate Governance Principles and Recommendations.
104. disclose whether they adhere to the Corporate Governance Principles and Recommendations.
105. disclose whether they adhere to the Corporate Governance Principles and Recommendations and if not, explain why not.
106. conduct their business in an ethical and responsible manner.

 

103. Commercial banks are the main type of financial institution in a financial system because they hold the largest amounts of financial assets.

True   False

 

104. The greater the dominance of commercial banks in an economy, the less regulation required.

True   False

 

105. Banks obtain funds from many areas. These sources of funds appear as liabilities on a bank’s balance sheet.

True   False

 

106. Liability management is where banks actively manage their liabilities in order to meet future loan demand.

True   False

 

107. Call deposits are funds lodged in a bank account for a specified short-term period.

True   False

 

108. 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

 

109. There is an inverse relationship between bank exposure to level of credit risk and amount of capital required under Basel II.

True   False

 

110. A capital buffer was introduced under Basel III to promote the conservation of capital above minimum requirements that can be used to absorb losses during periods of financial and economic stress.

True   False

 

111. One of the important attributes of certificates of deposit (CDs) for a bank is the ability to adjust the yields on new issues.

True   False

 

112. According to banks’ liability management principle, commercial banks now actively manage their sources of funds (liabilities) in order to ensure they have sufficient funds available to meet loan demand and other commitments.

True   False

 

113. For bills of exchange, a commercial bank serves as an acceptor to the bill. The acceptor, on behalf of the issuer, will repay the face value of the bill to the holder at maturity, will repay the face value of the bill to the holder at maturity.

True   False

 

114. One of the major advantages of an overdraft facility is that it allows a business to place its operating account into debit up to an agreed amount to counter cash flow mismatch.

True   False

 

115. 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

 

116. A bank may seek to obtain funds by issuing unsecured notes with a collaterised floating charge over its deposits.

True   False

 

117. Foreign currency liabilities are debt instruments issued into another country but not denominated in the currency of that country.

True   False

 

118. Briefly discuss the sources of funds for a commercial bank.

______________________________________________________________________________

 

119. Describe how a bill acceptance facility works.

______________________________________________________________________________

 

120. Discuss the main features of housing finance.

______________________________________________________________________________

 

121. Discuss the main features of a bank’s commercial lending.

______________________________________________________________________________

 

122. Within the context of off-balance-sheet business, explain direct credit substitutes, trade- and performance-related items and any differences between these items.

______________________________________________________________________________

 

123. In two or three sentences indicate what Basel is and why there are three versions.

 

Chapter 04 Testbank Key

 

1. A business organisation that is a separate legal entity, can buy property in its own name and can enter into contracts with other entities is a:
2. sole proprietorship.
3. partnership.
4. special partnership.
5. corporation.

Ans: D

AACSB: Communication
Bloom’s: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 

2. Listing on the stock exchange means:
3. taking a privately owned firm and creating a publicly owned corporation whose shares can be traded on the stock exchange.
4. taking a privately owned firm and creating a publicly owned corporation whose shares cannot be traded on the stock exchange until some designated time frame.
5. taking a publicly owned firm and creating a privately owned entity whose shares can no longer be traded.
6. none of the given answers.

Ans: A

AACSB: Communication
Bloom’s: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 

3. A publicly listed corporation:
4. has its shares listed on a formal exchange and designated with an exchange code.
5. is a legal entity (as part of the corporations law of a nation-state).
6. has to comply with the rules of the exchange where it is listed.
7. is all of the given answers.

Ans: D

AACSB: Communication
Bloom’s: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 

4. A corporation:
5. has a widely dispersed ownership amongst its shareholders.
6. has its objectives and policies decided by a board of directors.
7. has an executive management group responsible for day-to-day management of the corporation.
8. is all of the given answers.

Ans: D

AACSB: Communication
Bloom’s: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 

5. The actual owners of a company is/are the:
6. board of directors.
7. executive management group.
8. shareholders.
9. creditors.

