Chapter 03 Testbank: of Mcgraw-Hill Education

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Chapter 03 Testbank

1. The major distinction between non-bank financial institutions (NBFIs) and commercial banks
are the following except:
A. differentiated by their source and use of funds.
B. differentiated by their off-balanced business activities and regulations.
C. under Banking Act-1959 (Common Wealth), commercial banks are authorized to operate as
banks.
D. Both NBFIs and commercial banks attract deposit from the public.

2. Which of the following non-bank financial institutions are authorised depository institutions?
A. Savings and loans limited, credit unions and building societies
B. Investment banks, building societies and savings and loans limited
C. Investment banks, life office and finance companies
D. Commercial banks only

3. The financial institution that is a specialist provider of financial and advisory services to
companies is a/an:
A. credit union.
B. finance company.
C. building society.
D. investment bank.

4. Major functions of investment banks include the following except:
A. advising and providing underwriting arrangement for clients by issuing financial securities.
B. serving as dealers or market makers in capital markets.
C. providing advice on risk management and hedging.
D. attracting deposits and providing investment loans.

5. Money market corporations:
A. obtain all their funding by issuing bank bills.
B. are generally referred to as investment banks.
C. offer money market deposits to retail clients.
D. sell money market securities to retail clients.

6. The task of the investment bank in a public issue of new shares is to:
A. offer interim financing to the firm.
B. invest the funds raised in the capital markets.
C. provide advice in designing and pricing a share issue.
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D. act as a trustee of the funds raised.

7. Unlike depository institutions such as commercial banks, building societies and credit unions,
investment banks:
A. are supervised by APRA, since they operate in the banking sector.
B. focus their activities in the bank bill sector and money market.
C. obtain their deposits only from large corporations.
D. are not required to comply with minimum capital adequacy requirements.

8. A company may hire a/an ________ to advise on and underwrite its new share issue.
A. loans officer
B. investment banker
C. share analyst
D. treasury officer

9. A major source of income for investment banks is from:
A. issuing bank bills.
B. off-balance-sheet business activities.
C. issuing secondary securities.
D. issuing certificates of deposit.

10. Money market corporations (merchant and investment banks) have significantly increased
their off-balance-sheet business on account of competition. All of the following are off-balance-
sheet activities of investment banks except:
A. mergers and acquisitions.
B. managing project finance undertakings.
C. trading in the short-term money market.
D. strategic risk management advice.

11. Most corporations will seek advice from a/an ______ on possible mergers and acquisitions.
A. investment broker
B. commercial banker
C. accounting firm
D. investment banker

12. The process of due diligence involves:
A. underwriting of new equity issues by a company.
B. providing advice to companies on the raising of new equity.
C. detailed analysis of a firm's financial statements.
D. placement of securities to institutional investors.

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13. Which of the following statements correctly describes about an underwriting?

A. it is a service whereby investment banks agree to buy new securities issued by a client
company those are not fully subscribed or sold.
B. investment bank gives advice to a company about a merger.
C. an investment banker as an underwriter ensures funds are raised for their clients from an
equity or debt issue.
D. both A and C are correct.

14. When an investment bank guarantees a certain price for a company issuing new shares, it is
acting as a/an:
A. auctioneer.
B. broker.
C. dealer.
D. underwriter.

15. When an investment bank helps a company sell large parcels of shares directly to
institutional investors, this is called:
A. due diligence.
B. private placement.
C. securitisation.
D. underwriting.

16. The ________ is the company in a merger transaction that tries to merge with or acquire
another company.
A. target company
B. takeover company
C. conglomerate company
D. hostile company

17. Venture capital is:
A. a form of funding provided for a new start-up business by a group of investors.
B. providing advice to companies on the raising of new capital.
C. short-term funding provided by banks.

18. The ________ is the company in a merger transaction that is being pursued as a takeover
possibility.
A. target company
B. takeover company
D. hostile company

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19. If a car manufacturer were to purchase one of the companies listed below, which purchase
would be called a horizontal takeover?
A. A steel mill
B. A rival car manufacturer
C. A tyre manufacturer
D. A finance company

20. If an oil drilling company were to purchase one of the companies listed below, which
purchase would be called a vertical takeover?
A. An oil refinery company
B. A rival oil drilling company
C. A travel company

21.
In recent year, investment banking deals have been dominated by ‘spin-off’. Spin-off is best
described as:
1. where a company breaks itself into new companies and the new companies become
separately listed public companies.
2. where a publicly owned company breaks itself into new private equity firms.
3. where a private equity firm transitions into a publicly owned company.
4. none of the given answers.

22. Which of the following statements are true for managed funds?
A. They provide direct access to wholesale investment markets for pooled savings of individuals
(not an intermediary).
B. They provide opportunities for small investors to invest in financial securities and diversify
the risk.
C. They provide professional expertise, administrative efficiency, economies of scale and a
better diversification platform.
D. All of the given answers.

23. Reasons for mergers do NOT include:
A. finances.
B. economies of scale.
C. business diversification.
D. reduction of debt.

24. The financial institution that pools funds from individuals and then invests them in both the
money and capital markets is a:
A. savings bank.
B. credit union.
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C. investment bank.
D. managed fund.

25. Which of the following statements about managed funds is NOT correct?
A. The assets of large managed funds may be managed by several professional managers.
B. A mutual fund is required to use the services of a mutual fund custodian.
C. Sources of funds for a managed fund may be in the form of monthly payments.
D. For Australia, recent figures show that the statutory funds of life offices have the largest
amounts of assets under management.

26. A managed fund that is established under a trust deed and is managed by a responsible entity
is called a:
A. mutual fund.
B. trust fund.
C. trustee fund.
D. investment fund.

27. 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 funds.
B. capital guaranteed funds.
C. balanced growth funds.
D. capital stable funds.

28. An investor who wishes to save for their retirement in 20 years' time and who is less risk-
averse is likely to invest in a managed fund that invests in government securities and:
A. cash deposits.
B. some property.
C. debentures.
D. foreign equities.

29. Benefits of investing in mutual funds do NOT include:
A. record keeping and administration.
B. professional management.
C. diversification.
D. increasing supply of credit to the economy.

30. Managed fund managers:
A. invest funds according to their fund's trust deed.
B. generally reinvest income and any capital gains in the fund.
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C. will usually maintain a diversified portfolio of assets within the asset classes.
D. all of the given answers.

31. A mutual investment fund that specialises in short-term debt instruments and is managed by a
financial intermediary is called a:
A. money market fund.
B. cash management trust.
C. certificate of deposit fund.
D. bank bill fund.

32. The main feature of cash management trusts is:
A. they allow individuals to access the money markets.
B. they provide liquidity and access to funds.
C. that many are associated with stockbrokers and the electronic purchasing and selling of
securities by investors.

33. The largest proportion of funds held by cash management funds in Australia is in:
A. cash and deposits.
B. bills of exchange.
C. promissory notes and CDs.
D. bills of exchange and CDs.

34. Which of the following statements is NOT a feature of unit trusts?
A. Unit trusts are companies that accept funds from investors and make investments that yield
returns in the form of income and/or capital gains.
B. The market determines the value of a listed unit trust.
C. Unlisted unit trusts are generally highly liquid as they can accept money from investors at any
time.
D. The number of listed property trusts is far larger than the number of listed equity trusts.

