Chapter 01 A modern financial system: An overview

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

A: barterB*: money C: governmentsD: some combination of government transfer and barter

2: A nation state that has only a barter system has high transaction costs because:

A: the difficulties of trade result in high legal costs because of the contracts requiredB*: traders must spend quite a bit of time looking for trading partnersC: taxes under this system consume a large amount of outputD: the difficulties of trade require high insurance premiums

3: The term medium of exchange for money refers to its use as:

A: coinageB: currencyC*: anything that is widely accepted as payment for goods and servicesD: any standard of value that prices can be expressed in

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

A: the value of money falling only when the money supply fallsB: the value of money falling only when the money supply increasesC*: the fact that money allows worth to be stored readilyD: the fact that money never loses its value compared with other assets

5: Money increases economic growth by assisting transfers from:

A: consumers to investorsB*: savers to borrowersC: businesses to consumersD: borrowers to investors

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?

A: a store of valueB: a medium of exchange for settling economic transactionsC*: a claim to future cash flowsD: short-term protection against inflation

7: Buyers of financial claims lend their excess funds as they:

A: expect to borrow extra funds in the futureB*: want surplus funds in the futureC: want to invest in the futureD: want to increase their costs relative to their incomes

8: Sellers of financial claims promise to pay back borrowed funds:

A: by borrowing extra funds in the futureB*: based on their expectation of having surplus funds in the futureC: by selling other assetsD: by reducing their costs relative to their incomes

9: A savings-surplus unit is one:

A: that needs to borrow funds from a surplus unitB*: whose income exceeds its spendingC: whose spending exceeds its incomeD: that generally is a company

10: The process of facilitating the flow of funds between borrowers and lenders performed by the financial system:

A: is hindered by the problem of double coincidence of wantsB: greatly reduces the probability of inflationC*: increases the rate of economic growth of a countryD: occurs only through financial intermediaries

11: Both real and financial assets have four principal attributes that are significant factors in the investment decision process. These are:

I. liquidityII. capital gainIII. riskIV. return or yieldV. time pattern of future cash flowsVI. price and cash flow volatility

A: I, II, III, IVB*: I, III, IV, VC: I, III, IV, VID: II, III, IV, V

12: All of the following are associated with characteristics of shares EXCEPT:

A: part ownership of a companyB: capital gainsC*: a fixed interest paymentD: dividends

13: A financial institution that obtains most of its funds from deposits is:

A: an investment bankB: a unit trustC*: a commercial bankD: a general insurer

Level: 2

Question 14: Institutions that specialise in off-balance sheet advisory services are called:

A: depository financial institutionsB: contractual institutionsC: finance companiesD*: investment banks

Level: 2

Question 15: A _______ is a financial intermediary that receives premium payments that are used to purchase assets to cover future possible payments.

A: building societyB: credit unionC: savings bankD*: life insurance office

Level: 2

Question 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: money market corporationsB: unit trustsC*: contractual savings institutionsD: depository financial institutions

Level: 3

Question 17: Financial institutions that raise the majority of their funds by selling securities in the money markets are:

A: commercial banksB: building societiesC*: finance companiesD: life insurance offices

Level: 2

Question 18: All of the following are terms associated with shares EXCEPT:

A: residualB: ownershipC: voting rightsD*: contractual claim

Level: 2

Question 19: All of the following are characteristics commonly associated with preference shares EXCEPT:

A: a specified, fixed returnB: no voting rightsC*: higher ranking than bondholders on claims on assetsD: no entitlement to take possession of assets if the borrower defaults on payment

Level: 2

Question 20: Long-term debt financing instruments used by companies are called:

A: billsB*: debenturesC: sharesD: equities

Level: 2

Question 21: All of the following are associated with features of debt instruments EXCEPT:

A: contractual claim against the borrowerB: periodic interest paymentsC: higher claim on assets of borrower than equity holdersD*: do not fluctuate in price like shares

Level: 3

Question 22: The following are features of futures contracts EXCEPT:

A: they involve an obligation to buy or sell a specified amountB*: the contract price is settled at the end of the contractC: trading of contracts occurs on an exchangeD: trading an opposite contract usually closes out the contract

Level: 3

Question 23: All of the following are features of forward contracts EXCEPT:

A: they are not standardisedB: they do not trade on organised exchangesC: the contract price may be settled at the end of the contractD*: they are closed out by trading an opposite contract

Level: 3

Question 24: All of the following are features of option contracts EXCEPT when:

A: the buyer does not have the obligation to proceed with the contractB: the writer of the contract receives a feeC: the price of the designated asset is determined at the beginning of the contractD*: the right to buy is called a put option

Level: 3

Question 25: All of the following are features of swaps EXCEPT when:

A: there is a contractual arrangement to exchange cash flowsB*: interest rate swaps exchange principal at the beginning and the endC: a fixed rate obligation may be exchanged for a variable rate obligationD: a swap involves currencies as well

Level: 3

Question 26: The key reason for the existence of markets of financial assets is:

A*: that holders of shares occasionally want to exchange them for bonds and other financial instrumentsB: the high expenditure for many individuals and businessesC: that the lack of money in an economy makes trade in financial assets necessaryD: the refusal of most modern governments to print money on demand

Level: 2

Question 27: Financial markets:

A: facilitate the exchanges of financial assetsB: provide information about prices of financial assetsC: provide a channel for funds to flow between the providers and users of fundsD*: All of the above.

Level: 2

Question 28: The most important function of a financial market is:

A: to provide information about sharesB: to provide a market for sharesC*: to facilitate the flow of funds between lenders and borrowersD: to provide employment for brokers and agents

Level: 2

Question 29: Financial markets:

A: act as intermediaries by holding a collection of assets and issuing claims based on them to saversB*: issue claims on future cash flows of individual borrowers directly to lendersC: transmit funds indirectly between lenders and borrowersD: usually provide lenders with lower returns than other financial intermediaries

Level: 4

Question 30: A primary financial market is:

A: one that offers financial assets with the highest expected returnB: one that offers the greatest number of financial assetsC*: one that involves the sale of financial assets for the first timeD: one that offers financial assets with the highest historical return

Level: 2

Question 31: Purchasing unsecured notes on the Australian Stock Exchange is an example of:

A: a primary market transactionB*: a secondary market transactionC: companies raising new financeD: companies raising finance from another financial intermediary

Level: 3

Question 32: When a security is sold in the financial markets for the first time, then:

A: funds flow from the borrower to the saverB*: funds flow to the issuer from the saverC: it represents a secondary transaction to the underwriterD: it is an asset for the borrower

Level: 3

Question 33: All of the following are examples of primary market transactions EXCEPT:

A: a company issue of shares to raise funds for an investment projectB: a government issue of bondsC*: a mortgage bondD: a mortgage loan to buy a house

Level: 3

Question 34: A primary market is a market:

A: for equity by major or primary companiesB*: where borrowers sell new financial instruments to buyersC: where savers sell new financial claims to borrowersD: where government securities are bought and sold

Level: 3

Question 35: Buying bonds in the long-term debt market is an example of:

A: a primary market transactionB*: a secondary market transactionC: companies raising new fundsD: companies raising funds from a secondary source

Level: 2

Question 36: The market where existing securities are sold is:

A: the primary marketB*: the secondary marketC: the economic marketD: the financial market

Level: 2

Question 37: When a large company issues a financial instrument in the financial markets:

A: it buys a financial claimB*: it sells a financial claimC: funds flow indirectly from saver to borrowerD: the cost of funds is generally higher due to the risk involved

Level: 2

Question 38: Secondary markets:

A: allow borrowers to raise long-term fundsB: facilitate capital raising in the primary marketC: do not raise new funds but offer liquidityD: allow portfolio restructuringE*: All of the above.