Ans: C

AACSB: Communication
Bloom’s: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 

6. The _______ is/are responsible for conducting the day-to-day financial and operational affairs of the company.
7. board of directors
8. executive management group
9. shareholders
10. creditors

Ans: B

AACSB: Communication
Bloom’s: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 

7. The _______ is/are responsible for the objectives and policies of the company, but not its day-to-day affairs.
8. board of directors
9. executive management group
10. shareholders
11. creditors

Ans: A

AACSB: Communication
Bloom’s: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 

8. Which of the following forms of business organisation is characterised by limited liability?
9. Sole partnership
10. Partnership
11. General partnership
12. Corporation

Ans: D

AACSB: Communication
Bloom’s: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 

9. If a growing organisation wanted to set itself up so it had greater access to a wider range of capital, it would become a:
10. sole proprietorship.
11. partnership.
12. general partnership.
13. listed corporation.

Ans: D

AACSB: Communication
Bloom’s: Comprehension
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 

10. The owners of _______ face unlimited liability.
11. sole proprietorships only
12. sole proprietorships and partnerships only
13. corporations only
14. partnerships and corporations only

Ans: B

AACSB: Communication
Bloom’s: Comprehension
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 

11. The liability of shareholders in ‘limited liability’ companies means:
12. creditors of a company can call upon the shareholders in the case of company default to contribute an amount based only on the current market price of the shares.
13. shareholders are only liable for any amount that is unpaid on the shares of a company.
14. in the event of company default, the creditors have no claim on the shareholders for any contribution.
15. shareholders do not have a right to participate directly in the day-to-day management of a company.

Ans: B

AACSB: Communication
Bloom’s: Comprehension
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 

12. Because of their _____ liability, corporate stockholders are more interested in chances of _____.
13. limited; failure than success
14. limited; success than failure
15. unlimited; success than failure
16. unlimited; failure than success

Ans: B

AACSB: Communication
Bloom’s: Comprehension
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 

13. Which of the following statements about a corporation is NOT correct?
14. The executive management group of a corporation is responsible to its board of directors.
15. Under corporation law the board of directors of a corporation must report to its shareholders.
16. The directors of a corporation have a legal responsibility to make sure the corporation acts in the shareholders’ best interests.
17. The shareholders of a publicly listed small corporation have the right to participate in the day-to-day management of the business.

Ans: D

AACSB: Communication
Bloom’s: Comprehension
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 

14. When a no-liability company defaults on its loans with its creditors, this means the:
15. creditors have a legal claim against the directors only.
16. creditors have a legal claim against the CEO only.
17. creditors have a legal claim against the chairman of the company.
18. shareholders do not have to meet any remaining payment on shares.

Ans: D

AACSB: Communication
Bloom’s: Comprehension
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 

15. When the owners of a company hire full-time executives to be responsible for the day-to-day decisions, this _____ the _____ problem.
16. lessens, shareholder-lender
17. lessens, managers-shareholders
18. brings on, managers-shareholders
19. brings on, shareholder-lender

Ans: C

AACSB: Communication
Bloom’s: Comprehension
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 

16. All of the following are advantages of a corporation except:
17. freely transferable ownership.
18. limited liability.
19. access to capital markets.
20. low management costs.

Ans: D

AACSB: Communication
Bloom’s: Comprehension
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 

17. Which of the following statements regarding companies is NOT correct?
18. A company is a discrete legal entity.
19. Since shares represent ownership in a company, ownership cannot be readily transferred to new owners.
20. A company has a potentially unlimited life.
21. The shareholders’ liability is limited.

Ans: B

AACSB: Communication
Bloom’s: Comprehension
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 

18. When a corporation continues to operate regardless of changes in ownership, this is known as:
19. the right of perpetual succession.
20. perpetual shares.
21. perpetual trading.
22. unlimited succession.

Ans: A

AACSB: Communication
Bloom’s: Comprehension
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 

19. Which of the following is NOT an advantage of the corporate form of organisation?
20. The corporate form is particularly suited to large-scale business operations.
21. There is a separation of ownership (shareholders) and management control.
22. The corporate form allows for continuity of business activities.
23. Large amounts of funding can be raised on relatively favourable terms.