35. The majority of securities owned by unlisted public unit trusts are:
A. real physical assets.
B. money market securities.
C. capital market securities.
D. fixed interest trusts.

36. One of the major disadvantages of investing in unlisted real estate trusts is that:
A. they are generally unable to meet the demand for a large number of simultaneous withdrawal
requests as they do not hold cash reserves to the extent of the withdrawal demand.
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B. they are generally able to meet the demand for a large number of simultaneous withdrawal
requests as they hold cash reserves to the extent of the withdrawal demand.
C. they are generally able to meet the demand for a large number of simultaneous withdrawal
requests as the units are highly liquid.

37. Which of the following statements is NOT a feature of public unit trusts?
A. The four main classes of trusts are property, equity, mortgage and fixed interest trusts.
B. There was enormous growth in public unit trusts during the 1990s.
C. The majority of mortgages held by a mortgage trust are ‘first' mortgages.
D. Property trusts are generally unlisted as they need notice to sell their physical assets.

38. An investor is considering different methods of investment, including a public unit trust.
Which of the following is NOT a function of a public unit trust?
A. Acting as a vehicle for the pooling of investor funds
B. Providing a level of investor protection though the appointment of a trustee
C. Allowing small investors access to larger investment opportunities
D. Locking in a trust unit price by listing on the Australian Securities Exchange

39. 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 likely be established?
A. A mortgage trust
B. A property trust
C. An equity trust
D. A cash management trust

40. The main advantage of a listed trust over an unlisted unit trust is that a listed trust:
A. has a trustee but an unlisted trust does not.
B. units can be sold at any time by the unit holder in the secondary market.
C. invests in equities, while an unlisted trust invests only in fixed interest.
D. invests in equities, while an unlisted trust invests in property.

41. In Australia, listed property trusts dominate over the proportion of unlisted property unit
trusts because:
A. the valuations of buildings are larger than share valuations.
B. mortgages on buildings are larger than companies' valuations.
C. listed shares can be more advantageous in terms of liquidity.
D. it reflects the liquid nature of properties.

42. The function of a ________ is to provide income for employees of corporations or
governments after they retire.
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A. building society
B. credit union
C. general insurer
D. superannuation fund

43. Essentially, superannuation funds provide:
A. indefinite income when employees stop working.
B. indefinite income as long as employees continue to work.
C. limited income if an employee is injured and unable to work.
D. retirement income for employees.

44. Recent records about superannuation assets in Australia show that the largest amounts of
assets are in:
A. corporate superannuation funds.
B. industry corporation funds.
C. retail superannuation funds.
D. self-managed superannuation funds.

45. Which of the following funds is supervised by the Australian Taxation Office?
A. Corporate superannuation funds
B. Industry corporation funds
C. Retail superannuation funds
D. Self-managed superannuation funds

46. Which of the following statements is true?
A. Since the 1990s, assets of superannuation funds outside life insurance offices have grown
much slower 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 Australia's superannuation industry throughout the 1990s.
D. Industry superannuation funds are regulated superannuation entities with more than ten
members that provide benefits for employees working in the same industry.

47. 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 scheme.
B. superannuation savings plan.
C. standard superannuation scheme.
D. single premium scheme.

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48. 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 scheme.
B. growing annuity scheme.
C. rollover scheme.
D. termination scheme.

49. A defined benefit plan:
A. is always fully funded, with no shortfall requirement.
B. may have a shortfall, but the Commonwealth government will make good the shortfall.
C. may have a shortfall, but the employer will make good the shortfall.
D. is where the employee bears the risk if the performance of the investment is bad.

50. In an accumulation superannuation fund:
A. the employee is promised an allocated benefit based on earnings and years of service.
B. superannuation income varies depending on how well the plan's investments have performed.
C. 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.

51. The superannuation fund that involves the amount of benefit paid out on retirement being
calculated by a formula based at the time when a person joined the fund is called:
A. a defined benefit fund.
B. an accumulation fund.
C. a defined termination fund.
D. a defined payout fund.

52. The superannuation fund where the amount of funds available at retirement consists of past
contributions plus earnings less taxes and expenses is called:

53. The superannuation fund where the employer must make good a shortfall in the fund when
the benefit is to be paid up is a/an:
A. accumulation fund.
B. defined benefit fund.
C. fully funded fund.
D. private fund.

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54. When an employee makes regular contributions equal to 9.5 per cent of their salary and their
employer also contributes the equivalent of 14 per cent of salary to a superannuation fund that is
an accumulation scheme:
A. the final payout benefit is stated when the member joins the fund.
B. the final payout depends upon the investment performance of the fund.
C. payment is specified under the superannuation guarantee legislation.
D. the benefit is paid in the form of a life annuity.

55. All of the following Acts or Bills are relevant to the operation of the Australian
superannuation industry except the:
A. Superannuation Industry (Supervision) Act 1993.
B. Income Tax Assessment Act 1936.
C. Superannuation (Agents and Brokers) Act 1984.
D. Superannuation Guarantee Amendment Bill 2011.

56. Which of the following is NOT an important result of the compulsory guarantee charge
implemented in July 1992?
A. The amount of superannuation funds in Australia has increased significantly.
B. The employer contribution SGC increased to 9 per cent from July 2002.
C. The vast majority of retirement savings are invested in superannuation funds.
D. The SGC represents a penalty taxation charge on employers.

57. The amount of financial assets held by insurance companies has _______ over the past 20
years.
A. decreased
B. remained stable
C. increased slowly
D. increased dramatically

58. Which of the following has regular, relatively predictable and long-term inflow of funds?
A. Life insurance office
B. General insurance
C. Income protection insurance
D. Trauma insurance

59. Recent figures show the largest proportion of assets held by life insurance companies is:
A. Commonwealth securities.
B. loans and placements.
C. equities and units in trusts.
D. land and buildings.

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60. Under a co-insurance clause, a house with a replacement cost of $500 000 is covered for only
90 per cent of the losses. Which one of the following statements is true?
A. The insurance office will pay only $450 000 and the policy holder will be said to have self-
insured for the remaining 10 per cent of the damage.
B. The insurance office will pay only $400 000 and the policy holder will be said to have self-
insured for the remaining $100 000 of the damage.
C. The insurance office will pay only $50 000 and the policy holder will be said to have self-
D. The insurance company will pay only $100 000.

61. In Australia, the prudential supervisor of life insurance offices is:
A. ASIC.
B. APRA.
C. the Reserve Bank of Australia.
D. PSLI.

62. Which of the following statements with regard 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.

63. Which of the following statements about life insurance companies is false?
A. As inflows of funds are relatively predictable, they have a very stable level of liabilities.
B. Life insurance companies have greatly increased their assets over the past decade.
C. Life insurance companies sell contracts that offer financial cover against premature death.
D. Life insurance companies have large amounts of short-term liquid securities.

64. Life insurance companies:
A. are significant investors in equities.
B. invest mainly in debt, which is generally in the form of debentures.
C. are not important suppliers of equity funding.
D. do not match any of these answers.

65. In Australia there has been a substantial expansion of assets in the life insurance industry.
Which of the following factors is one of the primary reasons for this?
A. Increased confidence in life policies by individual investors
B. Growth in superannuation funds
C. Decreased cost of regulation by the Australian Financial Institutions Commission
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D. Rationalisation through mergers of small life insurance companies

66. 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 notes
C. Housing loan mortgages
D. Money market securities

67. 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 policies
B. 20-year-term policies
C. annuities
D. one-year renewable term policies

68. General insurance companies hold:
A. a smaller number of short-term assets than life insurance companies.
B. a greater number of short-term assets than life insurance companies.
C. approximately the same number of short-term assets as life insurance companies.
D. only long-term assets.