Level: 4

Question 39: The flow of funds through financial markets increases the volume of savings and investment by:

A: maintaining low interest ratesB*: providing savers with a variety of ways to lend to borrowersC: storing large quantities of cashD: offering lower interest rates than could be obtained directly from borrowers

Level: 4

Question 40: All of the following are features of financial markets EXCEPT:

A: they generally provide borrowers with lower-cost funds than through a financial intermediaryB: funds are channelled directly from savers to borrowersC: contractual agreements are issued between savers and borrowersD*: they generally deal only with the purchase and sale of government securities

Level: 2

Question 41: A well-functioning financial market includes all of the following EXCEPT:

A: a persistent increasing liquidity for most assetsB: an increased ease of restructuring portfolios of assetsC: quick assimilation of information into asset pricesD*: a selection of financial assets with similar timings of cash flow to reduce risk

Level: 4

Question 42: Financial markets:

A: involve the buying and selling of existing financial securities onlyB*: involve both primary and secondary transactionsC: act as intermediaries between borrowers and saversD: directly issue claims on savers to borrowers

Level: 2

Question 43: Direct financing allows a borrower to:

A: easily assess the level of default risk of a lenderB: match amounts and maturity of investments with borrowersC: lower search and transaction costsD*: diversify their funding sources

Level: 2

Question 44: All of the following may be disadvantages of direct financing EXCEPT:

A: matching amounts of funds to be borrowed with those to be lentB: assessment of the risk of the borrowerC: cost of preparing legal contracts, taxation and accounting adviceD*: cost of the financial intermediary involved

Level: 2

Question 45: An issue of debentures is an example of:

A: a secondary market transactionB: raising funding through financial intermediariesC*: a direct form of fundingD: an indirect form of funding

Level: 3

Question 46: An example of an indirect form of funding is:

A: an issue of debenturesB: an issue of unsecured notesC*: a term loanD: an issue of shares

Level: 2

Question 47: Financial intermediaries:

A*: act as a third party by holding a portfolio of assets and issuing claims based on them to saversB: issue claims on future cash flows of individual borrowers directly to lendersC: transmit funds directly between lenders and borrowersD: usually provide lenders with lower returns than other financial institutions

Level: 4

Question 48: The flow of funds between lenders and borrowers is:

A: channelled indirectly through financial marketsB: channelled directly through financial intermediariesC*: channelled indirectly through financial intermediariesD: channelled mainly through government agencies

Level: 2

Question 49: 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: asset transformationB*: maturity transformationC: credit risk transformationD: denomination transformation

Level: 3

Question 50: The main role of financial intermediaries is to:

A: provide advice to consumers on their financesB*: borrow funds from surplus units and lend them to borrowersC: provide funds for the government to cover budget deficitsD: help ensure enough funds in circulation in a country

Level: 2

Question 51: Financial intermediaries pool the funds of:

A: many small savers and make loans to a few large borrowersB: a few savers and make loans to many borrowersC*: many small savers and make loans to many borrowersD: a few large savers and make loans to a few large borrowers

Level: 3

Question 52: Small savers prefer to use financial intermediaries rather than lending directly to borrowers because:

A: financial intermediaries offer much higher interest rates than can be obtained directly from borrowersB*: financial intermediaries offer a wide portfolio of financial instruments to the saversC: borrowers dislike dealing with saversD: savers have a claim with the borrower by way of the financial intermediary

Level: 2

Question 53: Financial intermediaries can engage in credit risk transformation as:

A: they obtain cost advantages due to their size and business volumes transactedB: they can quickly convert financial assets into cash, close to the current market priceC*: they develop expertise in lending and diversify loansD: they can pool the savers short-term deposits and make long-term loans

Level: 4

Question 54: When a financial intermediary collects together deposits and lends them out as loans to companies, it is engaging in:

A: liability managementB: liquidity managementC: credit transformationD*: asset transformation

Level: 2

Question 55: Liquidity is:

A: a feature of money onlyB*: the ease with which an asset can be sold at the published market priceC: the best measure of risk of a financial assetD: to lower the rate of return for an asset

Level: 2

Question 56: When an individual has immediately access to their funds from an account with a financial intermediary, the intermediary is engaging in:

A: liability managementB*: liquidity managementC: credit transformationD: asset transformation

Level: 2

Question 57: When a financial intermediary can repeatedly use standardised documents, it is engaging in:

A: liability managementB: liquidity managementC: credit transformationD*: economies of scale

Level: 2

Question 58: According to the textbook, all of the following are financial intermediaries EXCEPT:

A: a bankB: an insurance companyC: a superannuation fundD*: a share broking firm

Level: 2

Question 59: An example of a financial intermediary is:

A: a stockbrokerB: the Australian Stock ExchangeC: the Australian Securities CommissionD*: an insurance company

Level: 2

Question 60: The main participants in the financial system are individuals, corporations and governments. Individuals are generally ______ of funds and corporations are net ________ of funds.

A: borrowers; suppliersB: users; providersC*: suppliers; usersD: demanders; providers

Level: 2

Question 61: Which of the following borrowers would pay the lowest interest rate on debt of equal maturity?

A: the National Bank of AustraliaB: TelstraC: the City of SydneyD*: the Commonwealth Government

Level: 2

Question 62: Generally, over the long term, a government:

A*: is a net borrower of fundsB: is a net supplier of fundsC: borrows funds directly from the householdsD: borrows funds directly from the financial market

Level: 2

Question 63: The _______ is created by a financial connection between providers and users of short-term funds.

A: share marketB: capital marketC*: money marketD: financial market

Level: 2

Question 64: Which of the following are not usually short-term discount securities?

A: negotiable certificates of depositB: commercial paperC: bank billsD*: unsecured notes

Level: 3

Question 65: All of the following are features of the money market EXCEPT:

A: it is a mainly wholesale marketB: it deals with short-term financial claimsC: it is important in financing the working-capital needs of businesses and governmentsD*: it only operates as a market in which new issues are created and marketed

Level: 2

Question 66: The market that involves the buying and selling of short-term securities is the:

A: securities marketB*: money marketC: share marketD: capital market

Level: 2

Question 67: A company with a temporary surplus of funds is most likely to buy:

A*: bank billsB: convertible notesC: debenturesD: shares

Level: 2

Question 68: A company that issues promissory notes into the short-term money market is said to be conducting a transaction in the:

A*: commercial paper marketB: inter-bank marketC: bills marketD: official short-term money market

Level: 3

Question 69: The market that generally involves the buying and selling of discount securities is:

A: securities marketB*: money marketC: share marketD: capital market

Level: 2

Question 70: A source of short-term liquidity funding for banks is the issue of:

A: bank billsB*: certificates of depositC: commercial paperD: debentures

Level: 3

Question 71: The market that includes individuals, companies and governments in the buying and selling of long-term debt and equity securities is the:

A: currency marketB: debt marketC*: capital marketD: financial market

Level: 2

Question 72: For additional funding, a company decides to issue $15 million in debentures. The securities will be issued into the:

A: retail marketsB: secondary marketsC: short-term money marketsD*: capital markets

Level: 3

Question 73: The major financial assets traded in the capital market are:

A: bank bills and commercial paperB: Treasury notes and certificates of depositsC: bonds and convertible securitiesD*: shares and bonds

74: Compared with Treasury bonds, Treasury notes generally:

A: have a longer maturityB: pay interest annuallyC*: are discount securitiesD: are issued in the capital markets

75: If you purchase a government bond, that bond is:

A*: an asset to you but a liability for the Australian governmentB: an asset to you as well as an asset for the Australian governmentC: a liability to you but an asset for the Australian governmentD: a liability to you as well as a liability for the Australian government

76: When government borrowing reduces the amount of funds available for lending to businesses, this is called:

A: credit rationingB*: crowding outC: capital rationingD: government quotas

77: All of the following are key financial services provided by the financial system EXCEPT:

A: liquidityB: risk transferC*: profitabilityD: information

78: Which of the following would be most likely to use financial markets?

