FINS1612 Quiz 1 Practice Semester 2, 2014 CHAPTER 1 - MULTIPLE CHOICE QUESTIONS 1. Both real assets and financial assets have four principal attributes which are important considerations in the investment decision process. Name them. I Liquidity II Capital gain III Risk IV Return or yield V Time-pattern of future cash flows VI Price and cash flow volatility A I, II, III, IV B I, III, IV, V C I, III, IV, VI D II, III, IV, V 2. It is usual to divide financial instruments into three broad categories of equity, debt and derivatives. Which of the following instruments may be issued by a company to raise new funds: I Ordinary shares II Debentures III Bills of exchange IV Futures contracts V Preference shares A II, III, IV, V B I, II, IV, V C I, II, III, V, D I, II, III, IV, V 3. Direct financing allows investors to easily: A Assess the level of default risk of an investment B Match amounts and maturity of investments with borrowers C Lower search and transaction costs D Diversify their investment portfolio 4. ‘Intermediaries, by managing the deposits they receive, are able to make loans of a longterm nature while satisfying savers’ preferences for liquid claims’. This statement is referring to which important attribute of financial intermediation? A Asset transformation B Maturity transformation C Credit risk transformation D Investment transformation 5. Which of the following is not a major factor in the credit rating process conducted by 1
agencies such as Moody’s Investors’ Service and Standard and Poor’s? A Sovereign risk of the country of the issuer B Industry risk associated with the type of issuer C Financial capacity of the issuer D Return attached the particular issue. 6. A company that issues promissory notes into the short-term money market is said to be conducting a transaction in the: A Commercial paper market B Intercompany market C Bills market D Official short-term money market 7. XYZ Enterprises Limited needs to raise additional funding to expand its manufacturing operations. The company decides to issue $5 million in debentures over the next three months. The paper will be issued into the: A Wholesale markets B Secondary markets C Unofficial short-term money market D Capital markets 8. 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 corporations B Unit trusts C Contractual savings institutions D Depository financial institutions
CHAPTER 2 - MULTIPLE CHOICE QUESTIONS 1. Banks have progressively 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 is 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 2. Which of the following financial securities does not represent a ‘use of funds’ by the banks? A Commercial bills B Credit cards C Certificates of deposit D Overdrafts
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3. The market structure of the banking sector has changed since deregulation of the financial system during the 1980s. Which statement more closely reflects the current structure of the banking sector in Australia? A Foreign banks dominate in number; and share of total assets B The major 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 4. Which of the following is not an off-balance sheet transaction of a bank? A Documentary letter of credit B Performance guarantee C Bills acceptance D Underwriting facility 5. The off-balance sheet business of banks is categorised below. Which category represents the most significant proportion of total off-balance sheet business of the banks? A Direct credit substitutes B Trade and performance related items C Commitments D Market-rate-related transactions 6. Under the Reserve Bank capital adequacy requirements, in order to fund a $100 000 loan for a multinational corporate client, a bank will: A Require funding of at least $8 000 of specific capital, and $92 000 of liabilities issues B Allocate tier 1 and tier 2 capital to the loan according to the riskiness of the company C Seek funding in the euromarkets to minimise the capital adequacy requirements D Apply a risk weighting of 20% to the loan to determine the total capital requirement 7. Mega bank provides documentary letters of credit for local government. The face value of contracts outstanding is $27 million. Calculate the dollar value of capital required under the capital adequacy requirements to support these facilities. A $43 200 B $86 400 C $216 000 D $432 000 8. Which balance sheet portfolio items does not represent an asset of a bank? A Overdrafts B Lease finance C Certificates of deposit D Credit card draw-downs
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CHAPTER 4 - MULTIPLE CHOICE QUESTIONS 1. The corporate form of a publicly listed company provides advantages to both the investor and the company. Which of the following benefits may also be regarded as a disadvantage in certain circumstances? A The corporate form is particularly suited to large scale business operations B There is a separation of ownership (shareholders) and management control C The corporate form allows for continuity of business activities D Large amounts of funding can be raised on relatively favourable terms 2. A number of different financial securities are listed on the Australian Stock Exchange. Which of the following security types is not listed on the ASX? A Ordinary shares B Treasury bonds C Debentures D Promissory notes 3. Complete the next sentence with the most appropriate response. “From the perspective of companies, the existence of an active, liquid, well-organised market in existing shares.....” A Facilitates the raising of further capital in the secondary market B Maintains the share price above the initial issue price C Encourages successful primary market issues D Is of little or no consequence 4. Techno Limited plans to operate in the communications industry, and is about to list on the Australian Stock Exchange. The company has been advised to appoint an underwriter to the new share issue. The basic role of an underwriter is to: A Provide advice on the timing of the share issue B Ensure the company complies with ASX listing rules C Establish a deep and liquid secondary market in the shares D Purchase any unsold shares on issue 5. In support of its primary market and secondary market roles, the Australian Stock Exchange provides a market for the trade of specific sharemarket related derivative products. Which of the following statements is not correct? “ASX derivative products .....” A Provide an investment tool to take advantage of future share price movements B Facilitate the management of risk within an existing share portfolio C Provide protection against adverse movements in share prices D Remove share price volatility of stocks listed on the ASX
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