69. General insurance companies hold more liquid assets than life insurance companies because:
A. they have a legal requirement to do so.
B. events such as fires and earthquakes are difficult to predict.
C. more people try to get payouts from them by fraud.
D. there are more items covered under a general insurance policy so there are more payouts to
the insured.

70. A major difference between a whole-of-life insurance policy and a term-life policy is:
A. a whole-of-life policy is long-term, whereas a term policy is only for a term of one year.
B. a term policy has an investment component, specified only for the term.
C. only a whole-of-life policy has an investment part.
D. term policies only pay bonuses at the end of the term, unlike the whole–of-life policy, which
pays them out immediately as they are accumulated.

71. Which of the following does NOT apply to a whole-of-life insurance policy?
A. It includes an investment component
B. It is a long-term insurance policy
C. It may pay a bonus if surplus investment returns are generated
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D. Premiums reduce over time owing to accumulated bonuses

72. In a/an _____ insurance policy, there is no savings component.
A. term
B. variable
C. whole
D. endowment

73. In relation to insurance for term-life policies with a stepped premium over time, the policy
holder pays premiums:
A. based on current market rates.
B. that increase gradually over time.
C. based on increases in inflation.
D. based on indexing the sum insured.

74. For motor vehicle insurance, a third party policy means:
A. the policy covers damage to the named vehicle plus any damage to any third party vehicle or
party.
B. the policy covers damage to both parties.
C. the policy covers damage or loss to a third party or property only.
D. the policy covers damage to the named vehicle plus any theft.

75. A fund that aims to achieve high investment returns by using exotic financial products is
called a:
A. a hedge fund.
B. project fund.
C. money market fund.
D. leverage fund.

76. A hedge fund that takes a long position in the Australian dollar is forecasting the Australian
dollar will:
A. depreciate in value.
B. appreciate in value.
C. remain the same in value.
D. depreciate in value in the long-term.

77. A hedge fund that takes a short position in equity markets:
A. will sell forward shares.
B. will buy a derivative that they expect will increase in price.
C. will buy shares.
D. is expecting the markets to increase.
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78. Finance companies generally:
A. issue shares and use the proceeds to buy bonds.
B. raise funds in financial markets to lend to households and companies.
C. raise funds from banks to lend to households and companies.
D. issue bonds and use the proceeds to buy shares.

79. Which of the following statements is NOT a feature of finance companies?
A. Finance companies came into existence in response to regulations on interest rates.
B. Finance companies sell unsecured notes and use the funds to make loans to borrowers.
C. The majority of finance companies' funds are sourced from banks.
D. Today the banks own many large finance companies.

80. Since deregulation of the financial markets in the 1980s, finance companies have seen the
largest growth in their assets in:
A. bills of exchange.
B. local government securities.
C. placements and deposits.
D. loans to businesses.

81. Finance companies use their funds to provide:
A. loans to individuals.
B. instalment credit to finance retail sales to retail stores.
C. lease financing.

82. 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 investors
B. Conversion of building societies to banks
C. Increased cost of regulation by the Australian Prudential Regulation Authority (APRA)
D. Rationalisation through the merger of small building societies

83. Which of the following statement about building societies in Australia is NOT correct?
A. The main activities of building societies are to take in deposits and provide mortgage finance.
B. The largest building societies have tended to convert to regional banks in recent times.
C. Now currently the building society sector holds 2 per cent of the total assets of the Australian
financial system.
D. Building societies are authorised deposit-taking institutions and supervised by APRA.

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84. Under deregulation, building societies lost market share to other financial institutions. Their
response included:
A. mergers with other building societies.
B. expenditure on technology.
C. expanding their range of products.

85. In Australia permanent building societies are supervised by:
A. ASIC.
B. APRA.
D. ASX.

86. 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 bank
B. superannuation fund
C. credit union
D. merchant bank

87. A credit union differs from most other financial institutions because:
A. it accepts deposits mainly from members.
B. its assets are mainly loans to members.
C. there are stringent requirements to hold prime liquid assets.

88. The uses of funds for credit unions are mainly:
A. company shares.
B. commercial paper.
C. debentures and unsecured notes.
D. mortgages.

89. Which of the following holds the smallest percentage of total assets of financial institutions?
A. Building societies
B. Credit unions
C. Finance companies
D. Managed funds

90. Export Finance and Insurance Corporation's function is:
A. solely to lend directly to small- or medium-sized businesses involved in export trade.
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B. solely to guarantee trade finance to small- or medium- sized businesses involved in export
trade.
C. to encourage export trade by providing trade insurance and financial services.
D. solely to provide insurance for Australian suppliers of goods and services against non-
payment.

91. The form of financing for large tourist resorts, property developments, heavy industry and
processing plant developments is called:
A. euro finance.
B. conglomerate finance.
C. project finance.
D. lease finance.

92. 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 project.
B. lenders take a major equity stake in the project.
C. the project company, which is set up as a separate legal entity, relies heavily on venture
capitalists for equity funding.
D. the lenders have a claim on the assets of the project as well as the sponsors.

93. When an oil refining company takes over an oil exploration company, the result is a:
A. vertical takeover.
B. horizontal takeover.
C. conglomerate takeover.
D. hostile takeover.

94. If someone does not want to make any investment decisions then the best type of fund would
be:
C. a rollover fund.
D. a superannuation fund.

95. Which insurance product is simply life insurance?
A. Whole-of-life
B. Term-life
C. Total and permanent disablement
D. Income protection

96. Which type of fund or trust employs a strategy that often uses high levels of leverage?
A. Hedge fund
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B. Superannuation fund
C. Public unit trusts
D. Capital guaranteed funds

97. Generally investment banks do not
A. place new issues of securities.
B. advise clients about restructuring.
C. advise clients about risk management.
D. accept deposits.

98. In Australia the predominant type of public unit trust is _____. Public unit trusts are _____.
A. equity; listed and unlisted
B. equity; unlisted only
C. fixed income; listed and unlisted
D. property; listed and unlisted

99. Which type of fund is the least liquid for most investors?
A. Public unit trust
C. Cash management trust
D. Real estate investment trust

100. Unlike commercial banks, investment banks only accept deposits from large corporations.
True False

101. As investment banks have increased their underwriting activities in recent years, the number
of financial assets held by them has similarly increased.
True False

102. In the context of a merger, the process of due diligence involves valuing the target company
shares.
True False

103. In relation to Australian managed funds, cash management trusts currently have the largest
amount of funds under management.
True False

104. A capital guaranteed fund guarantees that contributors will receive at least the value of the
contributions and future earnings of the fund.
True False
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105. A managed growth fund is designed to maximise the return from appreciation in the value
of assets in its portfolio.
True False

106. On average, the value of a balanced growth fund is subject to less market fluctuation than
that of a capital growth fund.
True False

107. Unlike commercial banks, investment banks do not have a depositor base from which to
acquire assets.
True False

108. Cash management trusts are restricted under their trust deed to hold only bank deposits and
cash.
True False

109. An insurance company is not a depository financial institution.
True False

110. The clients of investment banks include major corporations, governments, private firms,
financial institutions and qualified professional investors.
True False