A: a household with a small amount savedB: a small business wanting to borrow to buy some machineryC*: a government authority wanting to borrow to finance highway constructionD: a company with a poor credit rating

79: 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 notesII. Ordinary sharesIII. DebenturesIV. Bills of exchangeV. Futures contractsVI. Preference shares

A: II, III, IV, VB: II, IV, V, VIC*: I, II, III, IV D: I, II, IV, V

80: The flow of funds between the four sectors of a domestic economy and the rest of the world is called:

A: sector analysisB*: flow of fundsC: sectorial flowsD: cross-sector flows

skip to main | skip to sidebar Topic 2 Commercial banks

1.Deregulation of the banking sector throughout the late 1970s and the 1980s sought to:A.reduce the reliance of major Australian companies on international capital marketsB.reduce the excess profits of banksC.reduce the discrimination against banks owing to direct controls on them onlyD.provide reduced control on the money supply

Difficulty: MediumViney - Chapter 02 #1learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY2.The changes to the barriers to entry to the banking industry under deregulation in the early 1980s _______ the number of foreign banks.A.decreasedB.increasedC.did not alterD.dramatically decreased

Difficulty: EasyViney - Chapter 02 #2learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY3.Which of the following statements concerning banks is INCORRECT?A.Currently in Australia, banks 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.C.At least 50% of the capital requirement must be in the form of Tier 1 capital.D.The Australian Reserve Bank monitors capital adequacy requirements for banks.

Difficulty: EasyViney - Chapter 02 #3learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY4.Unlike most other businesses, a bank's balance sheet is made up mainly of:A.real assets and financial liabilitiesB.real liabilities and financial liabilitiesC.real assets and real liabilitiesD.financial assets and liabilities

Difficulty: EasyViney - Chapter 02 #4learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY5.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; increasedB.increased; decreased; remained stableC.decreased; increased; decreasedD.decreased; increased; remained stable

Difficulty: HardViney - Chapter 02 #5learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY6.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.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.

Difficulty: EasyViney - Chapter 02 #6learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY7.Which of the following is a role of a bank?A.Attracting funds from the capital markets to facilitate borrowing by the household sectorB.Facilitating the flow of funds from borrowers to lendersC.Facilitating the flow of funds from savers to borrowersD.Managing the level of interest rates

Difficulty: EasyViney - Chapter 02 #7learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY8.Banks have gradually moved to liability management in the management of their balance sheets. Which statement best describes liability management?A.The loan portfolio is tailored to match the available deposit base.B.The deposit base and other funding sources are managed in order to fund loan and other commitments.C.The ratio of debt to equity is managed to meet capital adequacy requirements.D.The liability to assets ratio is maintained within Reserve Bank standards.

Difficulty: MediumViney - Chapter 02 #8learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY9.Asset management for banks refers to:A.managing the assets of the banks; that is, their depositsB.managing the real assets, the bank buildingsC.managing the loans portfolioD.protecting the deposits by using derivatives

Difficulty: EasyViney - Chapter 02 #9learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY10.For banks, liability management refers to:A.managing the liabilities of the banks; that is, the loansB.banks ensuring they have sufficient funds by managing their deposit baseC.managing the real assets, the bank buildingsD.protecting the loans and other commitments by using derivatives

Difficulty: EasyViney - Chapter 02 #10learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY11.When a bank raises funds in the international markets to fund new lending growth, it is involved in:A.asset managementB.off-balance-sheet businessC.liability managementD.derivative management

Difficulty: MediumViney - Chapter 02 #11learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY12.The assets on the balance sheet of a bank are:A.the sources of fundsB.the uses of fundsC.the different types of deposits the bank offersD.equal to the liabilities of the banks

Difficulty: MediumViney - Chapter 02 #12learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY13.The liabilities on the balance sheet of a bank are:A.the sources of fundsB.the uses of fundsC.the different types of deposits the bank offersD.equal to the assets of the banks

Difficulty: MediumViney - Chapter 02 #13learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY14.All of the following balance sheet portfolio items are liabilities of a bank EXCEPT:A.term depositsB.bill acceptance facilitiesC.certificates of depositD.overdrafts

Difficulty: MediumViney - Chapter 02 #14learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY15.All of the following balance sheet portfolio items are sources of funds for a bank EXCEPT:A.term depositsB.bill acceptance facilitiesC.certificates of depositD.overdrafts

Difficulty: MediumViney - Chapter 02 #15learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY16.Which of the following is a bank liability?A.Consumer loansB.Lease financeC.Bills receivableD.Certificates of deposit

Difficulty: MediumViney - Chapter 02 #16learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY17.Which of the following statements about deposits is correct?A.Call accounts represent a fluctuating source of funds for banks.B.Term deposits are funds lodged with a bank for longer than two weeks.C.As current accounts are highly liquid, they form an unstable source of funds for a bank.D.A cheque account may pay interest.

Difficulty: EasyViney - Chapter 02 #17learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY18.Which of the following statements about banks' current accounts is INCORRECT?A.Current accounts today generally pay interest.B.They are a relatively stable source of bank funds.C.Deregulation had a major impact on current accounts.D.They form an increasingly important type of asset for banks.

Difficulty: EasyViney - Chapter 02 #18learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY19.Which of the following statements is NOT true of term deposits?A.They are less liquid than a current deposit.B.They usually offer a higher return than a current deposit.C.They are attractive to investors who expect interest rates to fall.D.They are generally negotiable instruments.

Difficulty: MediumViney - Chapter 02 #19learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY20.20: As a depositor shifts funds from current deposits to term deposits in a bank, generally the depositor's:A.liquidity increases and credit risk increasesB.liquidity decreases and interest income increasesC.liquidity decreases and interest income decreasesD.implicit interest increases and explicit interest decreases

Difficulty: MediumViney - Chapter 02 #20learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY21.If a bank required more short-term funding, it would issue:A.a certificate of depositB.a debentureC.an unsecured noteD.preference shares

Difficulty: MediumViney - Chapter 02 #21learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY22.Which of the following is generally a highly liquid instrument?A.A bank billB.A certificate of depositC.Neither a bank bill nor a certificate of depositD.Both bank bills and certificates of deposit are liquid instruments

Difficulty: MediumViney - Chapter 02 #22learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY23.The term 'negotiable' for a security means:A.its price can be bargained for when soldB.it can be sold easilyC.its buyer can negotiate its price when buyingD.it is reasonably illiquid and will drop in price when sold

Difficulty: MediumViney - Chapter 02 #23learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY24.Which of the following regarding certificates of deposit (CDs) is correct?A.CDs pay daily interest instead of monthly as for ordinary deposits.B.CDs generally pay higher interest, as they are not liquid.C.The rate of interest on a CD can be adjusted quickly.D.CDs with a face value of more than $100 000 are non-negotiable.

Difficulty: MediumViney - Chapter 02 #24learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY25.The advantage of a CD to a bank is:A.its rate of interest may be adjusted quicklyB.it can be sold quickly in the money market for cashC.it is a negotiable instrumentD.All of the given answers.