Ans: B

AACSB: Communication
Bloom’s: Comprehension
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 

20. Which of the following is an advantage of the corporate form of organisation?
21. The managers that control day-to-day operations have a strong incentive to act in the best interests of shareholders.
22. As agents of the shareholders, the managers want to follow a growth maximisation strategy.
23. The managers want to increase the number of staff so they can grow.
24. A wide pool of investors can supply large amounts of corporate funding to the corporation.

Ans: D

AACSB: Communication
Bloom’s: Comprehension
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 

21. Many companies use ______ to align the interests of shareholders with those of management.
22. bond options
23. share options
24. company cars
25. debentures

Ans: B

AACSB: Communication
Bloom’s: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 

22. Agency theory is concerned with:
23. a conflict between owners and managers.
24. the agents who act on behalf of the company.
25. the relationship between employees.
26. the conflict of interests between outside agents and the company.

Ans: A

AACSB: Communication
Bloom’s: Knowledge
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 

23. The conflict of interests between the goals of the firm’s owners and those of its managers is:
24. the antagonism theory.
25. the agency problem.
26. reduced when the company is large.
27. serious only when sales volumes decline dramatically.

Ans: B

AACSB: Ethical
Bloom’s: Comprehension
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 

24. The key aspect of the agency relationship for the corporate form of business is that:
25. the firm’s owners will always act in the best interests of the managers.
26. the managers will always act in the best interests of the firm’s owners.
27. with their management contracts, the managers have the incentive to act in the best interests of the shareholders.
28. the managers have different incentives from the shareholders.

Ans: D

AACSB: Ethical
Bloom’s: Comprehension
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 

25. Which of the following would NOT relate to agency costs involving management’s desire to maximise its benefits?
26. Management goals to achieve sales growth.
27. Management goals to achieve market share.
28. Management remuneration packages.
29. Management reports to shareholders.

Ans: D

AACSB: Ethical
Bloom’s: Comprehension
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 

26. Agency problems are reduced by:
27. monitoring management behaviour.
28. the shareholders’ ability to sell their shares.
29. the threat of takeover by another firm.
30. all of the given answers.

Ans: D

AACSB: Ethical
Bloom’s: Comprehension
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 

27. Agency problems would be less likely to exist in a:
28. sole proprietorship.
29. partnership.
30. private company.
31. public company.

Ans: A

AACSB: Ethical
Bloom’s: Comprehension
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 

28. The members of the board of directors of a corporation are elected by the:
29. executive management group.
30. shareholders.
31. creditors.
32. debt holders.

Ans: B

AACSB: Communication
Bloom’s: Comprehension
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 

29. A primary aim of corporate management should be to:
30. maximise the company’s profit.
31. maximise the number of shareholders.
32. maximise the shareholders’ wealth.
33. minimise the company’s costs.

Ans: C

AACSB: Communication
Bloom’s: Comprehension
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 

30. The most appropriate goal for corporate management, according to finance theory, is to:
31. maximise the company’s market share.
32. maximise the current profits of the company.
33. maximise the company’s share price.
34. minimise the company’s liabilities.

Ans: C

AACSB: Communication
Bloom’s: Comprehension
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 

31. A _______ represents a financial claim to the cash flow of a business after all other claims have been deducted.
32. bond
33. debenture
34. share
35. preference share

Ans: C

AACSB: Communication
Bloom’s: Comprehension
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly listed corporation.
Section: Introduction
Topic: The share market and the corporation

 

32. Which of the following is NOT a feature of a share?
33. Part ownership in the company
34. The right to vote in the control of the company
35. Readily transferable
36. The right to periodic payments

Ans: D

AACSB: Communication
Bloom’s: Comprehension
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly listed corporation.
Section: Introduction
Topic: The share market and the corporation

 

33. Consider the following statements:
    i. A corporation differs from other forms of business organisation only in that it tends to be larger.
    ii. The corporate form of business organisation is destined to fail because ‘managers’, and not the ‘owners’, run the business.
    iii. The corporate entity ceases on the death or bankruptcy of the individual shareholders.
    iv. The stock exchange is important to the corporation only because it provides the institutional framework through which new shares may be sold to the public.
    v. Maximisation of shareholder utility is presumed when managers maximise possible profit.
    How many of these statements are true and how many are false?
34. 1 statement is true and 4 are false
35. 2 statements are true and 3 are false
36. 3 statements are true and 2 are false
37. 4 statements are true and 1 is false