111. Investment banks are involved in dealers’ markets and provide bid and offer rates for major
currencies.
True False

112. Explain the role and operation of one of the largest types of managed funds, superannuation
funds.
______________________________________________________________________________

113. Explain the operation of cash management trusts.
______________________________________________________________________________

114. Identify and discuss the types of public unit trusts according to their assets.
______________________________________________________________________________

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115. What do hedge funds do? Discuss any concerns their operations may have for the financial
system.
______________________________________________________________________________

116. What are the principal assets of a finance company? How have these been affected in recent
years?
______________________________________________________________________________

117. The distinction between listed and unlisted trusts is important. Discuss the importance and
significance of listed and unlisted unit trusts.
______________________________________________________________________________
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Chapter 03 Testbank Key

1. The major distinction between non-bank financial institutions (NBFIs) and commercial banks
are the following except:
A. differentiated by their source and use of funds.
B. differentiated by their off-balanced business activities and regulations.
C. under Banking Act-1959 (Common Wealth), commercial banks are authorized to operate as
banks.
D. Both NBFIs and commercial banks attract deposit from the public.
Ans: D
AACSB: Communication
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
Learning Objective: 3.01 Describe the roles of investment banks, with an emphasis on the nature of their off-balance-sheet
business, in particular mergers and acquisitions.
Section: 3.01 Investment banks
Topic: Investment banks

2. Which of the following non-bank financial institutions are authorised depository institutions?
A. Savings and loans limited, credit unions and building societies
B. Investment banks, building societies and savings and loans limited
C. Investment banks, life office and finance companies
D. Commercial banks only
Ans: A
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Section: Introduction
Topic: Introduction

3. The financial institution that is a specialist provider of financial and advisory services to
companies is a/an:
A. credit union.
B. finance company.
C. building society.
D. investment bank.
Ans: D
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Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

4. Major functions of investment banks include the following except:
A. advising and providing underwriting arrangement for clients by issuing financial securities.
B. serving as dealers or market makers in capital markets.
C. providing advice on risk management and hedging.
D. attracting deposits and providing investment loans.
Ans: D
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

5. Money market corporations:
A. obtain all their funding by issuing bank bills.
B. are generally referred to as investment banks.
C. offer money market deposits to retail clients.
D. sell money market securities to retail clients.
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

6. The task of the investment bank in a public issue of new shares is to:
A. offer interim financing to the firm.
B. invest the funds raised in the capital markets.
C. provide advice in designing and pricing a share issue.
D. act as a trustee of the funds raised.
Ans: C
22
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

7. Unlike depository institutions such as commercial banks, building societies and credit unions,
investment banks:
A. are supervised by APRA, since they operate in the banking sector.
B. focus their activities in the bank bill sector and money market.
C. obtain their deposits only from large corporations.
D. are not required to comply with minimum capital adequacy requirements.
Ans: D
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

8. A company may hire a/an ________ to advise on and underwrite its new share issue.
A. loans officer
B. investment banker
C. share analyst
D. treasury officer
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

9. A major source of income for investment banks is from:
A. issuing bank bills.
B. off-balance-sheet business activities.
C. issuing secondary securities.
D. issuing certificates of deposit.
Ans: B
23
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

10. Money market corporations (merchant and investment banks) have significantly increased
their off-balance-sheet business on account of competition. All of the following are off-balance-
sheet activities of investment banks except:
A. mergers and acquisitions.
B. managing project finance undertakings.
C. trading in the short-term money market.
D. strategic risk management advice.
Ans: C
Bloom's: Comprehension
Difficulty: Medium
Est time: <1 minute

11. Most corporations will seek advice from a/an ______ on possible mergers and acquisitions.
A. investment broker
B. commercial banker
C. accounting firm
D. investment banker
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

12. The process of due diligence involves:
A. underwriting of new equity issues by a company.
B. providing advice to companies on the raising of new equity.
C. detailed analysis of a firm's financial statements.
Ans: C
24
AACSB: Ethical
Difficulty: Medium
Est time: <1 minute

13. Which of the following statements correctly describes about an underwriting?
A. it is a service whereby investment banks agree to buy new securities issued by a client
company those are not fully subscribed or sold.
B. investment bank gives advice to a company about a merger.
C. an investment banker as an underwriter ensures funds are raised for their clients from an
equity or debt issue.
D. both A and C are correct.
Ans: D
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute

14. When an investment bank guarantees a certain price for a company issuing new shares, it is
acting as a/an:
A. auctioneer.
B. broker.
C. dealer.
D. underwriter.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

15. When an investment bank helps a company sell large parcels of shares directly to
institutional investors, this is called:
A. due diligence.
B. private placement.
C. securitisation.
D. underwriting.
Ans: B
25
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

16. The ________ is the company in a merger transaction that tries to merge with or acquire
another company.
A. target company
B. takeover company
D. hostile company
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

17. Venture capital is:
A. a form of funding provided for a new start-up business by a group of investors.
B. providing advice to companies on the raising of new capital.
C. short-term funding provided by banks.
Ans: A
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

18. The ________ is the company in a merger transaction that is being pursued as a takeover
possibility.
A. target company
B. takeover company
D. hostile company
Ans: A
26
Difficulty: Easy
Est time: <1 minute

19. If a car manufacturer were to purchase one of the companies listed below, which purchase
would be called a horizontal takeover?
A. A steel mill
B. A rival car manufacturer
C. A tyre manufacturer
Ans: B
Difficulty: Medium
Est time: <1 minute

20. If an oil drilling company were to purchase one of the companies listed below, which
purchase would be called a vertical takeover?
A. An oil refinery company
B. A rival oil drilling company
C. A travel company
Ans: A
Difficulty: Medium
Est time: <1 minute

21.
In recent year, investment banking deals have been dominated by ‘spin-off’. Spin-off is best
described as:
1. where a company breaks itself into new companies and the new companies become
separately listed public companies.
2. where a publicly owned company breaks itself into new private equity firms.
3. where a private equity firm transitions into a publicly owned company.
4. none of the given answers.
Ans: A
27
Difficulty: Medium
Est time: <1 minute

22. Which of the following statements are true for managed funds?
A. They provide direct access to wholesale investment markets for pooled savings of individuals
(not an intermediary).
B. They provide opportunities for small investors to invest in financial securities and diversify
the risk.
C. They provide professional expertise, administrative efficiency, economies of scale and a
better diversification platform.
D. All of the given answers.
Ans: D
Difficulty: Hard
Est time: <1 minute
Learning Objective: 3.02 Explain the structure, roles and operation of managed funds and identify factors that have influenced their
rapid growth.
Section: 3.02 Managed funds
Topic: Managed funds

23. Reasons for mergers do NOT include:
A. finances.
B. economies of scale.
C. business diversification.
D. reduction of debt.
Ans: D
AACSB: Reflective thinking
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute

24. The financial institution that pools funds from individuals and then invests them in both the
money and capital markets is a:
A. savings bank.
B. credit union.
C. investment bank.
D. managed fund.
Ans: D
28
Difficulty: Easy
Est time: <1 minute
rapid growth.

25. Which of the following statements about managed funds is NOT correct?
A. The assets of large managed funds may be managed by several professional managers.
B. A mutual fund is required to use the services of a mutual fund custodian.
C. Sources of funds for a managed fund may be in the form of monthly payments.
D. For Australia, recent figures show that the statutory funds of life offices have the largest
amounts of assets under management.
Ans: D
Difficulty: Medium
Est time: <1 minute
rapid growth.