Difficulty: MediumViney - Chapter 02 #25learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY26.A major difference between a bank's term deposit and a certificate of deposit is a:A.term deposit represents an asset for a bank, while a certificate of deposit is a liabilityB.certificate of deposit does not pay interest until maturityC.certificate of deposit is illiquid when compared with a term depositD.certificate of deposit is a high-credit-risk instrument when compared with a term deposit

Difficulty: EasyViney - Chapter 02 #26learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY27.With regard to bank bills, the bill is sold at a discount:A.because the bank needs to find a buyerB.to encourage buyersC.because the difference between the initial price and the final sale price is the return to the holderD.because the bank pays the face value of the funds to the borrower at maturity

Difficulty: HardViney - Chapter 02 #27learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY28.28: With regard to bank bills, the expression 'the issuer sells the bill at the best discount' means the issuer:A.is providing the fundingB.is acting as mediator between the borrower and the bankC.is selling the bill into the market at the lowest yieldD.pays the lowest face value of the funds to the holder at maturity

Difficulty: HardViney - Chapter 02 #28learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY29.With regard to bank bills, the actual role of the acceptor is to:A.provide the initial fundingB.act as mediator between the borrower and bankC.issue the bank billD.pay the face value of the funds to the holder at maturity

Difficulty: HardViney - Chapter 02 #29learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY30.Which of the following in relation to bill financing is INCORRECT?A.The drawer is the party seeking the funds.B.If a bank accepts the bill this enhances its credit quality.C.An issuer will seek to sell the bill in the market at the highest yield.D.Bills are sold at a discount to face value.

Difficulty: HardViney - Chapter 02 #30learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY31.For a bank, the advantage of bill financing is:A.it earns income from accepting billsB.it doesn't necessarily have to use its own fundsC.interest rates on bill funding can be adjusted rapidlyD.All of the given answers.

Difficulty: MediumViney - Chapter 02 #31learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY32.Commercial banks take part in the money markets as:A.lenders of funds onlyB.borrowers of funds onlyC.both lenders and borrowers of fundsD.underwriters only

Difficulty: MediumViney - Chapter 02 #32learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY33.Foreign currency liabilities have increased in importance as a source of funds for Australian banks. Major reasons for this include: I. Deregulation of the foreign exchange marketII. Diversification of funding sourcesIII. Demand from multinational corporate clientsIV. Internationalisation of global financial marketsV. Avoidance of the non-callable deposit prudential requirementVI. Expansion of banks' asset-base denominated in foreign currenciesA.I, II, III, IV, VIB.II, III, IV, V, VIC.I, III, IV, V, VID.All of the given answers.

Difficulty: HardViney - Chapter 02 #33learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY34.Alternatives to the usual source of long-term bank funds that have the characteristics of both debt and equity are called:A.secured debenturesB.transferable certificates of depositC.promissory notesD.subordinated notes

Difficulty: MediumViney - Chapter 02 #34learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY35.All of the following balance sheet portfolio items are assets of a bank EXCEPT:A.overdraftsB.lease financeC.certificates of depositD.credit card draw-downs

Difficulty: MediumViney - Chapter 02 #35learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY36.Short-term discount securities issued by a drawer at a discount, with the promise to repay the face value at maturity, are called:A.commercial paperB.commercial billsC.certificates of depositD.All of the given answers.

Difficulty: MediumViney - Chapter 02 #36learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY37.All of the following financial securities are 'uses of funds' by the banks EXCEPT:A.commercial billsB.credit cardsC.certificates of depositD.overdrafts

Difficulty: MediumViney - Chapter 02 #37learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY38.If you take out a mortgage from a bank, the mortgage is a/an:A.liability to the bank and an asset to youB.liability to you and an asset to the bankC.liability to both you and the bankD.asset to both you and the bank

Difficulty: MediumViney - Chapter 02 #38learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY39.BBSW refers to:A.the reference rate for medium-term fundingB.a rate calculated each day from the offer rate of the last daily sale in the bank bill marketC.the average mid-point of the bid and offer rates in the bank bill marketD.the bank bill security rate

Difficulty: MediumViney - Chapter 02 #39learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY40.Banks invest in government securities because:A.they offer high yield owing to their riskB.they offer a low yield owing to their illiquidityC.all government bonds offer protection against inflation riskD.they can be used as security against banks' borrowing

Difficulty: MediumViney - Chapter 02 #40learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY41.Off-balance-sheet business for a bank refers to:A.deposits and loans longer than one yearB.transactions that are currently only a contingent liabilityC.call deposits that may be withdrawn on demandD.consumer loans that are in default

Difficulty: MediumViney - Chapter 02 #41learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY42.All of the following are off-balance-sheet transactions of a bank EXCEPT:A.documentary letters of creditB.performance guaranteesC.underwriting facilitiesD.bills receivable

Difficulty: MediumViney - Chapter 02 #42learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY43.By the end of 2000, there had been a substantial expansion in fee-related income for banks. What is the principal reason for this expansion?A.Increased confidence in banks by individual investorsB.Increased off-sheet business (OBS) for banksC.Reduced guidelines by APRAD.Increased deposits in banks

Difficulty: EasyViney - Chapter 02 #43learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY44.Which of the following is true for off-balance-sheet business for banks?A.It is a small part of a bank's income.B.It is recorded on a bank's statement of income and expense.C.It represents fee-based income.D.It records deposits that do not fit on the balance sheet.

Difficulty: MediumViney - Chapter 02 #44learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY45.Which of the following statements about market-related items for a bank is FALSE?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.D.They form a small part of banks' OBS business.

Difficulty: HardViney - Chapter 02 #45learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY46.The off-balance-sheet business of banks is listed below. Which category represents the most significant proportion of total off-balance-sheet business of the banks?A.Direct credit substitutesB.Trade and performance-related itemsC.CommitmentsD.Market-rate-related transactions

Difficulty: HardViney - Chapter 02 #46learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY47.Most of the market-rate-related off-balance-sheet business of banks is listed below. Which category represents the most significant proportion of total market-rate-related off-balance-sheet business of the banks?A.Currency swap agreementsB.Foreign exchange contractsC.Interest rate swapsD.Interest rate futures

Difficulty: MediumViney - Chapter 02 #47learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY48.An example of an 'off-sheet business' transaction that banks are generally involved in is:A.providing a 'standby letter of credit'B.providing a note issuance facilityC.providing a short-term, self-liquidating trade contingencyD.All of the given answers.

Difficulty: MediumViney - Chapter 02 #48learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY49.Off-balance-sheet business is usually divided into four major categories:A.Direct credit substitutes; trade and performance-related items; commitments; and trade guaranteesB.Direct credit substitutes; trade and performance-related items; commitments; and market-related transactionsC.Direct credit substitutes; trade and performance-related items; commitments; and underwriting facilitiesD.Direct credit substitutes; 'standby letters of credit'; commitments; and market-related transactions

Difficulty: MediumViney - Chapter 02 #49learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY50.50: A 'commitment' by a bank is:A.a form of swapB.a promise by a large depositor to provide extra funds to the bankC.the unused balance on a bank credit cardD.an undertaking to advance funds or to acquire an asset in the future

Difficulty: MediumViney - Chapter 02 #50learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY51.51: Consider the following five statements:Banks issue liquid financial liabilities that make up a large proportion of their activitiesBanks' share of assets of all financial institutions has increased after deregulationBanks' involvement in market-rate-related contracts forms a small part of their off-balance-sheet businessIf a bank discounts a bank bill drawn by a client into the marketplace, then it sells the loan to another partyTo improve the quality of their assets, the major banks may purchase more Commonwealth securitiesHow many of these statements are true and how many are false?A.2 statements are true and 3 are falseB.3 statements are true and 2 are falseC.4 statements are true and 1 is falseD.1 statement is true and 4 are false

Difficulty: HardViney - Chapter 02 #51learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY52.Which of the following is NOT an argument for some form of government regulation of the banking system?A.The money-creation role of banks.B.A major source of funds to the banks comes from households who need their savings protected.C.The excess return on assets that banks have been making in recent years.D.Maintaining confidence in the financial system.

Difficulty: MediumViney - Chapter 02 #52learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY53.Which of the following is NOT associated with the purpose of regulating financial institutions?A.Providing stability of the money supply.B.Directing flow of funds to priority areas.C.Maintaining the soundness and stability of the financial system.D.Lowering the cost of funds.