Ans: A

AACSB: Reflective thinking
Bloom’s: Synthesis
Difficulty: Hard
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 

34. Which of the following statements about share markets is NOT true?
35. They help carry out direct financing.
36. Most of the trading takes place in already-issued shares.
37. Share markets have aided in the increase in importance of corporations.
38. Every time a listed company’s shares are bought or sold, the company receives funding.

Ans: D

AACSB: Communication
Bloom’s: Comprehension
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.02 Consider the origins and purpose of a stock exchange.
Section: 4.02 The stock exchange
Topic: The stock exchange

 

35. The role of stock exchanges such as the ASX include:
36. they are a platform for firms’ shares to be listed.
37. they monitor the behaviour of market participants and also ensure compliance with the regulatory requirements of the nation-state supervisor.
38. listing on a stock exchange requires the corporation to comply with the rules of that exchange.
39. all of the given answers.

Ans: D

AACSB: Communication
Bloom’s: Comprehension
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.02 Consider the origins and purpose of a stock exchange.
Section: 4.02 The stock exchange
Topic: The stock exchange

 

36. An equity market is best described as:
37. a place where shares of listed companies are traded.
38. a physical platform where buy and sell orders are made.
39. where the trading and issuing of equities, bonds and other classes of publicly listed companies take place.
40. all of the given answers.

Ans: D

AACSB: Communication
Bloom’s: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.02 Consider the origins and purpose of a stock exchange.
Section: 4.02 The stock exchange
Topic: The stock exchange

 

37. The following statements about the primary market are true except:
38. it is where companies float shares to the general public in an initial public offering (IPO) to raise capital.
39. it is a platform for existing shareholders to liquidate previously owned shares.
40. only equities are issued.
41. all of the given answers.

Ans: A

AACSB: Communication
Bloom’s: Comprehension
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.02 Consider the origins and purpose of a stock exchange.
Section: 4.02 The stock exchange
Topic: The stock exchange

 

38. The total number of equity raisings on the ASX primary market over the past 20 years has:
39. increased.
40. decreased.
41. remained stable.
42. decreased significantly.

Ans: A

AACSB: Communication
Bloom’s: Comprehension
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.03 Understand the primary market role of a stock exchange through which corporations raise new funding.
Section: 4.03 The primary market role of a stock exchange
Topic: The primary market role of a stock exchange

 

39. The greatest number of issues of equity capital on the ASX over recent years has involved:
40. rights issues.
41. placements.
42. dividend reinvestment.
43. new floats.

Ans: D

AACSB: Communication
Bloom’s: Comprehension
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.03 Understand the primary market role of a stock exchange through which corporations raise new funding.
Section: 4.03 The primary market role of a stock exchange
Topic: The primary market role of a stock exchange

 

40. The listing of new companies on an exchange such as the ASX and subsequently raising funds is known as:
41. share buybacks.
42. initial public offerings.
43. share issues.
44. rights issues.

Ans: B

AACSB: Communication
Bloom’s: Comprehension
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.03 Understand the primary market role of a stock exchange through which corporations raise new funding.
Section: 4.03 The primary market role of a stock exchange
Topic: The primary market role of a stock exchange

 

41. Which of the following security types is NOT usually listed on the ASX?
42. Ordinary shares
43. Treasury bonds
44. Debentures
45. Commercial paper

Ans: D

AACSB: Communication
Bloom’s: Comprehension
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.03 Understand the primary market role of a stock exchange through which corporations raise new funding.
Section: 4.03 The primary market role of a stock exchange
Topic: The primary market role of a stock exchange

 

42. An issue of new shares to the public must have:
43. a prospectus attached.
44. an underwriter.
45. detailed documents called covenants.
46. a memorandum of understanding in place.