26. A managed fund that is established under a trust deed and is managed by a responsible entity
is called a:
A. mutual fund.
B. trust fund.
C. trustee fund.
D. investment fund.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
rapid growth.

27. 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 funds.
B. capital guaranteed funds.
C. balanced growth funds.
D. capital stable funds.
Ans: C
29
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
rapid growth.

28. An investor who wishes to save for their retirement in 20 years' time and who is less risk-
averse is likely to invest in a managed fund that invests in government securities and:
A. cash deposits.
B. some property.
C. debentures.
D. foreign equities.
Ans: D
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
rapid growth.

29. Benefits of investing in mutual funds do NOT include:
A. record keeping and administration.
B. professional management.
C. diversification.
D. increasing supply of credit to the economy.
Ans: D
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
rapid growth.

30. Managed fund managers:
A. invest funds according to their fund's trust deed.
B. generally reinvest income and any capital gains in the fund.
C. will usually maintain a diversified portfolio of assets within the asset classes.
Ans: D
30
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
rapid growth.

31. A mutual investment fund that specialises in short-term debt instruments and is managed by a
financial intermediary is called a:
A. money market fund.
B. cash management trust.
C. certificate of deposit fund.
D. bank bill fund.
Ans: B
Difficulty: Easy
Est time: <1 minute
Learning Objective: 3.03 Discuss the purpose and operation of cash management trusts and public unit trusts.
Section: 3.03 Cash management trusts
Topic: Cash management trusts

32. The main feature of cash management trusts is:
A. they allow individuals to access the money markets.
B. they provide liquidity and access to funds.
C. that many are associated with stockbrokers and the electronic purchasing and selling of
securities by investors.
Ans: D
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

33. The largest proportion of funds held by cash management funds in Australia is in:
A. cash and deposits.
B. bills of exchange.
C. promissory notes and CDs.
D. bills of exchange and CDs.
Ans: A
31
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

34. Which of the following statements is NOT a feature of unit trusts?
A. Unit trusts are companies that accept funds from investors and make investments that yield
returns in the form of income and/or capital gains.
B. The market determines the value of a listed unit trust.
C. Unlisted unit trusts are generally highly liquid as they can accept money from investors at any
time.
D. The number of listed property trusts is far larger than the number of listed equity trusts.
Ans: C
Difficulty: Medium
Est time: <1 minute
Section: 3.04 Public unit trusts
Topic: Public unit trusts

35. The majority of securities owned by unlisted public unit trusts are:
A. real physical assets.
B. money market securities.
C. capital market securities.
D. fixed interest trusts.
Ans: C
Difficulty: Medium
Est time: <1 minute

36. One of the major disadvantages of investing in unlisted real estate trusts is that:
A. they are generally unable to meet the demand for a large number of simultaneous withdrawal
requests as they do not hold cash reserves to the extent of the withdrawal demand.
B. they are generally able to meet the demand for a large number of simultaneous withdrawal
requests as they hold cash reserves to the extent of the withdrawal demand.
C. they are generally able to meet the demand for a large number of simultaneous withdrawal
requests as the units are highly liquid.
Ans: A
32
Difficulty: Medium
Est time: <1 minute

37. Which of the following statements is NOT a feature of public unit trusts?
A. The four main classes of trusts are property, equity, mortgage and fixed interest trusts.
B. There was enormous growth in public unit trusts during the 1990s.
C. The majority of mortgages held by a mortgage trust are ‘first' mortgages.
D. Property trusts are generally unlisted as they need notice to sell their physical assets.
Ans: D
Difficulty: Medium
Est time: <1 minute

38. An investor is considering different methods of investment, including a public unit trust.
Which of the following is NOT a function of a public unit trust?
A. Acting as a vehicle for the pooling of investor funds
B. Providing a level of investor protection though the appointment of a trustee
C. Allowing small investors access to larger investment opportunities
D. Locking in a trust unit price by listing on the Australian Securities Exchange
Ans: D
Difficulty: Medium
Est time: <1 minute

39. 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 likely be established?
A. A mortgage trust
B. A property trust
C. An equity trust
D. A cash management trust
Ans: B
Difficulty: Easy
Est time: <1 minute
33

40. The main advantage of a listed trust over an unlisted unit trust is that a listed trust:
A. has a trustee but an unlisted trust does not.
B. units can be sold at any time by the unit holder in the secondary market.
C. invests in equities, while an unlisted trust invests only in fixed interest.
D. invests in equities, while an unlisted trust invests in property.
Ans: B
Difficulty: Easy
Est time: <1 minute

41. In Australia, listed property trusts dominate over the proportion of unlisted property unit
trusts because:
A. the valuations of buildings are larger than share valuations.
B. mortgages on buildings are larger than companies' valuations.
C. listed shares can be more advantageous in terms of liquidity.
D. it reflects the liquid nature of properties.
Ans: C
Difficulty: Easy
Est time: <1 minute

42. The function of a ________ is to provide income for employees of corporations or
governments after they retire.
A. building society
B. credit union
C. general insurer
D. superannuation fund
Ans: D
Difficulty: Easy
Est time: <1 minute
Learning Objective: 3.04 Describe the nature and roles of superannuation funds, including the primary sources of superannuation
funds and the different types of fund.
Section: 3.05 Superannuation funds
Topic: Superannuation funds

43. Essentially, superannuation funds provide:
A. indefinite income when employees stop working.
B. indefinite income as long as employees continue to work.
34
C. limited income if an employee is injured and unable to work.

D. retirement income for employees.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

44. Recent records about superannuation assets in Australia show that the largest amounts of
assets are in:
A. corporate superannuation funds.
B. industry corporation funds.
C. retail superannuation funds.
D. self-managed superannuation funds.
Ans: D
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

45. Which of the following funds is supervised by the Australian Taxation Office?
A. Corporate superannuation funds
B. Industry corporation funds
C. Retail superannuation funds
D. Self-managed superannuation funds
Ans: D
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

46. Which of the following statements is true?
A. Since the 1990s, assets of superannuation funds outside life insurance offices have grown
much slower 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 Australia's superannuation industry throughout the 1990s.
35
D. Industry superannuation funds are regulated superannuation entities with more than ten
members that provide benefits for employees working in the same industry.
Ans: C
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute

47. 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 scheme.
B. superannuation savings plan.
C. standard superannuation scheme.
D. single premium scheme.
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

48. 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 scheme.
B. growing annuity scheme.
C. rollover scheme.
D. termination scheme.
Ans: C
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute

49. A defined benefit plan:
A. is always fully funded, with no shortfall requirement.
B. may have a shortfall, but the Commonwealth government will make good the shortfall.
C. may have a shortfall, but the employer will make good the shortfall.
D. is where the employee bears the risk if the performance of the investment is bad.
Ans: C
36

Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute

50. In an accumulation superannuation fund:
A. the employee is promised an allocated benefit based on earnings and years of service.
B. superannuation income varies depending on how well the plan's investments have performed.
C. 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.
Ans: B
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute

51. The superannuation fund that involves the amount of benefit paid out on retirement being
calculated by a formula based at the time when a person joined the fund is called:
Ans: A
Difficulty: Medium
Est time: <1 minute