Difficulty: MediumViney - Chapter 02 #53learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY54.APRA is responsible for the regulatory supervision of financial institutions, such as banks and credit unions. APRA stands for:A.Australian Practice and Regulatory AssociationB.Australian Prudential Regulation AuthorityC.Australian Prudential Rule AuthorityD.Australian Practice and Regulatory Authority

Difficulty: EasyViney - Chapter 02 #54learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY55.Which of the following institutions are supervised by APRA?A.Building societiesB.Commercial banksC.Credit unionsD.All of the given answers.

Difficulty: EasyViney - Chapter 02 #55learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY56.The requirement and observation of standards designed to ensure the stability and soundness of a financial system is called:A.fiscal policyB.monetary policyC.prudential supervisionD.the Basel accord

Difficulty: EasyViney - Chapter 02 #56learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY57.57: The Basel capital adequacy requirements apply to:A.all financial institutionsB.banks, investment banks and merchant banks onlyC.all financial institutions supervised by ASICD.all banks registered with APRA and some other financial institutions

Difficulty: EasyViney - Chapter 02 #57learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY58.Some of the elements in assessing capital adequacy requirements for banks under the Basel II capital accord are:A.credit risk, liquidity risk and interest rate riskB.credit risk, market risk and type of capital heldC.default risk, interest rate risk and market riskD.default risk, liquidity risk and type of capital held

Difficulty: MediumViney - Chapter 02 #58learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY59.According to the textbook, the Basel II approach to capital adequacy involves ____ main elements.A.threeB.fourC.fiveD.six

Difficulty: MediumViney - Chapter 02 #59learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY60.Which of the following does NOT apply to Tier 1 capital?A.It is described as 'core capital'.B.It must constitute at least 50% of a bank's capital base.C.Paid-up ordinary shares can be included in it.D.Cumulative irredeemable APRA-approved preference shares can be included in it.

Difficulty: HardViney - Chapter 02 #60learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY61.Which of the following statements about regulatory capital is FALSE?A.Tier 1 capital includes paid-up ordinary shares, retained earnings, non-cumulative irredeemable preference shares and general reserves.B.Tier 2 capital includes general provision for doubtful debts, revaluation reserves of premises, mandatory convertible notes and approved perpetual subordinated debt.C.Tier 1 capital is core capital, including paid-up ordinary shares, non-cumulative irredeemable preference shares and general reserves.D.Tier 2 capital includes general reserves for doubtful debts, asset revaluation reserves of premises, other preference shares, mandatory convertible notes, cumulative redeemable preference shares and perpetual subordinated debt.

Difficulty: HardViney - Chapter 02 #61learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY62.The Pillar 1 approach of Basel II capital adequacy incorporates three risk components:A.Credit risk, interest-rate risk and market riskB.Default risk, interest-rate risk and operational riskC.Credit risk, market risk and operational riskD.Default risk, foreign exchange risk and operational risk

Difficulty: MediumViney - Chapter 02 #62learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY63.Which of the following statements regarding capital adequacy requirements is INCORRECT?A.Existing credit-risk guidelines are extended to include market risk arising from a bank's trading activities.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.D.Tier 2 capital is divided into upper and lower Tier 2 parts.

Difficulty: MediumViney - Chapter 02 #63learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY64.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:A.assign a risk-weighting of 20% for the balanceB.allocate Tier 1 and Tier 2 capital to the loan according to the riskiness of the companyC.seek funding in the euromarkets to minimise the capital adequacy requirementsD.apply a risk weighting of 50% to the loan to determine the total capital requirement

Difficulty: HardViney - Chapter 02 #64learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY65.In the Basel II standardised approach to external rating grades, the asset counterparty weights for capital adequacy guidelines are:A.10%, 20%, 50% and 100%B.10%, 50%, 100% and 150%C.20%, 50%, 100% and 150%D.20%, 50%, 100% and 200%

Difficulty: HardViney - Chapter 02 #65learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY66.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.20%B.50%C.100%D.150%

Difficulty: HardViney - Chapter 02 #66learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY67.Under Pillar 1 of the Basel II framework, the risk weight for a residential housing loan is determined by the:A.amount borrowedB.level of mortgage insuranceC.house valuationD.All of the given answers.

Difficulty: MediumViney - Chapter 02 #67learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY68.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.A.$16 000B.$40 000C.$80 000D.$120 000

Difficulty: HardViney - Chapter 02 #68learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY69.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%.A.$6 400B.$16 000C.$160 000D.$240 000

Difficulty: HardViney - Chapter 02 #69learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY70.A large commercial bank operating in the international markets will generally apply to the banks' supervisor to use the _____ to credit risk.A.advanced internal ratings-based approachB.foundation external ratings-based approachC.standardised approachD.standardised approach with external ratings

Difficulty: MediumViney - Chapter 02 #70learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY71.The risk that arises from chance of loss as a result of inadequate internal bank processes is called:A.default riskB.interest rate riskC.market riskD.operational risk

Difficulty: MediumViney - Chapter 02 #71learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY72.Which of the following statements about recently adopted guidelines covering capital requirements for market risk that banks are required to perform is FALSE?A.They use a risk measurement model based on a VaR approach.B.They estimate the sensitivity of portfolio components to small changes in prices.C.They must hold capital against risk of loss from changes in interest rates.D.They hold a fixed allocation of funds between various balance sheet assets and off-balance-sheet business.

Difficulty: MediumViney - Chapter 02 #72learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY73.For a commercial bank that operates in foreign exchange, interest rate and equity markets, the capital adequacy guidelines for the market risk it is exposed to fall under:A.Pillar 1B.Pillar 2C.Pillar 3D.Pillar 4

Difficulty: MediumViney - Chapter 02 #73learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY74.Under _____ of Basel II, bank supervisors should review and evaluate banks' internal capital adequacy assessments.A.Pillar 4B.Pillar 3C.Pillar 1D.Pillar 2

Difficulty: MediumViney - Chapter 02 #74learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY75.Part of a bank's liquidity management is for it to hold a portfolio of:A.term loansB.mortgagesC.Commonwealth securitiesD.credit card loans

Difficulty: MediumViney - Chapter 02 #75learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY76.Generally, commercial banks are the main type of financial institution in a financial system because they hold the largest amounts of financial assets.TRUEBanks have long been the dominant type of financial institution, although in recent years managed funds have close to having the same amount of financial assets under management.

Difficulty: EasyViney - Chapter 02 #76learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY77.The greater the dominance of commercial banks in an economy, the less regulation required.FALSEBecause of the dominance of banks and the correlation between their business and a country's economy, there are strong arguments for regulation to constrain a bank's business.

Difficulty: EasyViney - Chapter 02 #77learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY78.Banks obtain funds from many areas. These sources of funds appear as liabilities on a bank's balance sheet.TRUEDeposits are a major part of a bank's sources of funds and a bank needs to pay interest expense.

Difficulty: EasyViney - Chapter 02 #78learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY79.Liability management is where banks actively manage their liabilities in order to meet future loan demand.TRUE

Difficulty: EasyViney - Chapter 02 #79learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY80.Call deposits are funds lodged in a bank account for a specified short-term period.FALSE

Difficulty: EasyViney - Chapter 02 #80learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY81.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.FALSE

Difficulty: MediumViney - Chapter 02 #81learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY82.One of the important attributes of certificates of deposit for a bank is the ability to adjust the yields on new issues.TRUE

Difficulty: EasyViney - Chapter 02 #82learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY83.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.FALSE

Difficulty: EasyViney - Chapter 02 #83learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY84.A bank may seek to obtain funds by issuing unsecured notes with a collaterised floating charge over its deposits.FALSE

Difficulty: EasyViney - Chapter 02 #84learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY85.Foreign currency liabilities are debt instruments issued into another country but not denominated in the currency of that country.FALSE

Difficulty: EasyViney - Chapter 02 #85learning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY86.Briefly discuss the sources of funds for a commercial bank.Sources of funds appear on a bank's balance sheet either as liabilities or shareholders' equity funds. The main sources of funds are first the more liquid funds from current account deposits, call deposits. Then there are term deposits, negotiable certificates of deposit where a bank may issue directly into the money market, bill acceptance liabilities, debt liabilities, foreign currency liabilities, and loan capital and shareholders' equity.