Ans: A

AACSB: Communication
Bloom’s: Comprehension
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.03 Understand the primary market role of a stock exchange through which corporations raise new funding.
Section: 4.03 The primary market role of a stock exchange
Topic: The primary market role of a stock exchange

 

43. From a company’s viewpoint, the existence of an active, liquid, well-organised secondary market in existing shares:
44. facilitates the raising of further capital in the secondary market.
45. maintains the share price above the initial issue price.
46. encourages successful primary market issues.
47. is of little or no consequence.

Ans: C

AACSB: Reflective thinking
Bloom’s: Comprehension
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.03 Understand the primary market role of a stock exchange through which corporations raise new funding.
Section: 4.03 The primary market role of a stock exchange
Topic: The primary market role of a stock exchange

 

44. The following statements about the secondary market are true except:
45. there is a transfer of ownership and a settlement of value for that transfer.
46. the existence of a well-developed secondary market is of great significance to a corporation that may be seeking to raise new equity finance in the future.
47. corporations normally seek to raise additional equity in order to expand the business through the secondary market because there are thousands of buyers and sellers of new securities.
48. all of the given answers.

Ans: C

AACSB: Reflective thinking
Bloom’s: Comprehension
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.03 Understand the primary market role of a stock exchange through which corporations raise new funding.
Section: 4.03 The primary market role of a stock exchange
Topic: The primary market role of a stock exchange

 

45. An initial public share offering represents the share market’s _____ role.
46. interest rate
47. information
48. primary
49. secondary

Ans: C

AACSB: Communication
Bloom’s: Comprehension
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.03 Understand the primary market role of a stock exchange through which corporations raise new funding.
Section: 4.03 The primary market role of a stock exchange
Topic: The primary market role of a stock exchange

 

46. The primary market role of a stock exchange is:
47. to trade the shares of the largest corporations.
48. to ensure the sale of new-issue securities.
49. to ensure deep trades in listed securities.
50. to ensure that information about listed companies is quickly reflected in share prices.

Ans: B

AACSB: Communication
Bloom’s: Comprehension
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.03 Understand the primary market role of a stock exchange through which corporations raise new funding.
Section: 4.03 The primary market role of a stock exchange
Topic: The primary market role of a stock exchange

 

47. Which of the following securities would you expect to buy on the primary market?
48. A bond that has no maturity left
49. A bond with a very long maturity date
50. A newly issued share
51. A previously issued share

Ans: C

AACSB: Communication
Bloom’s: Comprehension
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.03 Understand the primary market role of a stock exchange through which corporations raise new funding.
Section: 4.03 The primary market role of a stock exchange
Topic: The primary market role of a stock exchange

 

48. The company process that gives the shareholders the chance to change their dividends into additional company shares is called:
49. share placement.
50. dividend reinvestment scheme.
51. secondary public offering.
52. rights issue.

Ans: D

AACSB: Communication
Bloom’s: Comprehension
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.03 Understand the primary market role of a stock exchange through which corporations raise new funding.
Section: 4.03 The primary market role of a stock exchange
Topic: The primary market role of a stock exchange

 

49. The distribution of extra shares on pro-rata basis by a company to all existing shareholders is called a:
50. new float.
51. private placement.
52. secondary float.
53. pro-rata rights issue.

Ans: D

AACSB: Reflective thinking
Bloom’s: Synthesis
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.03 Understand the primary market role of a stock exchange through which corporations raise new funding.
Section: 4.03 The primary market role of a stock exchange
Topic: The primary market role of a stock exchange

 

50. The selling of new shares to a selected number of institutional investors is called a/an:
51. share release.
52. private placement.
53. share float.
54. initial offering.

Ans: B

AACSB: Reflective thinking
Bloom’s: Synthesis
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.03 Understand the primary market role of a stock exchange through which corporations raise new funding.
Section: 4.03 The primary market role of a stock exchange
Topic: The primary market role of a stock exchange

 

51. Compared with other forms of equity raisings, private placements for shares:
52. can be quicker but more expensive because of the short time frame involved.
53. can be quicker if a prospectus is available for distribution.
54. can be quicker and often cheaper.
55. involve stricter regulatory requirements for meeting the shorter time frame involved.