52. The superannuation fund where the amount of funds available at retirement consists of past
contributions plus earnings less taxes and expenses is called:
Ans: B
37

Difficulty: Medium
Est time: <1 minute

53. The superannuation fund where the employer must make good a shortfall in the fund when
the benefit is to be paid up is a/an:
A. accumulation fund.
B. defined benefit fund.
C. fully funded fund.
D. private fund.
Ans: B
Difficulty: Medium
Est time: <1 minute

54. When an employee makes regular contributions equal to 9.5 per cent of their salary and their
employer also contributes the equivalent of 14 per cent of salary to a superannuation fund that is
an accumulation scheme:
A. the final payout benefit is stated when the member joins the fund.
B. the final payout depends upon the investment performance of the fund.
C. payment is specified under the superannuation guarantee legislation.
D. the benefit is paid in the form of a life annuity.
Ans: B
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute

55. All of the following Acts or Bills are relevant to the operation of the Australian
superannuation industry except the:
A. Superannuation Industry (Supervision) Act 1993.
B. Income Tax Assessment Act 1936.
C. Superannuation (Agents and Brokers) Act 1984.
D. Superannuation Guarantee Amendment Bill 2011.
Ans: C
38

Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute

56. Which of the following is NOT an important result of the compulsory guarantee charge
implemented in July 1992?
A. The amount of superannuation funds in Australia has increased significantly.
B. The employer contribution SGC increased to 9 per cent from July 2002.
C. The vast majority of retirement savings are invested in superannuation funds.
D. The SGC represents a penalty taxation charge on employers.
Ans: C
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute

57. The amount of financial assets held by insurance companies has _______ over the past 20
years.
A. decreased
B. remained stable
C. increased slowly
D. increased dramatically
Ans: D
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
Learning Objective: 3.05 Define life insurance offices and general insurance offices, and explain the main types of insurance
policies offered by each type of insurer.
Section: 3.06 Life insurance offices
Topic: Life insurance offices

58. Which of the following has regular, relatively predictable and long-term inflow of funds?
A. Life insurance office
B. General insurance
C. Income protection insurance
D. Trauma insurance
Ans: A
39

Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute

59. Recent figures show the largest proportion of assets held by life insurance companies is:
A. Commonwealth securities.
B. loans and placements.
C. equities and units in trusts.
D. land and buildings.
Ans: C
Bloom's: Knowledge
Difficulty: Hard
Est time: <1 minute

60. Under a co-insurance clause, a house with a replacement cost of $500 000 is covered for only
90 per cent of the losses. Which one of the following statements is true?
A. The insurance office will pay only $450 000 and the policy holder will be said to have self-
insured for the remaining 10 per cent of the damage.
B. The insurance office will pay only $400 000 and the policy holder will be said to have self-
C. The insurance office will pay only $50 000 and the policy holder will be said to have self-
D. The insurance company will pay only $100 000.
Ans: A
Bloom's: Problem solving
Difficulty: Hard
Est time: <1 minute

61. In Australia, the prudential supervisor of life insurance offices is:
A. ASIC.
B. APRA.
D. PSLI.
Ans: B
40
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

62. Which of the following statements with regard 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.
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

63. Which of the following statements about life insurance companies is false?
A. As inflows of funds are relatively predictable, they have a very stable level of liabilities.
B. Life insurance companies have greatly increased their assets over the past decade.
C. Life insurance companies sell contracts that offer financial cover against premature death.
D. Life insurance companies have large amounts of short-term liquid securities.
Ans: D
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute

64. Life insurance companies:
A. are significant investors in equities.
B. invest mainly in debt, which is generally in the form of debentures.
C. are not important suppliers of equity funding.
D. do not match any of these answers.
Ans: A
41
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

65. In Australia there has been a substantial expansion of assets in the life insurance industry.
Which of the following factors is one of the primary reasons for this?
A. Increased confidence in life policies by individual investors
B. Growth in superannuation funds
C. Decreased cost of regulation by the Australian Financial Institutions Commission
D. Rationalisation through mergers of small life insurance companies
Ans: B
Difficulty: Medium
Est time: <1 minute

66. 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 notes
C. Housing loan mortgages
D. Money market securities
Ans: D
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

67. 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 policies
B. 20-year-term policies
C. annuities
D. one-year renewable term policies
Ans: D
42
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

68. General insurance companies hold:
A. a smaller number of short-term assets than life insurance companies.
B. a greater number of short-term assets than life insurance companies.
C. approximately the same number of short-term assets as life insurance companies.
D. only long-term assets.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Section: 3.07 General insurance offices
Topic: General insurance offices

69. General insurance companies hold more liquid assets than life insurance companies because:
A. they have a legal requirement to do so.
B. events such as fires and earthquakes are difficult to predict.
C. more people try to get payouts from them by fraud.
D. there are more items covered under a general insurance policy so there are more payouts to
the insured.
Ans: B
Difficulty: Easy
Est time: <1 minute

70. A major difference between a whole-of-life insurance policy and a term-life policy is:
A. a whole-of-life policy is long-term, whereas a term policy is only for a term of one year.
B. a term policy has an investment component, specified only for the term.
C. only a whole-of-life policy has an investment part.
D. term policies only pay bonuses at the end of the term, unlike the whole–of-life policy, which
pays them out immediately as they are accumulated.
Ans: C
43

Difficulty: Medium
Est time: <1 minute

71. Which of the following does NOT apply to a whole-of-life insurance policy?
A. It includes an investment component
B. It is a long-term insurance policy
C. It may pay a bonus if surplus investment returns are generated
D. Premiums reduce over time owing to accumulated bonuses
Ans: D
Difficulty: Medium
Est time: <1 minute

72. In a/an _____ insurance policy, there is no savings component.
A. term
B. variable
C. whole
D. endowment
Ans: A
Difficulty: Easy
Est time: <1 minute

73. In relation to insurance for term-life policies with a stepped premium over time, the policy
holder pays premiums:
A. based on current market rates.
B. that increase gradually over time.
C. based on increases in inflation.
D. based on indexing the sum insured.
Ans: B
44

Difficulty: Medium
Est time: <1 minute

74. For motor vehicle insurance, a third party policy means:
A. the policy covers damage to the named vehicle plus any damage to any third party vehicle or
party.
B. the policy covers damage to both parties.
C. the policy covers damage or loss to a third party or property only.
D. the policy covers damage to the named vehicle plus any theft.
Ans: C
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

75. A fund that aims to achieve high investment returns by using exotic financial products is
called a:
A. a hedge fund.
B. project fund.
C. money market fund.
D. leverage fund.
Ans: A
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 3.06 Discuss hedge funds, including their structure, investors, investment strategies and risk.
Section: 3.08 Hedge funds
Topic: Hedge funds

76. A hedge fund that takes a long position in the Australian dollar is forecasting the Australian
dollar will:
A. depreciate in value.
B. appreciate in value.
C. remain the same in value.
D. depreciate in value in the long-term.
Ans: B
45
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Topic: Hedge funds

77. A hedge fund that takes a short position in equity markets:
A. will sell forward shares.
B. will buy a derivative that they expect will increase in price.
C. will buy shares.
D. is expecting the markets to increase.
Ans: A
Difficulty: Easy
Est time: <1 minute
Topic: Hedge funds