Viney - Chapter 02 #86difficulty: EMPTYlearning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY87.Describe how a bill acceptance facility works.If a company with a good credit record is looking to raise funds through the issue of a bill of exchange 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. Or the bank may provide the funds directly for the bill by agreeing to discount the bill and buy it from the issuer, and usually rediscount the bill subsequently. So the bank could provide a bill acceptance facility and a bill discount facility.

Viney - Chapter 02 #87difficulty: EMPTYlearning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY88.Discuss the main features of housing finance.This involves the lending of long-term funds to individuals so that they can buy residential property. As security for the loan the bank lender registers a mortgage over the property. In recent years commercial banks and specialist mortgage lenders have used securitisation to refinance their lending.

Viney - Chapter 02 #88difficulty: EMPTYlearning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY89.Discuss the main features of a bank's commercial lending.Commercial lending is when banks lend to the business sector and other financial institutions. This is considered essential if economic growth is to be achieved within a country. Commercial banks offer borrowers both short-term and long-term loans of various types such as overdraft facilities.

Viney - Chapter 02 #89difficulty: EMPTYlearning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY90.Within the context of off-balance-sheet business, explain direct credit substitutes and trade- and performance-related items and any differences between these items.Direct credit substitutes are where a bank supports a client's financial obligation such as providing a 'standby letter of credit' so that a company may raise funds directly in the market place. Trade- and performance-related items are when a bank offers guarantees to support a client's non-financial obligations. Both of these items are not recorded on a bank's balance sheet.

Viney - Chapter 02 #90difficulty: EMPTYlearning goal: EMPTYlearning objective: EMPTYlevel: EMPTYlo: EMPTYquestion type: EMPTYsource: EMPTYtype: EMPTY

MenuItem 3: {Topic 3} Non-bank financial institutions

Question 1: The financial institution that is a specialist provider of financial and advisory services to companies is:

A: a credit unionB: a finance companyC: a building societyD*: an investment bank

Level: 2

Question 2: Money market corporations:

A: obtain all their funding by issuing bank billsB*: are generally referred to as investment banksC: offer money market deposits to retail clientsD: sell money market securities

Level: 2

Question 3: The task of the investment bank in a public issue of new shares is to:

A: offer interim financing to the firmB: invest the funds raised in the capital marketsC*: provide advice in designing and pricing a share issueD: act as a trustee of the funds raised

Level: 3

Question 4: Investment banks:

A: are supervised by APRA, since they operate in the banking sectorB: focus their activities in the bank bill sector and money marketC: obtain their deposits from only large corporationsD*: are not required to comply with minimum capital adequacy requirements, but commercial banks are

Level: 3

Question 5: A company may hire ________ to advise on and underwrite its new share issue.

A: a loans officerB*: an investment bankerC: a share analystD: a treasury officer

Level: 2

Question 6: The principal source of income for investment banks is:

A: issuing bank billsB*: off-balance sheet businessC: issuing secondary securitiesD: issuing certificates of deposit

Level: 3

Question 7: Money market corporations (merchant and investment banks) have significantly increased their off-balance sheet business due to competition. All of the following are off-balance sheet activities of investment banks EXCEPT:

A: mergers and acquisitionsB: managing project finance undertakingsC*: trading in the short-term money marketD: strategic risk management advice

Level: 3

Question 8: Most corporations will seek advice from ______ for possible mergers and acquisitions.

A: an investment brokerB: a commercial bankerC: an accounting firmD*: an investment banker

Level: 2

Question 9: The process of due diligence involves:

A: underwriting of new equity issues by a companyB: providing advice to companies on the raising of new equityC*: detailed analysis of a firms financial statementsD: placement of securities to institutional investors

Level: 3

Question 10: Underwriting is:

A: when a broker places new share issues with selected financial institutionsB: when an investment bank gives advice to a company about a mergerC*: when a broker guarantees prices on a security issue for a companyD: when an investment bank finds funding for a company

Level: 3

Question 11: When an investment bank guarantees a certain price for a company issuing new shares, it is acting as:

A: an auctioneerB: a brokerC: a dealerD*: an underwriter

Level: 2

Question 12: When an investment bank helps a company sell large parcels of shares directly to institutional investors, this is called:

A: due diligenceB*: private placementC: securitisationD: underwriting

Level: 3

Question 13: The ________ is the company in a merger transaction that tries to merge with or acquire another company.

A: target companyB*: takeover companyC: conglomerate companyD: hostile company

Level: 2

Question 14: The ________ is the company in a merger transaction that is being pursued as a takeover possibility.

A*: target companyB: takeover companyC: conglomerate companyD: hostile company

Level: 2

Question 15: If a car manufacturer were to purchase one of the companies listed below, which purchase would be called a horizontal takeover?

A: a steel millB*: a rival car manufacturerC: a tyre manufacturerD: a finance company

Level: 2

Question 16: A conglomerate takeover occurs when:

A*: companies from different business areas mergeB: both parties are similar in sizeC: the merged entity is expected to have large additional valueD: the management team of the target company are combined with those of the takeover company.

Level: 3

Question 17: All of the following are reasons for mergers EXCEPT:

A: financesB: economies of scaleC: business diversificationD*: to have a dominating share of the market

Level: 2

Question 18: The amount of financial assets held by insurance companies has _______ over the last 20 years.

A: decreasedB: remained stableC: increased slowlyD*: increased dramatically

Level: 3

Question 19: As of 2005, the largest proportion of assets held by life insurance companies is:

A: Commonwealth securitiesB: loans and placementsC*: equities and units in trustsD: land and buildings

Level: 4

Question 20: In Australia, the prudential supervisor of life insurance offices is:

A: ASICB*: APRAC: the Reserve Bank of AustraliaD: SIS

Level: 2

Question 21: Which of the following statements with regards to life insurance companies is true?

A: Life insurance companies are more likely to acquire short-term assets than long-term securities, for liquidity reasons.B*: Life insurance companies are more likely to acquire long-term assets because their liabilities are long-term in nature.C: life insurance companies tend to acquire short-term assets because they have relatively predictable inflows and outflows.D: The Reserve Bank of Australia regulates life insurance companies.

Level: 3

Question 22: All of the following statements about life insurance companies are true EXCEPT:

A: as inflows of funds are relatively predictable, they have a very stable level of liabilitiesB: they have greatly increased their assets over the last decadeC: they sell contracts that offer financial cover against premature deathD*: they have large amounts of short-term liquid securities.

Level: 2

Question 23: Life insurance companies:

A*: are significant investors in equitiesB: invest mainly in debt, which is generally in the form of debenturesC: are not important suppliers of equity fundingD: None of the above.

Level: 3

Question 24: The change in the portfolio of financial assets for the life insurance companies since the 1980s has been mainly due to:

A*: change in government regulationsB: strong financial marketsC: change in policies of life insurance companiesD: strong growth in the number of life insurance policies.

Level: 3

Question 25: By the end of 2005, there had been a substantial expansion of assets in the life insurance industry. What is one of the primary reasons for this?

A: increased confidence in life policies by individual investorsB*: growth in superannuation fundsC: decreased cost of regulation by the Australian Financial Institutions CommissionD: rationalisation through mergers of small life insurance companies

Level: 3

Question 26: 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: equity investments B: debentures and notesC: housing loan mortgagesD*: money market securities

Level: 3

Question 27: A life insurance company that sells a large number of ________ will need a large portion of liquid assets to match the liabilities.