Ans: C

AACSB: Communication
Bloom’s: Comprehension
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.03 Understand the primary market role of a stock exchange through which corporations raise new funding.
Section: 4.03 The primary market role of a stock exchange
Topic: The primary market role of a stock exchange

 

52. The basic role of a company underwriter about to list a new share issue on a stock exchange is to:
53. provide advice on the timing of the share issue.
54. ensure the company complies with the stock exchange’s listing rules.
55. establish a deep and liquid secondary market in the shares.
56. purchase any unsold shares on issue.

Ans: D

AACSB: Communication
Bloom’s: Comprehension
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.03 Understand the primary market role of a stock exchange through which corporations raise new funding.
Section: 4.03 The primary market role of a stock exchange
Topic: The primary market role of a stock exchange

 

53. If the depth and liquidity of a share market is high, it means:
54. corporations may raise funds at higher costs.
55. investors will experience higher risk exposures.
56. investors can passively manage their risk exposure.
57. corporations may raise funds at lower costs.

Ans: D

AACSB: Reflective thinking
Bloom’s: Synthesis
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.03 Understand the primary market role of a stock exchange through which corporations raise new funding.
Section: 4.03 The primary market role of a stock exchange
Topic: The primary market role of a stock exchange

 

54. The document drawn up by a company stating the terms and conditions of a public share issue is called a:
55. share directory.
56. memorandum.
57. share plan.
58. prospectus.

Ans: D

AACSB: Communication
Bloom’s: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.03 Understand the primary market role of a stock exchange through which corporations raise new funding.
Section: 4.03 The primary market role of a stock exchange
Topic: The primary market role of a stock exchange

 

55. Secondary markets:
56. can provide liquidity but do not raise new funds.
57. make capital-raising in the primary market more attractive.
58. help borrowers raise long-term funds.
59. include all of the given answers.

Ans: D

AACSB: Communication
Bloom’s: Knowledge
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.04 Discuss the secondary market role of a stock exchange through which existing securities are bought and sold.
Section: 4.04 The secondary market role of a stock exchange
Topic: The secondary market role of a stock exchange

 

56. A characteristic of secondary markets for shares is that:
57. only highly risky shares are traded.
58. only low-risk shares are traded.
59. they are where companies borrow funds for the second time.
60. companies do not get funds from the secondary market in shares.

Ans: D

AACSB: Communication
Bloom’s: Knowledge
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.04 Discuss the secondary market role of a stock exchange through which existing securities are bought and sold.
Section: 4.04 The secondary market role of a stock exchange
Topic: The secondary market role of a stock exchange

 

57. A well-developed secondary market is likely to:
58. aid in raising extra finance in the primary market.
59. help manage risk exposures of investors.
60. help with corporate agency problems.
61. include all of the given answers.

Ans: D

AACSB: Communication
Bloom’s: Comprehension
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.04 Discuss the secondary market role of a stock exchange through which existing securities are bought and sold.
Section: 4.04 The secondary market role of a stock exchange
Topic: The secondary market role of a stock exchange

 

58. In relation to a share market, the ratio of the value of turnover to market capitalisation is called:
59. market depth.
60. market flow.
61. market transfer.
62. market liquidity.

Ans: D

AACSB: Communication
Bloom’s: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.04 Discuss the secondary market role of a stock exchange through which existing securities are bought and sold.
Section: 4.04 The secondary market role of a stock exchange
Topic: The secondary market role of a stock exchange

 

59. The following descriptions are true of a derivative instrument:
60. it is a risk management product that derives its value from an underlying commodity or financial instrument.
61. it helps determine the price today for an underlying asset, but delivered into a specified future point in time.
62. it helps individuals, firms and other entities to hedge possible risk exposure in their investment portfolio.
63. all of the given answers.