78. Finance companies generally:
A. issue shares and use the proceeds to buy bonds.
B. raise funds in financial markets to lend to households and companies.
C. raise funds from banks to lend to households and companies.
D. issue bonds and use the proceeds to buy shares.
Ans: B
Difficulty: Medium
Est time: <1 minute
Learning Objective: 3.07 Explain the principal functions of finance companies and general financiers, and the changes that have
had an impact on finance company business.
Section: 3.09 Finance companies and general financiers
Topic: Finance companies and general financiers

79. Which of the following statements is NOT a feature of finance companies?
A. Finance companies came into existence in response to regulations on interest rates.
B. Finance companies sell unsecured notes and use the funds to make loans to borrowers.
C. The majority of finance companies' funds are sourced from banks.
D. Today the banks own many large finance companies.
Ans: C
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
46

80. Since deregulation of the financial markets in the 1980s, finance companies have seen the
largest growth in their assets in:
A. bills of exchange.
B. local government securities.
C. placements and deposits.
D. loans to businesses.
Ans: D
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute

81. Finance companies use their funds to provide:
A. loans to individuals.
B. instalment credit to finance retail sales to retail stores.
C. lease financing.
Ans: D
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute

82. 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 investors
B. Conversion of building societies to banks
C. Increased cost of regulation by the Australian Prudential Regulation Authority (APRA)
D. Rationalisation through the merger of small building societies
Ans: B
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
Learning Objective: 3.08 Outline the roles and relative importance of building societies and credit unions, and analyse the significant
changes that have occurred in these sectors.
Section: 3.10 Building societies
Topic: Building societies

83. Which of the following statement about building societies in Australia is NOT correct?
47
A. The main activities of building societies are to take in deposits and provide mortgage finance.
B. The largest building societies have tended to convert to regional banks in recent times.
C. Now currently the building society sector holds 2 per cent of the total assets of the Australian
financial system.
D. Building societies are authorised deposit-taking institutions and supervised by APRA.
Ans: C
AACSB: Diverse and multicultural
Bloom's: Evaluation
Difficulty: Medium
Est time: <1 minute

84. Under deregulation, building societies lost market share to other financial institutions. Their
response included:
A. mergers with other building societies.
B. expenditure on technology.
C. expanding their range of products.
Ans: D
Bloom's: Evaluation
Difficulty: Easy
Est time: <1 minute

85. In Australia permanent building societies are supervised by:
A. ASIC.
B. APRA.
D. ASX.
Ans: B
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

86. 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 bank
B. superannuation fund
48
C. credit union
D. merchant bank
Ans: C
Difficulty: Easy
Est time: <1 minute

87. A credit union differs from most other financial institutions because:
A. it accepts deposits mainly from members.
B. its assets are mainly loans to members.
C. there are stringent requirements to hold prime liquid assets.
Ans: D
Difficulty: Easy
Est time: <1 minute

88. The uses of funds for credit unions are mainly:
A. company shares.
B. commercial paper.
C. debentures and unsecured notes.
D. mortgages.
Ans: D
Difficulty: Easy
Est time: <1 minute

89. Which of the following holds the smallest percentage of total assets of financial institutions?
A. Building societies
B. Credit unions
C. Finance companies
D. Managed funds
Ans: A
49

Bloom's: Evaluation
Difficulty: Hard
Est time: <1 minute

90. Export Finance and Insurance Corporation's function is:
A. solely to lend directly to small- or medium-sized businesses involved in export trade.
B. solely to guarantee trade finance to small- or medium- sized businesses involved in export
trade.
C. to encourage export trade by providing trade insurance and financial services.
D. solely to provide insurance for Australian suppliers of goods and services against non-
payment.
Ans: C
Bloom's: Evaluation
Difficulty: Medium
Est time: <1 minute
Learning Objective: 3.09 Describe the unique role of export finance corporations.
Topic: Export Finance Corporations

91. The form of financing for large tourist resorts, property developments, heavy industry and
processing plant developments is called:
A. euro finance.
B. conglomerate finance.
C. project finance.
D. lease finance.
Ans: C
Bloom's: Evaluation
Difficulty: Easy
Est time: <1 minute
Learning Objective: 3.10 Understand project finance and structured finance, and the related roles of investment banks.
Section: Extended learning
Topic: Extended learning

92. 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 project.
B. lenders take a major equity stake in the project.
C. the project company, which is set up as a separate legal entity, relies heavily on venture
capitalists for equity funding.
D. the lenders have a claim on the assets of the project as well as the sponsors.
Ans: A
50

Difficulty: Medium
Est time: <1 minute
Learning Objective: 3.10 Understand project finance and structured finance, and the related roles of investment banks.
Section: Extended learning
Topic: Building societies

93. When an oil refining company takes over an oil exploration company, the result is a:
A. vertical takeover.
B. horizontal takeover.
C. conglomerate takeover.
D. hostile takeover.
Ans: A
Bloom's: Knowledge
Difficulty: Easy
Difficulty: Medium
Est time: <1 minute

94. If someone does not want to make any investment decisions then the best type of fund would
be:
C. a rollover fund.
D. a superannuation fund.
Ans: A
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
Topic: superannuation funds

95. Which insurance product is simply life insurance?
A. Whole-of-life
B. Term-life
C. Total and permanent disablement
D. Income protection
Ans: B
51
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Topic: Life Insurance offices

96. Which type of fund or trust employs a strategy that often uses high levels of leverage?
A. Hedge fund
C. Public unit trusts
D. Capital guaranteed funds
Ans: A
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
Topic: Hedge funds

97. Generally investment banks do not
A. place new issues of securities.
B. advise clients about restructuring.
C. advise clients about risk management.
D. accept deposits.
Ans: D
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Topic: Investment Banks

98. In Australia the predominant type of public unit trust is _____. Public unit trusts are _____.
A. equity; listed and unlisted
B. equity; unlisted only
C. fixed income; listed and unlisted
D. property; listed and unlisted
Ans: D
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
52

99. Which type of fund is the least liquid for most investors?
A. Public unit trust
C. Cash management trust
D. Real estate investment trust
Ans: B
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

100. Unlike commercial banks, investment banks only accept deposits from large corporations.
Ans: False
Feedback: Investment banks are specialist providers of financial and advisory services to
corporations, high-net-worth individuals and governments.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

101. As investment banks have increased their underwriting activities in recent years, the number
of financial assets held by them has similarly increased.
Ans: False
Feedback: The number of financial assets held by them has decreased as they are focused on
advisory services.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

102. In the context of a merger, the process of due diligence involves valuing the target company
shares.
Ans: False
Feedback: Due diligence is detailed analysis of the financial and operational condition of the
target company.
53

Difficulty: Easy
Est time: <1 minute

103. In relation to Australian managed funds, cash management trusts currently have the largest
amount of funds under management.
Ans: False
Feedback: Superannuation trusts have the largest amount of funds under management.
Difficulty: Easy
Est time: <1 minute

104. A capital guaranteed fund guarantees that contributors will receive at least the value of the
contributions and future earnings of the fund.
Ans: False
Feedback: Only the capital is guaranteed.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
rapid growth.

105. A managed growth fund is designed to maximise the return from appreciation in the value
of assets in its portfolio.
Ans: True
Feedback: The proportion of equity is generally larger than for a balanced growth fund and the
equity part of the fund includes a greater range of risk securities than a balanced growth fund.
These offer the possibility of potentially higher returns.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
rapid growth.