A: whole-of-life policiesB: 20-year term policiesC: annuitiesD*: one-year renewable term policies

Level: 3

Question 28: General insurance companies hold:

A: a smaller amount of short-term assets than life insurance companies doB*: a greater amount of short-term assets than life insurance companies doC: approximately the same amount of short-term assets as life insurance companiesD: only long-term assets

Level: 2

Question 29: General insurance companies hold more liquid assets than life insurance companies do because:

A: they have a legal requirement to do soB*: events such as fires and earthquakes are difficult to predictC: more people try to get payouts from them by fraudD: as there are more items covered under a general insurance policy, there are more payouts to the insured

Level: 2

Question 30: A major difference between a whole-of-life insurance policy and a term-life policy is:

A: the whole-of-life policy is long-term, whereas a term policy is only for the term of one yearB: a term policy has an investment component, specified only for the term C*: only a whole-of-life policy has an investment componentD: term policies only pay bonuses at the end of the term, unlike the wholeof-life policy, which pays them out immediately as they are accumulated

Level: 3

Question 31: All of the following apply to a whole-of-life insurance policy EXCEPT:

A: includes an investment componentB: is a long-term insurance policyC: may pay a bonus if surplus investment returns are generatedD*: premiums reduce over time due to accumulated bonuses

Level: 3

Question 32: In a(n) _____ insurance policy, there is no savings component.

A*: termB: variableC: wholeD: endowment

Level: 2

Question 33: For term-life policies with a stepped premium over time, the policy holder pays:

A: premiums based on current market ratesB*: premiums that increase gradually over timeC: premiums based on increases in inflationD: premiums based on indexing the sum insured

Level: 3

Question 34: A portfolio manager for a general insurance company who expects a downturn in the markets is likely to shift more of the companys portfolio into:

A: common stockB: long-term corporate bondsC: preference sharesD*: short-term securities

Level: 2

Question 35: The function of a ________ is to provide income for employees of corporations or governments after they retire.

A: building societyB: credit unionC: general insurerD*: superannuation fund

Level: 2

Question 36: Essentially, superannuation assets provide:

A: indefinite income when employees stop workingB: indefinite income as long as employees continue to workC: limited income if an employee is injured and unable to workD*: retirement income for employees

Level: 2

Question 37: Since the early 1990s, the largest growth in assets held by superannuation funds outside life offices has been in:

A: Commonwealth securitiesB: loans and placementsC*: equities and units in trustsD: land and buildings

Level: 3

Question 38: Which of the following statements is true?

A: In the 1990s, assets of superannuation funds outside life insurance offices have grown much faster than life insurance office funds.B: Assets in defined benefit schemes have experienced greater growth than assets in accumulation schemes.C: The introduction of the Superannuation Guarantee Charge (SGC) policy in 1992 resulted in rapid growth in Australias superannuation industry throughout the 1990s.D*: Both A and C.

Level: 3

Question 39: Superannuation funds, because of the ______-term nature of their liabilities, prefer to hold _____-term assets.

A*: long, longB: long, shortC: short, longD: short, short

Level: 2

Question 40: A private superannuation fund to which an individual makes recurring, predetermined payments for a given number of years into the plan is called a(an):

A: approved deposit schemeB*: superannuation savings planC: standard superannuation schemeD: single premium scheme

Level: 3

Question 41: If an individual retires early but wants to retain their superannuation entitlements in a favourable taxation environment, they can hold their eligible superannuation funds in a:

A: single-premium schemeB: growing annuity schemeC*: rollover schemeD: termination scheme

Level: 2

Question 42: 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: managed growth fundsB: capital guaranteed fundsC*: balanced growth fundsD: capital stable funds

Level: 3

Question 43: A defined benefit plan:

A: is always fully funded, with no shortfall requirementB: 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 shortfallD: is where the employee bears the risk if the performance of the investment is bad

Level: 3

Question 44: An investor who wishes to save for their retirement in 20 years time and who has a high propensity for risk is likely to invest in:

A: a fund that invests in government securities and cash depositsB: a fund that invests in government securities and some propertyC: a fund that invests in government securities and debenturesD*: a fund that invests in government securities and foreign equities

Level: 3

Question 45: In an accumulation superannuation fund:

A: the employee is promised an allocated benefit based on earnings and years of serviceB*: superannuation income varies depending on how well the plans investments have performedC: if the funds in the plan exceed the promised amount, the excess remains with the issuing firm or institution D: all of the earnings taxes are paid by the employer

Level: 4

Question 46: 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 accumulation fundB*: a defined benefit fundC: a fully funded fundD: a private fund.

Level: 3

Question 47: 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, then:

A: the final payout benefit is stated when the member joins the fundB*: the final payout depends upon the investment performance of the fundC: payment is specified under the superannuation guarantee legislationD: the benefit is paid in the form of a life annuity.

Level: 3

Question 48: All of the following Acts are relevant to the operation of the Australian superannuation industry EXCEPT:

A: Superannuation Industry (Supervision) Act 1993B: Income Tax Assessment Act 1936C*: Superannuation (Agents and Brokers) Act 1984D: None of the above.

Level: 4

Question 49: All of the following are important results of the compulsory guarantee charge implemented in July 1992 EXCEPT:

A: the amount of superannuation funds in Australia has increased significantlyB: the employer contribution SGC increased to 9% from July 2002 C*: the vast majority of retirement savings are invested in superannuation fundsD: the SGC represents a penalty taxation charge on employers.

Level: 3

Question 50: Finance companies generally:

A: issue shares and use the proceeds to buy bondsB*: raise funds in financial markets to lend to households and companiesC: raise funds from banks to lend to households and companiesD: issue bonds and use the proceeds to buy shares

Level: 2

Question 51: All of the following are features of finance companies EXCEPT:

A: they came into existence in response to regulations on interest ratesB: they sell unsecured notes and use the funds to make loans to borrowersC*: the majority of their funds are sourced from banksD: today the banks own the major finance companies

Level: 2

Question 52: Since deregulation of the financial markets in the 1980s, finance companies have seen the largest growth in their assets in:

A: bills of exchangeB: local government securitiesC: placements and depositsD*: loans to businesses

Level: 3

Question 53: Which of the following liability types represents a main source of funding for finance companies?

A: fixed-term depositsB*: debentures and unsecured notesC: bills of exchangeD: borrowings from non-residents (overseas)

Level: 3

Question 54: 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?

A: loss of confidence in building societies by individual investorsB*: conversion of building societies to banksC: increased cost of regulation by the Australian Prudential Regulation Authority (APRA)D: rationalisation through the merger of small building societies

Level: 3

Question 55: In the 1980s, building societies expanded their lending operations to:

A: foreign-currency loans for membersB: commercial paperC*: increased lending to high-risk business borrowersD: underwriting facilities

Level: 3

Question 56: Under deregulation, building societies lost market share to other financial institutions. Their response included:

A: mergers with other building societiesB: expenditure on technologyC: expanding their range of productsD*: All of the above.

Level: 2

Question 57: Permanent building societies are supervised by:A: ASICB*: APRAC: the Reserve Bank of AustraliaD: ASX

Level: 2

Question 58: A ________ is a financial intermediary that deals mainly in the flow of funds between members. Membership is generally derived from some common bond.

A: savings bankB: superannuation fund C*: credit unionD: merchant bank

Level: 2

Question 59: A credit union differs from most other financial institutions because:

A: it accepts deposits mainly from membersB: its assets are mainly loans to membersC: there are stringent requirements to hold prime liquid assetsD*: All of the above.