Ans: D

AACSB: Communication
Bloom’s: Comprehension
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.05 Examine the managed product (exchange traded funds, contracts for difference, real estate investment trusts and infrastructure funds) and derivative product (options, warrants and futures contracts) roles of a stock exchange.
Section: 4.04 The secondary market role of a stock exchange
Topic: The managed product and derivative product roles of a stock exchange

 

60. If a stock exchange provides a market for the trade of specific share market-related derivative products, which of the following options is generally NOT correct?
61. The derivative products provide an investment tool to take advantage of future share price movements.
62. The derivative products facilitate the management of risk within an existing share portfolio.
63. The derivative products provide protection against adverse movements in share prices.
64. The derivative products remove the share price volatility of stocks listed on the stock exchange.

Ans: D

AACSB: Reflective thinking
Bloom’s: Synthesis
Difficulty: Hard
Est time: <1 minute
Learning Objective: 4.05 Examine the managed product (exchange traded funds, contracts for difference, real estate investment trusts and infrastructure funds) and derivative product (options, warrants and futures contracts) roles of a stock exchange.
Section: 4.05 The managed product and derivative product roles of a stock exchange
Topic: The managed product and derivative product roles of a stock exchange

 

61. Compared with an exchange-traded derivative product, over-the-counter derivative products:
62. are discussed and agreed upon by the parties involved.
63. are standardised.
64. have margin calls.
65. are traded between banks, not on the exchange.

Ans: A

AACSB: Reflective thinking
Bloom’s: Synthesis
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.05 Examine the managed product (exchange traded funds, contracts for difference, real estate investment trusts and infrastructure funds) and derivative product (options, warrants and futures contracts) roles of a stock exchange.
Section: 4.05 The managed product and derivative product roles of a stock exchange
Topic: The managed product and derivative product roles of a stock exchange

 

62. To protect their portfolio of shares from a possible share price fall, an investor could buy a:
63. call option.
64. put option.
65. warrant on a matching share index.
66. matching share index future.

Ans: B

AACSB: Communication
Bloom’s: Knowledge
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.05 Examine the managed product (exchange traded funds, contracts for difference, real estate investment trusts and infrastructure funds) and derivative product (options, warrants and futures contracts) roles of a stock exchange.
Section: 4.05 The managed product and derivative product roles of a stock exchange
Topic: The managed product and derivative product roles of a stock exchange

 

63. The strategy of lowering risk exposure by holding a number of investments in a portfolio is called:
64. augmentation.
65. diversification.
66. expansion.
67. optimisation.

Ans: B

AACSB: Communication
Bloom’s: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.05 Examine the managed product (exchange traded funds, contracts for difference, real estate investment trusts and infrastructure funds) and derivative product (options, warrants and futures contracts) roles of a stock exchange.
Section: 4.05 The managed product and derivative product roles of a stock exchange
Topic: The managed product and derivative product roles of a stock exchange

 

64. In options markets, option premiums are paid by:
65. option writers to buyers.
66. option buyers to sellers.
67. both option buyers and sellers.
68. put option buyers only.

Ans: B

AACSB: Communication
Bloom’s: Knowledge
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.05 Examine the managed product (exchange traded funds, contracts for difference, real estate investment trusts and infrastructure funds) and derivative product (options, warrants and futures contracts) roles of a stock exchange.
Section: 4.05 The managed product and derivative product roles of a stock exchange
Topic: The managed product and derivative product roles of a stock exchange

 

65. Which of the following is NOT correct?
66. A real estate investment trust may purchase industrial property.
67. An infrastructure fund may hold investments in power stations.
68. The units of a listed REIT purchases property are generally illiquid.
69. An investor may use a CFD to go long in a rising market.

Ans: C

AACSB: Reflective thinking
Bloom’s: Synthesis
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.05 Examine the managed product (exchange traded funds, contracts for difference, real estate investment trusts and infrastructure funds) and derivative product (options, warrants and futures contracts) roles of a stock exchange.
Section: 4.05 The managed product and derivative product roles of a stock exchange
Topic: The managed product and derivative product roles of a stock exchange

 

66. An investor holding an investment portfolio who purchases a put option is expecting:
67. share prices to go up in the short term.
68. share prices to fall in the short term.
69. interest rates to go up.
70. interest rates to go down.