106. On average, the value of a balanced growth fund is subject to less market fluctuation than
that of a capital growth fund.
54
Ans: True
Feedback: The proportion of equity is lower and so a balanced growth fund has generally lower
volatility.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
rapid growth.

107. Unlike commercial banks, investment banks do not have a depositor base from which to
acquire assets.
Ans: True
Feedback: Under the Banking Act 1952 (Cwlth) only commercial banks are authorised to act as
banks and attract deposits.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

108. Cash management trusts are restricted under their trust deed to hold only bank deposits and
cash.
Ans: False
Feedback: Cash management trusts are generally restricted to short-term money market
securities.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

109. An insurance company is not a depository financial institution.
Ans: True
Feedback: Insurance companies receive funds in the form of premiums.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
55
110. The clients of investment banks include major corporations, governments, private firms,
financial institutions and qualified professional investors.
Ans: True
Feedback: Investment banks maintain a pool of clients to facilitate funding arrangements. The
services are mainly fee-based arrangements.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

111. Investment banks are involved in dealers’ markets and provide bid and offer rates for major
currencies.
Ans: True
Feedback: The functions and roles of investments banks are diverse. They have expertise all
areas of finance including dealers’ markets. In dealers’ markets they maintain portfolios of
currencies as well other financial securities from which they offer quotations for buying and
selling price.
AACSB: Synthesis
Bloom's: Knowledge
Difficulty: Hard
Est time: 1-2 minutes

112. Explain the role and operation of one of the largest types of managed funds, superannuation
funds.
Ans: Their sources of funds are individuals who set aside funds for their retirement so that they
can maintain their lifestyle once they retire from the workforce. The majority of members make
regular contributions over their working life. The superannuation funds invest these funds in a
range of assets from money market, government securities, property and domestic and
international equities.
Difficulty: Medium

113. Explain the operation of cash management trusts.
Ans: A cash management trust invests the majority of its funds in money market securities such
as bills and commercial paper. They provide a high degree of liquidity and often a higher rate of
56
return for the short-term funds of smaller investors as a consequence of indirect access to the
wholesale money markets.
Bloom's: Knowledge
Difficulty: Medium

114. Identify and discuss the types of public unit trusts according to their assets.
Ans: Public unit trusts may be grouped into property trusts, both listed and unlisted; equity trusts,
both listed and unlisted; mortgage trusts, and other trusts including fixed interest trusts. Two
major types of trusts according to assets under management are listed property trusts and listed
equity trusts.
Bloom's: Knowledge
Difficulty: Medium

115. What do hedge funds do? Discuss any concerns their operations may have for the financial
system.
Ans: Hedge funds use supposedly complicated investment strategies and invest in exotic
financial products to try to achieve higher returns. Some of the instruments they invest in are
commodities, private equity, foreign exchange, bonds and derivatives. They tend to leverage
their positions using derivative products and are vulnerable to pressure to liquidate assets quickly
if they sustain significant losses. They also operate largely outside the regulatory framework
established to protect the stability of the financial system.
Bloom's: Knowledge
Difficulty: Hard
Topic: Hedge funds

116. What are the principal assets of a finance company? How have these been affected in recent
years?
Ans: The main assets are loans to individuals, instalment credit to finance retail sales, lease
financing, loans to businesses including floor plan financing, factoring and accounts receivable
financing.
57
Difficulty: Medium

117. The distinction between listed and unlisted trusts is important. Discuss the importance and
significance of listed and unlisted unit trusts.
Ans: A unit trust fund, particularly a property trust, in the environment of falling property prices,
will have a major impact on value of the trust. This will cause an unexpected demand for
withdrawals of funds by unit holders who wanted to exit the trusts before they experienced
further write-downs. Unlisted unit trusts make it difficult for unit holders to withdraw their
funds, unlike listed property funds, where there are established secondary markets through which
unit holders can liquidate their positions.
Difficulty: Medium
rapid growth.
58
Chapter 03 Testbank Summary

# of
Category Questions
AACSB: Communication 78
AACSB: Diverse and multicultural 5
AACSB: Ethical 1
AACSB: Reflective thinking 32
AACSB: Synthesis 1
Bloom's: Comprehension 39
Bloom's: Evaluation 5
Bloom's: Knowledge 54
Bloom's: Problem solving 1
Bloom's: Synthesis 18
Difficulty: Easy 44
Difficulty: Hard 9
Difficulty: Medium 65
Est time: 1-2 minutes 1
Est time: 1-3 minutes 6
Est time: <1 minute 110
Learning Objective: 3.01 Describe the roles of investment banks, with an 32
emphasis on the nature of their off-balance-sheet business, in particular mergers
and acquisitions.
Learning Objective: 3.02 Explain the structure, roles and operation of managed 12
funds and identify factors that have influenced their rapid growth.
Learning Objective: 3.03 Discuss the purpose and operation of cash 16
management trusts and public unit trusts.
Learning Objective: 3.04 Describe the nature and roles of superannuation funds, 18
including the primary sources of superannuation funds and the different types of
fund.
Learning Objective: 3.05 Define life insurance offices and general insurance 19
offices, and explain the main types of insurance policies offered by each type of
insurer.
Learning Objective: 3.06 Discuss hedge funds, including their structure, 6
investors, investment strategies and risk.
Learning Objective: 3.07 Explain the principal functions of finance companies 5
and general financiers, and the changes that have had an impact on finance
company business.
Learning Objective: 3.08 Outline the roles and relative importance of building 8
societies and credit unions, and analyse the significant changes that have
occurred in these sectors.
Learning Objective: 3.09 Describe the unique role of export finance 1
corporations.
Learning Objective: 3.10 Understand project finance and structured finance, and 2
the related roles of investment banks.
59
Section: 3.01 Investment banks 37

Section: 3.02 Managed funds 11
Section: 3.03 Cash management trusts 7
Section: 3.04 Public unit trusts 9
Section: 3.05 Superannuation funds 19
Section: 3.06 Life insurance offices 16
Section: 3.07 General insurance offices 3
Section: 3.08 Hedge funds 5
Section: 3.09 Finance companies and general financiers 6
Section: 3.10 Building societies 1
Section: Extended learning 2
Section: Introduction 1
Topic: Building societies 2
Topic: Cash management trusts 7
Topic: Export Finance Corporations 1
Topic: Extended learning 1
Topic: Finance companies and general financiers 6
Topic: General insurance offices 3
Topic: Hedge funds 5
Topic: Introduction 1
Topic: Investment Banks 1
Topic: Investment banks 35
Topic: Life Insurance offices 1
Topic: Life insurance offices 15
Topic: Managed funds 11
Topic: Public unit trusts 9
Topic: Superannuation funds 18
Topic: superannuation funds 1

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1

D. act as a trustee of the funds raised.

13. Which of the following statements correctly describes about an underwriting?

D. Rationalisation through mergers of small life insurance companies

D. Premiums reduce over time owing to accumulated bonuses

Chapter 03 Testbank Key

C. limited income if an employee is injured and unable to work.

AACSB: Reflective thinking

AACSB: Reflective thinking

AACSB: Reflective thinking

AACSB: Reflective thinking

AACSB: Reflective thinking

AACSB: Reflective thinking

AACSB: Diverse and multicultural

AACSB: Reflective thinking

AACSB: Reflective thinking

Chapter 03 Testbank Summary

Section: 3.01 Investment banks 37

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