Level: 3

Question 60: An important source of funds for credit unions is:

A: cheque accountsB*: loan interestC: interest from government securitiesD: financial support from the organisations that employ its members

Level: 2

Question 61: The uses of funds for credit unions are mainly:

A: company sharesB: commercial paperC: debentures and unsecured notesD*: mortgages

Level: 2

Question 62: Credit unions, while representing a very small proportion of total financial assets, have strong numerical representation throughout Australia. They derive this numerical strength:

A*: from a common bond of association of society membersB: through the wide dispersion of societies throughout the countryC: because of the full range of financial services providedD: due to a guarantee of deposits provided by the government

Level: 2

Question 63: Currently, out of finance companies, credit unions, managed funds and permanent building societies, which one holds the smallest percentage of total assets of financial institutions?

A*: building societiesB: credit unionsC: finance companiesD: managed funds

Level: 3

Question 64: The financial institution that pools funds for individuals and then invests them in both the money and capital markets is a:

A: savings bankB: credit unionC: investment bankD*: managed fund

Level: 2

Question 65: Funds under management by managed funds in 2005 represented almost _____ of the total assets of financial institutions.

A: 20 per centB*: 40 per centC: 50 per centD: 60 per cent

Level: 3

Question 66: All of the following are features of unit trusts EXCEPT:

A: they are companies that accept funds from investors and make investments that yield returns in the form of income and/or capital gainsB: the market determines the value of a listed unit trustC*: unlisted unit trusts are generally highly liquid as they can accept money from investors at any timeD: the number of listed property trusts is far larger than the number of listed equity trusts.

Level: 3

Question 67: A mutual investment fund that specialises in short-term debt instruments and is usually managed by a financial intermediary is called:

A: a money market fundB*: a cash management trustC: a certificate of deposit fundD: a bank bill fund

Level: 2

Question 68: The main features of cash management trusts are:

A: they allow individuals to access the money marketsB: they provide liquidity and access to fundsC: many are associated with stockbrokers, and the electronic purchasing and selling of securities by investorsD*: All of the above.

Level: 2

Question 69: The average maturity of deposits and money market securities held in a cash management account is approximately:

A: 10 daysB: 20 daysC*: 40 daysD: 90 days

Level: 2

Question 70: Since the early 1990s, public unit trusts have seen the largest growth in assets in:

A: cash and depositsB: long-term government securitiesC*: equities and units in trustsD: land and buildings

Level: 3

Question 71: The majority of securities owned by unlisted public unit trusts are:

A: real physical assetsB: money market securitiesC*: capital market securitiesD: fixed interest trusts

Level: 3

Question 72: All of the following are features of public unit trusts EXCEPT:

A: the four main classes of trusts are property, equity, mortgage and fixed interest trustsB: there was enormous growth in public unit trusts during the 1990sC: the majority of mortgages held by a mortgage trust are first mortgagesD*: property trusts are generally unlisted as they need notice to sell their physical assets

Level: 2

Question 73: An investor is considering different methods of investment, including a public unit trust. All of the following are functions of a public unit trust EXCEPT:

A: acts as a vehicle for the pooling of investor fundsB: provides a level of investor protection though the appointment of a trusteeC: allows small investors access to larger investment opportunitiesD*: locks in a trust unit price by listing on the Australian Stock Exchange

Level: 3

Question 74: A developer is promoting a large new suburban shopping centre and decides to establish a publicly listed unit trust to attract investors. Which type of unit trust would be established?

A: a mortgage trustB*: a property trustC: an equity trustD: a cash management trust

Level: 2

Question 75: The main advantage of a listed trust over an unlisted unit trust is:

A: a listed trust has a trustee but an unlisted trust does not have a trusteeB*: a listed trust can be sold at any time by the unit holder in the marketplaceC: a listed trust invests in equities, while an unlisted trust invests only in fixed interestD: a listed trust invests in equities, while an unlisted trust invests in property

Level: 2

Question 76: Export Finance and Insurance Corporations:

A: only function is to lend directly to small- or medium-sized businesses involved in export tradeB: only function is to guarantee trade finance to small- or-medium sized businesses involved in export tradeC*: function is to encourage export trade by providing trade insurance and financial servicesD: only function is to provide insurance for Australian suppliers of goods and services against non-payment

Level: 3

Question 77: All of the following are services provided by financial institutions EXCEPT:

A: to pay interest on depositors fundsB: to provide loans to customersC: to invest customers savings in the capital marketsD*: to buy the businesses of customers

Level: 2

Question 78: _________ is the form of financing for large tourist resorts, property developments, heavy industry and processing plant developments.

A: Euro financeB: Conglomerate financeC*: Project financeD: Lease finance

Level: 2

Question 79: The main difference between project finance and other forms of lending is:

A*: lenders base their participation on expected future cash flows and assets of the projectB: lenders take a major equity stake in the projectC: the project company, which is set up as a separate legal entity, relies heavily on venture capitalists for equity fundingD: the lenders have a claim on the assets of the project as well as the sponsors

Level: 3

Question 80: All of the following features for project finance in Australia are generally correct EXCEPT:

A: guarantees provided by sponsors to lenders usually do not cover all the risks involved in the projectB: a project company is usually established as a separate legal entityC: lenders rely mainly on the expected future cash flows and the assets of the projectD*: finance is usually established on a non-recourse basis

MenuItem 4: {Topic 4} The share market and the corporation

Question 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: a sole proprietorshipB: a partnershipC: a special partnershipD*: a corporation

Level: 2

Question 2: The actual owners of a company are the _______.

A: board of directorsB: executive management groupC*: shareholdersD: creditors

Level: 2

Question 3: The _______ is(are) responsible for conducting the day-to-day financial and operational affairs of the company.

A: board of directorsB*: executive management groupC: shareholdersD: creditors

Level: 2

Question 4: The _______ is(are) responsible for the objectives and policies of the company, but not the day-to-day affairs.

A*: board of directorsB: executive management groupC: shareholdersD: creditors

Level: 2

Question 5: Which of the following forms of business organisation is characterised by limited liability?

A: sole partnershipB: partnershipC: general partnershipD*: corporation

Level: 3

Question 6: If a growing organisation wanted to set itself up so it had greater access to a wider range of capital, then it would become a:

A: sole proprietorshipB: partnershipC: general partnershipD*: listed corporation

Level: 2

Question 7: The owners of _______ face unlimited liability.

A: sole proprietorships onlyB*: sole proprietorships and partnerships onlyC: corporations onlyD: partnerships and corporations only

Level: 2

Question 8: The liability of shareholders in limited liability companies signifies that:

A: 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 sharesB*: shareholders are only liable for any amount that is unpaid on the shares of a companyC: in the event of company default, the creditors have no claim on the shareholders for any contributionD: shareholders do not have a right to participate directly in the day-to-day management of a company

Level: 3

Question 9: Because of their _____ liability, corporate stockholders are more interested in chances of _____.

A: limited, failure than successB*: limited, success than failureC: unlimited, success than failureD: unlimited, failure than success

Level: 3

Question 10: When a no-liability company defaults on its loans with its creditors, this means:

A: the creditors have a legal claim against the directors onlyB: the creditors have a legal claim against the CEO onlyC: the creditors have a legal claim against the chairman of the companyD*: the shareholders do not have to meet any remaining payment on shares

Level: 2

Question 11: When the owners of a company hire full-time executives responsible for the day-to-day decisions, this _____ the _____ problem(s)

A: lessens, shareholder-lenderB: lessens, managers-shareholdersC*: brings on, managers-shareholdersD: brings on, shareholder-lender

Level: 3

Question 12: All of the following are advantages of a corporation EXCEPT:

A: freely transferable ownershipB: limited liabilityC: access to capital marketsD*: low management costs

Level: 2

Question 13: All of the following are correct statements regarding companies EXCEPT:

A: a company is a discrete legal entityB*: since shares represent ownership in a company, ownership cannot be readily transferred to new ownersC: a company has potentially unlimited lifeD: the shareholders liability is limited

Level: 2

Question 14: All of the following are advantages of the corporate form of organisation EXCEPT:

A: the corporate form is particularly suited to large-scale business operationsB*: there is a separation of ownership (shareholders) and management controlC: the corporate form allows for conti