Ans: B

AACSB: Communication
Bloom’s: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.05 Examine the managed product (exchange traded funds, contracts for difference, real estate investment trusts and infrastructure funds) and derivative product (options, warrants and futures contracts) roles of a stock exchange.
Section: 4.05 The managed product and derivative product roles of a stock exchange
Topic: The managed product and derivative product roles of a stock exchange

 

67. The writer of a put option expects the share price to:
68. decrease.
69. increase.
70. remain unchanged.
71. pay a dividend.

Ans: B

AACSB: Reflective thinking
Bloom’s: Comprehension
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.05 Examine the managed product (exchange traded funds, contracts for difference, real estate investment trusts and infrastructure funds) and derivative product (options, warrants and futures contracts) roles of a stock exchange.
Section: 4.05 The managed product and derivative product roles of a stock exchange
Topic: The managed product and derivative product roles of a stock exchange

 

68. If an investor buys a put option on shares they own and then the price of the shares rises, the investor:
69. must exercise the option.
70. must pay the difference between the contract start and close values.
71. has no obligation to exercise the option.
72. has to pay an additional premium to the option writer.

Ans: C

AACSB: Reflective thinking
Bloom’s: Comprehension
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.05 Examine the managed product (exchange traded funds, contracts for difference, real estate investment trusts and infrastructure funds) and derivative product (options, warrants and futures contracts) roles of a stock exchange.
Section: 4.05 The managed product and derivative product roles of a stock exchange
Topic: The managed product and derivative product roles of a stock exchange

 

69. A futures contract is a:
70. contract that provides a specified commodity or instrument to be bought at a future date at a price determined at the expiry date.
71. contract that provides a specified commodity or instrument to be bought at a future date at a price decided today.
72. right to buy a specified commodity or instrument at a price determined today.
73. right to buy a specified commodity or instrument at a price determined at the expiry date.

Ans: B

AACSB: Communication
Bloom’s: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.05 Examine the managed product (exchange traded funds, contracts for difference, real estate investment trusts and infrastructure funds) and derivative product (options, warrants and futures contracts) roles of a stock exchange.
Section: 4.05 The managed product and derivative product roles of a stock exchange
Topic: The managed product and derivative product roles of a stock exchange

 

70. Units sold in a managed investment scheme that follows the performance of a specified share market index are called:
71. contracts for difference.
72. exchange traded funds.
73. option funds.
74. warrant funds.

Ans: B

AACSB: Communication
Bloom’s: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.05 Examine the managed product (exchange traded funds, contracts for difference, real estate investment trusts and infrastructure funds) and derivative product (options, warrants and futures contracts) roles of a stock exchange.
Section: 4.05 The managed product and derivative product roles of a stock exchange
Topic: The managed product and derivative product roles of a stock exchange

 

71. A contract for difference is:
72. the difference between a put and a call option on the same security.
73. the difference between an option and a warrant on the same security.
74. the difference between a physical stock market and the futures market.
75. an agreement to exchange the difference between a contract start and close values.

Ans: D

AACSB: Communication
Bloom’s: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.05 Examine the managed product (exchange traded funds, contracts for difference, real estate investment trusts and infrastructure funds) and derivative product (options, warrants and futures contracts) roles of a stock exchange.
Section: 4.05 The managed product and derivative product roles of a stock exchange
Topic: The managed product and derivative product roles of a stock exchange

 

72. A stock exchange may also list some debt issues of companies and governments. This provision by a stock exchange is known as a/an:
73. subordinate debt market.
74. interest rate market.
75. primary debt market.
76. secondary bond market.

Ans: B

AACSB: Communication
Bloom’s: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.06 Examine the interest rate market role of a stock exchange.
Section: 4.06 The interest rate market role of a stock exchange
Topic: The interest rate market role of a stock exchange

 

73. Which of the following statements, in regard to the provision of an interest rate market by a stock exchange, is NOT correct?
74. It is beneficial to both borrowers and lenders because it can add liquidity.
75. It can provide ease of access to information about debt securities.
76. It can reduce investors’ transaction costs.
77. Its main function is to serve as a primary market for debt issues.

Ans: D